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Andrew Edmond: Right. Okay. Welcome, everybody, again. We're going to hear very shortly about Impax' full year results for the period up to the end of September. I'm just going to go through a few admin points. First of all, this presentation is being recorded, so you will be able to watch it again and you'll also be able to see the slides that are presented by the management. There will be a feedback form to the audience after the event, which both ourselves and the management would be very grateful if you can take just a minute or two to share your thoughts on that. For those of you not familiar with Zoom, you will see in the options button under more and then Q&A.. An obvious place to please write your questions and we should have plenty of time to go through those at the end of the formal presentation. On which we're very delighted to be joined again by CFO, Karen Cockburn; and Ian Simm, who is the CEO and of course, the founder of Impax Asset Management, and I am now going to pass over to Ian to commence the presentation. Ian Simm: Okay. Andy. So without further ado, just straight into the agenda. So three things to cover, I don't think we need to get through the appendices, but I'm going to give a quick summary. Karen will then cover the financials, and then I'll come back with a brief summary of the outlook. So many of you perhaps have not met us before, but why it Impax asset management? Well, we believe there's an enormous investment opportunity worldwide over the next 5 to 15 years in what we call the transition to a more sustainable economy which essentially is based on a mainstream capitalist idea that consumers are increasingly looking for more efficient, less polluting goods and services and that would cover areas like clean energy, infrastructure, smart materials, food and agriculture and many others beyond that. This is not about ethical investing, it's about thematic or sector-specific opportunities. Impax has been in business since I started the company in 1998, and we've become a global player. We have clients all over the world. Over the last 5 years, we've initially seen a rapid expansion in competition as many of the large branded houses in our area or in the asset management area have decided they wanted to develop and launch products in climate change or related topics, but many of those players have recently retreated in the wake of some challenges, particularly from U.S. regulators around their response to fiduciary duty. Many of them have confused themselves and the market as to whether they're trying to make money or save the world, whereas Impax is very clearly been aiming to make money, but in areas where those investors looking for good environmental outcomes, there is a tangible nonfinancial benefit. So a global player with weakening competition. And crucially, our business strategy is focused on scaling the business. So as you'll see, we have three elements: listed equities, fixed income and private equity, each of which is positioned to be scalable. And we are well on the way to scaling fixed income. We've already scaled listed equities and in private markets, we are well established with the planned scale in the future. And of course, a scaled business model will deliver a rapid growth of returns to shareholders. Next slide, please. So what's behind this transition to a more sustainable economy? Well essentially, it's about disruption, which creates market uncertainty around pricing. So the disruption is coming from technology change, from regulatory change and from changing consumer sentiment in areas like electric vehicles and transportation, in renewable energy, in the rapid growth of infrastructure investment, for example, water supply. The regulations in these areas are changing as rapidly as the technology. And so there's plenty of opportunity around the mispricing of both publicly traded and privately held assets. So these sectors have been transformed. And therefore, there's an opportunity for a specialist manager with significant resources to more insightful research than the average market investor and therefore, to uncover value. So that's basically what we're doing. Next slide. So as Andy said, these are from now on the results for our financial year ended 30th of September 2025, the six elements of the business highlights that I've shown here so it has been a particularly challenging market for investors this year, we don't need to tell you that, but it's been a continued dominance in some parts of the year by the so-called magnificent 7 stocks or AI-related mega cap names in particular. At other times, the market has been quite broad. So timing of those changes has been quite challenging. We -- after a period of rapid growth in the 2019 to 2022 period, we have outflows to negative, but the net outflows are initially quite significant -- at the start of this financial year have become significantly improved in the second half. As I'll show in a moment, the valuation of the main equity strategies that we're running has become quite compelling. So this does represent an attractive buying opportunity. Meanwhile, from a broader perspective, as we seek to develop further scale and opportunities to build the business further, we're making quite significant progress, particularly with the acquisition of SKY Harbor, a unit focused on high-yield investment management in the fixed income space. Meanwhile, we've been increasingly focused on efficiency in our business operations and we've reduced our cost base, but not in sacrificing our ability to grow or our financial strength. So the business remains very strong with a very material balance sheet such that we've been able to announce and we're nearly completed with a GBP 10 million share buyback program. Next slide. So Karen will cover the financial highlights in a moment, so I won't steal her thunder, but if you eyeball these numbers and compare them to the smaller numbers below FY 2024, you'll see that things have generally retreated, and that's on the back of the outflows that I just mentioned. So I'll come back to the details, but still healthy results in absolute terms, but less than they were the previous financial year. So the market has been challenging. I think the backdrop here is that consumer confidence has been fragile and is probably weakening, particularly in the U.S., and that's been precipitated by the tariff interventions, geopolitical tensions and the consequences for inflation, not least of which concerns about government debt. So we're not definitely heading into a downtown or recession, but over the last 6, 9 months or so, there's been concern about that fragility. And so that has really caused institutional investors to be cautious while at the same time, retail investors are seemingly ignoring those signs and continuing to plow our money into the stock market. A lot of the asset owners in the world are looking back at the last three years, seeing that the very, very narrow market with the AI stocks dominating as -- caused a problem for active management and say there's an increasing interest in the non-actively managed or so-called systematic strategies where Impax does have quite a nice established base. Meanwhile, fixed income markets have been pretty well positioned this year, but the relatively tight spread, particularly compensation for risk premium is holding everyone back at the moment. And in private markets, there's a huge amount of capital chasing the larger deals but Impax is playing in the small to midsize area where there's still plenty of value to be harnessed. Next slide. So I'm afraid in this presentation, there's a couple of very busy slides. This is the first of them and best to look at this in 4 quadrants. So water in the top left, leaders, specialists and global opportunities are our 4 largest sources of revenue in terms of investment strategies. And in each of the quadrants, there's a pair of bars for each of the last 5 years, the dark blue bar is the return in the year from the Impax strategy compared to the all Country World Index in yellow. So if you look at the right-hand end of each of the quadrants, you can see that in 2021, we outperformed the market. But in each of these strategies for the last four years, we have not kept pace the market. And that's been accompanied by -- or driven by a significant derating and the bursting of the valuation metrics that we've seen back in 2021. So we do feel that we're at the bottom of the cycle at the moment because we are tilted towards certain areas of economy, then it's very common as we've seen on a couple of occasions, probably three occasions in the last 27 years that we are out of favor relative to the main market for a period and then we come back into favor. So we are long a return to being in favor. And I think the catalyst for that return are starting to appear. It's probably a little bit too early to announce that we're definitely out of the woods. Hopefully, that will materialize in the new year. Next slide. So on this valuation point, just some data around 2 of those 4 strategies I referred to, water and specialists. This is a -- in each case, a 5-year comparison between September '20 and September 2025 of something that's called the PEG ratio or price earnings to growth so that the ratio of price earnings, which is a metric of valuation divided by the growth rate. So a high number here means quite expensive, a low number quite cheap. So the dark blue, again, Impax' strategy against the Country World Index benchmark in yellow. So September 2020, we were trading at a premium in both of these strategies, and now we're trading at a notable discount. So this is what I was referring to earlier about the compelling nature of the valuations now relative to where we were 4 or 5 years ago. Next slide. So same busy slide, but this time for fixed income, same quadrant arrangement this time for our 4 major fixed income strategies. The top left is the one we just picked up with the acquisition of SKY Harbor, which just closed first of April this year. And the bottom right, global high yield is the strategy we picked up last year 2024 from the acquisition of Absalon Capital Management in Denmark. And then the other two strategies are the fixed income strategy we've had since 2018 when we bought Pax World management in the United States. So if you do the same comparison blue bar against yellow bar for each of the years, then you can see that, broadly speaking, the fixed income strategies are either ahead of benchmark or not too far behind. So this is a much more robust area where the underperformance or outperformance is much less pronounced, much less cyclical, but this is what clients really want something which is a bit more reliable with lower probability of deviation. So these strategies are actually quite nicely positioned, and we've got a very good pipeline in this area. Next slide. I'm afraid that I'm just [ trotting ] through a set of slides that we present on a semiannual basis. So if you're not that interested in the numbers, apologies, this is how we put everything together, but I'll just keep going. So what this does is it shows the bridge on -- from the left, which is our assets under management in GBP 1 billion at the end of 2024, financial year 2024. So that's GBP 37.2 billion through the half year period or half year point rather in green, GBP 25.3 billion to the end of September, GBP 26.1 billion. So this is the bridge shape. So I'm sure if you followed us for a year, you'll have heard the press news about us losing a mandate from St. James's Place announced back in December, and this actually landed in February, so that was GBP 6.2 billion of asset under management reduction. And then the outflows and inflows in the first half were negative about GBP 4 billion offset by some market movement -- or sorry, first half was compounded by some market movement down. And then in the second half, the net flows were GBP 2.7 billion, so a significant improvement in the second half. We got the acquired assets from SKY Harbor acquisition and then markets were positive in the second half. So as you can see, comparing the green, blue and yellow, we had a particularly significant drop in the first half of the year and then a slight increase net-net in the second half. So I think that does point to a stabilization of the business. Next slide. This is a breakdown of our assets under management and revenue. So the first two columns shown in the blue bars, the Impax financial year end position. And the yellow bar this time is our position a year earlier. So starting with the left-hand column, our thematic equities represented 64% of our asset under management at the end of September 25, up slightly, core equity is down because that's where the St. James's Place mandate dropped from. I'm not going to read out all these numbers, but I hope you get the idea. So the regional breakdown in the middle shows that the EMEA region and North America region were down moderately, but the U.K. was down considerably as a percentage -- sorry, the North American and EMEA was up slightly, but that was because the U.K. was down considerably as a result of the St. James's Place mandate loss. And then by product type, the revenue is shown again in blue bars. So just worth pointing out the BNP Paribas mutual funds, which remains our largest aggregate client, 25% of revenue coming from them. Just stable compared to 12 months earlier. Next slide. And the movement inflows or assets under management, this is in GBP 1 millions. But basically, if you divide by GBP 1,000, you get to GBP 1 billion. So St. James' Place, that's the GBP 6.2 billion outflow. Notable here on this slide is the middle top, which is the significantly reduced outflows from BNP Paribas. So that's encouraging and has continued to decline into the new financial year. And then segregated accounts on the bottom right is actually a Asia Pacific institutional investor that was paying us a very, very low fee and a performance fee. So we're not too disappointed to see that one go. Next slide. So moving on from the numbers to our strategic priorities, of which there are 6. So essentially, we're looking to scale the business in equities, fixed income and then grow private equity. That's the top line. And then the bottom line, build our sales and marketing, all our distribution channels, deepen our partnership with clients and then optimize our operating model. So a little bit more detail on these coming up. Next slide. So starting with listed equities. We are continuing to enhance our investment process, using technology and of course, AI, to which we're doing through a careful set of experiments. We have introduced more structure into our research team. And then in the product area, we are launching our first exchange-traded fund in the United States, which will happen in a couple of months' time, we are expanding our systematic equity product range and we've launched our new emerging markets fund. Next slide. In distribution, there's much more work being done to sell to clients directly in German-speaking Europe, which is DACH, Scandinavia, Benelux and France, and then we have a very good sales colleague in Canada. Through this channel in the Benelux area, we've won a very large segregated mandate, which landed in June. And meanwhile, our Sustainability Center is continuing to provide a differentiated service to clients. I'll come back to that in a moment. The -- in addition to the reduced outflows from BNP Paribas, we have been cultivating further partnerships for distribution in the Asia Pacific region, Latin America and Southern Europe. Meanwhile, our brand continues to resonate globally and as our competitors pull back, as I was saying at the start, then we're seeing an increasing opportunity not just for winning new [indiscernible], but also for winning mandates that clients are wanting to switch from some of these large branded houses that they no longer want to do business with. Next slide. So fixed income, as I mentioned, we completed the acquisition of SKY Harbor in April. We now have 23 investment team members, which is critical mass. That compares to 5 when we bought the Pax business. Client base is now spread nicely over both Europe and the U.S. with an established set of products around those 4 major strategies. We're making very good progress in adviser or consultant endorsements. These are essential for gatekeeping for the major asset owners and we're starting to extend our wealth management profile, not just in the U.S., which we've had for a number of years, but also now in many markets in Europe. So lots to look forward to in fixed income, and I think there's a good chance of a rapidly expanding set of inflows here. Next slide. And then in private equity, for those of you that don't know us in this area, we have been, since 2005, running a series of 10-year funds, we call them limited partnerships, and they are investing in the renewable energy space, particularly backing the developers of renewable energy assets all around Europe. These developers tend to be relatively small companies. They are relatively under-resourced in financial terms, and therefore, they're very happy and keen to do work with a sophisticated and well-capitalized or well-sized fund manager like Impax. So we are making very good progress with exiting our third fund and also deploying our fourth fund. So regulation around what you can say in this area around expansion, but I'll leave you to join the dots about what happens next. So we're making good progress in expanding this business. Meanwhile, the efficiency programs continue to develop because of the drop in assets under management, we've been able to reduce headcount from about [ 320 rolls to 275 ], so that's a drop roughly 15%. Frankly, that did actually reflect an inefficiency in our expansion 2019 to 2022 period when we were growing extremely quickly. And the way that we added roles at that time was probably not optimal. So many of these positions have been eliminated without any loss of capability. So crucially, we've been able to downsize the head count without any reduction in that capability or in our growth potential. And meanwhile, there's plenty of project work underway to improve our efficiency with the broader adoption of technology. That may well lead to further head count reduction in the future, again, without compromising our growth potential. And then as I said, the sustainability center, this essentially is helping our clients in 4 or 5 ways. So we are through the center, enhancing our research, we are coordinating our engagement and stewardship work with underlying companies. We're providing detailed reports to clients around nonfinancial outcomes, and we are helping them with thought leadership information, for example, around physical climate risk and at the same time, working on a collaborative basis with them around the engagement with policymakers so that there can be a financial expertise injection into new market creation and the associated regulations. At which point, I think I'm handing over to Karen. Karen Cockburn: Thank you, Ian, and thank you all for your time this afternoon. I'm just going to take you through those numbers that Ian's flashed in front of you there at the start. But it do reflect that Ian's comments that we find ourselves at the bottom of the cycle and numbers still a healthy profit but do reflect the level of outflow that we have seen this year. So starting with on Monday, we announced then the adjusted operating profit of GBP 33.6 million and the EPS sitting at 21.3. Now both of those numbers down by just over 1/3 from the prior year. And you can see that it's a net reduction of GBP 19 million, and that has come from a GBP 28 million reduction in revenue being offset then by the cost action that Ian referenced by about the savings that we made in year of GBP 9 million. Important, I think, we'll get into in a little more detail that as we did lose some of those larger clients, the actual fee margin, a key measure for the health of the business did improve. Now we finished the year in an operating margin of 23.7% and also finished the year with the balance sheet in very good health with capital and cash surplus. And on the back of that, proposing a dividend of 8p, 12p for the full year, representing a payout of 55.7%, and that's aligned to our dividend policy, a nice set our dividend payout, a sustainable rate. And then we finished a busy year also with a buyback, our first-ever buyback, which I'm happy to say is well on track for completion for the end of the calendar year. So the next slide looks at the revenue in a little more detail that sort of just unpacks that sort of reduction that we saw in the year, but it's predominantly driven by the reduction in the AUM. Based on Ian's slide, if you recall, that started the year at GBP 37 billion, but finished at GBP 26 billion. The average is for the two years are the ones that really drive sort of the revenue calculations and you can see that they have dropped reflecting that outflow. So just looking at the bridge, you can see the significant drop in the income year-on-year was this level of outflow and you can see SJP being the largest contributor to that. Now that was offset by favorable market movement and then the impact of the acquisitions as we build out our fixed income capability that took the full year to GBP 141.9 million. Now looking at asset management, it's usually important just to see where we are today. And there's a figure in the circle at the bottom of GBP 126.1 million. We call that the run rate, which is where we find ourselves and September times 12. Now what that figure reflects, it's important to sort of say the level of outflow that we had, 80% of it happened in the first half of the year. So the business has been in a very stable position of GBP 26 billion plus or minus a little for the last 6 months. And that's the position that we look for -- that we would like to retain before we push on for growth. In terms of looking at sort of where we think a number like that, I know you all have models and how that might outturn for the year. The guidance that we gave to the broad analyst community of which equity development takes part in our consensus is really very conservative that it's difficult to call when we expect sort of the growth to return, but we have many reasons to be optimistic as we talk there about the fixed income opportunity systematic and the ETF that we're very active in terms of new product. But I'm being very conservative in terms of where I see that coming in. So I expect the revenue to be a figure still beginning with a 1, maybe with a 3 at some point in the next 12 months. Now a really key component of looking at the AUM then is the average fee margin, which you saw increased to 46.9 in the year. Now that is the fee that's made up of over 80 clients and about 90% of that -- 95%, it comes from our listed equity business. And then about 10% of our business is this fixed income. So a combination of those as we grow forward, I expect to see sort of that run rate margin of 48.4 basis points come down slowly over time as we do grow that fixed income business. But that is a very healthy, well diversified supported by 80 clients margin and a sign, I think, of the underlying strength of the business. I then move on to look at costs on the back of that outflow that we had with a very active cost management program and the 45 people left the business. You can see in the bridge that the two orange blocks that we talk there are really staff related, so 45 people resulted in GBP 5.6 million saving in the year. On average, they left maybe 6, 7 months into the year. So that will gross up to over an GBP 11 million saving as we move into the new year. For those that follow us, a very important policy that we have is the level of variable staff cost. That's the bonus pool. We align that very closely to investor interest in that the policy is to pay out no more than 45% of the pre-bonus profits in the form of bonus. So what that means is that with that adjusted profit, the reduced profitability coming through, and it is the simple mathematics of that takes that into a saving, but the key point being very aligned. So a significant cost reduction in the business. And then we continue to invest -- whilst removing costs, we will continue to invest in the areas where we do see the opportunity for growth, and that's where you see the cost base build back up marginally, the acquisition of SKY Harbor bringing in additional cost and also then sort of just the regular inflation view. But where we finish the year is that whilst the cost across that bridge dropped by GBP 9 million, the two figures at the bottom of the table show you the actual run rate cost of the business reduced by GBP 20 million, so we have been able to respond to quite a significant amount of the AUM and flow loss that we've had. Just very quickly, looking down the left-hand side, you can see the head count there that has reduced, 45 heads came out. We did add some further into our fixed income business. We now have 23 investment professionals in our fixed income business. So that's a business ready to scale. And you can see the cost reductions just came broadly out of -- across the whole business rather than any one specific area. So our refined cost base is what we're taking into the new year and then bringing the revenue and the cost together just to look at that operating margin, 23.7. We have enjoyed a number of years previously in the 30s, and we feel confident about getting back into an operating margin of 30% in the medium term. So that's really finishing off on the P&L. Very quickly on the balance sheet, moving on to a couple of slides to say all in very good health. And with health finishing the year with GBP 64.7 million of cash on the balance sheet, significant healthy surplus in that. Key uses of the cash this year, it has reduced and broadly because of the relatively large prior year dividend being paid out of this year's reduced operating earnings. We -- and the acquisition of our own shares, which is the buyback. And also, we continue to buy shares into our EBT to further align our staff to shareholders. and of course, the purchase of SKY Harbor, which happened in April for $6 million roughly that comes out of that figure. So that leaves us with very healthy cash balances and on the back of that paying a dividend yield of 6.9%. Again, a very clearly defined policy that we've had for dividend over a number of years which is to pay out at least 55% of adjusted profit after tax. And this year, we're just -- we're putting this 55.7% to a sustainable rate. Now that level of dividend of 12p for the year plus the buyback, I'll talk about that in a moment. That's putting GBP 25 million, a significant amount of cash back in shareholders' hands over the period. Based on that dividend payout, looking on the next slide, at capital, again, remains with very healthy surplus. There's no debt in the business. We continue to generate capital. It shows we will -- it shows that actually the surplus there in that orange box looks as if it increased in the year. Once we complete the buyback, you'll see that reduce slightly. And then also an important message for me, just like costs where we're invested for growth. Our capital, we also have nearly GBP 17 million in seed capital, where we see growth opportunities. When we're doing this presentation, I think always important to talk about our capital allocation priorities. These have not changed since we updated at the half year when we restated our capital allocation policy. But the real priority right now in this period of volatile earnings is the financial resilience we will seek to pay the sustainable dividend. I mentioned we continue to purchase shares into the EBT. And then there always is the excess that we will carry looking for growth to invest into the business but also seeking to grow by small accretive acquisitions has always been part of the DNA of the organization, and that continues. And then just a page to finish with based on looking at the buyback. Just to confirm, we announced on the 22nd of May, a buyback of GBP 10 million. At the 30th of September, when the accounts, when you read them, you'll see that we had about 1/3 of that completed. We had a very active last couple of months and finish as of the day of the -- on Monday's date of announcement that we had 89% complete of the program. We, therefore, expect to complete that over the coming weeks. Net-net base, give or take a bit on where the share price is, we expect to be canceling up to 4% of the opening share capital on that. EBT. So just to sort of -- we've mentioned that, we continue to buy shares, spending GBP 3.4 million this year. And the EBT holds a significant portion, GBP 5.9 million of the issued share capital of the business. And then I just wanted to call out, we haven't looked at it for a while in these presentations, it's just that the broad shape of the share ownership with BNP being the largest asset holder and also being the largest shareholder of the business with 14%. That has been at that level for quite some time. And then we do seek and hence, why we continue with this EBT -- capital. We're seeking to have employees whether it be to own up to 12% of the issued share capital as well. Of course, we've got the founders in there and the free float. But that's always been a broadly stable set of shareholdings. With that, until our time for questions, I will hand it back to Ian. Thank you. Ian Simm: So just to wrap up on the outlook slide. So look, I think the investment management market is really an interesting juncture. The major asset owners around the world are increasingly looking for specialist investment management service in differentiated areas. So this is where Impax really stands out because for more than a quarter of a century, we've been focused on an area of the economy that is growing in a sort of secular way in the direction of more and more provision of cleaner less polluting goods and services. So there are some political bumps in the road around, for example, U.S. energy policy. But frankly, that's what asset management in the active area is all about. So we're able to navigate these political headwinds very successfully. So our differentiated brand does give a very easy calling card to the world's major asset owners, pension funds and sovereign wealth funds. And we've got a very wide base of such clients already. We also have offices in the U.S., a couple of offices in Asia and throughout Europe. So we're well placed to reach out to other potential clients in this space. The equity business relative to fixed income and private markets still dominates with 90% roughly of our value or our revenue coming from listed equities. And as I'm sure you appreciate, strategically, we are trying to diversify that by growing fixed income and private markets so that the business is less dependent on the equity market cycle. We haven't got that yet because it takes time to diversify. And therefore, we have been exposed in the last 3 or 4 years to that equity market cycle, which is similarly at the bottom, and we're waiting for a recovery. But in the meantime, the AI phenomenon is delaying that as more and more capital chasing the very large AI stocks. So I think the wide expectation in the market is that 2026 will be broader, there'll be less dominance by the major cap tech, AI names. And in that context, we ought to bounce back to outperformance. So the business development and diversification of business will continue. We're not signaling any more acquisitions at the moment, but that's certainly part of our medium-term plan. And in that context, as Karen laid out, we have a very strong balance sheet and ability to fund directly further acquisitions and a brand which asset management teams and boutiques, I think, increasingly find attractive as a potential home. So I will pause there, hand back to Andy. Andrew Edmond: Great. Thank you very much, both of you. Very thorough detail and a very clear presentation. Plenty of questions coming in, so let's go straight into them. Exuberance is a long way of describing the -- some of the flows money in recent years. And it certainly seems to be the case that some clients who put money with Impax have only had a short-term lived interest in sustainable investing. As you mentioned Ian, 27 years, this business has been going. Could you give more of a perspective about how long typical mandates might last on average in recent years or over that period. and give a bit more comfort on the stickiness of institutions who are genuinely interested in investing in this space? Ian Simm: Okay. That was quite a long question. So I think the easy way to address that is to say that there's two types of clients that we've seen recently, the long-term clients that have been with us for 5 to 25 years and then the more recently arrived clients. So I think the more recently arrived clients who've probably been less patient, and many of them came in with a very strong tailwind to the sector in the 2019 to 2021 period. And aggressively, that was pretty much the top of the market. So they're the ones who've experienced the most significant negative impact from the cycle. So as implied by the question, the longer-term clients generally are still with us at scale, as Tara mentioned, there's over 80 clients and that's 80 contracts. So some of those contracts will be with funds with multiple, in some cases, hundreds of underlying clients. What's the outlook for the business in terms of clients? Well, I think there's a very good chance that those longer-term clients will ride out the cycle because they've not lost as much money from -- because they didn't invest in the peak but also probably understand what we're doing better than the more recently arrived ones. But then as I said several times, we do have a great client outreach and client service team all around the world, so we're well placed to win additional business. Andrew Edmond: Very clear. Thank you. Right. You have consistently sought to grow fixed income and private markets to diversify the business. Does the Board have a longer-term target in mind for what might be a more balanced and ideal split between listed equities, fixed income and private markets? Ian Simm: Well, the Board doesn't have a formal target, and there's no statement as to what we're aiming to achieve. But I think if you look at other firms at a slightly bigger scale who do both fixed income and listed equities, then it's not uncommon to have two equally sized divisions. I think the uncertainty really is around private markets, which generally are more difficult to scale and where you need to be very careful about quality because if you don't deliver consistently good returns, then it's almost impossible to grow further. So we do enjoy the market insights and relationship connections for -- in the industry that our private markets team build or offering us, but we're not in a hurry to expand that area as rapidly as we think fixed income will expand. Andrew Edmond: Okay. Just on private markets, we have a question. Would you describe their activities as more VC than PE or the other way around? Ian Simm: Well, these terms tend to be a little bit slippery as I'm sure the questioner knows, the way we describe what we do is value-add infrastructure. So we are looking to get a capital gain by backing the developers of new assets and by putting money into -- from the construction of the new assets and then once the assets are built, we sell them. So that's why there's an infrastructure style, but it's value add in the sense of having a relatively short turnaround time and not owning the assets for yield, which would be a more sort of core or core plus based infrastructure strategy. Andrew Edmond: Okay. And whilst we're checking definitions, we have someone asking if you could just describe in a bit more detail what systematic equities products involve and who are the typical buyers for such products? Ian Simm: Sure. Yes. So one of Impax' strengths is the creation of taxonomies or universes of thematic stocks that fit the criteria, for example, in the water sector, we have a taxonomy of water stocks, water-related stocks or similarly in the food sector. So at the moment, our actively managed strategies, look at those universes and pick stocks through the judgment of the individual fund manager in a systematic equity strategy for, for example, water or food, the human intervention would simply be to check how the computer was doing in performing the same exercise, so computer and systematic would basically pick the stocks by running a very large number of portfolios of different weightings and different stocks and recommend the best one. So then the human intervention is simply to make sure that the output is consistent with the process. So less human intervention, lower tracking error or lower deviation from the benchmark and as a result, probably lower fees to the clients, but an ability to scale very considerably. Andrew Edmond: All very clear. Karen, I think this one might be for you. You mentioned that adjusted operating margins are hopefully going to move back to what have historically been much higher levels. It seems like most of the heavy lifting has been done in cost control. So can you just identify where your confidence is coming from on the other side of the equation is that operational leverage as assets grow? Or is it margins, if you can just elaborate? Karen Cockburn: Yes. So we have been very diligent, I think, this year in cost reduction and we sort of -- I want to say we have the cost base that we believe is the right cost base for the opportunity that's in front of us. So where would the confidence come from is where I'm being cautious. So that's why I say over the medium rather than the short term is the fixed income. They come -- they're large mandates that we've sort of -- we have in place our distribution network. So we have in place and that team of 23 investment professionals. We have a 10-year track record. So our investments have been made in that area that really should be scaled -- that will -- is our main opportunity for scaling. So I think the way I look at it is that we have really refined the cost reductions, what they did was really refined the listed equity cost base. So when that grows again, that will grow without much investment. But the real sort of step change will come from me in the fixed income growth. And the piece that I can't call is just the timing on that, but all the infrastructure is in place to enable that. Andrew Edmond: Yes, makes sense. Geographical question. North America or North American operations provided about 40% of your revenues. Could you give us an indication of the split between America and Canada in that number? And looking ahead, do you think that the sheer scale of the U.S. economy is the bigger opportunity? Or is it perhaps that Canada, which is certainly at the moment, more pro sustainability may prove the more interesting area to invest in? Ian Simm: Well, we've had some distribution in the United States since 2008. In fact, we brought our distribution partner, Pax World management in 2018. And we have, therefore, a very nicely positioned mutual fund platform serving the wealth management and to some degree, the retail market as well as an institutional client service group. In Canada, we have initially used BNP Paribas Asset Management but when they decided to pull out of Canada, we were able to pick up their representative who moved from BNP Paribas to Impax and is currently living in Montreal and doing the same job for us directly now. So we've had business in Canada for probably 15 years. In terms of the relative size of Canada, I think I know the answer, but Karen, do you have the exact number? Karen Cockburn: So I'm going to say North America in total is about GBP 10 billion of our asset. And I'd say somewhere mid-15%, probably Canada, 15% to 20%. Ian Simm: Yes. So that is heavily skewed to the wealth management market through distributors in Ontario and Quebec. A little bit of institutional, but it's mainly wealth. I do think there's very strong potential for that platform to grow because I think Canadian individuals and families are very well disposed towards and interested in the transition to a more sustainable economy. In the United States, I think, clearly, we need to be careful where we market. We do have a very well-established client base with the so-called wire houses, which will be the groups like JPMorgan, Morgan Stanley, Bank of America, Merrill Lynch and to some degree, Raymond James, Wells Fargo. And those represent very scalable relationships. There's also quite strong consultant following for -- amongst U.S. groups like Cambridge Associates who know our strategies very well, and there's a large number of institutional investors, particularly East Coast and West Coast who are still very interested in this area. So as a net or summary of all that, I would say that the North American opportunity is still very attractive in spite of the federal political headwinds and we do have a team of about 110 people in U.S. with one person in Canada who are building on our brand, which has been there since actually 1970s, which was the origins of taxable management. Andrew Edmond: Great. A couple of questions on the BNP channel, which I'll put together. Historically, Ian, I think you've explained that their outflows last year were mostly driven by top-down asset allocation at their end. And there is an additional -- there's a question, is that why it's stabilized in recent months? And an additional question, is it a question of the BNP sales force being more focused on your product and the two may well be linked. Ian Simm: I think that BNP Paribas Asset Management is well known throughout Europe as a money market funds and fixed income specialist with equity funds being a key component, but not as big or is a sort of high prominent, as prominent as those two other asset classes. So as you correctly pointed out, Andy, I've said before that in the last two or three years, BNP has been recommending to its wealth management clients, wealth management sector clients that they have a relatively conservative portfolio. So I think, yes, the fact that the outflows have been dropping does suggest that the central gatekeepers are incrementally more positive about equities and the salespeople are, therefore, proposing that allocation to equities are improved. So the other components in that story is the acquisition by BNP Paribas Investment Management of the counterpart in AXA, so AXA Investment management, which dramatically increases the size of the aggregated team. So we're looking forward to more distribution potential through a much larger platform. Andrew Edmond: Good to hear. And last question, I think, with some providers of asset management services, withdrawing from the sustainable investment area. Has that changed the identity of competitors that you come up against in tenders in recent months. Do they still tend to be firms with global reach, like yourselves? Or might there be local experts based in the region, be it Asia or America? Ian Simm: Well, if we cast our minds back 5 or 6 years or longer, then there was a group of specialist players with global reach who we would generally come up against. It's probably half a dozen names. And those groups are still around because like Impax, they are focused on not necessarily dedicated to you, but focused on this transition to a more sustainable economy. Around 2019, 2020, as I've mentioned, many of the very large asset managers in the world developed products in this area, and many of them, if not most of them, have actually bought back. So we're left with the same old group of experienced peers. But frankly, no one is as large as Impax in terms of resources. I think we are globally the largest manager dedicated to this area and probably the most diversified client base. So we are well placed to win mandates. And meanwhile, as I've said, the asset owner community is still very interested in what we're doing, albeit some of the pension funds, for example, in the southern part of the U.S. are fearful of coming into the space because of the political backlash. But if you strip that out, then the rest of the market is still very interested in what we're doing. Andrew Edmond: Great. Very good notes on which to finish the Q&A. Thank you to the audience for many questions. Thank you, of course, to our presenters. And Ian, perhaps would you just like to summarize the positive outlook? Ian Simm: Sure. Yes. Well, thanks for joining. Thank you to Equity Development for hosting. I think investment has to be a medium-term game. Otherwise, it becomes impossible to do other things in life. And I think Impax is fantastically positioned for medium-term success given our globally leading brand in an area which is set for further expansion. And the market is overdue a return to a more normal broader structure with less dominance by a handful of names. And in that context, our investment performance should be bouncing back fairly promptly. And when it does, then I think the flows can pick up very quickly. So we also have a good track record of acquisitions. We have a very strong culture management, as Karen says earning around 20% of the business, so very nicely aligned with external investors. So we really value the connection with everybody. Thank you to everybody who's dialed in and particularly those who've dialed in before and are following us. We're always available for one-on-one questions, if there's anything you'd like to address to us directly and look forward to staying in touch. Andrew Edmond: Thank you. Ian Simm: Thanks, Andy. Appreciate it.
Andrew Edmond: Right. Okay. Welcome, everybody, again. We're going to hear very shortly about Impax' full year results for the period up to the end of September. I'm just going to go through a few admin points. First of all, this presentation is being recorded, so you will be able to watch it again and you'll also be able to see the slides that are presented by the management. There will be a feedback form to the audience after the event, which both ourselves and the management would be very grateful if you can take just a minute or two to share your thoughts on that. For those of you not familiar with Zoom, you will see in the options button under more and then Q&A.. An obvious place to please write your questions and we should have plenty of time to go through those at the end of the formal presentation. On which we're very delighted to be joined again by CFO, Karen Cockburn; and Ian Simm, who is the CEO and of course, the founder of Impax Asset Management, and I am now going to pass over to Ian to commence the presentation. Ian Simm: Okay. Andy. So without further ado, just straight into the agenda. So three things to cover, I don't think we need to get through the appendices, but I'm going to give a quick summary. Karen will then cover the financials, and then I'll come back with a brief summary of the outlook. So many of you perhaps have not met us before, but why it Impax asset management? Well, we believe there's an enormous investment opportunity worldwide over the next 5 to 15 years in what we call the transition to a more sustainable economy which essentially is based on a mainstream capitalist idea that consumers are increasingly looking for more efficient, less polluting goods and services and that would cover areas like clean energy, infrastructure, smart materials, food and agriculture and many others beyond that. This is not about ethical investing, it's about thematic or sector-specific opportunities. Impax has been in business since I started the company in 1998, and we've become a global player. We have clients all over the world. Over the last 5 years, we've initially seen a rapid expansion in competition as many of the large branded houses in our area or in the asset management area have decided they wanted to develop and launch products in climate change or related topics, but many of those players have recently retreated in the wake of some challenges, particularly from U.S. regulators around their response to fiduciary duty. Many of them have confused themselves and the market as to whether they're trying to make money or save the world, whereas Impax is very clearly been aiming to make money, but in areas where those investors looking for good environmental outcomes, there is a tangible nonfinancial benefit. So a global player with weakening competition. And crucially, our business strategy is focused on scaling the business. So as you'll see, we have three elements: listed equities, fixed income and private equity, each of which is positioned to be scalable. And we are well on the way to scaling fixed income. We've already scaled listed equities and in private markets, we are well established with the planned scale in the future. And of course, a scaled business model will deliver a rapid growth of returns to shareholders. Next slide, please. So what's behind this transition to a more sustainable economy? Well essentially, it's about disruption, which creates market uncertainty around pricing. So the disruption is coming from technology change, from regulatory change and from changing consumer sentiment in areas like electric vehicles and transportation, in renewable energy, in the rapid growth of infrastructure investment, for example, water supply. The regulations in these areas are changing as rapidly as the technology. And so there's plenty of opportunity around the mispricing of both publicly traded and privately held assets. So these sectors have been transformed. And therefore, there's an opportunity for a specialist manager with significant resources to more insightful research than the average market investor and therefore, to uncover value. So that's basically what we're doing. Next slide. So as Andy said, these are from now on the results for our financial year ended 30th of September 2025, the six elements of the business highlights that I've shown here so it has been a particularly challenging market for investors this year, we don't need to tell you that, but it's been a continued dominance in some parts of the year by the so-called magnificent 7 stocks or AI-related mega cap names in particular. At other times, the market has been quite broad. So timing of those changes has been quite challenging. We -- after a period of rapid growth in the 2019 to 2022 period, we have outflows to negative, but the net outflows are initially quite significant -- at the start of this financial year have become significantly improved in the second half. As I'll show in a moment, the valuation of the main equity strategies that we're running has become quite compelling. So this does represent an attractive buying opportunity. Meanwhile, from a broader perspective, as we seek to develop further scale and opportunities to build the business further, we're making quite significant progress, particularly with the acquisition of SKY Harbor, a unit focused on high-yield investment management in the fixed income space. Meanwhile, we've been increasingly focused on efficiency in our business operations and we've reduced our cost base, but not in sacrificing our ability to grow or our financial strength. So the business remains very strong with a very material balance sheet such that we've been able to announce and we're nearly completed with a GBP 10 million share buyback program. Next slide. So Karen will cover the financial highlights in a moment, so I won't steal her thunder, but if you eyeball these numbers and compare them to the smaller numbers below FY 2024, you'll see that things have generally retreated, and that's on the back of the outflows that I just mentioned. So I'll come back to the details, but still healthy results in absolute terms, but less than they were the previous financial year. So the market has been challenging. I think the backdrop here is that consumer confidence has been fragile and is probably weakening, particularly in the U.S., and that's been precipitated by the tariff interventions, geopolitical tensions and the consequences for inflation, not least of which concerns about government debt. So we're not definitely heading into a downtown or recession, but over the last 6, 9 months or so, there's been concern about that fragility. And so that has really caused institutional investors to be cautious while at the same time, retail investors are seemingly ignoring those signs and continuing to plow our money into the stock market. A lot of the asset owners in the world are looking back at the last three years, seeing that the very, very narrow market with the AI stocks dominating as -- caused a problem for active management and say there's an increasing interest in the non-actively managed or so-called systematic strategies where Impax does have quite a nice established base. Meanwhile, fixed income markets have been pretty well positioned this year, but the relatively tight spread, particularly compensation for risk premium is holding everyone back at the moment. And in private markets, there's a huge amount of capital chasing the larger deals but Impax is playing in the small to midsize area where there's still plenty of value to be harnessed. Next slide. So I'm afraid in this presentation, there's a couple of very busy slides. This is the first of them and best to look at this in 4 quadrants. So water in the top left, leaders, specialists and global opportunities are our 4 largest sources of revenue in terms of investment strategies. And in each of the quadrants, there's a pair of bars for each of the last 5 years, the dark blue bar is the return in the year from the Impax strategy compared to the all Country World Index in yellow. So if you look at the right-hand end of each of the quadrants, you can see that in 2021, we outperformed the market. But in each of these strategies for the last four years, we have not kept pace the market. And that's been accompanied by -- or driven by a significant derating and the bursting of the valuation metrics that we've seen back in 2021. So we do feel that we're at the bottom of the cycle at the moment because we are tilted towards certain areas of economy, then it's very common as we've seen on a couple of occasions, probably three occasions in the last 27 years that we are out of favor relative to the main market for a period and then we come back into favor. So we are long a return to being in favor. And I think the catalyst for that return are starting to appear. It's probably a little bit too early to announce that we're definitely out of the woods. Hopefully, that will materialize in the new year. Next slide. So on this valuation point, just some data around 2 of those 4 strategies I referred to, water and specialists. This is a -- in each case, a 5-year comparison between September '20 and September 2025 of something that's called the PEG ratio or price earnings to growth so that the ratio of price earnings, which is a metric of valuation divided by the growth rate. So a high number here means quite expensive, a low number quite cheap. So the dark blue, again, Impax' strategy against the Country World Index benchmark in yellow. So September 2020, we were trading at a premium in both of these strategies, and now we're trading at a notable discount. So this is what I was referring to earlier about the compelling nature of the valuations now relative to where we were 4 or 5 years ago. Next slide. So same busy slide, but this time for fixed income, same quadrant arrangement this time for our 4 major fixed income strategies. The top left is the one we just picked up with the acquisition of SKY Harbor, which just closed first of April this year. And the bottom right, global high yield is the strategy we picked up last year 2024 from the acquisition of Absalon Capital Management in Denmark. And then the other two strategies are the fixed income strategy we've had since 2018 when we bought Pax World management in the United States. So if you do the same comparison blue bar against yellow bar for each of the years, then you can see that, broadly speaking, the fixed income strategies are either ahead of benchmark or not too far behind. So this is a much more robust area where the underperformance or outperformance is much less pronounced, much less cyclical, but this is what clients really want something which is a bit more reliable with lower probability of deviation. So these strategies are actually quite nicely positioned, and we've got a very good pipeline in this area. Next slide. I'm afraid that I'm just [ trotting ] through a set of slides that we present on a semiannual basis. So if you're not that interested in the numbers, apologies, this is how we put everything together, but I'll just keep going. So what this does is it shows the bridge on -- from the left, which is our assets under management in GBP 1 billion at the end of 2024, financial year 2024. So that's GBP 37.2 billion through the half year period or half year point rather in green, GBP 25.3 billion to the end of September, GBP 26.1 billion. So this is the bridge shape. So I'm sure if you followed us for a year, you'll have heard the press news about us losing a mandate from St. James's Place announced back in December, and this actually landed in February, so that was GBP 6.2 billion of asset under management reduction. And then the outflows and inflows in the first half were negative about GBP 4 billion offset by some market movement -- or sorry, first half was compounded by some market movement down. And then in the second half, the net flows were GBP 2.7 billion, so a significant improvement in the second half. We got the acquired assets from SKY Harbor acquisition and then markets were positive in the second half. So as you can see, comparing the green, blue and yellow, we had a particularly significant drop in the first half of the year and then a slight increase net-net in the second half. So I think that does point to a stabilization of the business. Next slide. This is a breakdown of our assets under management and revenue. So the first two columns shown in the blue bars, the Impax financial year end position. And the yellow bar this time is our position a year earlier. So starting with the left-hand column, our thematic equities represented 64% of our asset under management at the end of September 25, up slightly, core equity is down because that's where the St. James's Place mandate dropped from. I'm not going to read out all these numbers, but I hope you get the idea. So the regional breakdown in the middle shows that the EMEA region and North America region were down moderately, but the U.K. was down considerably as a percentage -- sorry, the North American and EMEA was up slightly, but that was because the U.K. was down considerably as a result of the St. James's Place mandate loss. And then by product type, the revenue is shown again in blue bars. So just worth pointing out the BNP Paribas mutual funds, which remains our largest aggregate client, 25% of revenue coming from them. Just stable compared to 12 months earlier. Next slide. And the movement inflows or assets under management, this is in GBP 1 millions. But basically, if you divide by GBP 1,000, you get to GBP 1 billion. So St. James' Place, that's the GBP 6.2 billion outflow. Notable here on this slide is the middle top, which is the significantly reduced outflows from BNP Paribas. So that's encouraging and has continued to decline into the new financial year. And then segregated accounts on the bottom right is actually a Asia Pacific institutional investor that was paying us a very, very low fee and a performance fee. So we're not too disappointed to see that one go. Next slide. So moving on from the numbers to our strategic priorities, of which there are 6. So essentially, we're looking to scale the business in equities, fixed income and then grow private equity. That's the top line. And then the bottom line, build our sales and marketing, all our distribution channels, deepen our partnership with clients and then optimize our operating model. So a little bit more detail on these coming up. Next slide. So starting with listed equities. We are continuing to enhance our investment process, using technology and of course, AI, to which we're doing through a careful set of experiments. We have introduced more structure into our research team. And then in the product area, we are launching our first exchange-traded fund in the United States, which will happen in a couple of months' time, we are expanding our systematic equity product range and we've launched our new emerging markets fund. Next slide. In distribution, there's much more work being done to sell to clients directly in German-speaking Europe, which is DACH, Scandinavia, Benelux and France, and then we have a very good sales colleague in Canada. Through this channel in the Benelux area, we've won a very large segregated mandate, which landed in June. And meanwhile, our Sustainability Center is continuing to provide a differentiated service to clients. I'll come back to that in a moment. The -- in addition to the reduced outflows from BNP Paribas, we have been cultivating further partnerships for distribution in the Asia Pacific region, Latin America and Southern Europe. Meanwhile, our brand continues to resonate globally and as our competitors pull back, as I was saying at the start, then we're seeing an increasing opportunity not just for winning new [indiscernible], but also for winning mandates that clients are wanting to switch from some of these large branded houses that they no longer want to do business with. Next slide. So fixed income, as I mentioned, we completed the acquisition of SKY Harbor in April. We now have 23 investment team members, which is critical mass. That compares to 5 when we bought the Pax business. Client base is now spread nicely over both Europe and the U.S. with an established set of products around those 4 major strategies. We're making very good progress in adviser or consultant endorsements. These are essential for gatekeeping for the major asset owners and we're starting to extend our wealth management profile, not just in the U.S., which we've had for a number of years, but also now in many markets in Europe. So lots to look forward to in fixed income, and I think there's a good chance of a rapidly expanding set of inflows here. Next slide. And then in private equity, for those of you that don't know us in this area, we have been, since 2005, running a series of 10-year funds, we call them limited partnerships, and they are investing in the renewable energy space, particularly backing the developers of renewable energy assets all around Europe. These developers tend to be relatively small companies. They are relatively under-resourced in financial terms, and therefore, they're very happy and keen to do work with a sophisticated and well-capitalized or well-sized fund manager like Impax. So we are making very good progress with exiting our third fund and also deploying our fourth fund. So regulation around what you can say in this area around expansion, but I'll leave you to join the dots about what happens next. So we're making good progress in expanding this business. Meanwhile, the efficiency programs continue to develop because of the drop in assets under management, we've been able to reduce headcount from about [ 320 rolls to 275 ], so that's a drop roughly 15%. Frankly, that did actually reflect an inefficiency in our expansion 2019 to 2022 period when we were growing extremely quickly. And the way that we added roles at that time was probably not optimal. So many of these positions have been eliminated without any loss of capability. So crucially, we've been able to downsize the head count without any reduction in that capability or in our growth potential. And meanwhile, there's plenty of project work underway to improve our efficiency with the broader adoption of technology. That may well lead to further head count reduction in the future, again, without compromising our growth potential. And then as I said, the sustainability center, this essentially is helping our clients in 4 or 5 ways. So we are through the center, enhancing our research, we are coordinating our engagement and stewardship work with underlying companies. We're providing detailed reports to clients around nonfinancial outcomes, and we are helping them with thought leadership information, for example, around physical climate risk and at the same time, working on a collaborative basis with them around the engagement with policymakers so that there can be a financial expertise injection into new market creation and the associated regulations. At which point, I think I'm handing over to Karen. Karen Cockburn: Thank you, Ian, and thank you all for your time this afternoon. I'm just going to take you through those numbers that Ian's flashed in front of you there at the start. But it do reflect that Ian's comments that we find ourselves at the bottom of the cycle and numbers still a healthy profit but do reflect the level of outflow that we have seen this year. So starting with on Monday, we announced then the adjusted operating profit of GBP 33.6 million and the EPS sitting at 21.3. Now both of those numbers down by just over 1/3 from the prior year. And you can see that it's a net reduction of GBP 19 million, and that has come from a GBP 28 million reduction in revenue being offset then by the cost action that Ian referenced by about the savings that we made in year of GBP 9 million. Important, I think, we'll get into in a little more detail that as we did lose some of those larger clients, the actual fee margin, a key measure for the health of the business did improve. Now we finished the year in an operating margin of 23.7% and also finished the year with the balance sheet in very good health with capital and cash surplus. And on the back of that, proposing a dividend of 8p, 12p for the full year, representing a payout of 55.7%, and that's aligned to our dividend policy, a nice set our dividend payout, a sustainable rate. And then we finished a busy year also with a buyback, our first-ever buyback, which I'm happy to say is well on track for completion for the end of the calendar year. So the next slide looks at the revenue in a little more detail that sort of just unpacks that sort of reduction that we saw in the year, but it's predominantly driven by the reduction in the AUM. Based on Ian's slide, if you recall, that started the year at GBP 37 billion, but finished at GBP 26 billion. The average is for the two years are the ones that really drive sort of the revenue calculations and you can see that they have dropped reflecting that outflow. So just looking at the bridge, you can see the significant drop in the income year-on-year was this level of outflow and you can see SJP being the largest contributor to that. Now that was offset by favorable market movement and then the impact of the acquisitions as we build out our fixed income capability that took the full year to GBP 141.9 million. Now looking at asset management, it's usually important just to see where we are today. And there's a figure in the circle at the bottom of GBP 126.1 million. We call that the run rate, which is where we find ourselves and September times 12. Now what that figure reflects, it's important to sort of say the level of outflow that we had, 80% of it happened in the first half of the year. So the business has been in a very stable position of GBP 26 billion plus or minus a little for the last 6 months. And that's the position that we look for -- that we would like to retain before we push on for growth. In terms of looking at sort of where we think a number like that, I know you all have models and how that might outturn for the year. The guidance that we gave to the broad analyst community of which equity development takes part in our consensus is really very conservative that it's difficult to call when we expect sort of the growth to return, but we have many reasons to be optimistic as we talk there about the fixed income opportunity systematic and the ETF that we're very active in terms of new product. But I'm being very conservative in terms of where I see that coming in. So I expect the revenue to be a figure still beginning with a 1, maybe with a 3 at some point in the next 12 months. Now a really key component of looking at the AUM then is the average fee margin, which you saw increased to 46.9 in the year. Now that is the fee that's made up of over 80 clients and about 90% of that -- 95%, it comes from our listed equity business. And then about 10% of our business is this fixed income. So a combination of those as we grow forward, I expect to see sort of that run rate margin of 48.4 basis points come down slowly over time as we do grow that fixed income business. But that is a very healthy, well diversified supported by 80 clients margin and a sign, I think, of the underlying strength of the business. I then move on to look at costs on the back of that outflow that we had with a very active cost management program and the 45 people left the business. You can see in the bridge that the two orange blocks that we talk there are really staff related, so 45 people resulted in GBP 5.6 million saving in the year. On average, they left maybe 6, 7 months into the year. So that will gross up to over an GBP 11 million saving as we move into the new year. For those that follow us, a very important policy that we have is the level of variable staff cost. That's the bonus pool. We align that very closely to investor interest in that the policy is to pay out no more than 45% of the pre-bonus profits in the form of bonus. So what that means is that with that adjusted profit, the reduced profitability coming through, and it is the simple mathematics of that takes that into a saving, but the key point being very aligned. So a significant cost reduction in the business. And then we continue to invest -- whilst removing costs, we will continue to invest in the areas where we do see the opportunity for growth, and that's where you see the cost base build back up marginally, the acquisition of SKY Harbor bringing in additional cost and also then sort of just the regular inflation view. But where we finish the year is that whilst the cost across that bridge dropped by GBP 9 million, the two figures at the bottom of the table show you the actual run rate cost of the business reduced by GBP 20 million, so we have been able to respond to quite a significant amount of the AUM and flow loss that we've had. Just very quickly, looking down the left-hand side, you can see the head count there that has reduced, 45 heads came out. We did add some further into our fixed income business. We now have 23 investment professionals in our fixed income business. So that's a business ready to scale. And you can see the cost reductions just came broadly out of -- across the whole business rather than any one specific area. So our refined cost base is what we're taking into the new year and then bringing the revenue and the cost together just to look at that operating margin, 23.7. We have enjoyed a number of years previously in the 30s, and we feel confident about getting back into an operating margin of 30% in the medium term. So that's really finishing off on the P&L. Very quickly on the balance sheet, moving on to a couple of slides to say all in very good health. And with health finishing the year with GBP 64.7 million of cash on the balance sheet, significant healthy surplus in that. Key uses of the cash this year, it has reduced and broadly because of the relatively large prior year dividend being paid out of this year's reduced operating earnings. We -- and the acquisition of our own shares, which is the buyback. And also, we continue to buy shares into our EBT to further align our staff to shareholders. and of course, the purchase of SKY Harbor, which happened in April for $6 million roughly that comes out of that figure. So that leaves us with very healthy cash balances and on the back of that paying a dividend yield of 6.9%. Again, a very clearly defined policy that we've had for dividend over a number of years which is to pay out at least 55% of adjusted profit after tax. And this year, we're just -- we're putting this 55.7% to a sustainable rate. Now that level of dividend of 12p for the year plus the buyback, I'll talk about that in a moment. That's putting GBP 25 million, a significant amount of cash back in shareholders' hands over the period. Based on that dividend payout, looking on the next slide, at capital, again, remains with very healthy surplus. There's no debt in the business. We continue to generate capital. It shows we will -- it shows that actually the surplus there in that orange box looks as if it increased in the year. Once we complete the buyback, you'll see that reduce slightly. And then also an important message for me, just like costs where we're invested for growth. Our capital, we also have nearly GBP 17 million in seed capital, where we see growth opportunities. When we're doing this presentation, I think always important to talk about our capital allocation priorities. These have not changed since we updated at the half year when we restated our capital allocation policy. But the real priority right now in this period of volatile earnings is the financial resilience we will seek to pay the sustainable dividend. I mentioned we continue to purchase shares into the EBT. And then there always is the excess that we will carry looking for growth to invest into the business but also seeking to grow by small accretive acquisitions has always been part of the DNA of the organization, and that continues. And then just a page to finish with based on looking at the buyback. Just to confirm, we announced on the 22nd of May, a buyback of GBP 10 million. At the 30th of September, when the accounts, when you read them, you'll see that we had about 1/3 of that completed. We had a very active last couple of months and finish as of the day of the -- on Monday's date of announcement that we had 89% complete of the program. We, therefore, expect to complete that over the coming weeks. Net-net base, give or take a bit on where the share price is, we expect to be canceling up to 4% of the opening share capital on that. EBT. So just to sort of -- we've mentioned that, we continue to buy shares, spending GBP 3.4 million this year. And the EBT holds a significant portion, GBP 5.9 million of the issued share capital of the business. And then I just wanted to call out, we haven't looked at it for a while in these presentations, it's just that the broad shape of the share ownership with BNP being the largest asset holder and also being the largest shareholder of the business with 14%. That has been at that level for quite some time. And then we do seek and hence, why we continue with this EBT -- capital. We're seeking to have employees whether it be to own up to 12% of the issued share capital as well. Of course, we've got the founders in there and the free float. But that's always been a broadly stable set of shareholdings. With that, until our time for questions, I will hand it back to Ian. Thank you. Ian Simm: So just to wrap up on the outlook slide. So look, I think the investment management market is really an interesting juncture. The major asset owners around the world are increasingly looking for specialist investment management service in differentiated areas. So this is where Impax really stands out because for more than a quarter of a century, we've been focused on an area of the economy that is growing in a sort of secular way in the direction of more and more provision of cleaner less polluting goods and services. So there are some political bumps in the road around, for example, U.S. energy policy. But frankly, that's what asset management in the active area is all about. So we're able to navigate these political headwinds very successfully. So our differentiated brand does give a very easy calling card to the world's major asset owners, pension funds and sovereign wealth funds. And we've got a very wide base of such clients already. We also have offices in the U.S., a couple of offices in Asia and throughout Europe. So we're well placed to reach out to other potential clients in this space. The equity business relative to fixed income and private markets still dominates with 90% roughly of our value or our revenue coming from listed equities. And as I'm sure you appreciate, strategically, we are trying to diversify that by growing fixed income and private markets so that the business is less dependent on the equity market cycle. We haven't got that yet because it takes time to diversify. And therefore, we have been exposed in the last 3 or 4 years to that equity market cycle, which is similarly at the bottom, and we're waiting for a recovery. But in the meantime, the AI phenomenon is delaying that as more and more capital chasing the very large AI stocks. So I think the wide expectation in the market is that 2026 will be broader, there'll be less dominance by the major cap tech, AI names. And in that context, we ought to bounce back to outperformance. So the business development and diversification of business will continue. We're not signaling any more acquisitions at the moment, but that's certainly part of our medium-term plan. And in that context, as Karen laid out, we have a very strong balance sheet and ability to fund directly further acquisitions and a brand which asset management teams and boutiques, I think, increasingly find attractive as a potential home. So I will pause there, hand back to Andy. Andrew Edmond: Great. Thank you very much, both of you. Very thorough detail and a very clear presentation. Plenty of questions coming in, so let's go straight into them. Exuberance is a long way of describing the -- some of the flows money in recent years. And it certainly seems to be the case that some clients who put money with Impax have only had a short-term lived interest in sustainable investing. As you mentioned Ian, 27 years, this business has been going. Could you give more of a perspective about how long typical mandates might last on average in recent years or over that period. and give a bit more comfort on the stickiness of institutions who are genuinely interested in investing in this space? Ian Simm: Okay. That was quite a long question. So I think the easy way to address that is to say that there's two types of clients that we've seen recently, the long-term clients that have been with us for 5 to 25 years and then the more recently arrived clients. So I think the more recently arrived clients who've probably been less patient, and many of them came in with a very strong tailwind to the sector in the 2019 to 2021 period. And aggressively, that was pretty much the top of the market. So they're the ones who've experienced the most significant negative impact from the cycle. So as implied by the question, the longer-term clients generally are still with us at scale, as Tara mentioned, there's over 80 clients and that's 80 contracts. So some of those contracts will be with funds with multiple, in some cases, hundreds of underlying clients. What's the outlook for the business in terms of clients? Well, I think there's a very good chance that those longer-term clients will ride out the cycle because they've not lost as much money from -- because they didn't invest in the peak but also probably understand what we're doing better than the more recently arrived ones. But then as I said several times, we do have a great client outreach and client service team all around the world, so we're well placed to win additional business. Andrew Edmond: Very clear. Thank you. Right. You have consistently sought to grow fixed income and private markets to diversify the business. Does the Board have a longer-term target in mind for what might be a more balanced and ideal split between listed equities, fixed income and private markets? Ian Simm: Well, the Board doesn't have a formal target, and there's no statement as to what we're aiming to achieve. But I think if you look at other firms at a slightly bigger scale who do both fixed income and listed equities, then it's not uncommon to have two equally sized divisions. I think the uncertainty really is around private markets, which generally are more difficult to scale and where you need to be very careful about quality because if you don't deliver consistently good returns, then it's almost impossible to grow further. So we do enjoy the market insights and relationship connections for -- in the industry that our private markets team build or offering us, but we're not in a hurry to expand that area as rapidly as we think fixed income will expand. Andrew Edmond: Okay. Just on private markets, we have a question. Would you describe their activities as more VC than PE or the other way around? Ian Simm: Well, these terms tend to be a little bit slippery as I'm sure the questioner knows, the way we describe what we do is value-add infrastructure. So we are looking to get a capital gain by backing the developers of new assets and by putting money into -- from the construction of the new assets and then once the assets are built, we sell them. So that's why there's an infrastructure style, but it's value add in the sense of having a relatively short turnaround time and not owning the assets for yield, which would be a more sort of core or core plus based infrastructure strategy. Andrew Edmond: Okay. And whilst we're checking definitions, we have someone asking if you could just describe in a bit more detail what systematic equities products involve and who are the typical buyers for such products? Ian Simm: Sure. Yes. So one of Impax' strengths is the creation of taxonomies or universes of thematic stocks that fit the criteria, for example, in the water sector, we have a taxonomy of water stocks, water-related stocks or similarly in the food sector. So at the moment, our actively managed strategies, look at those universes and pick stocks through the judgment of the individual fund manager in a systematic equity strategy for, for example, water or food, the human intervention would simply be to check how the computer was doing in performing the same exercise, so computer and systematic would basically pick the stocks by running a very large number of portfolios of different weightings and different stocks and recommend the best one. So then the human intervention is simply to make sure that the output is consistent with the process. So less human intervention, lower tracking error or lower deviation from the benchmark and as a result, probably lower fees to the clients, but an ability to scale very considerably. Andrew Edmond: All very clear. Karen, I think this one might be for you. You mentioned that adjusted operating margins are hopefully going to move back to what have historically been much higher levels. It seems like most of the heavy lifting has been done in cost control. So can you just identify where your confidence is coming from on the other side of the equation is that operational leverage as assets grow? Or is it margins, if you can just elaborate? Karen Cockburn: Yes. So we have been very diligent, I think, this year in cost reduction and we sort of -- I want to say we have the cost base that we believe is the right cost base for the opportunity that's in front of us. So where would the confidence come from is where I'm being cautious. So that's why I say over the medium rather than the short term is the fixed income. They come -- they're large mandates that we've sort of -- we have in place our distribution network. So we have in place and that team of 23 investment professionals. We have a 10-year track record. So our investments have been made in that area that really should be scaled -- that will -- is our main opportunity for scaling. So I think the way I look at it is that we have really refined the cost reductions, what they did was really refined the listed equity cost base. So when that grows again, that will grow without much investment. But the real sort of step change will come from me in the fixed income growth. And the piece that I can't call is just the timing on that, but all the infrastructure is in place to enable that. Andrew Edmond: Yes, makes sense. Geographical question. North America or North American operations provided about 40% of your revenues. Could you give us an indication of the split between America and Canada in that number? And looking ahead, do you think that the sheer scale of the U.S. economy is the bigger opportunity? Or is it perhaps that Canada, which is certainly at the moment, more pro sustainability may prove the more interesting area to invest in? Ian Simm: Well, we've had some distribution in the United States since 2008. In fact, we brought our distribution partner, Pax World management in 2018. And we have, therefore, a very nicely positioned mutual fund platform serving the wealth management and to some degree, the retail market as well as an institutional client service group. In Canada, we have initially used BNP Paribas Asset Management but when they decided to pull out of Canada, we were able to pick up their representative who moved from BNP Paribas to Impax and is currently living in Montreal and doing the same job for us directly now. So we've had business in Canada for probably 15 years. In terms of the relative size of Canada, I think I know the answer, but Karen, do you have the exact number? Karen Cockburn: So I'm going to say North America in total is about GBP 10 billion of our asset. And I'd say somewhere mid-15%, probably Canada, 15% to 20%. Ian Simm: Yes. So that is heavily skewed to the wealth management market through distributors in Ontario and Quebec. A little bit of institutional, but it's mainly wealth. I do think there's very strong potential for that platform to grow because I think Canadian individuals and families are very well disposed towards and interested in the transition to a more sustainable economy. In the United States, I think, clearly, we need to be careful where we market. We do have a very well-established client base with the so-called wire houses, which will be the groups like JPMorgan, Morgan Stanley, Bank of America, Merrill Lynch and to some degree, Raymond James, Wells Fargo. And those represent very scalable relationships. There's also quite strong consultant following for -- amongst U.S. groups like Cambridge Associates who know our strategies very well, and there's a large number of institutional investors, particularly East Coast and West Coast who are still very interested in this area. So as a net or summary of all that, I would say that the North American opportunity is still very attractive in spite of the federal political headwinds and we do have a team of about 110 people in U.S. with one person in Canada who are building on our brand, which has been there since actually 1970s, which was the origins of taxable management. Andrew Edmond: Great. A couple of questions on the BNP channel, which I'll put together. Historically, Ian, I think you've explained that their outflows last year were mostly driven by top-down asset allocation at their end. And there is an additional -- there's a question, is that why it's stabilized in recent months? And an additional question, is it a question of the BNP sales force being more focused on your product and the two may well be linked. Ian Simm: I think that BNP Paribas Asset Management is well known throughout Europe as a money market funds and fixed income specialist with equity funds being a key component, but not as big or is a sort of high prominent, as prominent as those two other asset classes. So as you correctly pointed out, Andy, I've said before that in the last two or three years, BNP has been recommending to its wealth management clients, wealth management sector clients that they have a relatively conservative portfolio. So I think, yes, the fact that the outflows have been dropping does suggest that the central gatekeepers are incrementally more positive about equities and the salespeople are, therefore, proposing that allocation to equities are improved. So the other components in that story is the acquisition by BNP Paribas Investment Management of the counterpart in AXA, so AXA Investment management, which dramatically increases the size of the aggregated team. So we're looking forward to more distribution potential through a much larger platform. Andrew Edmond: Good to hear. And last question, I think, with some providers of asset management services, withdrawing from the sustainable investment area. Has that changed the identity of competitors that you come up against in tenders in recent months. Do they still tend to be firms with global reach, like yourselves? Or might there be local experts based in the region, be it Asia or America? Ian Simm: Well, if we cast our minds back 5 or 6 years or longer, then there was a group of specialist players with global reach who we would generally come up against. It's probably half a dozen names. And those groups are still around because like Impax, they are focused on not necessarily dedicated to you, but focused on this transition to a more sustainable economy. Around 2019, 2020, as I've mentioned, many of the very large asset managers in the world developed products in this area, and many of them, if not most of them, have actually bought back. So we're left with the same old group of experienced peers. But frankly, no one is as large as Impax in terms of resources. I think we are globally the largest manager dedicated to this area and probably the most diversified client base. So we are well placed to win mandates. And meanwhile, as I've said, the asset owner community is still very interested in what we're doing, albeit some of the pension funds, for example, in the southern part of the U.S. are fearful of coming into the space because of the political backlash. But if you strip that out, then the rest of the market is still very interested in what we're doing. Andrew Edmond: Great. Very good notes on which to finish the Q&A. Thank you to the audience for many questions. Thank you, of course, to our presenters. And Ian, perhaps would you just like to summarize the positive outlook? Ian Simm: Sure. Yes. Well, thanks for joining. Thank you to Equity Development for hosting. I think investment has to be a medium-term game. Otherwise, it becomes impossible to do other things in life. And I think Impax is fantastically positioned for medium-term success given our globally leading brand in an area which is set for further expansion. And the market is overdue a return to a more normal broader structure with less dominance by a handful of names. And in that context, our investment performance should be bouncing back fairly promptly. And when it does, then I think the flows can pick up very quickly. So we also have a good track record of acquisitions. We have a very strong culture management, as Karen says earning around 20% of the business, so very nicely aligned with external investors. So we really value the connection with everybody. Thank you to everybody who's dialed in and particularly those who've dialed in before and are following us. We're always available for one-on-one questions, if there's anything you'd like to address to us directly and look forward to staying in touch. Andrew Edmond: Thank you. Ian Simm: Thanks, Andy. Appreciate it.
Operator: Greetings. Welcome to the Dollar Tree Q3 2025 Earnings Conference Call [Operator Instructions] Please note that this conference is being recorded. I will now turn the conference over to Bob LaFleur, Senior VP of Investor Relations. Thank you. You may begin. Robert LaFleur: Good morning, and thank you for joining us to discuss Dollar Tree's Third Quarter Fiscal 2025 results. With me today are Dollar Tree's CEO, Mike Creedon; and CFO, Stewart Glendinning. Before we begin, I would like to remind everyone that some of the remarks that we will make today about the company's expectations, plans and future prospects are considered forward-looking statements under the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties, which could cause actual results to differ materially from those contemplated by our forward-looking statements. For information on the risks and uncertainties that could affect our actual results, please see the Risk Factors, Business and Management's Discussion and Analysis of Financial Condition and Results of Operations sections in our annual report on Form 10-K filed on March 26, 2025, our most recent press release and Form 8-K and other filings with the SEC. We caution against any reliance on any forward-looking statements made today, and we disclaim any obligation to update any forward-looking statements, except as required by law. Also during this call, we will discuss certain non-GAAP financial measures. Reconciliations of these non-GAAP items to the most directly comparable GAAP financial measures are provided in today's earnings release available on the IR section of our website. These non-GAAP measures are not intended to be a substitute for GAAP results. Unless otherwise stated, we will refer to our financial results on a GAAP basis. Additionally, unless otherwise stated, all discussions today refer to our results from continuing operations and all comparisons discussed today for the third quarter of fiscal 2025 are against the same period a year ago. Please note that a supplemental slide deck outlining selected operating metrics is available on the IR section of our website. Following our prepared remarks, Mike and Stewart will take your questions. Given the number of callers who would like to participate in today's session, we ask that you limit yourself to one question. I'd now like to turn the call over to Mike. Michael Creedon: Thanks, Bob. Good morning, everyone, and thank you for joining us to discuss our third quarter results. It's great to be with you again. When we recently gathered in New York for Investor Day, I said this was the start of a new era for Dollar Tree, one company, one brand, one focus. Our energy is now directed towards strengthening and growing the Dollar Tree business. We delivered a high-quality quarter, accompanied by mid-single-digit comps, above outlook earnings and strong end-of-quarter momentum heading into the holidays. These results speak to our disciplined execution and focused strategy. Let me start by framing the quarter at a high level, and then Stewart will take you through the financial details. First, I'd like to highlight the strength of our discretionary business, which showed its first positive year-over-year mix shift since Q1 of 2022. We believe this strength illustrates how our exceptional value proposition, including our growing multi-price assortment is resonating with our shoppers by helping them meet their needs and desires in the budget-constrained environment that many consumers find themselves today. The 3 pillars that define Dollar Tree are value, convenience and discovery. Those are not slogans. They're how we win. They describe a brand that offers customers compelling values across a variety of price points that help them do more with less in stores that are easy to shop and full of surprises worth discovering. While the consumer landscape remains uneven, the underlying story remains consistent. All consumers are seeking value. Marrying that value-seeking behavior with convenience and discovery is the intersection where Dollar Tree thrives. And the evidence is clear. Dollar Tree continues to gain share and attract new shoppers while continuing to serve its large and loyal base of core customers. Today, we serve an increasingly broad spectrum of shoppers from core value-focused households to middle and higher-income shoppers who are making deliberate choices about how and where they spend. We had 3 million more households shop with us in Q3 this year compared to Q3 last year. Approximately 60% of these incremental shoppers came from higher-income households, those earning over $100,000, 30% from middle-income households, those earning between $60,000 to $100,000 with the rest from lower-income households, those earning under $60,000. Importantly, Q3 spending growth was broad-based across all income sub cohorts, including households earning below $20,000. To us, this demonstrates that Dollar Tree isn't just for tough times or for those with limited resources. Dollar Tree is for smart shoppers across all income brackets where value, convenience and discovery matter. At the same time, higher income households are trading into Dollar Tree, lower-income households are depending on us more than ever. For example, the average spend for lower-income households grew more than twice as fast in the third quarter as the average spend for higher income households. While part of this reflects the fact that higher income households are typically earlier in their customer life cycle with us, the data clearly shows that our core customer remains loyal and deeply engaged. She's balancing her household budget carefully and continues to count on Dollar Tree for essentials and increasingly for the seasonal and discretionary items that bring joy to her and her family. Over time, our goal is to inspire the same level of loyalty in our newer higher income customers that we see in our core customers. While the average per household spend for our higher income customers is currently lower, even given their higher income, larger average basket size and ability to spend more, this is a simple function of trip frequency. Because many of our higher income customers are still early in their relationship with Dollar Tree, their purchase frequency has significant room to grow. Over time, we believe that growing trip frequency among these higher-income customers, given their propensity to build bigger baskets will be a powerful growth driver for Dollar Tree. This is why our brand promise matters so much right now. We make it easier for customers to do more with less without trading down on quality or experience. And that is what keeps our traffic and baskets healthy in a cautious consumer environment. And with that, let's take a look at some of our Q3 highlights. Comparable sales increased 4.2%, a nice acceleration from the quarter-to-date trend of 3.8% we shared in mid-October. As the results suggest, October finished strong, driven by momentum in our multi-price assortment and a great Halloween. Our Q3 comp was all ticket-driven as traffic was slightly negative. Discretionary mix improved 40 basis points to 50.5%. Comp increased 4.8% in discretionary and 3.5% in consumables. Gross margin performance exceeded expectations, reflecting strong operational execution and cost discipline. Adjusted EPS of $1.21 was nicely above our outlook, and Stewart will go through the drivers behind this upside in his remarks. We believe these results reflect our sharper focus and more disciplined execution. Multi-price was a key driver of our Q3 momentum. As a reminder, multi-price is a deliberate long-term data-driven strategy that began back in 2019 to make Dollar Tree more relevant, flexible and profitable. Multi-price is about evolving our assortment over time to include new, more relevant and attractively valued items that we could not offer at a fixed price point of $1 or $1.25. Multi-price is one of the most important strategic shifts in Dollar Tree's modern history, and it's working. As we highlighted at our Investor Day, the roughly 5.5% annual comp we've averaged since breaking the dollar in 2022 is among the very best in all of retail. Those of you who attended our Investor Day may recall a slide from Stewart's presentation, where he demonstrated how expanded multi-price penetration in categories like electronics, hardware and Easter had a meaningfully positive impact on sales and per unit profitability. We've reproduced a similar analysis on our multi-price Halloween assortment this year, which we've included in our supplemental presentation available on our Investor Relations website. Our Halloween performance this year is another clear example of the power of multi-price. This year, our Halloween assortment generated over $200 million in sales, an all-time record. But to see the full impact of multi-price, let's go back to Halloween 2022 when multi-price was still in its infancy. That year, multi-price represented about 3% of units sold, 10% of sales and 7% of merchandise gross margin across our full Halloween assortment. Fast forward to 2025 on a 25% larger base of sales, where multi-price accounted for roughly 1/4 of our total Halloween sales and merchandise gross margin, but only 8% of Halloween units sold. We are continually engineering incremental value and profitability drivers into our multi-price assortment. Across Halloween this year, each multi-price item that we sold generated 3.5x more profit than each non-multi-price item we sold. This is a full turn higher than Halloween 2022. By combining this increased per unit profitability with a higher multi-price mix, we were able to generate approximately 25% more margin dollars from our Halloween assortment this year compared to 2022, while selling approximately 10% fewer units. And this is just the positive impact on merchandise margin. It doesn't take into consideration any labor or distribution cost savings that come from handling fewer units. Looking at it this way, multi-price is a powerful growth and profitability driver. It broadens our value proposition and relevance to our customers, allows us to compete more effectively, helps drive cost leverage and sets the business up for long-term success. More importantly, we are just getting started. Multi-price is not a one-and-done proposition. We expect these dynamics to play out across every holiday and special occasion and strengthen as our multi-price penetration expands. Over time, our customers will let us know what the right multi-price mix ultimately is, but we're confident that it's meaningfully higher than where we are today. So let's take a look at some broader merchandising highlights from the quarter. Discretionary categories accelerated through the quarter with standout performances in party and home decor. Consumables were steady, led by household cleaning, personal care, snacks and cookies. Seasonal performance was strong, particularly towards the end of the quarter. We planned the inventory carefully, had strong in-store execution and are pleased with our sell-through. Those wins are proof points for our merchandising strategy and ever-changing more relevant assortment that drives trip completion and more importantly, enhances profitability and margin performance. Today, with a wider assortment of multi-price merchandise and restickering largely complete, 85% of the items in our store are still priced at $2 or below, offering a broad range of price points while staying firmly grounded in value preserves the integrity of the Dollar Tree brand. We believe time, convenience, pack size and quality are all part of our customers' value calculation and so is an expanded range of products that address a wide range of shopping occasions. When a customer can fill a basket with snacks, cleaning supplies, home decor items and seasonal products, all at a great value, that's when the Dollar Tree magic is on full display. Q3 results were also powered by strong execution in our stores, supply chain and support functions. At Investor Day, Jocy Konrad spoke about our commitment to simplify work, elevate standards and empower our people. In Q3, we saw measurable improvement in these key areas. On store standards, we've rolled out new tools and training that simplify store routines and improve accountability. The results are visible with cleaner aisles, stock shelves and faster checkouts with more to come. On associate engagement, our Race to G.O.L.D. initiative continues to gain traction. As we've increased our investment in training and career progression, we've seen continued improvement in turnover. In supply chain, the network is performing at a very high level. Service levels and in-stocks coming out of this year's peak season are among the highest we've seen and our planned increases in distribution capacity over the next several years should allow us to unlock even greater operating efficiencies and distribution cost savings. In technology, we continue to modernize our back-office systems and upgrades to our infrastructure. These investments are simplifying work and enabling smarter decision-making in merchandising and replenishment. All of this comes down to one thing, making it easier for our teams to deliver a consistently great experience for our customers. With the Family Dollar sale behind us, we are already seeing measurable improvements in our culture and performance. We are fully aligned behind one brand, one set of priorities and one mission with leadership and investment focus concentrated on growing Dollar Tree. Every decision across product, stores, technology, supply chain and people is aligned to strengthening one business. That alignment brings speed and accountability. Teams test, learn and scale faster, and we now measure progress across a single set of metrics directly tied to creating shareholder value. We are moving forward with purpose, clarity and conviction guided by the 5 strategic priorities we laid out at our Investor Day, surprise and delight our customer with an expanded, more relevant assortment, manage expenses with agility by controlling the cost of the goods we sell and managing our SG&A with discipline to drive operating leverage and profitability, create a strong connection with our customers with cost-effective, quick return, data-driven marketing, open more stores and improve the condition of our fleet; and finally, improve the in-store experience for our customers by raising the bar on our store standards. At the foundation of these priorities are a fast, flexible and efficient supply chain and disciplined financial management that focuses on high-return investments and smart capital allocation. And at the forefront of our success is our people, the more than 150,000 associates who show up every day to serve our customers, support their colleagues and strengthen the communities where we operate. They are the reason we do what we do and the driving force behind every decision we make. As you heard me emphasize at Investor Day, we manage this business with a focus on what I call the say-do ratio, making clear commitments and delivering on those commitments. This mindset builds trust and accountability across the organization, and we believe that maintaining alignment between what we say and what we do is how we deliver consistent performance over time. In summary, we are pleased with our Q3 results. We're building a stronger foundation for the future, and we're confident about the direction we're heading. With that, I'll turn it over to Stewart. Stewart Glendinning: Thanks, Mike, and good morning, everyone. Q3 comp sales increased 4.2% and adjusted EPS was $1.21. Both our comp performance and our adjusted EPS were ahead of the expectations we shared in mid-October. The 40 basis points of Q3 comp acceleration between the middle and end of October was driven by a late but strong performance in Halloween sales on the back of a deeper multi-price assortment and excellent execution across our stores. Dollar Tree's seasonal assortment and value resonated strongly with shoppers. Our EPS improvement versus expectations was largely driven by freight, higher discretionary sales mix and SG&A. With that, let's go over the details of our third quarter results. Q3 net sales increased 9.4% to $4.7 billion. Consistent with our expectations, Q3 comp growth was primarily ticket driven as traffic was slightly negative. Average ticket growth was supported by increased multi-price penetration, particularly across our Halloween assortment and the pricing actions we began rolling out last quarter. Importantly, strong execution around merchandise cost, tariff mitigation, freight and operating expenses helped drive profitability. Q3 gross margin expanded 40 basis points to 35.8%. These results reflect the strength of our assortment and the agility of our merchandising, supply chain and store operations teams. The key drivers of this improvement were merchandise margin, successful execution of our 5 merchant levers: renegotiation, reengineering, shifting country of origin, discontinuing and targeted price changes, all contributed to our ability to manage increased costs from tariffs. Freight, import and inbound freight rates were favorable versus prior year with lower spot market utilization and better container flow-through at our DCs. Domestic transportation costs were also favorable. Mix, discretionary and seasonal categories, particularly Halloween, were stronger than expected, increasing the realized mark-on -- markdowns. As part of the ongoing strategic initiative to increase shelf productivity that we outlined at Investor Day, we identified and wrote off various slow-turning SKUs. This will create room for more productive items and help optimize storage space utilization in our stores and DCs. The total impact to Q3 earnings was approximately $56 million or approximately $0.21 of EPS. We believe we will see increased sales and profits per store going forward as we bring in new items or reallocate shelf space to existing but faster-turning products. Shrink. Overall, shrink was higher than last year, but in line with our expectations. These drivers taken together drove the Q3 gross margin performance. At the Dollar Tree segment level, our Q3 adjusted SG&A rate increased 160 basis points to 26.2%, driven by higher store payroll related to wage increases and restickering, general liability claims costs and D&A from elevated store investments. These were partially offset by sales leverage. As a reminder, we do not expect costs related to restickering and other price-related activities to be repeated next year. Also, the wage-related payroll increases this year were expected and planned. Looking forward to next year, we expect wage growth to moderate. As we discussed at Investor Day, on a go-forward basis, our goal is to grow Dollar Tree segment SG&A per store below the rate of inflation while reinvesting selectively in high-return initiatives that enhance the customer experience and the long-term profitability of our store base. We believe this will result in future SG&A cost leverage. Adjusted corporate SG&A should be considered net of TSA income because of the costs we carry in order to service the Family Dollar transition. Using this lens, our adjusted corporate SG&A rate, net of the $24 million of TSA income leveraged 80 basis points to 2.4%, a positive step toward our goal of reducing corporate SG&A to 2% of sales by fiscal 2028. Adjusted operating income increased 4.1% to $345 million. Our operating margin contracted by 30 basis points to 7.3%, reflecting the offset between the gross margin expansion and SG&A deleveraging, partially driven by cost headwinds such as restickering that will not repeat in 2026. Keep in mind our comments with respect to anticipated SG&A leverage next year at both the Dollar Tree segment and the corporate level. Net interest expense and our adjusted tax rate were broadly in line with expectations. Adjusted EPS from continuing operations increased 12% to $1.21. Moving on to the balance sheet and free cash flow. Inventory was down $143 million or 5% versus prior year, while sales increased by 9.4%, our store count increased by 4.5%, and we ramped up our DCs in Ocala and Odessa. This reduction reflects our focused efforts to increase inventory turns and improve shelf productivity. We ended the quarter with $620 million of commercial paper notes outstanding and $595 million in cash and cash equivalents. On the Q3 cash flow statement, we generated $319 million in cash from operating activities and had capital expenditures of $376 million. This resulted in negative free cash flow in the quarter of $57 million. Year-to-date, we've generated $88 million of free cash flow. As a reminder, the fourth quarter is our highest cash-generating quarter because of normally higher levels of sales and because our capital expenditures skew towards the first 3 quarters of the year. In Q3, we purchased 4.1 million shares for $399 million, including excise tax. Subsequent to quarter end, we repurchased an additional 1.7 million shares for $176 million. Year-to-date, we've completed $1.5 billion of share repurchases or approximately 16.7 million shares at an average price of $90 per share. This represents approximately 8% of the shares we had outstanding at the beginning of the year. Our liquidity remains healthy. Our balance sheet remains flexible, and we have ample capacity to fund our growth and return significant capital to shareholders. Our capital allocation priorities remain unchanged: number one, invest in growth; number two, maintain a strong and flexible balance sheet; and number three, return capital to shareholders. Looking ahead, we expect Q4 comps will come in between 4% and 6%, which should support net sales of $5.4 billion to $5.5 billion and adjusted EPS in the range of $2.40 to $2.60. On a full year basis, this would raise our comp outlook to between 5% and 5.5% and our adjusted EPS outlook to $5.60 to $5.80. The underlying assumptions incorporated into our full year outlook are as follows: net sales of approximately $19.35 billion to $19.45 billion. Gross margin expansion of approximately 50 to 60 basis points, reflecting sustained favorability in merchandise margin, freight and occupancy leverage with some offset from markdown and shrink. Dollar Tree segment SG&A deleverage of approximately 120 basis points, primarily driven by higher store payroll related to wage increases and restickering and to a lesser extent, facilities costs and D&A. Corporate SG&A costs. We expect corporate SG&A net of $55 million of TSA income to decrease by approximately 3% year-over-year. Net interest expense of approximately $85 million to $90 million, which is about $10 million to $15 million below our prior outlook, an effective tax rate of approximately 25%. Shares outstanding of approximately $206.4 million, reflecting our share repurchase activity through December 2. We remain on track to meet our full year CapEx target of $1.2 billion to $1.3 billion. We understand that at this point, many of you are shifting your attention to next year. As is customary, we intend to give a detailed outlook for 2026 on our next earnings call in March. With that said, I will remind you of the directional outlook we provided at our Investor Day, where we outlined an algorithm for adjusted EPS to grow at a 12% to 15% CAGR through 2028, supported by underlying EPS growth of 8% to 10%, with the balance being driven by the unwind of certain discrete items, mostly affecting 2026 with some residual carryover into 2027. To review the underlying details of the algorithm, I direct you to our Investor Day presentation, which is archived on our IR site, and we will give you more specifics in any updates next quarter. To wrap up, we're executing well against the road map we shared with you in mid-October. Each day, we continue to see tangible proof that the fundamental appeal of this business, value, convenience and discovery is resonating with customers and translating into strong financial results. With that, I'll turn things back over to Mike. Mike? Michael Creedon: Thanks, Stewart. Let me wrap up by putting Q3 in the broader context of where we are and where we're going. When we shared our road map at Investor Day, we said this transformation was about focus, consistency and accountability. We believe Q3 was a strong proof point that our strategy is working. We delivered above-market comps, expanded gross margin and continued to make meaningful cultural progress across the organization. Today, Dollar Tree is a pure-play value retailer with the scale and focus to compete at the highest level. Post Family Dollar, we have clarity of purpose and our teams are responding with renewed intensity. As we look to Q4, the setup is solid. Halloween was great, and our Thanksgiving and Christmas assortments are resonating with our customers as we remain focused on consistently delivering unbeatable wow value and the thrill of the hunt experience. As 2025 winds down, let me wrap up by saying, first, to our associates, thank you. Your dedication, creativity and pride in the work you do are what makes Dollar Tree special. To our customers, thank you for your trust and loyalty for choosing us for the moments big and small that matter the most in your daily lives. And to our shareholders, thank you for your continued confidence and partnership. With that, Stewart and I are happy to take your questions. . Operator: [Operator Instructions] Our first question comes from the line of Matthew Boss with JPMorgan. Matthew Boss: Congrats on another nice quarter. So maybe 2 parts. Mike, could you elaborate on drivers of the same-store sales acceleration that you saw in October, speak to comp trends that you've seen in November that support the 4% to 6% fourth quarter comp guide? And then, Stewart, could you just help break down gross margin expansion opportunities in the fourth quarter and how best to think about gross margin puts and takes maybe at a high level for next year? Michael Creedon: Yes. Sure, Matt. As we looked at how the quarter unfolded, the Halloween was just a great finish to the quarter. It did come as we see in times like this, people buying for need and a little closer to need. So it came a little later, but it came incredibly powerfully, and it came with a record number. If you go back, Easter performed that way, a great Easter, a great Halloween. And our setup for Thanksgiving and Christmas is just fantastic. So we really look at what we've done with multi-price and how the assortment has gotten better and our customer across all incomes is really resonating with that and providing just fantastic seasons for us. So we feel really good about our guide on the 4% to 6%. Stewart Glendinning: Matt, let me pick up on the gross margin for the fourth quarter and then just talk a little bit about next year. So first of all, as we think about the fourth quarter, the same kind of levers that you saw in the third quarter, we detailed some of that in our supplementary materials as well as in my prepared remarks are going to be drivers in the fourth quarter. You will see a very powerful fourth quarter on the back of those drivers. If you look to next year and just think about next year, freight is a benefit certainly in the fourth quarter, it came through in the third quarter. As you look to next year, both freight and markdowns are the areas that we'll be watching. If you think about how we operate our business, we buy to a margin. And so when we set up our goal for next year, we shared with you that we said we would be equivalent to this year's margin, plus or minus 50 basis points, and that's the place that we're targeting. There may be continued benefit in freight as we move into next year. There is some belief that perhaps on the freight side, we'll see a tightening of capacity later in the year, and we are watching the potential shortage of drivers. But I understand that the reason I bring up the targeted gross margin is because we use those 5 merchant levers to achieve that margin. So I think the margin you can take to the bank for next year. The second piece is to refer back to the Investor Day materials that we had. And in our fourth -- in our recent Investor Day, we shared with you an algorithm that said we would achieve high teens improvement next year. That's on the basis of that same gross margin achievement and based on some of the discrete items that we're expecting to see in the coming years. So we're set up well for next year, and I think that probably gives you the main drivers. Operator: Our next question comes from the line of Michael Lasser with UBS. Michael Lasser: It's on traffic. And obviously, this was the first decline in traffic that Dollar Tree has experienced in a while. To what degree is that as a result of some of the legacy households pushing back on the price increases that have been taken in the last couple of quarters? And if that's the case, does that give you any pause on your ability to achieve this high teens EPS growth next year in light of the prospect that you might have to make some investments in order to recapture those households that are just dissatisfied with the pricing changes? Michael Creedon: Yes, Michael, we really see traffic as a mix between some internal activity, namely the restickering and some broader retail trends. We don't see it as a pushback from our customer. And if you look at our performance in the quarter, we had great growth across all income cohorts, and our core customer really had our highest comp. So we look at it and say we saw the traffic decelerate in that August, September time frame. That was the peak of our restickering. Those red stickers that was the peak distraction for us and then it was good to see traffic strengthen towards the end of the quarter, really on the backs of that Halloween and that great strength in Halloween. So we believe there was some broad-based retail traffic decel around back-to-school, some of the sticker shock around back-to-school. But as we got into the real core of what Dollar Tree does and does, we think, better than anyone, we saw the strength in our Halloween, and we're very excited about what Thanksgiving and Christmas and all the seasons can do for us. Operator: Our next question comes from the line of John Heinbockel with Guggenheim Partners. John Heinbockel: Mike, 2 quick ones. When you think about traffic or divergence between traffic and units, so sort of is the idea, traffic will be strong, units maybe to a lesser degree because you're basically trading people into higher price point items. Talk about that divergence in your mind. And then secondly, if the units are going to grow at a slower pace, how do you think about space allocation and replanogramming the stores over maybe the intermediate to longer term? Michael Creedon: First of all, thanks. We'll always follow our customer on that. We believe that the customer is resonating incredibly well with multi-price. We're hearing that in the surveys we're doing. We're seeing it in how our customers are performing in the store and that real strength in the comp of that core customer. So yes, when we look at the store, when we take multi-price, we'll take away sections of $1.25. And so your units will naturally decline there as you take that space and make that space more productive. So we do see some of that. But we believe the proof point we have from break the dollar was that you took up the price of the whole store. There were elements of the store that just didn't work, and our merchant team took the next buying cycles to really recover that. What we've seen here in this multi-price evolution and some of the restickering we did based on the inflationary cost environment is that the units have performed better, the traffic has performed better, and we're confident that we can continue to drive that value in our product across these price points and continue to give the customer exactly what they need. So we see that coming together very well for us, and we'll respond to the customer and their trends with how we set up the store. Operator: Our next question comes from the line of Edward Kelly with Wells Fargo. Edward Kelly: I wanted to ask you about the mix of multi-price as you think about next year. Just looking out, it does seem like you'll have more conversions. I would imagine you're still doing more merchandising around improving the multi-price mix. So how do you think the stores look from the standpoint of the multi-price offering as we think about next year? And then how does that play into the way that you are thinking about driving comp next year in terms of traffic versus ticket? Michael Creedon: Yes. Thanks, Ed. I mean I really want to start with saying 85% of the store is still $2 or less. So we're still early in this multi-price game. And when you look at what the seasons have done, we're going to continue to benefit in those seasons from the multi-price assortment. And we're really looking at everyday essentials and where we can benefit in the assortment there and the shift towards multi-price. Where it ultimately goes, our customers will respond to us and we'll respond to them in terms of building it out. But I know it's higher than where we are today, and it's something that we believe sets up a multiyear run where we're able to respond to our customers, wow them with new discovery and not just at the seasons, but new discovery every day because multi-price contains something on a wow table for us or on an end cap that shows them something they couldn't believe they could get at that price, even though it's a price higher than $2. So we're delivering the everyday value with the majority of the stores still at that $2 or less, and we're wowing the customer in what we bring into the multi-price assortment. Operator: Our next question comes from the line of Paul Lejuez with Citi. Paul Lejuez: Curious if you could talk about Thanksgiving weekend and what you saw from a traffic versus ticket perspective. It sounded like you saw a pickup in traffic around the Halloween period. Curious what you saw Thanksgiving week and weekend. And then that 85% number, I think you're talking in terms of units, in terms of the percent of the store that's still $2 and below. What percent of sales would we -- should we think about being above that $2 level? And how does it split between discretionary and consumables? Michael Creedon: Yes, Paul, let me clear up the first one. So first of all, it's sales dollars that are at the 85% of the stores $2 left. That is on sales dollars. As we look at how the quarter has started, I said in my prepared remarks, we're really pleased. We look at the strength of the seasons, the Thanksgiving, the setup for Christmas, what we've seen so far in Christmas. So we feel really good about the guide for the fourth quarter. We've got one period in, and we're feeling really good about where we sit. Operator: Our next question comes from the line of Rupesh Parikh with Oppenheimer. Rupesh Parikh: I also have a 2-part one. So just on the elasticity front, just curious on the categories you took pricing related tariff trip and price increases. Just curious how that played out. And then if we do get tariff relief, how do you guys approach that, whether passing on those savings or letting it flow to the bottom line? Michael Creedon: Yes. Thanks, Rupesh. I mean the elasticity has really -- it's come in as we've modeled it. It's very manageable. It's really offset by the mix we see in the multi-price. But most importantly, the value perception is intact. Our customers responding across all income cohorts, core customers, new customers, the 60% of the new $3 million that have come in, making more than $100,000. So we believe that the elasticity is very manageable. And then I do think it's important to go back to that break the dollar moment, what we saw there, it's a proof point. You can go back and look, see what happened with traffic. And now our performance, we believe, and what we're seeing in our numbers is better than that and gives us the confidence in the path we're on, on this. As for the tariffs, I know it's been a lot in the news. We have, I think, one of the very best global sourcing teams in the business. They are all over this. They've got great partners watching this. We'll see how it unfolds with the Supreme Court, and we'll take action from there. Operator: Our next question comes from the line of Simeon Gutman with Morgan Stanley. Uriel Zachary Abraham: This is Zach on for Simeon. Just a couple from our end. Back to the traffic question, is there a way you could compare your frequent and most loyal customers to those who are more episodic? And would you say there's a similar deceleration in traffic trends between both of those groups? Or is there a gap in the trend? Michael Creedon: Yes. When we break it down, we really look at more our sales across all those income cohorts. It's really important to us to make sure that as we know multi-price skews and attracts more towards higher income that we are committed to the base of our business, which is that core customer, that customer that makes around $60,000 a year. And we were particularly pleased with how our comps performed at that core customer. They had our highest comps in that customer. And so we think that our customer, whether you're new to Dollar Tree or you shop us several times a month, that you're finding what you need as you seek -- if you seek out affordability, you're finding exactly what you need at Dollar Tree. Operator: Our next question comes from the line of Scot Ciccarelli with Truist. Scot Ciccarelli: Scott Ciccarelli. I think we all understand that there was some internal disruption as you resticker product. But with the negative traffic this quarter and the expectation to keep expanding MPP, should we just expect 4Q and next year to have a similar mix of traffic and ticket that we saw in 3Q? In other words, it's all the comp is primarily driven by ticket. Michael Creedon: Yes. Scott, it's hard to say. We can go back and we know what we saw and break the dollar. You saw the multiple quarters and how the traffic performed there. We believe this time around, we were much more strategic. I mean back then, the only choice was raising everything to $1.25. And as I've mentioned, you had a healthy percentage of the store that just didn't work at that new level and the merchant team had to go over several buying cycles and reengineer product and renegotiate and get product that did work, and you saw what happened with traffic recovery. This time, we were much more strategic in how we took that. We really feel that we have found the right value places to take price. And our customers responded. If you look at the value we took in Halloween or in Christmas, I mean, our customers responded incredibly well to that move. So I look at it and say, I think we were more strategic this time or we at least had a more strategic opportunity available to us this time, and we'll see how the traffic plays out. Stewart Glendinning: Yes. And maybe one other thing, just to supplement, I think if you go back to the investor materials we laid out, I mean, that entire strategy is set up to drive higher sales in stores via productivity on the shelves, via the way we intend to market to customers and based on the way we intend to run better stores. I think that entire setup really is organized to enhance the traffic and the ticket flow. Operator: Our next question comes from the line of Michael Montani with Evercore. Michael Montani: I was going to ask if you could share what the average selling price was in 3Q versus this time a year ago. And then curious if you think that you'd be able to get that level of price increase again in 2026 to drive comp. Michael Creedon: Yes. Our AUR right now right about $1.50. When you look at that value over time, it's pretty remarkable considering what this company has done, what other prices have done. So we look at it and say, our customer is going to tell us with their comps, with their wallets that we're hitting the right points in terms of value, convenience and discovery. One of the things that we really turn to is that expanded more relevant assortment. So yes, it comes at a higher ticket, but it's still an incredible wow for the customer. It fits their occasion, the purpose for their trip and whether it's a great pack size for them that helps them or just an item that helps them celebrate and they love it. So we feel that while the AUR moves up, it does so lock squarely into that value play for the customer. Stewart Glendinning: Keep in mind one other item is that, obviously, as our multi-price penetration increases, so that will also move AUR, that is not price dependent. And I think if you look at the supplementary materials and you look at how well the multi-price worked in Halloween this year, it will give you a sense for the kind of benefit we might see going forward as we drive that multi-price harder. Operator: Our next question comes from the line of Zhihan Ma with Bernstein. Zhihan Ma: Just one quick clarification on corporate expenses. Did it come in a bit better than your prior expectations? If you can provide a bit more color there, that would be really helpful. And then a quick one on next year. Given the trade-in you have seen from middle to higher income consumers, what does the tax refund, the incremental tax refund next year do to middle to high-income consumers shopping behaviors in your mind? Stewart Glendinning: Yes, I'll pick up on the first part, Stewart here. The SG&A did come in better than we expected as we get ready to set ourselves up for next year and achieve some of the aggressive savings targets we've set up, we've been squeezing down on SG&A. Some of those savings came in a little bit faster than we had expected. Michael Creedon: Yes. And then I'll take the second one. I look at the tax refunds of the OB3, Big Beautiful Bill. Would you offer the best value in retail, you benefit when people have more money in their wallet. And Dollar Tree has the best value retail has, and we think we'll benefit as they get more money in their pocket. Operator: Our next question comes from the line of Kelly Bania with BMO Capital Markets. Kelly Bania: I wanted to ask about the consumables, the market share trends there from a unit perspective. They seemed quite strong in the first half, but really shifted in the third quarter here. I was just curious if you had any explanation of what you think is happening there? Is that attributable to the sticker -- the restickering impact? Or any other color on the market share trends there? Michael Creedon: Yes, Kelly, the red dots is kind of how I'll answer that. It really peaked for us in this Q3. It was the mass distraction. I will tell you, though, as we've seen trends from our customer post that, we track via customer surveys, via scrapes of website and star ratings and all that, the sentiment of our customer that really peaked negative in that August, September has improved every week. So the fewer mentions of pricing, more positivity, less negativity, we've been watching that. And every week, that's gotten better. So we don't love that we had to create that environment for our customer. It was a necessary evil to continue to deliver for them and give them product at a value. But it is what it is, and it's behind us now. The red stickering is basically done. You get a little bit as you take some pack away, but it's basically done. The distraction is behind us and our stores and customers are responding very favorably. Operator: Our next question comes from the line of Joe Feldman with Telsey Advisory Group. Joseph Feldman: When you talked about the -- that higher income consumer trying to get them to visit more often with more frequency. I'm just wondering how you guys plan to go about that? Maybe is it more stimulus from a marketing standpoint? Or I don't know what other methods that you might be thinking of, but how do you get them to come more frequently? Michael Creedon: Yes. We love that this customer is finding us. We want to create a very sticky relationship with them. And we believe it is the more relevant assortment. So continuing to wow them each season that they come up and for their everyday essentials with items they just can't believe they found. Remember, you don't come into Dollar Tree with a list and you head down and I have to get this. You come in with your head moving around, looking at all the things that are wowing you. So that relevant assortment creates a sticky relationship, and then there is nothing more important than running better stores. Our store standards are on the move up, and we believe that as we continue to improve the in-store experience, those customers are going to want to come more and more often. Operator: Our next question comes from the line of Robby Ohmes with Bank of America. Robert Ohmes: I wanted to follow up on the last question. Just the -- it's impressive how you guys are gaining all the new customers and the info you gave us on that. Just help me understand gaining all these new customers at all these income cohorts versus negative traffic. Like how does that happen? Is somebody -- are there cohorts dropping out or coming a lot less frequently and that's offsetting all these new customers that you guys have gotten to come to the stores? Maybe a little more color on like what's happening there. Michael Creedon: Yes, Robby, it's really a question of frequency. So you're driving new customers to the store, which is fantastic. I mean, 3 million new households. Yes, they're skewing a bit higher income, but the strength of our business is still in that core customer, their purchase frequency, their comp dollars. We believe that these new customers come in, we can increase their trip frequency, too when they find better run stores and they find an assortment that keeps them coming back. So right now, they're coming in because of a Halloween or they're coming in for a great season and then what they find in the store when they're there in health and beauty and in everyday essentials, that's what keeps them coming back. If you look at Dollar Tree compared to some of the folks we aspire to be, the difference is not in our ticket. The difference is in trip frequency. We believe we've got an opportunity to unlock increased trip frequency with these great newer trade-in customers. Operator: Our next question comes from the line of Bobby Griffin with Raymond James. Robert Griffin: Just curious if you can expand a little bit more on shrink and where you are in that journey of bending that line item. And then I don't think it was discussed at the Investor Day, but what is embedded in the multiyear outlook for shrink? Is that elevated rate versus pre-COVID? Or is it a return to 2019 rates? Michael Creedon: Yes. I'll start with that with the focus we have. We learned a lot about shrink from Family Dollar. Family Dollar has a higher shrink threshold, if you will. And we were able to bend the curve over there. And so we've really reorganized how we're addressing shrink at Dollar Tree. It's not as simple for us as it is other. We can't just go rip out a bunch of self-checkouts and improve our shrink. We don't have self-checkout in any large capacity. So for us, it has to be leveraging training of our people, leveraging technology to address shrink over time. And then in terms of how it builds, Stewart? Stewart Glendinning: So Bobby, Stewart, we have built in some improvement in shrink as we move forward. I mean we've made these changes to people and process. We're investing money in our -- in our asset protection, and we expect that to bend the trend. So that is built into the forward expectations. Operator: Our next question comes from the line of Chuck Grom with Gordon Haskett. Charles Grom: I have just a question on the SG&A line. In Slide 9, you talk about the unit trend going from 100 to 89. So there's a clear benefit from running less units through the store on freight and handling expenses. But when we look at the core SG&A line, can we unpack the 160 basis point increase in SG&A? And then also looking ahead to the fourth quarter, how are you thinking about the complexion of both gross margins and SG&A in the last quarter of the year? Stewart Glendinning: Yes. So Chuck, Stewart. When you really look at SG&A in total, the big driver for SG&A increases is really in store payroll in that whole space. We do have some increases, as we said before, both in D&A based on store investments and also in general liability claims. Those are probably the big areas to think about. If I unpack the store payroll for you a little bit, earlier in the year, we commented on the fact that first, we were faced with some rate increases. Those -- a number of those were driven by state minimum wage increases. And second, we had decided at the beginning of this year that we would put some more hours back into the stores because we felt that if we invested some hours in stores, we could drive a better comp. And certainly, we set that out as an aggressive goal for the year, 3% to 5% comp, and we're obviously at the top end of that. And the last piece, of course, is the tariff-related stickering activities, which is a pretty substantial add. So if you think about the increase in payroll, which, again, the biggest driver of the SG&A, it was about 1/3, 1/3, 1/3. 1/3 was the rate, 1/3 was the increased investment in hours and 1/3 was stickering. Let me come back now to your unit point because I want to look forward to next year. If you're thinking about next year, the stickering is sort of largely gone. So that piece is not going to be pushing on our P&L. In fact, that's a benefit. The rate increases, we believe that rate is going to start to moderate, and that's going to help us next year. And then the last piece on the hours side, actually on the hours side is exactly the point you've just made. The success of multi-price, in fact, allows us to move fewer units through the store, and that will give us the flexibility to decide do we take the units -- do we take the hours down? Do we invest some more hours in running the stores better? But I think it puts us in a better position overall. Hopefully, that gives you a good flavor for your question. Operator: We have reached the end of our question-and-answer session. I would now like to turn the floor back over to Mike Creedon for any closing comments. Michael Creedon: Thanks for joining us today, and we wish everyone a safe and healthy holiday season. Thanks so much. Operator: Ladies and gentlemen, thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.
Operator: Good afternoon, and welcome to the Fiscal Fourth Quarter and Full Year 2025 Earnings Conference Call for Leslie's. [Operator Instructions] As a reminder, this conference call is being recorded and will be available for replay later today on the company's website. I will now turn the call over to Nitza McKee from ICR. Nitza McKee: Thank you, and good afternoon. I would like to remind everyone that comments made today may include forward-looking statements, which are subject to significant risks and uncertainties that could cause the company's actual results to differ materially from management's current expectations. These statements speak as of today and will not be updated in the future if circumstances change. Please review the cautionary statements and risk factors contained in the company's earnings press release and recent filings with the SEC. During the call today, management will refer to certain non-GAAP financial measures. A reconciliation between the GAAP and non-GAAP financial measures can be found in the company's earnings press release, which was furnished to the SEC today and posted to the Investor Relations section of Leslie's website at ir.lesliespool.com. On the call today is Jason McDonell, Chief Executive Officer; and Jeff White, Chief Financial Officer. With that, I will turn the call over to Jason. Jason McDonell: Good afternoon, everyone, and thank you for joining us today to discuss our fourth quarter and full year fiscal 2025 results. Before we dive into today's discussion, I'm pleased to announce that we've successfully completed a smooth transition in our CFO role during the quarter. I'd like to welcome Jeff White, who joined Leslie's in early October as our Chief Financial Officer and Treasurer. Jeff brings a combination of financial and accounting expertise and the operational retail experience that will be instrumental as we continue our transformation journey towards sustainable, profitable growth. Jeff has hit the ground running and is heads down focused on several key areas, helping us lead our critical transformation at Leslie's, including, but not limited to, cost optimization, cash and capital management and leading actions and next steps to address our capital structure. Jeff will provide more detail on these critical areas shortly. On today's call, I will provide a review and a summary of actions we are taking as we execute on the transformation road map for Leslie's future. I will then turn the call over to Jeff, who will discuss our financial results in detail as well as our financial outlook. I'll return with closing thoughts on our path forward before we open the line up for questions. As outlined in this morning's release, we have implemented immediate actions to improve Leslie's operations and accelerate our path to financial profitability. As we look at the past of Leslie's, we've experienced market share loss and the main driver is price value challenge on some of our key items. In specific national research we've conducted, we found that pricing on our key items was often out of step with our competitors. And as the customer environment continues to be more value-focused during these macroeconomic conditions, it is critical that we act and invest in our customer value proposition. While we believe the weather was also a factor leading to our softer sales, our price value equation has been a major contributor to a net loss of over 160,000 residential customers this year and decline in residential traffic in 2025 of 8.6%. Key value item pricing sets price value perception with our customer, and we need to improve here. Price optimization on many of these core items is an area we will address. Keeping in mind, we enjoy a vertical integration on many of these products. As we are streamlining costs in our manufacturing operations, we are also focused on cost optimization efforts across direct materials, packaging and distribution. Layering on top of these operational cost efforts, we've also taken actions to improve our cost structure by announcing the closure of 80 to 90 underperforming stores over the next month. We closed a warehouse in Denver in July, are closing a distribution center in Illinois that will be completed this January, and we are also currently exiting underperforming SKUs in our system. These overarching cost savings will allow us to invest in an improved price value equation on key items. Investing in our value proposition at Leslie's is a top priority to reinvigorate our traffic performance. The great news is that we are adjusting our pricing strategy, and we have the ability to target communications directly to customers based on our zero-party data, which is information that has been provided by the customer to Leslie's. Stated quite simply, we know who our current and former customers are, where to reach them via e-mail, phone or home address as well as other specifics about their pool and historical purchases. Our Pool Perks loyalty program captures these details on over 85% of our transactions. To communicate our pricing adjustments, we are utilizing precision targeted marketing via our customer data file. For example, delivering personalized messages to lapsed customers to directly address what they told us will bring them back. Our research shows the most effective approach combines a clear value message with Leslie's industry-leading expertise and water testing capabilities. We're refining these messages further by incorporating purchase history, regional uniquenesses and local weather events. Once we've established that connection with our customer, we leverage our key competitive advantage in this sector with our consultative destination retail model. Once in the store, we work with the customer and customize a solution specific for their needs. That has been a strength for us this year. In fiscal year '25, conversion rates after a water test increased by 500 basis points year-over-year, reinforcing the trust customers place in our technical expertise. Our 10-point water test delivers a personalized treatment plan tailored to each person's pool environment, size and water composition, driving deeper engagement and continuous improvement in every market we serve. This is a key advantage for us at Leslie's. When customers come to visit us at Leslie's, our team members will help our customers build their basket. Now this is similar to what is commonplace in the grocery industry. Customers come into the grocery store for milk and bread and fill their basket with other items. The same at Leslie's. As customers come in to buy pool chemicals, our team members make sure they have everything they need and build their basket. Our team members in our stores focused on this in quarter 4, and we achieved mid-single-digit growth in units per transaction in the latest quarter. Improving our value proposition with better pricing in combination with our customer service and pool expertise will help us grow the basket, improve overall loyalty and ultimately regain share that we've lost. In addition to the actions of price value improvements, targeted marketing and basket building, another action we're taking is to build on our strengths around expertise and customer service. Today, we are announcing a restructuring of our field teams around a market leadership approach that sharpens our focus and facilitates deeper multichannel consumer relationships to drive growth. In the past, we've operated in silos, stores, service, commercial and trade were all separate within the Leslie's organization. We are integrating at a local level, giving our managers clear ownership of the pools in the markets and ZIP codes they lead. This restructuring accelerates our vision of becoming America's one-stop shop for pool care. By combining our customer file with our new market leadership model, we will strengthen customer relationships and capture significant growth across millions of pool owners in local markets. The new structure enables full service delivery in every store from BOPIS and service appointments to equipment repair and improved PRO fulfillment. Supported by our vendor partners, we will also launch deeper training ahead of next pool season to elevate our pool expertise nationwide. These actions all fall under our customer centricity pillar that I've mentioned on past earnings calls and are focused on the Leslie's value proposition and targeted customer approach, which will help Leslie's drive traffic and grow our share across the United States. Our next set of actions are under our convenience pillar and are focused on directly addressing the evolving expectations of today's pool owners who demand service when, where and how they want. To be even more convenient at Leslie's, we are accelerating our proximity to pools competitive advantage and our omnichannel transformation by expanding same-day delivery through our Uber partnership. In our Phoenix test market, new technology integrations cut ship-to-home fulfillment from days to hours and often minutes. We are now scaling this model across Arizona, and we'll continue expanding across the United States through 2026. Another action we are taking is to build on the pool service and repairs that we provide by expanding our pool maintenance and service offerings in new markets to meet customers' needs. Today, we offer pool service for their equipment in each territory across the country and are looking to grow this service business. In addition, today, we offer pool maintenance in Northern California, linked to stores in our Sacramento market and have recently added a test market in Orlando, Florida. In our California market, we've experienced strong double-digit sales growth. And overall, we've grown our active customer accounts by double digits as well. Pool maintenance provides a great opportunity for us at Leslie's. Being right there in their own backyard gives us more frequent connections with each of our customers. At Leslie's, we are the easy one place customers can go for quality products, advice to solve a problem, get service on their pool equipment, reliable, accurate water test or in expanding markets, we help maintain their pool. Under convenience, we also continue to optimize our local fulfillment centers to maximize coverage and efficiency while providing flexibility to better manage inventory and reduce working capital. Our local fulfillment centers continue to show benefits, improving in-stock rates and accelerating fulfillment speed, especially in high-volume markets. These local fulfillment centers are giving smaller locations the ability to better serve our PRO customers with access to larger PRO items like 50-pound buckets of chlorine tabs or 100-pound buckets of shock. Additionally, they hold long-tail inventory and stores can meet local customers' needs with having the inventory in the market to help meet the local demand. We look forward to sharing more in the future on how Leslie's will continue to be more convenient and deliver on being customers' one-stop shop for pool care. Now to discuss the asset utilization pillar, which directly addresses the fixed cost deleverage challenge at Leslie's that we have highlighted on past calls and represents one of our most significant opportunities for operational improvement. For asset utilization, we have used a combination of internal and external resources to evaluate our asset base, to help optimize productivity, drive efficiency, maximize profitability and optimize the debt structure. Starting with our stores. We first looked at pool proximity as it is a key competitive advantage, then pool density, the number of pools in the market and then the optimal distance between stores with an omnichannel mindset and approach. We also looked at the profitability and performance of each store. And as mentioned, we made the strategic decision to optimize the Leslie's store network. As I touched on above, we are announcing today that we will be closing 80 to 90 underperforming locations. These stores represent an annual sales impact of approximately $25 million to $35 million, and this decision will yield an annualized net EBITDA improvement of $4 million to $10 million. These locations are across multiple regions across America and are not centralized in one region of the country. For those stores that are closing, we will use a targeted marketing approach to reach out to customers and invite them with a personalized offer to another nearby location and remind them of accessing our portfolio and services online or via our mobile app. These decisive measures will improve our fixed cost structure, enhance EBITDA flow-through and position Leslie's for sustainable profitable growth. As we reset our store network, we are also streamlining our distribution footprint. In quarter 3, we closed our Denver warehouse and seamlessly shifted volume to other DCs, reducing annual cost by roughly $500,000. Looking ahead, we will transition to a more efficient 5 DC network in 2026, including the planned closure of our Illinois facility in January, driving another $500,000 in annualized savings. The Illinois location was mainly focused on our e-commerce fulfillment. Our optimized 5 DC network will fulfill e-commerce orders closer to the customer through local DCs and support BOPIS in stores, lowering shipping costs and significantly improving delivery speed across our app, website and marketplace business. In another action to improve asset utilization, we are continuing to take a precision inventory approach. Under our recently hired Chief Merchandising and Supply Chain Officer, Amy College, we are improving the Leslie's assortment. The first priority in our inventory optimization work is in SKU optimization. We're conducting a comprehensive assortment review to focus on our highest value inventory items, reducing the long tail of SKUs and deepening our focus on the most valuable items that drive most of our sales. As we enter the 2026 pool season, we are strategically reducing our SKU count by more than 2,000 SKUs, mainly coming from our long tail in e-commerce and marketplace that is fulfilled from our DCs. With the reduction in SKU count in our distribution centers, this enables Leslie's to simplify our go-to-market solutions and our operations. With this reduction, we will improve our annualized EBITDA by $4 million to $5. Building on SKU optimization, inventory management also remains a key priority. I'm pleased with the focus that the team has put towards inventory optimization in 2025 as it simplifies our operations by ensuring we have the right product at the right place with the right level of product depth. In 2025, we rationalized our inventory by $26 million, which exceeded our Q3 commitment of $20 million. Even with this inventory reduction, we improved in-stock levels in our top-selling never out SKUs by over 400 basis points compared to 2024. This in-stock performance helped support strong traffic conversion results by 74 basis points in fiscal year 2025. With a clear focus on inventory, SKU and network optimization, we are targeting continued inventory rationalization by another $20 million to $40 million in fiscal year 2026. As part of our strategic operating review, we continue to be in a process of conducting a thorough assessment of all of our noncore assets. Specific to our Stellar manufacturing facility, it represents a critical vertical integration asset for our key value items like chlorine tabs, and it enables us to compete effectively in the marketplace. Our team is working diligently to drive continued cost productivity at this site, and this will be passed on to the customer in everyday price value. When it comes to our hot tubs and Horizon businesses, we continue to evaluate, and we'll provide a further update on upcoming calls. In summary, we have a very robust asset optimization plan for Leslie's across our stores, DCs, warehouse, inventory and SKU assortment. These initiatives represent the next phase of our strategic transformation plan, which are focused on strengthening our balance sheet, optimizing our cost structure and delivering on operational performance and rebuilding stakeholder confidence. We recognize the urgency of our situation and are committed to transparent communication as we execute these critical steps to restore Leslie's to profitable growth. Lastly, in our cost optimization pillar, we are focused on building a more agile and efficient cost structure that supports profitable growth. With a combination of internal and external resources, we have doubled down on our commitment to accelerated savings and are increasing our cost optimization range to $7 million to $12 million. These savings will begin to benefit the business in fiscal 2026. In summary, these transformative actions represent fundamental changes to how we operate and how we serve our customers. We're building Leslie's to improve our overall value proposition, be more responsive to local market needs while maintaining the scale advantages that make us the industry leader. Our operational and strategic review continues with urgency and discipline. We're assessing performance across our business, our direct and indirect cost structure and other initiatives that we believe will deliver improvements in working capital and profitability. I would now like to shift to a summary of our latest performance. While we're capping off a challenging year at Leslie's, we were able to deliver fourth quarter sales and adjusted EBITDA ranges at or above the high end of our guidance. I will now turn the call over to Jeff to provide a detailed review of our financials. Jeffrey White: Thank you, Jason. I'm excited to be joining you today as Leslie's new Chief Financial Officer. While I've only been with the company for a short time, I've been impressed by the quality of our team and the dedication I see throughout the organization. I am looking forward to working with everyone as we continue to execute our strategic priorities, and I'm optimistic about the opportunities to help transform the organization. I'll begin my remarks today with a review of our fourth quarter and full year fiscal 2025 financial results, then cover our liquidity and capital allocation plans and finally, review our outlook for 2026. Net sales for the fourth quarter were $389.2 million and came in above the high end of our guided range. This is compared to $397.9 million in the fourth quarter of the prior year or a 2.2% decline. As a reminder, 2025 was a 53-week year, which resulted in 1 extra week in the fourth quarter when compared with the prior year. The 53rd week for 2025 contributed an estimated $18.3 million of net sales and resulted in an additional $0.21 loss to EPS and approximately $760,000 of negative EBITDA compared to the prior year's 52-week period. Same-store sales decreased 6.8% in the fourth quarter on a 13-week basis compared with the same time period of fiscal year 2024. Looking at comparable sales by categories, our chemicals were down approximately 7.1%, and our equipment category was down 7.6% on a 13-week comparable basis. All other departments were down in the quarter, reflecting the tough macroeconomic environment we are operating in and underscores the importance of the strategic initiatives that Jason highlighted in his prepared remarks. On our last call, Jason outlined our strategy to optimize inventory and end the year in a much healthier position. During the fourth quarter, we successfully executed on this plan, exceeding our goal and ending the year with $208 million in inventory. By reducing inventory $26 million year-over-year and over $100 million in the last 2 years, while significantly increasing our in-stock percentage on our core goods, we continue to focus on the productivity, utilization and return of our investment of working capital. Gross margin for the fourth quarter increased to 38.6% versus 36% in the prior year period. This increase was primarily driven by favorable vendor rebates as well as favorable freight costs as we continue to focus on maximizing the efficiency of our spend in our distribution network. SG&A increased 50 basis points as a percentage of sales on a year-over-year adjusted basis. The most significant year-over-year increase was in store payroll, where strategic investments were made to ensure that we were adequately staffed during peak selling times. During the quarter, we recorded a $184 million impairment charge predominantly related to our goodwill due to current business condition as well as partial impairment charges relating to the closure of underperforming stores. We expect to incur further impairment charges in Q1 and Q2 2026 in relation to the closure of stores in the range of $12 million to $17 million and expect to provide updates during our Q1 and Q2 earnings calls. Net loss for the fourth quarter was $162.8 million or $17.54 per diluted share compared with net loss of $9.9 million or $1.07 per diluted share in the fourth quarter of the prior year. Excluding the charges, adjusted net income in the fourth quarter was $840,000 or $0.09 per diluted share compared with adjusted net income of $4.4 million or $0.47 per diluted share in the fourth quarter of the prior year. Adjusted EBITDA for the fourth quarter increased to $45.2 million compared with adjusted EBITDA of $43 million in the fourth quarter of 2024. Shifting now to the full fiscal year. For the full year of 2025, we finished with sales of approximately $1.24 billion and adjusted net loss of $4.70 per basic share. This is compared to sales of approximately $1.33 billion and adjusted net loss of $0.12 per diluted share. Full year 2025 ending inventory was $208 million compared to $234.3 million at the end of 2024, a decrease of approximately $26 million or 11%. On a 2-year basis, inventory is down over $100 million, while our in-stock percentage on our core SKUs is significantly up. Inventory management will remain a primary focus as we now expect to move more efficiently in and out of season and improve the productivity of our inventory as we continue to rationalize SKUs and vendors. For the full year 2025, we incurred approximately $25 million of net capital expenditures, primarily relating to ongoing fleet maintenance and technology investments. This represents an over $20 million reduction in capital expenses versus the same time period of the prior year. Regarding liquidity, we ended the fiscal year with no outstanding borrowings on our line of credit and $752 million of net long-term debt. As of year-end, we had approximately $168 million of availability from cash on hand and borrowings available under our line of credit facility. We used our cash flow generated during the fourth quarter to pay off our line of credit. Turning now to our guidance. We are adjusting our cadence and will now provide annual net sales and adjusted EBITDA guidance, which we will update quarterly. Our focus will be on longer-term measures being a great retailer and returning Leslie's to a more efficient operating business in 2026. We are focused on executing our strategic pillars to stabilize our business and position Leslie's for long-term value creation. Our path to financial recovery includes taking immediate actions to optimize our cost structure and strengthen our balance sheet. Let me walk you through the expected financial impact of the initiatives we have outlined and how it will impact our 2026 financial operating plan. We are making structural adjustments to the pricing of our core chemical products to ensure that we are everyday value priced in the market. This investment is expected to impact product gross margins by 100 to 150 basis points, and we expect to execute on these initiatives starting in Q2 2026. To partially offset this investment into pricing, we will drive internal operational efficiency and continue to work with our suppliers and distribution channels to gain further efficiency. Our store optimization strategy involves closing approximately 80 to 90 underperforming stores. While this will have an annual sales impact of approximately $25 million to $35 million, it is expected to generate net EBITDA improvement of $4 million to $10 million annually once they are fully completed by the end of Q2 2026. During the first half of 2026, we will undertake a comprehensive expense reduction initiative to align our costs with the trends of the business. These efforts will include the renegotiation of all major contracts with our vendors, suppliers and landlords and continued review of our noncore assets of the business. We strongly believe that we can leverage our SG&A to further enhance the profitability of the company as we continue to focus our efforts on driving traffic and transactions through strategic investments in pricing and meeting the customer with the skill and expertise that they expect from Leslie's. Our DC network optimization is well underway. We closed our Denver warehouse during the third quarter and expect this to reduce annual cost by approximately $500,000 annually. We will close an additional distribution center, which will help make our supply chain more efficient. This additional closure is expected to provide $500,000 of savings annually once fully completed in January. We are committed to disciplined inventory management. During fiscal 2025, we reduced inventory levels by $26 million and anticipate reducing another $20 million to $40 million in fiscal 2026 without compromising our in-stock rates on our core products. This will be done through the cleanup of slow-moving inventory that is not providing the gross margin return on investment that we would like to see in certain categories. In cleaning up this inventory, we expect to incur a roughly 100 to 200 basis point onetime reduction to annualized gross margins as we move through the product. We anticipate that this decline will be most pronounced in Q1, Q2 and Q3 as we move through products that are no longer sellable due to age or condition and as we sell through products at discounts during peak selling season. Our SKU rationalization initiative involves eliminating over 2,000 SKUs, driving cost and inventory efficiency. We expect this to lead to $4 million to $5 million in incremental EBITDA savings as we focus our assortment on a true dead net profit metric and the ultimate profitability of every SKU we sell. In total, these cost savings and pricing investments that are needed to be made to the business amount to a net benefit to EBITDA of approximately $7 million to $12 million when fully annualized. And we are carefully evaluating and strongly believe that there are other significant opportunities to further improve efficiencies and profitability in fiscal 2026. Turning to our outlook for fiscal 2026. We are confident in our ability to execute and drive traffic and sales through focusing on meeting the customer with the right product in the right place at the right time and for the right price. We have identified significant cost savings opportunities across our operations. While we are mindful of the uncertain macroeconomic environment and its potential impact on consumer spending, our proactive approach to customer focus and cost management positions us well to navigate this dynamic environment. As is typical in our business, we anticipate generating the large majority of our sales and earnings during the second half of the year, driven by the seasonal nature of our industry. For fiscal 2026, which is a 52-week year compared to a 53-week year in fiscal 2025, we expect sales of $1.1 billion to $1.25 billion and adjusted EBITDA of $55 million to $75 million. Included in our guide is the reduction in sales and increase in EBITDA relating to store closures announced today. Also included in our guide are the strategic pricing initiatives that we have discussed as well as all associated cost savings initiatives noted within today's call. We have not assumed any impacts from abnormal weather patterns or further deterioration in the current macroeconomic environment. We expect CapEx to be in the range of $20 million to $25 million in 2026 as we focus on maintenance and productivity investments as well as providing positive free cash flow for fiscal year '26. As a reminder, while we are not providing guidance for our Q1 period, we expect to experience meaningful headwinds in the business as we anniversary the hurricane impacts felt during Q1 2025, which drove a significant increase in our business, which we are seeing materialize in our actuals as we move through the Q1 2026 period. We estimate that these events drove an incremental 2% to 4% increase in our Q1 2025 same-store sales. Incremental to all the work that Leslie's team has done to prepare and execute on our strategic pillars, we periodically engage advisers to identify opportunities to enhance profitability, optimize our store base and distribution network and advance our strategic initiatives. At this time, we are currently working with Kirkland & Ellis, Centerview Partners, BRG and A&G Real Estate, among others. We are energized by the operating initiatives currently underway, which on top of a now stronger and more profitable distribution network and store base will position the company for long-term success. In closing, we are confident in our strategic direction and our ability to deliver sustainable value for our shareholders. We are taking decisive actions to improve profitability and strengthen our balance sheet. We will remain disciplined with expenses and inventory management, which combined with the cost optimization opportunities we have identified, positions Leslie's for improved performance going forward. I will now turn the call back over to Jason for closing remarks. Jason McDonell: Thanks, Jeff. I want to take this moment to summarize our actions, which are not just operational improvements, but represent a fundamental reimagining of how Leslie's serves our customers and communities. Through customer centricity, we're returning to our roots as the local pool care expert that customers trust. We've taken decisive action to improve our value proposition by implementing targeted strategies and price value on key items, targeted marketing and a market leadership approach. Through convenience, we're meeting customers where and when they need us, with omnichannel capabilities and comprehensive service offerings. Through asset utilization, we're optimizing every element of our footprint to drive efficiency and profitability. We've conducted a comprehensive review and are executing on optimization opportunities that will structurally improve our cost base and efficiency. And through cost optimization, we're building the agile cost structure necessary for sustainable growth. We've identified significant savings opportunities and are moving with urgency to remove unnecessary costs while preserving our ability to serve our customers. These 4 pillars collectively position Leslie's for long-term profitable growth while maintaining our commitment to maximizing cash flow, reducing debt and building a stronger Leslie's for the future. We look forward to sharing more details on our progress and the path forward on future calls. Most importantly, I want to express my deep gratitude to our entire Leslie's team. Your unwavering flexibility and dedication to embracing our new strategic direction has been remarkable. You've shown incredible resilience, adapted quickly to new ways of working and maintained our commitment to serving our customers. Your ability to execute while we transform, to embrace change while maintaining operational excellence and to stay focused on our long-term vision while managing day-to-day dynamics has been truly inspiring. This transformation is only possible because of your hard work and commitment. Thank you for your continued dedication as we build a stronger Leslie's together. Now I'd like to pass the call back to the operator. Operator: [Operator Instructions] Our first question comes from Justin Kleber with Baird. Justin Kleber: First one, Jason, just for you. You mentioned rebuilding stakeholder confidence. So I'm curious if your supplier partners, are they fully supporting your turnaround efforts? Are you getting the right allocation of product you need to serve the customer? And are you getting that at normal payment terms? That's my first question. Jason McDonell: Yes. Thanks so much for the question, Justin. Yes, our vendor partners have been great partners with us. And as we continue to build our transformation here at Leslie's, that has been key for us in terms of success and having the confidence to build the plan that we're moving towards with the focus on the customer and making sure we have everything from -- and delivering against the in-stock position that we have. I think I mentioned in the call, is like we have just -- the strength of our in-stocks has been very key, with an increase of over 400 basis points improvement in our in-stocks across the network and even our key value items. So this -- it's been a partnership that we greatly appreciate. Jeffrey White: Justin, it's Jeff. Good to talk with you here. One thing I'll add on that is just as we -- as you hear about the SKU optimization and rationalization, what that helps us do is provide better forecast to the vendor partners, which they really appreciate. So we can plan with them a lot better to get the inventory when we want it, when we need it and make sure it's on time and work with them. So from that aspect, which is really critical compared to how we used to work with them in the past. Justin Kleber: Got it. Okay. That makes sense, and that's good to hear. And then just a question for you, Jeff, on the EBITDA guide for this year, how much of that do you expect you can convert into free cash this year? Just asking directionally as you did a similar amount of EBITDA in fiscal '25, and it looks like you burned through a bit of cash. So just curious, any directional help you can give us on free cash conversion this year would be helpful. Jeffrey White: Yes. Well, we didn't provide a free cash flow guide. I can -- I'll tell you that at the midpoint of the guide, we're assuming free cash flow positivity. So up and down from there, it could vary on where we end up, but the midpoint does assume that we're free cash flow positive for the year. Operator: Our next question comes from Jonathan Matuszewski with Jefferies. Jonathan Matuszewski: I had 2 questions. And the first one was on pricing. I appreciate the discussion in terms of plans to kind of reinvest back in price to be more competitive. I was just curious if you could help maybe frame where you see the most opportunity across kind of chemicals versus equipment? And just trying to understand, do the price investments you're doing this year get you back to historical parity? Or is the go-forward pricing for Leslie's now going to be a bit more kind of value-oriented? Just trying to get a sense of directionally where we're going with pricing. That's my first question. Jason McDonell: Yes. Thanks for the question. Obviously, from a pricing standpoint this year, we have spent -- that's been a key area of focus for us, making sure that we have focus on making sure where do we want to make sure that we have that level of focus. For price optimization, we've identified that it's predominantly on our key value items. Those are predominantly in our chemical area that we're focused. And the good thing is we enjoy being -- having vertical integration across our portfolio here at Leslie's, specifically on sort of chlorine tabs. And that's an area of focus that we're going to continue to put on, and that's where we're going to be investing back. From a pricing strategy overall, we've done a variety of different tests in the marketplace, and we continue to hold on the strategy that we want to make sure that we are driving -- be comparable to that of other specialty and ahead of that of -- slightly ahead of that of big box and other major retailers. And that changed a lot this year because in quarter 3, we saw some aggressiveness in pricing that pushed into quarter 4, and we reacted, and we saw some good performance from it. So that's exactly where we're going to be investing. We plan on continuing to keep that strategy going forward. It's really about the everyday focus that we're going to be bringing to the business, and that's the spot. Jonathan Matuszewski: Okay. That's helpful. And then my follow-up question, just on kind of the EBITDA margin guidance. Looks like maybe just over 0.5 point of margin expansion at the midpoint. Just trying to get a sense of maybe P&L geography a bit. Is it fair to expect, given the price investments for gross margin to be down year-over-year and the EBITDA margin expansion is being largely driven by SG&A operating expense rationalization? Or just want to get a sense for that framework. Jeffrey White: Yes, Jonathan, great question. This is Jeff. Good to meet you. As we think about that, you're right, we talked about there's margin degradation built in into the guide. I think I gave 100 to 150 basis points due to the pricing investment. We're going to look at ways to offset that in gross margin, whether that be through freight expense reduction and/or occupancy costs, which goes up into COGS for Leslie's. We'll also look at SG&A. As we talked about on the call, we're identifying and are currently working hard to find ways to optimize our cost base and bring down the amount of SG&A that we're running through as a percentage of sales. So as you flow it down to EBITDA, you're seeing a mix of both kind of gross margin and an offset in SG&A that gives you that slight increase on a year-over-year basis. Operator: Our next question comes from David Bellinger with Mizuho Securities. David Bellinger: First one on the store closures. You called out a $25 million to $35 million impact to revenue. That seems like a pretty low average unit volume on those units, even if it's just a partial year. Is there potentially another tranche of locations you could close on top of the 80 to 90 that are still well below the company average? Is there a larger subset of stores? Or is there something else you could tap into throughout 2026 if this sales recovery doesn't materialize into next year? Jeffrey White: Yes, David, it's Jeff. Great question. As we did this optimization exercise, and we looked at the profitability of these stores, you're spot on that they were a low sales and obviously not making profitability in terms of a 4-wall EBITDA basis. As we peel these ones back, I'm happy to say that from here, the group of stores, everything for the most part is profitable. If sales continue to decline, I think there's further opportunity to continue to look at stores that may be on the line and look at potential closures in the future. That's something that as a good retailer, we're always going to be looking at. But for right now, this takes out the majority of the unprofitable stores that we have in the chain on a 4-wall basis. David Bellinger: Got it. And then maybe a 2-part follow-up on the lost customers. I think you mentioned $160,000 lost retail customers. Do you have a sense of where those customers went? And second piece is on getting them back, the targeted marketing, the price investments, is there a way to quantify just how much that should cost in order to regain those lost customers? Jason McDonell: Yes, great question. So firstly, the net loss of the customers was $160,000, as you mentioned. The one thing we know about these customers is about 80% of them were switchers. So the great thing about these customers is they are current Pool Perks -- they're Pool Perks members. So we know exactly who they are, where they -- what stores they bought in, where they live in terms of their pools and the communities they're in. And honestly and candidly, also what's the reason why they left because we know these are highly conscious towards -- they like our expertise. They like the water testing, but they have an area of opportunity when it comes to price value. So we are going to make sure that we are specifically targeting them with marketing efforts. And because of that level of precision that we have in targeting them, it becomes a rather efficient marketing spend because we can specifically target them with customized offers to bring them back. And then when they come back, we can then use our consultative approach in our stores to help build the basket and keep them on as customers. So that's what we are doing, and that's what we're currently doing in the marketplace. Jeffrey White: Yes, David, just to add a little more color in terms of how we're looking at 2026 guide, the guide does not imply an increase in marketing spend compared to where we've historically been. It's a redeployment of existing dollars and putting them into a more efficient channel that generates a higher ROA. So we're not -- the guide doesn't have an increase in marketing spend. We're keeping it flattish. It's a shift in effectiveness of marketing spend. Operator: Our next question comes from Simeon Gutman with Morgan Stanley. Lauren Ng: This is Lauren Ng on for Simeon. First, can you comment more on the competitive dynamics you saw in Q4 and maybe how you're thinking about your competitive positioning for '26? Jason McDonell: Yes. I would say from a competitive dynamics, if I step back to quarter 3, in quarter 3, we saw heightened competitive pricing in the marketplace. We had a bit of a late season in quarter 3. So because of that, we had excess supply in the marketplace. And when we saw that excess supply, we saw some price activity in the market. That carried itself through quarter 4. We obviously -- we reacted to that and made sure that we were aggressive in the -- we were also aggressive in the marketplace on price to make sure that we could remain competitive. We've seen sequential improvement in our performance from quarter 3 to quarter 4. And -- but that's why we also have the insight around making sure that we are sharper on our key value items, and that's why we're committed to drive improvement going forward and are confident in our actions that we're going to do to drive share performance in the future. Lauren Ng: Okay. And just a follow-up. Can you give an overall assessment of your strategic pillar framework? Like what have been your biggest learnings? What's gone right versus maybe wrong? And how should we think about it for '26? Jason McDonell: Yes. So thanks for that question. I would say the great -- the first thing about our strategic pillar framework is it has provided the unification across our team to be very focused on a common vision across the organization as we want to be the one-stop shop for pool care across America. And I feel very good, especially in this call and what we've announced today around our actions that we're taking across those key pillars of cost optimization and asset utilization and convenience actions we put in place. I think the biggest area of opportunity that we need to make sure that we're doing to bring our market share back in the marketplace is really by embracing the customer and winning in the residential business and building traffic. And that's why we're making the clear actions of investment around value for the customer so that we can win by improving our price value on our key value items. That's our area of opportunity. Operator: Ladies and gentlemen, thank you for your participation. This concludes our question-and-answer session as well as today's conference. Please disconnect your lines, and have a wonderful day.
James O'Shaughnessy: Good morning, and [Foreign Language]. We're happy to welcome you here today for Inditex' 9 Month 2025 Results Presentation. I'm James O'Shaughnessy, Investor Relations. The presentation today will be chaired by our CEO, Oscar Garcia Maceiras. As well as Oscar, we also have Andrés Sánchez, our CFO; and Gorka García-Tapia, Director of Investor Relations. Following this presentation, we will open the floor to a question-and-answer session, starting with the questions received on the phone and we'll then proceed to the webcast platform. Let's take the disclaimer as read. Oscar. Oscar Maceiras: Good morning, and welcome to our results presentation. Thank you for joining us today. In the 9 months of 2025, we have generated a strong performance with sales growth in a complex market environment, while maintaining very satisfactory levels of profitability. This is all down to the consistent and strong execution of the group. Our high levels of diversification have underlined the resilience of our business model. This performance, as always, comes from the 4 key sources of strength that we have, our unique fashion proposition, our increasingly optimized customer experience, our focus on sustainability and the quality and commitment of our people. Our differentiation in the market is as a result of these factors. As you have already seen, our autumn/winter collections have been well received by customers. Andrés will provide some color on the third quarter results shortly. In the 9 months of 2025, sales in constant currency increased by 6.2%. This satisfactory growth rate extended to both stores and online. Sales were positive across each of the concepts and in constant currency across all geographies. In the 9 months of 2025, sales grew by 2.7% to reach EUR 28.2 billion. It's clear to see from the figures we have released this morning that good execution of the model has permitted us to generate both an excellent gross margin and also to exhibit disciplined cost control. Profit before tax increased by 3.6% to EUR 6 billion. At the bottom line, net income increased by 3.9%, to EUR 4.6 billion. This strong performance has continued into the fourth quarter. Store and online sales in constant currency between the 1st of November and the 1st of December grew by 10.6%. Between the 1st of November and the 24th of November, the sales growth in constant currency was 9%. Our presence across 214 markets in conjunction with low market penetration in almost all of these countries supports our diversification. We continue to enjoy significant global growth opportunities. This confidence comes from the fact that we have a unique model that permits us to build up on the increasing levels of differentiation. And now let's pass over to Andres, who will cover the numbers. Andrés Sánchez Iglesias: Thanks, Oscar. Before turning to our 9-month figures, I would like to briefly comment on the performance over the third quarter. As you can see, sales grew at 4.9%, impacted by about 350 basis points of currency headwinds. Gross margin expanded 79 basis points, primarily driven by a strong execution of the business model. Playing a lesser role, but worth mentioning in anyway, we also had the negative currency impact on sales, as I mentioned previously, as well as a favorable U.S. dollar tailwind from our sourcing. OpEx in the period has been tightly controlled, growing 3%. Net profit rose 9%. Moving on to the 9-month figures now. You can see from the results released earlier this morning, and I hope you will agree with me that our performance as a company has been exemplary. In the face of substantial currency headwinds, our sales performance was robust at plus 2.7%. As a consequence of the disciplined management of operating expenses over the period, we can see a meaningful amount of operating leverage. There is no structural change taking place here. This is purely a result of good execution and a good example of the flexibility of the business model. EBITDA advanced 4.2% to reach EUR 8.3 billion, while PBT increased 3.6% to EUR 6 billion, resulting in a PBT margin of 21.2%. Net income increased nicely at 3.9% to EUR 4.6 billion. The sales line has progressed well at plus 2.7% and has reached EUR 28.2 billion. In constant currency, that is sales growth of 6.2%. You will note that the third quarter saw the strongest sales growth for the year so far, offset by a negative currency impact, as I mentioned previously. Sales growth has been strong both in stores and online. Furthermore, sales growth was positive across all concepts and in constant currency in all geographies. At current exchange rates, the company reiterates its expectation of around minus 4% top line currency impact in the full year 2025. Over the first 9 months of 2025, the gross profit increased 3.2% to EUR 16.8 billion. The best explanation for this, as Oscar alluded to a few moments ago, is the successful execution of the business model over the period. The gross margin reached 59.7%. We reiterate our stable gross margin guidance for the full year 2025, perhaps with a slight bias to the positive side of the usual range we provide. Over the 9-month trading period, we've been able to closely monitor and control operating expenses across all departments and business areas. The accounts show 29 basis points of operating leverage for the 9 months. Taking into account all these charges, operating expenses grew 33 basis points below sales growth. In fact, on a stand-alone basis, Q3 also saw operating leverage of 187 basis points. Our structural negative operating working capital comes as a result of our model. As per usual, the evolution of operating working capital is aligned with the performance of the business over the period. We consider the quality of the closing inventory to be high. The net cash position was EUR 11.3 billion at the end of the period. And now Gorka, over to you. Gorka Yturriaga: Thanks, Andres. Over the 9 months of 2025, the sales performance of the group has been remarkable. Perhaps one could say back-end weighted in terms of sales performance over the whole 9 months, but there is no doubt that the execution and commercial discipline has been good throughout as is reflected by the integrity of the P&L over the period. This strong performance was consistent across all concepts. We're happy with the execution of the model over the period. Our global store expansion plan continues. In the 9 months, we opened stores across 39 markets all across the globe. This quarter, Bershka entered Denmark with its first store in Copenhagen. Oysho continues with its European expansion. After opening its first store in Amsterdam in September, it is opening its second store in Germany and Berlin, a market where it has been performing strongly online. The execution of the concepts have been highly satisfactory. Store sales have been strong. Online sales have been great. So all around an excellent performance. Let's stop for a few moments just to bring out an aspect of our business that sometimes passes people by, our diversification. Whether you're talking about diversification by number of concepts or by channel, online versus stores or by geography, as we've already mentioned, we have online presence in 214 markets, 97 markets if you're talking about physical stores. We're a company that enjoys a very broad level of diversification. We also have over 70 independent design teams across our 8 concepts looking to capture and react to fashion trends. Even if we're referring to diversification by sourcing markets, we source from over 50 different markets. This diversification has added an extra layer of resilience to our business model, as has been evidenced throughout this year. And now back to you, Oscar. Oscar Maceiras: Thank you, Gorka. One of our goals is to continually strengthen the key elements that are at the heart of today's results. Our priority remains to continually increase the appeal of our fashion proposition. Creativity, innovation, design and quality at defining features of our collections and a key focus. As Gorka has just highlighted, we have more than 70 design teams across 8 concepts. All of them apply a meticulous design process that impacts every detail of our garments and collections, while striving to provide the latest quality fashion to customers around the world. The results of this unique approach can be clearly seen in the collections we offer every season and our rapid response to customer demands. We continue generating a very broad range of fashion propositions for each of our differentiated concepts. The focus on an ever more enhanced customer experience includes the continuous process of upgrading stores with strong architectural features and with highly curated internal spaces. One of the recent flagship projects has been the relocation of the Zara store in Osaka Shinsaibashi with a special Zacaffe on the top floor. With around 2,000 square meters across 4 floors, the new store combines Japanese tradition and contemporary design. Similar to other projects in different countries, the existing Zara store nearby will become a stand-alone Zara Man store. Since Zara arrived in the country in 1998 with its first store in Shibuya, Tokyo, it has improved our commercial presence today reaching 64 stores spread throughout Japan. We continue to see many opportunities to improve our presence in the world's prime locations as well as expanding to new cities and new territories. We continue innovating in how we enhance the customer experience. An example of this is our recently opened store in Diagonal Barcelona after a refurbishment designed in collaboration with Vincent Van Duysen. The store showcases our collections in a very unique and curated way. This week, we are opening a Zara Man stand-alone store in Palazzo Verospi, Rome as well as our store in Charlotte, North Carolina, expanding to our 26th state in the United States. For that same market, in October, we opened a new store in Las Vegas Forum Shops at Ceasars Palace. Of course, the improvement of our customer experience is also fostered, thanks to our use of technology. As you know, in 2025, we are rolling out the new security technology in the concepts beginning with Bershka and Pull&Bear. The implementation was completed in Zara in 2024, and the feedback in the first full year of operation has been very positive. On the occasion of its 50th anniversary, Zara has presented the capsule collection 50 Creators, a solidarity project that brings together 50 professionals from different creative fields. Zara will donate all profits to the Women's Earth Alliance, an organization that promotes female leadership in environmental and community initiatives. On the 18th of November, the opening of the new Zara Home for&from store in Porto was celebrated. With it, the group reaches a total of 17 stores of this format that since 2002 have generated job opportunities in Spain, Portugal, Italy and Mexico for almost 1,000 people with different disabilities in collaboration with local NGOs. In terms of Inditex's potential for long-term growth, in the current year, we are executing investments that are scaling up our capabilities and generating efficiencies that are being reinvested back into the business, increasing our competitive differentiation. The growth of annual gross space in the period 2025 to 2026 is expected to be around 5%. Over this time frame, Inditex expects net space to be positive, of course, in conjunction with strong online sales. We operate in 214 markets. In the vast majority of these markets, we have a very low market share of a sector which remains very fragmented. These 2 factors alone help to underpin the strong growth opportunities we see ahead of us. For 2025, we estimate ordinary capital expenditure of approximately EUR 1.8 billion. We continue to focus the ordinary capital expenditure on our global store base, the online platform and the rollout of technology programs aimed at enhancing the level of integration. In light of our view on Inditex's strong long-term growth opportunities, we have been rolling out the logistics expansion plan. This 2-year extraordinary investment program focusing on the expansion of the business allocates EUR 900 million per year to increase logistic capacities in each of the 2024 and 2025 financial years. In October of this year, the new building for Zara in Arteixo, A Coruña was inaugurated. This building is over 200,000 square meters in size and houses the product department teams for Zara Woman and Zara Kids with sustainability and technology as relevant features of this new space. A brief note on dividends. The final dividend payment for 2024 of EUR 0.84 per share was made on the 3rd of November. I would like to leave you with a brief comment on our current trading. Our autumn/winter collections have been well received by customers. Store and online sales in constant currency between the 1st of November and the 1st of December 2025 increased 10.6%. Between the 1st of November and the 24th of November, the sales growth in constant currency was 9%. Thanks to everyone for taking part in our presentation this morning. That's it for today. We will be happy to answer any questions you have. James O'Shaughnessy: [Operator Instructions] The first question goes to Monique Pollard from Citi. Monique Pollard: I was just interested in understanding from you, latest press reports are suggesting that the EU are planning to bring forward the legislation, which will remove duties exemptions on low-value parcels, the de minimis rules and whether you think that would remove some competitive pressure going into 2026 and 2027, please? Gorka Yturriaga: Thank you, Monique. Thank you for your question. First of all, I'm going to keep my comments focused on Inditex rather than speak of the competitive landscape or any other competitors that you're referring to. You know that we don't use the de minimis rules in the way that we operate. We're focused on identifying the trends in the market, reacting as quick as possible. The business model that we're doing has been executing quite strong throughout this quarter. And as you've seen, we've come out at the beginning of quarter 4 with a strong trading update as well. James O'Shaughnessy: The next question comes from Geoff Lowery from Redburn. Geoff Lowery: Could you talk a little bit more about your step change in logistics infrastructure, in particular, what you think it can do for you in terms of future capacity, operating efficiency and how quickly you expect to really sort of bring it into full use. Gorka Yturriaga: Great. Thank you, Geoff. I mean we're talking about logistics capacities, and you know the 2-year extraordinary CapEx program that we have, EUR 1.8 billion for the 2 years that we've been investing that we're going to be finishing up at the end of this year. We've mentioned during the presentation that this program is on track. You know that Zaragoza II, one of the major logistics centers that we've been talking about is now up and running, and we're just at the beginning of that ramp-up stage. Remember that the purpose of this logistics plan was to capture the future growth that we're seeing. And I think that in a way with the results today, you're really seeing reflected the growth that we're talking about for future. Thank you. James O'Shaughnessy: The next question today comes from Warwick Okines from BNP Exane. Alexander Richard Okines: You've talked a bit about operating leverage on the call. And you also talked about wanting to reinvest the benefits of efficiency. Do you think it's reasonable to assume that your staff costs grow more slowly than sales in the future? Andrés Sánchez Iglesias: Thank you. In 9 months, as you have seen from our release, our OpEx grew slightly below sales, 29 basis points. If you look in Q3, that growth was even lower with an operating leverage of 187 basis points. As you see, those figures demonstrate the flexibility of our business model and the variable component of our OpEx line. As a reminder, you have to take into account that personnel costs and rental expenses, 2 of the main elements of this line are highly variable linked to the sales performance. So as we mentioned, there is no structural change here. This is a purely result of good execution and a good example of the flexibility of the business model. In any case, operating margins over the medium to long term are expected to be stable with a focus on driving demand for our products by executing the business model successfully in order to continue to generate highly fashionable collections and therefore, maximizing sales at full price. Thank you. James O'Shaughnessy: The next question comes from Anne Critchlow from Berenberg. Anne Critchlow: My question is on the EBIT margin, which reached above 24% in the third quarter. So just wondering if there's a level above which you would not want to see the margin progress, but rather invest back into the customer proposition. Andrés Sánchez Iglesias: Thank you. We have seen positive evolution throughout the year so far. So in this sense, growth in 9 months was plus 6.2% in constant currency, with sales growth of plus 8.4% in Q3. So despite the significant impact on the supply chains and currency markets, our gross margin has remained broadly stable as a consequence of the consistent strong execution of our business model that continues allowing us to maximize full price sales and achieving this gross margin performance. For this upcoming year, 2025, we reiterate our stable gross margin guidance. However, given the current trends, as we repeated, we are likely to be slightly positive within the range. Regarding OpEx in 9 months, and as we repeated, so we have a very flexible structure in terms of costs. So there is no changes here. It's a pure good execution and a good example of the flexibility of the business model, but we continue expecting operating margin to be stable over the medium to long term. Thank you. James O'Shaughnessy: The next question comes from Sreedhar Mahamkali from UBS. Sreedhar Mahamkali: I guess if I can just get you to comment on the U.S., please. What price adjustments have you made in the U.S., what customer response have you seen and what are your thoughts on the potential for expansion in the midterm here? Has anything changed? Oscar Maceiras: Thanks for the question. Well, we have mentioned several times in previous calls, U.S. is a very relevant market for us, and we continue to see opportunities to keep on executing our strategy of selective growth in that market. We should bear in mind that despite good results, we have a low market share, and we believe that growth is in our hands, not dependent on the performance of the broader market. 2025 has been a year full of relevant projects for us. Some examples have been the opening of our new flagship stores in L.A., The Grove, the recent opening of our store in Las Vegas Forum Shops at Ceasars Palace. As we mentioned during the presentation, this week, we are arriving at our 26th state with the opening of our store in Charlotte, North Carolina, and also, this same week, we are reopening after an important refurbishment, our store in Newbury Street in Boston City Center. 2026, we will be also full of new exciting projects the opening of our flagship store in 400 Post Street in San Francisco, an important refurbishment of our iconic Zara store in Fifth Avenue in New York and also, we can confirm that Bershka after a successful online performance in the U.S. will open in 2026, its first 2 stores in Miami area. James O'Shaughnessy: The next question goes to James Grzinic from Jefferies. James Grzinic: Really a factual question. I think you told us back in Q1 that the percentage of in-store data sales that were going through self-checkouts were around 30%. Can we have an update on what that number has reached now? That would be very helpful. Gorka Yturriaga: Great. So I think you're right. We're talking about assisted checkouts, which have been implemented throughout the group. Remember that this is also in conjunction with soft tags, as the soft tag rollout really enhances the use of assisted checkouts for obvious reasons. And as this progresses throughout the year and the next year with the new concepts of Bershka and Pull&Bear that we're rolling soft tags out, I think that this is going to have an increasing impact. The percentage of sales process through ACOs has been progressing nicely since we last spoke. I think what I can tell you at this stage, at least, is that in some of the larger flagship stores that really drive a lot of traffic, where you would think that these ACOs really should be coming in, in terms of usage, we're seeing close to 90% of total transactions in some of those stores. Thank you. James O'Shaughnessy: The next question comes from Georgina Johanan from JPMorgan. Georgina Johanan: I just wanted to ask a question on AI, and I appreciate it's sort of quite a high level at the moment. But how are you using AI in the business already in terms of driving efficiencies, but also thinking about ways to sort of support the consumer performance from here? And just any thoughts on how that would sort of develop over the coming 12 months would be really helpful, please. Gorka Yturriaga: Sure. So I think you know that we've been historically a company that's really been data-driven for many years. We're trying to capture the trends in the market, reacting real time and adjusting our product offering through the in-season sourcing that we do in order to provide these trends into the market and capture that full price sales. What I would say initially with regards to AI, I think we're at a very incipient moment of artificial intelligence. And what we see at this stage is that AI is a tool that can really empower our people, but not really substitute them, right? There are a series of different things that we're doing, both on the web page with regards to, for example, concept searches, which is, I think, is a novel idea with regards to how you find a product on our web page. And of course, you can imagine in some of the back office functions, AI is really a great tool to go through contracts of different sorts and pull out interesting information. I hope that's helpful. James O'Shaughnessy: We're going to proceed with the webcast questions now. We've had a few today. The first of which is, can you comment on why you took the decision to give a short trading update, please? Gorka Yturriaga: Sure. So before I answer this question, maybe I'd just highlight the fact that in this particular quarter, it is a relatively short period. So we're talking about the 1st of November to the 1st of December. So for the rest of the year, we still have 2 whole months left. Secondly, you've seen that in the third quarter, we had constant currency sales of about 8.4%, and that's really still coming through in the trading update that we've provided of 10.6%, showing that we've started the fourth quarter well. We've also provided that 1st of November to 24th of November with a constant currency sales of 9%. And the reason we've provided the shorter period and that 9% is with the purpose of stripping out the last week for obvious reasons, as we think that this is a better reflection of the commercial sentiment our teams are seeing as of today in the market. In any case, I'd highlight that with regards to the last week, there's been no significant change in promotional activity this year, and we're completely focused on the execution of the business model. And to that point, I think we've reiterated throughout the presentation that for 2025, we have -- we're looking at stable gross margin, albeit perhaps with the current trends with a slightly positive range of that range that we normally provide. Thank you. James O'Shaughnessy: The next webcast question relates to the concepts. Bershka, Stradivarius and Oysho are growing very strongly. Are you thinking about expanding these concepts? We've already spoken about the U.S. into perhaps other markets. Oscar Maceiras: Well, thanks for the question. Well, we are happy with the positive performance of Zara and the rest of our concepts. I have already mentioned some projects for 2026 in the states, including the opening of our first Bershka stores in Miami area. And besides, we keep on identifying good opportunities for expansion of our concepts in the rest of the markets. As an example, this year, this 2025 Stradivarius opening its first stores in Austria and Oysho in the Netherlands. We have the advantage of having not only a good knowledge of the different markets at group level, but also the advantage of having a global online presence for all of our concepts. Thank you. James O'Shaughnessy: The next webcast question also relates to the concepts. Can you comment on the growth strategy for Oysho. Growth in H1 for Oysho was 6% reported, the highest of the group. Oscar Maceiras: Well, again, we are seeing good growth opportunities for all of our 8 concepts. In the case of Oysho, that concept has pivoted a few years ago into selling more athleisure and sportswear and developing a very good strategy in terms of creating an Oysho community. The consequence has been a very positive performance that is also consistent with the expansion to new countries. And we mentioned during the presentation that -- well, Oysho not only entering the Netherlands with its first store in Amsterdam, but also has just opened its second store in Germany in Berlin. So many good opportunities to keep on growing in the future. James O'Shaughnessy: The next webcast question. Inditex continues to experience good growth. Does this give you more confidence in your recent investments into stores and logistics? Oscar Maceiras: Well, the growth that we have seen in recent years is driven by the good execution of our teams, our -- what we consider a unique business model and also a culture of investing to maintain the differentiation. We have to talk to you about investing in our retail optimization program for many years, building unique retail spaces that allows us to enhance the customer experience. Our stores in Osaka Shinsaibashi and Barcelona Diagonal, just to provide you 2 examples mentioned during our presentation, reflect this approach. And we also continue to invest in store technology, including assisted checkout, as has been covered a question by Gorka with very positive feedback from customers. What we see is that these investments, together with the fashion proposition, are driving growth. And our 2-year logistics extraordinary investment plan is also consistent with this view about the potential future growth of the group. So I guess that you should expect us to continue to invest in the business in order to keep on capturing new growth opportunities. James O'Shaughnessy: Thank you. That concludes the webcast questions for today. Oscar Maceiras: Well, thank you to all of those participating in the presentation today. For any additional questions you may have, please get in touch with our Investor Relations department and we will welcome you back in March for the full year 2025 results.
Operator: Welcome to the Sprinklr Third Quarter Fiscal Year 2026 Financial Results Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I will now turn the conference over to Eric Scro. Thank you, Eric. You may now begin. Eric Scro: Thank you, operator, and welcome, everyone, to Sprinklr's third quarter fiscal year 2026 financial results call. Joining us today are Rory Read, Sprinklr's President and CEO, and Anthony Coletta, Sprinklr's Chief Financial Officer. We issued our earnings release a short time ago, filed the related Form 8-Ks with the SEC, and we've made them available on the Investor Relations section of our website, along with the supplementary investor presentation. Please note that on today's call, management will refer to certain non-GAAP financial measures. While the company believes these non-GAAP financial measures provide useful information for investors, the presentation of this information is not intended to be considered in isolation as a substitute for financial information presented in accordance with GAAP. You are directed to our press release and investor presentation for a reconciliation of such measures to GAAP. In addition, during today's call, we will be making some forward-looking statements about the business and about the financial results of Sprinklr that involve many assumptions, risks, and uncertainties, including our guidance for the fourth fiscal quarter and full fiscal year of 2026, the impact of our corporate strategies, and changes to our leadership, benefits of our platform, and our market opportunity. Our actual results might differ materially from such forward-looking statements. Any forward-looking statements that we make on this call are based on our beliefs and assumptions as of today, and we disclaim any obligation to update them. For more details on the risks associated with these forward-looking statements, please refer to our filings with the SEC, also posted on our website. With that, let me now turn it over to Rory. Rory Read: Thank you, Eric, and hello, everyone. It's nice to be with you today. Third quarter total revenue grew 9% year over year to $219.1 million, and subscription revenue grew 5% year over year to $190.3 million. We generated $33.5 million in non-GAAP operating income, which resulted in a 15% non-GAAP operating margin for the quarter. I want to thank our global Sprinklr team as well as our customers and partners for trusting us to help solve some of their most pressing business challenges. I'm excited to welcome two new leaders to our executive team: Anthony Coletta as CFO and Kartik Suri as the Chief Product and Corporate Strategy Officer. Both bring deep experience in scaling operations, driving growth, and building world-class products at leading technology companies. We've been intentional about strengthening our leadership team, and with these additions, we're nearly complete. Anthony and Kartik join us as we sharpen execution and continue our work to drive Sprinklr into its next phase of durable growth. When I became CEO a year ago, we set a clear strategy to improve Sprinklr's position in a rapidly evolving customer experience market. To leverage our AI-powered platform through an ambidextrous approach, reenergizing and growing our core while expanding and strengthening our disruptive services. The rise of first-party data is transforming this landscape. Brands and consumers now have unprecedented access to own data, tools, and channels, fueling a shift from transactional interactions to personalized omnichannel engagement powered by AI and analytics. First-party data enables granular segmentation and real-time personalization across every touchpoint, making hyper-personalization not optional but essential. Customers expect their experiences to reflect their entire relationship with the brand, tailored to their unique needs. Delivering this requires moving beyond basic personalization toward immersive engagement across discovery, commerce, support, and service. Sprinklr makes this possible. Our AI-native platform turns first-party data into actionable insight, enabling brands to anticipate customer needs and deliver meaningful value across all customer interactions. Through our social insights, service, and customer feedback management suites, leading brands leverage real-time behavior and sentiment to recommend content and products that drive engagement and loyalty. With Sprinklr, brands gain a unified voice and holistic customer view, which is unique and unmatched in the industry. These evolving dynamics require a different Sprinklr. Leveraging our robust technology platform, iconic customer brands, and strong balance sheet, we've used fiscal 2026 as a transitional year as we transform the company. At the beginning of this year, we recognized the need for foundational change, and we've taken decisive action. Since then, we've made significant operational improvements, streamlining processes, modernizing systems, and enhancing cross-functional alignment. We've also strengthened our leadership team and welcomed new talent across the organization, bringing in expertise to drive durable growth. While these changes are the right ones and we believe will deliver long-term value, real transformation takes time. We're entering the second phase of our transformation, transition, and execution, which will extend into next year. This phase is about embedding the actions from phase one into our operations and culture, creating a foundation for scale and efficiency. Key indicators and customer engagement trends are moving in the right direction, and we're seeing some early momentum. Importantly, we are in a stronger position today than at the start of the year. While more work remains, we are confident in our strategy and committed to driving sustainable growth and long-term shareholder value over the next couple of years. One of our most important initiatives is Project Bearhug, focused on deepening engagement with our top 700 customers, representing more than 80% of our total revenue. In the first ten months, we've established a steady cadence and held many meaningful engagements with key accounts. We also hosted our second annual CX Unifiers conference in Nashville, bringing together hundreds of attendees, including leading customers, for advisory sessions and an analyst summit. The event showcased our latest innovations and thought leadership in AI and customer experience. Early results from Project Bearhug are telling: stronger C-suite relationships, tighter alignment with customer priorities, and clear demonstration of Sprinklr's value. We expect these efforts to improve renewal rates into FY '27. Sprinklr is a system of record for customer engagement across social, digital, customer feedback, and voice channels. Our AI-native platform is purpose-built for customer experience with deep industry and application integrations to meet enterprise needs. As we shared in prior earnings calls, we continue to invest strategically to help customers navigate rapid industry shifts and meet evolving expectations in real-time. These investments strengthen our leadership position across both core and Sprinklr service and will continue through FY '27, reinforcing our commitment to innovation and customer success. Now I'd like to share a couple of customer stories. We recently signed an expansion deal with a leading Latin American bank that is scaling digital-first customer service for tens of millions of customers. The partnership began in early 2024 with Sprinklr service and insights in one country, and rapid success drove expansion. AI-powered automation delivered a 35% increase in case deflection, 50% faster handling times, and a 500% boost in agent productivity. CSAT scores rose significantly, and the insight-to-action cycle dropped from days to minutes, enabling faster decisions on service and campaign adjustments. Building on these results, the bank doubled channel coverage in the next market, managing 4x more cases and unlocking millions of dollars in value through efficiency, risk mitigation, and retention. Today, Sprinklr's unified platform consolidates customer care and marketing intelligence across three regional markets, creating a single source of truth for CX and marketing teams. The latest expansion in AI agent underscores the bank's confidence in Sprinklr's ability to secure scalable and efficient digital services as it expands across Latin America. Our second customer story highlights our commitment to improve delivery and execution in partnership with one of the world's premier streaming and entertainment companies. We've come a long way since the initial implementation. In 2024, we launched the first phase of their global contact center transformation in Asia using Sprinklr service and knowledge management. We had some initial challenges, and the customer let us know. Ahead of the North America, EMEA, and LATAM rollouts in early 2025, we met regularly face-to-face to address these challenges and to drive improvement. We made key personnel changes, tightened processes, and strengthened quality controls. With each phase, delivery improved. By September, the customer was fully live: 5,000 agents across 210 countries supporting 40-plus languages, handling over 40 million contacts annually. The result: a new multiyear commitment. This turnaround reflects our values. We showed up, and we made it right. We executed with excellence, and that's how we earn trust and drive growth. In closing, we made strong progress in our transformation to build a stronger, more customer-centric Sprinklr. Retention rates are beginning to show improvement, and our pipeline remains strong. Clearly, more work remains, but we are executing with new discipline and prudence to enable future and sustainable growth. As brands face rising customer expectations, first-party data has become mission-critical, creating new opportunities for loyalty and monetization. Sprinklr's AI-native platform is uniquely positioned to unify this data across all channels, delivering consistent, connected experiences at scale. Our dual focus on transformation and execution is gaining momentum. 3Q marked another important step forward. And while some challenges remain, we are confident these initiatives will continue to improve our business. Now I'll turn the call over to Anthony for the financials. Anthony? Anthony Coletta: Thank you, Rory, and good morning. It's great to be with you today. I look forward to a constructive dialogue with the financial community. I would like to start by thanking everybody at the company for delivering such a strong Q3. This quarter marks another step in the transformation focus on business continuity as we solidify our position. It's a step forward on a longer path, one that sets the tone for consistent performance. With the leadership team, we are very much aligned and on scaling this business with clarity and operational discipline. As we progress towards the end of the fiscal year, we are laying out the groundwork for the next phase to shape the trajectory that compounds value over time. I'm excited to join Sprinklr at this pivotal moment. What stands out for me so far is the competitive edge and the quality of our customer base, including some of the world's most iconic brands. This speaks volumes about the differentiated value of our unified CXM platform. Consistent with Rory's comments, we have a clear strategic vision, and we are committed to executing it with transparency. We are actively working through a transformation that we believe will position us for sustained growth coupled with quality of earnings. I want to thank the investors who have placed their trust in Sprinklr so far. You should expect a steady voice from us, open about the state of play, and we'll be intentional in our approach. Now let me dive into the financial performance. In Q3, total revenue was $219.1 million, up 9% year over year. Subscription revenue was $190.3 million, up 5% year over year. While this was ahead of expectations, there has been downward pressure from renewals for more than two years now. In the third quarter, we continued to make tangible progress on previously challenged accounts. Driving consumption and securing renewals remain high on the agenda. Operational services revenue came in at $28.8 million as we are working on some large cash flow outs for our customers that we expect will translate into software subscription revenue in future quarters. Services revenue came in better than anticipated due to more hours linked to some of these large projects. Our subscription revenue-based net dollar retention rate in the third quarter was 102%. This is flat sequentially, showing some encouraging stabilization. At the end of the third quarter, we had 145 customers contributing $1 million or more in subscription revenue over the past twelve months, which is another decrease of four customers from Q2. Given the level of down sales over the past years, some customers have seen their trailing twelve-month revenue dip below the $1 million level for this metric. However, and I believe more importantly, I would like to note that the revenue contributed by the $1 million customers cohort was up 9% year over year, and the net dollar expansion for this cohort in Q3 was 113%. We don't intend to disclose this metric quarterly going forward, but I wanted to give you a sense of some of the progress we're seeing in terms of cross-selling. We firmly believe that our focus will solidify our baseline and contribution from the top-tier enterprise customer over time. Regarding gross margins for the third quarter on a non-GAAP basis, our subscription gross margin was 77%, and the professional services gross margin was 5%, resulting in a total non-GAAP gross margin of 67%. As noted in previous calls, we are experiencing higher data and hosting costs in response to business opportunities, especially in Sprinklr service and our expanded AI capabilities. Turning to profitability for the quarter, non-GAAP operating income was $33.5 million or a 15% margin, which was non-GAAP net income of $0.12 per diluted share. We incurred $800,000 in restructuring and non-recurring litigation costs that are deemed to be non-core to the operations of the business, and as such, these costs are not included in our non-GAAP figures. We generated $15.5 million in free cash flow in Q3 and $126 million year to date on a reported basis. Excluding restructuring payments made mostly in the first half of the year, free cash flow for the first nine months was nearly $110 million. Our balance sheet remains strong with $480.3 million in cash and marketable securities and no debt, providing optionality for future capital allocation. Calculated billings for the third quarter were $158.4 million, an increase of 7% year over year. As of October 31, 2025, total remaining performance obligations or RPO were $857.6 million, down 5% compared to the same period last year. In Q3 of the full year 2025, there were a couple of large deals that were put forward and reported in that quarter, leading to a higher baseline. Excluding these outliers, RPO would be flat year over year. And current RPO or CRPO was $562.2 million, up 3% year over year. Now I'd like to shift to our financial outlook guidance for the remainder of the year. For Q4, we expect total revenue to be in the range of $216.5 million to $217.5 million, representing 7% growth year over year at the midpoint. Within this, we expect subscription revenue to be in the range of $191 million to $192 million, representing 5% growth year over year at the midpoint. The Q4 guide implies $25.5 million in professional services revenue, growing by 25% year over year. This is a step down sequentially because of a one-time positive impact from large projects in Q3. We expect professional services gross margin to be slightly lower in Q4 due to continued investment in services delivery and capabilities. We believe such investment is worthwhile, as these implementations will yield dividends in terms of increased consumption and customer satisfaction in the future. With respect to billings, Q4 is traditionally the strongest quarter given business seasonality and overall technology spending. We estimate total billings of approximately $320 million for the quarter. We expect non-GAAP operating income to be in the range of $29 million to $30 million, resulting in non-GAAP net income per diluted share between $0.09 and $0.10, assuming 254 million diluted weighted average shares outstanding. This equates to an approximately 14% non-GAAP operating margin at the midpoint. As noted earlier in the year, we are experiencing a stronger take in our AI products, leading to higher cloud costs. Secondly, as Rory noted in his remarks, we are investing to position the company for revenue growth in the future through hiring AI and R&D talent, particularly in targeted regions to best serve key customers, as well as enabling additional go-to-market capabilities. These factors are reflected in the guide for Q4. For the full year FY 2026, we are raising our expectations for both subscription revenue and total revenue estimates. We now expect subscription revenue to be in the range of $754 million to $755 million, representing 5% growth year over year at the midpoint. We flowed through all the Q3 beats. We now expect total revenue to be in the range of $853 million to $854 million, representing 7% growth year over year at the midpoint. This is a $15.5 million increase from prior guidance, driven by an increase in our professional services revenue expectation to $99 million and the corresponding flow-through in subscription revenue. For the full year FY 2026, we are raising our non-GAAP operating income to be in the range of $137.5 million to $138.5 million, driving a 6% non-GAAP operating margin. This equates to non-GAAP net income per diluted share between $0.43 and $0.44, assuming 265 million diluted weighted average shares outstanding. Deriving the net income per share for modeling purposes, a total tax provision of approximately $42 million to be added to the non-GAAP profit before tax line. To get to non-GAAP profit before tax, start with the non-GAAP operating income ranges provided and add an estimated $24 million in other income for the full year, with $4 million of that to be earned here in Q4. This other income line primarily consists of interest income. We estimate a tax provision of approximately $8.7 million in Q4. This equates to approximately a 26% effective tax rate on our non-GAAP profit before tax for both the quarter and the year. We are maintaining our full-year free cash flow estimate of $110 million, excluding restructuring costs. This implies approximately negative $50 million in Q4, driven by collections on a smaller Q3 book of business and targeted investment this quarter. On a reported basis, we expect full-year free cash flow of about $110 million, up over 80% year over year. Given the recent leadership changes and our diligence in the approach, we will provide a detailed financial outlook for FY 2027 on our Q4 earnings call, which we expect to be scheduled for mid-March. In summary, Q3 came in better than anticipated across the board. We are encouraged by the tangible progress made so far and see signals of some green shoots. We are raising the full-year top line and non-GAAP bottom line guidance, reflecting our Q3 performance and business prospects. As we transition into Q4, we move with velocity and are laser-focused on turning our growth engine, sustaining innovation, and staying the course towards the next leg of our journey. And with that, we will now open the line to take questions from the audience. Operator? Operator: Thank you. We'll now be conducting a question and answer session. Our first question comes from the line of Jackson Ader with KeyBanc. Please proceed with your questions. Jackson Ader: Great. Good morning, guys. Thanks for taking our questions. The first one, I guess, for Rory, I understand we're moving into kind of a second phase here, but with the revenue performance in the quarter, I'm just curious, you know, in the here and now or in the short run, like, how sustainable do you view this kind of performance, like this quarter's performance, as we head into next year? Rory Read: Sure. Hey, Jackson, great to hear from you. I think, Jackson, the key here is in the three phases of a transformation. You do the optimization work, then you're into the execution and transition phase. And that's the key phase that you're burning in the changes. You're getting the organization to the right set of processes, the right execution. You have the Bearhug work, you know, that will eventually move into an acceleration phase. In that transition execution phase, it's not as predictable as you want it to be. I mentioned on the last call that we began to see improvements in our metrics and our predictability. I'm very eager to see how 4Q, 1Q, and 2Q perform. This was a good quarter, no question, and we saw a better performance on NAR, better performance in terms of the predictability on renewals. All of those pointed in the right direction. But, you know, it's one quarter. We need to see several quarters in a row. We need to manage this transition. We have still significant improvements in all our key initiatives. We're expanding Bearhug to more than 800 customers now. We want to make sure that we're driving the changes in the technology base with the enhancements. We're seeing significant improvements across our major implementations. But we're still a work in progress, and there's more work to do. And sometimes it's three steps forward and one step back. I mean, we're moving in the right direction. Let's run several quarters together. Let's see how 4Q, 1Q, and 2Q perform. That's when I think we see how sustainable this all is. It's moving in the right direction. But, again, work in progress, more work to do. Good 3Q. Jackson Ader: Yeah. That's helpful color. And then a quick follow-up on Project Bearhug or, you know, when you go into some of these, I think the phrase you used was, like, you go into troubled accounts. Right? And you're trying to, you know, through Project Bearhug, kind of, like, reengage, get your arms around them literally and maybe, you know, salvage some things. Can you give us an idea just like what is at risk, and what are you able to actually deliver once Project Bearhug works? Are we talking about, you know, a customer might be down, you might expect them to be down 20%, and you're able to only negotiate something that's down five? Is it down 10 and it ends up being flat? Like, what are we talking about here? Rory Read: Yeah. Bearhug is a really important initiative, and it came from my time when I worked at IBM back when Lou Gerstner transformed the company, and he drove the organization back to the field. And he used to say the customer is the final arbiter. Bearhug is about creating deep, deep relationships with your customer every single day. If you're engaged with the customer, your competitors can't be. And that's key. Sometimes it's about growing the relationship, getting closer and higher level into the C-suite, understanding their next generation usage. Sometimes it's understanding that the account is challenged and how we can fix it. As a cohort, growing 9% year over year, with a net dollar expansion rate of 113%. That's a very important metric that shows the impact of Bearhug. Now, we're pulling Bearhug down to the top 500 and ultimately, the top 700-800 accounts. That'll represent about 90%. When we do have a troubled account, if we do Bearhug well, we have seen situations where we were looking at a down-sell or even a significant down-sell, and we've been able to change that outcome. We've been able to renew, extend the relationship, and sometimes even grow it. It's really a real variety of outcomes, but the key is the engagement and creating value for them. You are going to get a better outcome, whether it's better growth or better retention. All signs are good. Jackson Ader: Got it. Alright. Great. Thank you very much. Operator: Our next questions are from the line of Elizabeth Porter with Morgan Stanley. Please proceed with your questions. Elizabeth Porter: Great. Thank you so much. Welcome, Anthony. We're really looking forward to working with you. Rory, question for you. There's been a fair amount of leadership change in the organization over the past couple of quarters as you've just gone through the transformation journey across CFO, CRO, CPO roles. Could you just talk about how you're stabilizing the leadership bench and what early indicators you're watching to ensure that productivity isn't disrupted through fiscal 2027 and we are minimizing the risk of any sort of step back after some really encouraging step forwards? Thank you. Rory Read: Yeah. Thanks, Elizabeth. Always great to chat with you. I think as I've signaled throughout the past couple of earnings calls, pretty much all of the senior leadership changes are complete at this point. I think what's key is we have a nice mix of existing experienced players. Sure, there could be other changes down the road. You always have to be ready, and people make decisions. You never know. But I think we have a strong team. I think we have a team that's got experience and knowledge in the space. They know how to scale. They're used to rolling up their sleeves and getting their hands in the gearbox. And a transformation like this, we need team members that want to be part of this for the next three or four years and that want to create something unique. We're on a journey, and we're a work in progress. Sure, I think there could be other changes in the future, but for the most part, we're pretty much done on the major leadership changes. I'm excited to be running sales now again. I love doing that, especially in 4Q and 1Q. I think these are pivotal quarters after a solid 3Q. I'm not seeing any indication that we'll have problems because of changes in the organization in the tactical time frame. Our drivers are better customer relationships, paying down our technical debt, engaging our customers more effectively, streamlining our processes, and implementing the changes that I've been talking about. That's going to yield better performance as we move through 4Q, 1Q, and 2Q. We get to the middle of next year, I think we start to see a different Sprinklr. Elizabeth Porter: Great. And then just as a follow-up, you've shown a lot of margin expansion this year. And as we look into next year, understanding we'll get more formal guidance in a couple of months, just as you reinvest in the go-to-market and you're investing in AI and product, how should we think about the trend into margin next year as you're balancing but also investing behind growth? Rory Read: Yeah. I think, Elizabeth, the key on the bottom line, you can always stretch it out anytime you want. I think we're in a good general position, and we'll share more about where we are for FY '27 when we get to the next earnings call. I think it's a prudent balance between making some reasonable investments and running around the rates that we are today. I think that's a good place to be. I think we can be profitable, return value to the bottom line in our pristine balance sheet, but at the same time, make those spot investments. Now, if we did come across an opportunity that we could seize on and we wanted to spend a little bit more, we would talk about that, and we would definitely slant toward growth. But right now, I think we have a very nice balanced approach. I think we're in the right kind of space today. Does that help? Elizabeth Porter: Yes. It does. Thank you. Operator: The next questions are from the line of Patrick Walravens with Citizens. Please proceed with your questions. Patrick Walravens: Great. Thank you. And let me add my congratulations. Rory, for you first, I mean, it seems to me the big thing to get done, initially at least, is renewals. So how did renewals in Q3 compare to your expectations? And do we have some big ones coming up in Q4? Rory Read: Yes. I think renewal rate is the key for us over the next several quarters. As I've always talked about the bend in the business, I think we have a very interesting technology platform. We have iconic brands that, when we get it right, they spend a lot of money with us. And I think the indications on that $1 million cohort are powerful. I think the key on renewals is in 3Q, our metrics, our forecasting predicted where we were going to be, and we came in there or better. So that was good. That's the first time we've seen real predictability in the numbers, and I think that's reflecting a better management system. As we look forward to 4Q, 1Q, 2Q, that's where I think we start to see that bend in that renewal rate. And I think what we want to do is run several quarters together. We have Bearhug plans, account-level plans, to manage those engagements months and months in advance. I mean, that's just got to yield better results. I think what we got to do is see where we go in April. It's a big quarter. Good pipeline, good momentum coming out of 3Q. But we have work to do. And then seeing renewal rates in January, February, I think, are going to be fundamental that we see that continued improvement. This has been a three, four-year decline. We're now starting to be able to predict it, and we're starting to see the benefits. I really like those numbers, Pat, in that $1 million cohort. That's where we focus Bearhug first. And we see net dollar expansion, 113%. That's where you want to be. Patrick Walravens: Good stuff. Alright. Fantastic. And then, Anthony, I covered, you know, nice to chat with you again. I covered SAP for eighteen years you were there. It was already a big company when you joined in 2006, and then, you know, eighteen years later, it was four times bigger. So it's interesting to me that you took this role. What attracted you to Sprinklr? Anthony Coletta: Thanks, Pat. I appreciate the question. Obviously, Sprinklr is very attractive in terms of the space, the product, and also the quality of its customers. So I'm very impressed by what I've seen so far. What motivated me is obviously I see the opportunity in this market. I see Sprinklr as a leader and with some products also that are driving kind of the way up the market. So we can lead this market and move it really in the right direction. On the financial aspect, I think the balance sheet is healthy, the fundamentals are there, it's solid, but I see potential also in terms of the evolution. I've been doing transformation in my prior company, and I see it looks on the other side. So I believe also in the execution and what you can get on the other side of the transformation story. And, obviously, I click with the leadership team. So I had a great connection and great kind of alignment with what I heard from in terms of strategy and philosophy around the business from Rory and the team. So many elements, but that's in short kind of what motivated me to join. And what I've seen so far validates that. So the quality of the customers, the logos that I see, and also the power of our product is pretty impressive. And I gave you one example, which gives you also kind of validating that. When I looked at the five most valued companies in the US or the most valued companies in Europe, they are all using Sprinklr today. So that gives you a sense of the relevance of Sprinklr in the enterprise space, in the large enterprise space. So there's work to do here. But I think we know where we're going. We have a clear strategy, and we're very well aligned to execute on it. But I see the potential of growing this business and obviously optimizing the margin profile. So we are now in a way, very good start so far, and I appreciate the question. Thanks. Patrick Walravens: Alright. Fantastic. Thank you. Operator: Our next question is from the line of Catharine Trebnick with Rosenblatt Securities. Please proceed with your question. Catharine Trebnick: Hi, thank you for taking my question and congratulations on the new role. So I have a question. Back last March, you talked about how in going through Phase I and into II that you were going to really do a lot of pricing and bundling on your sales and enablement. Can you update us on that? Thank you, Rory. Rory Read: Catherine. Great to speak with you. As we did the work, I talked about on the last earnings call, we did implement the first phase of our new pricing and bundling package work. We did it on new, tech core, you know, Martech stack core, you know, the whole social listening insight space. Early feedback over the first quarter has been good. Customers liked it. We saw good acceptance of it, good feedback. It wasn't crazy positive. It wasn't negative at all. It was good. It was a step forward. What we're doing now is in the next quarter after this, we'll continue to burn it in, make sure it's performing the way we want. Then we'll expand it to all existing Martech stack customers. So we'll begin to move them to the new pricing model, not just on the new offerings, but on the existing base. And then finally, later next year, we'll move the service in that direction. So we implemented the first phase. It's going reasonably good and well. And we're seeing good feedback. Next phase, it's to expand it from the new implementations to the existing for the Martech stack in the core space. And then later next year, we'll move it to service probably midyear or second half. Catharine Trebnick: Okay. Thank you. And then just a follow-on question more tactical, I think, is, you know, you did win that Deutsche Telekom pretty large deal on contact center for your services. Where are you in the deployment of that, if you can give us an idea. Thanks. Rory Read: Yeah. I think, you know, there's a number of large deployments that I focused a lot of time on with the team over the past ten months. We've seen a significant improvement in our execution. I highlighted one customer example in my prepared remarks and the progress we made. And the progress was really material, and the customer super appreciated it. We've been doing the same thing with some of the larger implementations. Some of those were a bit choppy before, you know, as I was arriving. And some were challenged. The good news is as we fix those implementations, and as they're rolling out to the agents, the agents love the solution. They like the technology. They like the offering. I think that's the most encouraging thing. I don't think some of these customers would have stuck it out with us if the solution wasn't really interesting and good. I think we've made great progress. We're rolling out in production across many of the customers in Europe. And they're accelerating. In the telco space, DT, Telefonica's, the sunrises of the world, they're all moving in a good direction. And I think good progress. I think we're moving right through the implementation, and the feedback's been good. Catharine Trebnick: Alright. Thank you very much. Operator: The next question from the line of Arjun Bhatia with William Blair. Please proceed with your question. Arjun Bhatia: Yes, perfect. Thank you so much. Rory, just one question for you on AI capabilities. I'm curious just where you think you are in terms of capabilities you already have on the platform, where you need to make investments still, and just as you look out, what sort of margin impact should we expect over the next year or so as more AI use cases get into production? Rory Read: Yeah. Thanks, Arjun. I think the AI discussion is really a good one. And I think you have to understand that this is an AI-native platform for the last nine or ten years. Because of its history in social and unstructured data, it was key. When you bring the voice of the customer together across all these vectors, whether it's social or conversational commerce or customer feedback or digital support or voice support, you begin to see the total 360-degree customer signals, and that's going to be critical. That's why I firmly believe the unification of customer experience is going and is happening. And we're in a unique position to play in that space. Many of our competitors in each of those towers can't knit it together. They can't pull the data together. We can show our customers, large enterprises, the whole view across all of those interactions. And AI is fundamental to that. Our AI is embedded into the platform. And when you see data, you get to see the data that pulls together social information, conversations around commerce activities, maybe it's feedback data, maybe it's the contact center. Now you're getting to see that holistic view of that customer, and AI is analyzing it across a broader set of data, making it more valuable and impactful. And our approach in AI is all around context. You must have context, and we want intelligent collaboration. We see this idea of having a studio, the ability to build and use the AI technology on our platform. Check. Two, be able to then implement Copilotings. Intelligent collaboration, augmenting the experience for the agent, for the marketing leader, for the C-suite person. We have customers at one of the world's largest retailers using our analytics to understand buying patterns in their stores today. In places like Arkansas, New York, etcetera. This is creating the insights that allow them to drive an outcome. I think it's a powerful concept. Then we have the agentic capability, where we can drive the deflection. And I mentioned the bank reference in Latin America in my prepared remarks. I think that's powerful, but there's a number of those. We see AI as built on top of a powerful platform that allows us to augment the experience of the agent and the human collaboration and intelligent collaboration and the work to have the agentic deflection that removes some of the workload. It's the combination and the context across that set of data that truly unlocks the value. That's why our customers who are implementing our AI are seeing that impact. Where we're going to continue to invest, we'll add more capabilities in terms of more skills. We have over 300 AI skills in the organization at the engineering level. We'll add more. If we get a good tuck-in, we'll tuck one in. We're not going to spend crazy money on it, but we have the opportunity to add skills, we're going to add them. And the second part is we'll put more in-region forward-deployed skills that will help the implementations with the customer. But, again, the real point here, Arjun, is it's the combination of this platform and data that's there and using AI to take it to a new level. That's the power of AI. Arjun Bhatia: Perfect. That's very helpful. Thank you. And then you've been pretty clear that, you know, this year for FY 2026 is a transition year. I'm curious, like, how we should think about fiscal 2027 qualitatively. Is that going to be a transition year as well? It seems like you're making quite a bit of progress on some of your initiatives. And it's still, you know, maybe a little bit early, but how do you just feel about the work that's still left to be done next year and beyond as we think about where the company is in its turnaround? Rory Read: Sure. I think we'll give very specific guidance for FY 2027 at the next earnings call. I think we got to remember, this is a journey. And we have to keep our powder dry. We need to string several quarters together. I think we've been doing a good job of setting the right prudent expectation and managing. But as I said, it's two, three steps forward and there's a step back. I mean, we're not fully in that acceleration phase. We're still fixing a lot of things. We need to be patient. One of the things that I think is that execution and transition phase, this part of the transformation journey, as I said in prepared remarks, will move into next year. At some point next year, I'm hopeful that we'll move into the acceleration phase. But we had a solid 3Q. Solid. We saw better performance on NAR and more predictable and better performance on renewal rates. Good. Check. Now we need to execute 4Q. And more importantly, we've got to execute 1Q and 2Q. That'll string several quarters together and really form the foundation. At that point, I think then we can kind of talk about when do we move into phase three. But I think in terms of expectation, I think the street has us in a general right vicinity as they think about next year. It's still part of the transition year. At some point, we'll move toward acceleration. But at this point, we're still cleaning up things. We're making good progress. But let's string a few quarters together. Let's go execute 4Q now. And that 1Q and 2Q are really important in terms of the renewal rates as we move into next year. Hope that helps. Arjun Bhatia: Understood. Yes. Thank you. Operator: The next question is from the line of Raimo Lenschow with Barclays. Please proceed with your questions. Raimo Lenschow: Perfect. Thanks for having me. And, Anthony, all the best from me as well. Rory, one for you, like, you talked in the prepared remarks about the services organization helping you at the moment, just more leading. How do you think about that time frame between services doing more handholding, you know, driving projects forward, and then that translating into better subscription revenue growth? Like, you know, how do you see that link there between that? And I had one follow-up. Rory Read: Yes, Raimo. I think what you're we've talked about this a couple of times in the past around services and implementations. One of the two challenge areas when I came here, both from the service and support areas, one was around implementations. Sometimes they were great, and sometimes they were not great. And then on the support side, we had a very mixed set of stories on support. Over the past couple of quarters and into the next, future quarters, we've been implementing transformation initiatives in the service and support areas. One of the things we're doing in support is we're moving our support function onto Sprinklr. I mean, that's a great idea, don't you think? I mean, we do it for some of the world's biggest brands. Let's do it for ourselves. That implementation is underway. We're going to bring all of our support onto Sprinklr and use enhanced processes and flows to give better support to our customers. They have highlighted this in the past as an area of gap. That will see an increase in coverage at the end of this calendar year, beginning of next year, calendar, and we're implementing Sprinklr in this fiscal fourth quarter into 1Q next year. So we will be moving that support. That's an important step. On the services side, we're doing other transformational. We're moving to new technology to track. Do you know that we tracked our services projects and skills with spreadsheets? Come on. That's not modern. We're implementing a real technical solution from a third party that's gonna allow us to really understand where our skills are, how they're being used, how the projects are going, exactly where our capacity is. And we're expanding our relationship with our partners. Our partner win rate is almost double other channels' win rate. We saw in the quarter some out wins where we partnered with some of the usual suspects, you know, the NTT Data, the Accenture, Deloitte, the Sammies, the Premium Blends. And the list goes on. If I offend any of my partners, I apologize. I love my partners, and they're key. We're seeing good traction there. We're going to build that out. Over the course of the year, we're going to continue to build stronger practices with that. And then finally, we're implementing runbooks around all of our implementations. And our new products are going through a new product introduction process. So they actually have documented implementation plans. One of the things that's frustrated me while I was here is some of our implementations are amazing. They go just perfect, and the customer loves it. And then others are all over the floor. Why? We don't do it consistently. And every day, we're working to make that better with those three areas. Again, I think those initiatives time out in that, you know, early spring, early summer time frame, mid-summer time frame next year. All of those are all working in that period. Raimo Lenschow: Okay. Perfect. And, thank you. And then, Anthony, on the if you think about the communication you want to do, like, I remember at SAP, there was a very strict way of kind of guiding. If you think about the situation here, this you know, we are going to try to get, obviously, leading indicators of where things are going. There's, you know, there's billings, and you talk a little bit to that. There's CRPO, which might be a bit broader, etcetera. What's your initial thinking here as you kind of think about how to communicate going forward? Anthony Coletta: That's a great question. I mean, in terms of guidance philosophy, we will be focusing really on being realistic and transparent on what we do on the assumptions and the risk. So we want to have a clear modeling and clear narrative. So and obviously, most importantly, we want to deliver on it. So you can expect that we say what we do and we do what we mean at the end of the day. And you can expect really that we'll be focusing on consistency and transparency. So that's the philosophy. And around the key metrics, I mean, it's fairly simple. We'll continue to focus on subscription revenue. That's that kind of key indicator for us. But obviously, the quality of the CRPO, the quality of the growth of the platform, the net dollar expansion are also key elements for me in terms of on one end when you see the upsell and cross-sell traction that we have, you see that we have the right product market fit. But when we think of this NDE amongst the key cohorts, to me, that's showing also the growth on the platform and the opportunity here. So I think I would continue to focus on that. And when it comes to the financials, the operating margin, we need to continue to make progress on that, and we'll have some key initiatives to solve that and the free cash flow generation. So there is good cash flow combination so far, but we continue to make to grow that metric, and that will be a key element for me suggesting the success that we have going forward. We have a healthy balance sheet, so we need to continue to fuel that growth on the free cash flow generation. But that's kind of what you can expect. It's consistency in the performance, transparency in the execution, and deliver on it. And focusing on the right metrics to support the sustained growth of this company. Raimo Lenschow: Okay, perfect. Thank you. Good luck. Operator: Thank you. The next question is from the line of Matt Van Vliet with Cantor Fitzgerald. Please proceed with your question. Matt Van Vliet: Hey, good morning. Thanks for taking the question and welcome, Anthony. I guess, wanted to double down and ask about the comment you made about the RPO change. Can you give us just a little more detail in terms of what the contracts that were booked last year? How the renewal cycle on those are and, you know, how we can sort of square together the pretty significant sequential decline in total RPO? Anthony Coletta: Sure. I think one of the keys in that space is we saw last year as I was just coming on that we had some larger deals that came in, in the telco space. We saw some timing issues in terms of that. We're looking out over the next couple of quarters, as Anthony suggested in his remarks, we expect that to move in a positive direction. We also see that the progress that we're seeing in terms of our NAR and in terms of our renewal rates. And we're seeing that guidance. We don't we saw that same drop. We think that's really more timing. If you get to an apples and apples, it's basically a slight increase or about the same. I think we should start to see that move in a positive direction. I think we'll see some very interesting renewals in the telco space over the coming quarters. And I think that's gonna reflect on our improved execution that we've been delivering this year. But again, I think it's a work in progress. I think you gotta see the next several quarters unfold, and I think everyone needs to be patient and focused on that. That's the key. Matt Van Vliet: Great. And then as you think about moving to a larger cohort on the Bearhug initiative, you know, any I guess, couple learnings from the first go-round that you think will either be faster to or even more, I guess, fixated on certain metrics as you go into those customers and ultimately what the outcome could be there? Rory Read: Yeah. Absolutely. There's a couple of things that jump right out at me. I've met with over 450 customers over the first year directly at extended times and many of them multiple times. You know, the feedback that we've gotten, where we've gotten ourselves in trouble, it was because of poor execution, not delivering on commitments we made, choppy levels of support, and too many changes in the organization at the field level. I think we've been addressing each of those items. And Bearhug is about engaging that customer. As we expand from the first several hundred to go to the 700-800 kind of range and really cover 90% of our revenue, that's gonna be the foundational growth that enterprises that we can grow into big accounts. We have accounts in $10-20 plus million dollars a year spending. That means that we're doing it really well with some tough customers. We have to do that on a broader scale. The keys that you see having done Bearhug the past four, five months, build the right account team. Make sure you can create consistency. Get an ongoing discussion with the customer every week, every month, be way ahead of renewals. Don't even focus on the concept of renewal. Focus on the concept of creating value and upsell all along. Beat RFPs. Get ahead of them. Extend and extend the customer earlier. We have a bag of tricks, a utility belt like Batman, you know, we have a utility belt of programs that we're giving to the teams. Bring in service skills to augment and get next-generation usage. Redo the platform. These are all items that Bearhug we've learned over the first six months that we're applying at scale now. And I think by the time we get through 1Q and 2Q, I think we're gonna have very interesting proof points at that time. Do not get ahead of ourselves. We have work to do. We're a work in progress. We're making good progress. But it's still a transition execution. And as you know, some step forward, some step back. We are generally moving in the right direction. We're not in the full acceleration phase. The next couple of few quarters, building on a solid 3Q is the path forward for us. Operator: Thank you. At this time, this will conclude our question and answer session. I'll hand the floor back to management for closing comments. Rory Read: Yes. I want to thank everyone for joining today. And I want to acknowledge our Sprinklr team members around the world for their hard work. And really importantly, our partners. We love our partners. They make a huge difference. Our customers who trust us with some of the most difficult work, they're giving us the time and space to make a better Sprinklr. They see the future. This unified customer experience trend built on an AI-native platform linking the voice of the customer in a 360-degree ubiquitous structure, it's huge. And it makes a big, big difference. And it's going to change the marketplace. I think we're uniquely positioned with a competitive moat if we improve our execution, improve our technical debt, and become a fully mature enterprise software company that enables enterprises to do the right thing. We're showing the right steps forward and moving in the right direction. Give us time. Be patient. And I thank our investors who have shown interest and keep following us. We're a work in progress, but I think it's a very interesting work in progress with significant opportunities in the future. Thanks, everybody. Have a wonderful day, and thank you for joining us. Operator: Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may now disconnect your lines, and have a wonderful day.
Operator: Greetings, and welcome to the Macy's, Inc. Third Quarter 2025 Earnings Conference Call. As a reminder, this call is being recorded. I would now like to turn the call over to Pamela Quintiliano Vice President of Investor Relations. Pamela, you may now begin. Pamela Quintiliano: Thank Thank you, operator. Good morning, everyone, and thanks for joining us. With me on the call today are Tony Spring, our Chairman and CEO; and Tom Edwards, our COO and CFO. Along with our third quarter 2025 press release, a Form 8-K has been filed with the Securities and Exchange Commission, and the presentation has been posted on the Investors section of our website, macysinc.com and is being displayed live during today's webcast. Unless otherwise noted, the comparisons we provide will be versus 2024. All references to our prior expectations, outlook or guidance refer to information provided on our September 3 earnings call. On today's call, we will refer to certain non-GAAP financial measures. Reconciliations of these measures can be found in our earnings presentation and SEC filings available at www.macysinc.com/investors. All of our consistent comp sales throughout today's prepared remarks represent comparable owned-plus-licensed-plus-marketplace sales and the owned-plus-licensed sales for our store locations, unless otherwise noted. Go-Forward Macy's, Inc. comp sales include the approximately 350 Macy's Go-Forward locations in digital and Bloomingdale's and Bluemercury nameplates inclusive of stores in digital. Go-Forward Macy's comp sales include the approximate 350 Macy's Go-Forward locations and Macy's Digital. All forward-looking statements are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the expectations and assumptions mentioned today. A detailed discussion of these factors and uncertainties is contained in our filings with the SEC. Today's call is being webcast on our website. A replay will be available approximately 2 hours after the conclusion of this call. With that, I'll turn it over to Tony. Antony Spring: Good morning, and thank you for joining us today. We're encouraged by recent results, which reflect the accelerating momentum of our Bold New Chapter strategy. The fundamental enterprise-wide changes we are making are resonating with our customers. Initiatives are gaining traction across all three pillars of our strategy and driving broad-based operational and financial improvements. For the third quarter, we delivered growth across key metrics and results were meaningfully better than expected. Macy's, Inc. net sales, comparable sales, core adjusted EBITDA and adjusted diluted EPS all exceeded our guidance with positive contributions from each nameplate. Macy's had its strongest comp growth in 13 quarters led by a Go-Forward business, which achieved another quarter of positive comps. Bloomingdale's posted its fifth consecutive quarter of growth and its best comp in 13 quarters. And Bluemercury recorded another consecutive quarter of comparable sales growth. I want to thank our teams and our partners. You're an integral part of our success. Results reflect your diligent execution of the Bold New Chapter strategy. We have a shared ambition for Macy's, Inc. and together, we are making significant progress towards achieving our goal of sustainable, profitable growth. Antony Spring: Turning to a more detailed view of the quarter. Macy's, Inc. delivered a positive 3.2% comp with Go-Forward Macy's, Inc. continuing to outperform, growing 3.4%. Adjusted EPS of $0.09 was well above our guidance range of a loss of $0.15 to $0.20 and above last year's third quarter result of $0.04. EPS was driven by better-than-expected net sales, comparable sales, gross margin and SG&A. End of quarter inventories were in line with our expectations and we have a compelling mix of newness across brands, categories and price points for the peak holiday season. Looking at the evolving retail landscape, consumers are more discerning about how and where they spend their dollars. They want curated product assortments, consistent service and a seamless omnichannel shopping experience, and that's exactly what we're striving to deliver through the three pillars of our Bold New Chapter strategy: strengthening and reimagining the Macy's nameplate; accelerating and differentiating luxury; and simplifying and modernizing end-to-end operations. Antony Spring: Let's discuss how each pillar contributed to our better-than-expected third quarter results, beginning with strengthening and reimagining Macy's. Macy's nameplate achieved 2% comparable sales growth, its second quarter of positive results and a sequential improvement from the prior quarter. Performance was driven by Go-Forward Macy's, which rose 2.3% and inclusive of Reimagine 125 stores, which were up 2.7%. Macy's nameplate also benefited from digital growth, inclusive of Macy's marketplace, as well as the ongoing outperformance of our off-price concept Backstage. We believe Macy's results reflect a positive response to improvements in our omnichannel customer experience, brand curation and category offerings. We are seeing this drive momentum in our Reimagine 125 locations and in the broader Macy's business. Turning to the customer experience. One of the best ways to measure progress is through our Net Promoter Scores. We view this as an important measure of customer sentiment and a leading indicator of future sales. Notably, Macy's delivered its highest third quarter Net Promoter Score on record. Customer e-mail serve as another valuable form of feedback, and I read everyone I receive. Recently, a customer visited our Clearwater, Florida store to buy a suit for a wedding. He wrote "Your colleague Andrew, had me outfitted not just with clothes but with confidence. He treated me with patience, kindness and professionalism. As he was helping me, he assisted a young man shopping for his very first interview suit. He took the time to show him how to wear it, carry himself, and even shared some encouraging words. Employees like can remind me that Macy's is a place where people can walk out feeling seen, valued and better than when they walked in." Andrew is a great example of how customer relationships are strengthened when our colleagues demonstrate hospitality and care. As part of our Bold New Chapter strategy, we are enhancing our selling education to improve colleague engagement and provide our customers with a seamless shopping experience. In addition to a better experience, we are elevating our product curation to deliver a more inspiring mix of newness and fashion. Our merchants continue to be focused on the clarity of our offering, enhancing variety and reducing redundancies. Our strong balance sheet, large addressable market and loyal customer base are attractive differentiators and brands are eager to work with us. Recently, we introduced Rodd & Gunn, Reiss and Prada Beauty and Expanded Barbour, Mackenzie-Childs and MFK. Looking at category performance, we delivered year-over-year improvements across all lines of business: fine jewelry, watches, handbags, men's career, and ready-to-wear outperformed the total Macy's comp, while active categories were softer. The variety of brands and categories we offer speak to our fashion authority and the relevancy in a way we haven't for years, and we are not done. We're committed to bringing Macy's to the consideration set of even more shoppers and our reimagine 125 locations are providing a road map for the future. When I walk these locations, I'm inspired. We are methodically working to improve the experience in each area of the store. They are now better organized, easier to shop and have a more compelling visual presentation. Within each category, we're driving higher interest and engagement through increased differentiation. We're carving out floor space to leverage new trends and maintaining a presence in categories and brands that we're known for. Antony Spring: Now I'd like to provide a perspective on how we're approaching the fourth quarter at Macy's. Holiday is core to who we are. It's where our brand heritage and customer relationships are strongest and where we consistently deliver differentiated experiences. This year, over 34 million people tuned in to watch the Macy's Thanksgiving Day Parade, setting a new all-time record. The Parade was the most watched live entertainment event in 7 years and the second most watched event of 2025 behind only the Super Bowl. We continued our tradition of blending beloved classics with contemporary culture debuting Buzz Lightyear, PAC-MAN, Mario, and characters from the smash hit KPop Demon Hunters, including a live performance by HUNTR/X. In addition, POP Mart, the makers of Labubu, had a Friends-giving in POP CITY float. These floats and balloons nicely complement our Herald Square in-store experiences with PAC-MAN, Disney, Marvel and POP Mart, just to name a few. Congratulations to our entire team. I know you're already hard at work on next year's 100th Parade celebration. Our holiday campaign, The Most Wonderful Stories Start Here is in full swing. It serves as a storytelling platform for holiday emotion and nostalgia across channels and touch points. Messaging highlights a mix of new brands, key items, exclusive products and incorporates a more personalized approach to customer communication. We have built on last year's success with our 25 days of gifting campaign, featuring new curated gift lists each day and holiday markets in Herald Square and our Chicago State Street locations. In addition, Alison Brie is back as our personified Gift Guide, pairing across broadcast and our digital platforms, and we're leveraging our iconic Santaland IP with Santa visiting 11 markets this year. Our campaigns and events are supported by a comprehensive 360-degree media mix that features social influencers and celebrities, including a partnership with Jennifer Hudson and our first ever Chief Ornament Officer, Hannah Strickland, the 9-year-old who has won the hearts and minds of so many with their exuberant reaction to shopping Macy's Holiday Lane. Summing up to Macy's nameplate, I'm encouraged by recent results, which reinforce our belief that we have the initiatives in place to deliver long-term growth. Antony Spring: Turning to our second pillar the Bold New Chapter strategy, accelerating and differentiating luxury. In the third quarter, momentum built at Bloomingdale's, while Bluemercury had another quarter of positive comparable sales. At Bloomingdale's, we're making great progress on our ambition of being the omnichannel local leader in the markets we serve. We've cultivated a unique multigenerational customer base that's incredibly loyal, including the luxury customer of the future and are taking share across categories, regions and brands. Bloomingdale's delivered another impressive quarter, achieving a positive 9% comp, which was its best in 13 quarters as well as a sequential improvement in its Net Promoter Score. This speaks to the differentiated aspirational positioning, which continues to resonate with consumers. Our success is built on strong brand partnerships. We're deeply focused on nurturing those and on being the most reliable and innovative partner in the market. During the third quarter, we continued to expand the breadth of the brands we offer, introducing a number of important designer brands, including Totême, TWP, Zimmermann, Victoria Beckham, Christian Louboutin and Roger Vivier, just to give a few examples. From a category perspective, ready-to-wear men's apparel, fine jewelry, shoes and tabletop all outperformed. Bloomingdale's is truly unique in the marketplace. We serve as a house of discovery, providing an experience that's vibrant, inviting, original and anchored on exceptional customer service. In the fourth quarter, we're building on our recent success. Our Holiday Campaign, Happy Together leverages Bloomingdale's appeal as the destination, shopping experience that brings loved ones together. The campaign is wide ranging, spanning window displays, in-store experiences, a curated gift guide and compelling digital messaging. In addition, we have several exclusive collaborations, including our AQUA, and Salvatore Rizza collection. A core component of Bloomingdale's Holiday Campaign is our unique partnership with Burberry. This season, we're offering an exclusive omnichannel collection for the whole family, including our custom design carousel pop-up shop and Windows, as well as our famous Holiday Bear. We invite those of you in New York City to visit our 59th Street flagship store to see an illuminated Burberry plaid scarf that wraps the entire building. Looking ahead, there are a number of opportunities to further strengthen Bloomingdale's position. We have significant opportunities to grow in markets we serve as well as expand existing distribution, increase our digital penetration, and open additional small-format Bloomies and outlet locations. By staying nimble and personalizing all elements of the customer experience from access to special products and customer activations, to digital elevation, we will further differentiate Bloomingdale's as the leading, modern, luxury destination. Rounding out the conversation on luxury, Bluemercury achieved a 1.1% comparable sales growth, representing another quarter of gains. Results continue to be driven by dermatological skincare and expanded brand partnerships, including Parfums de Marly, Byredo, and Sisley Paris. We remain confident in the long-term growth profile of our luxury category and are excited about the strategies we have in place. Antony Spring: The final pillar of the Bold New Chapter is simplifying and modernizing end-to-end operations. In the third quarter, we achieved a key milestone on our end-to-end journey with the opening of our new China Grove distribution center. The state-of-the-art facility incorporates automation, robotics and AI into our delivery ecosystem. It propels us into the future and ensures we're able to exceed customer expectations for accuracy and timeliness of deliveries and further reduce our delivery costs. The 2.5 million square foot facility expands our reach, enabling faster, more efficient service for millions of customers. By supporting all product categories from apparel and beauty to home and toys, more orders can be shipped from a single location, helping customers receive everything they need faster and in fewer boxes. The China Grove facility is initially supporting customer fulfillment and store replenishment for the Macy's nameplate with plans to expand to additional nameplates. Antony Spring: Now let's discuss our thoughts on the consumer and the early read on holiday. Starting with the Consumer Health, our customer base, which is predominantly middle to upper income, remained resilient and engaged in the third quarter. We have strong visibility on the factors that are in our control. These include inventory discipline, composition and the level of newness as well as improved experiences in messaging. We're pleased with the start of the fourth quarter. However, the majority of the sales volume is still ahead of us, and we believe it's prudent to continue to incorporate a more trustful consumer into our guidance for the remainder of the quarter. The assumption is consistent with our prior view. To conclude, I remain excited by our customer response to the meaningful changes we're making under the Bold New Chapter strategy. We now have achieved three consecutive quarters of better-than-expected top and bottom line results and two consecutive quarters of comparable sales growth. These results further illustrate the benefits of being multi-brand, multi-category and multichannel. Our unique positioning provides sourcing optionality, economies of scale and brand product and price diversification. And our off-price to luxury offerings, combined with our strong financial position enable us to continue to expand existing relationships, attract new partners and lean into other areas of opportunity. With that, let me turn it over to Tom. Thomas Edwards: Thank you, Tony, and good morning, everyone. In the third quarter, customers responded well to the substantive enterprise-wide enhancements we are making under our Bold New Chapter strategy. We are encouraged by recent performance. Macy's, Inc. comparable sales of 3.2% were our strongest in 13 quarters. Go-forward comps were up 3.4%, with growth across all nameplates. An adjusted EPS of $0.09 was well above the high end of our guidance on better-than-expected sales, gross margin and SG&A. Thomas Edwards: Looking at a detailed view of the quarter. Macy's, Inc. net sales of $4.7 billion were down 0.6% or about $29 million to last year. The sales decline was entirely attributable to the 64 non-go-forward stores that closed at the end of last year. These contributed roughly $160 million to sales in the year ago period. Excluding the impact of these planned closures, Macy's, Inc. sales grew 2.9%. This represents an acceleration from second quarter sales growth of 0.9% when similarly adjusted for closed stores. By nameplate, Macy's net sales were down 2.3%. Macy's comparable sales were up 2%, while go-forward, comparable sales continued to outperform, rising 2.3%. Reimagine 125 comparable sales rose 2.7%. Both the first 50 and the next 75 locations achieved another quarter of positive comparable sales results. Net Promoter Scores at these locations continued to exceed the broader fleet. In Luxury, Bloomingdale's net sales rose 8.6% and comparable sales were up 9%, and Bluemercury net sales were up 3.8% and comparable sales were up 1.1%. Thomas Edwards: Turning to revenue. Total revenue was $4.9 billion. Other revenue, which is comprised of credit card and Macy's media network was $200 million. Within that, credit card revenue was $158 million or $38 million higher than prior year. Credit card revenue continued to be driven by our healthy credit portfolio and the prudent management of net credit card losses as well as growth in new applications. Macy's Media Network revenue was $42 million, roughly flat with the prior year. Gross margin was $1.9 billion or 39.4% of net sales compared to 39.6% last year. Excluding a 50 basis point tariff impact, gross margin rate would have expanded approximately 30 basis points. The third quarter tariff impact was lower than anticipated as mitigation actions performed well. This led to a better-than-expected gross margin rate. Traffic was positive and AUR continued to increase, primarily due to a favorable mix shift and positive customer response to newness across classifications. SG&A expense of $2 billion declined $40 million from last year, reflecting the net benefit from our closed Macy's locations and continued cost containment efforts. This was partially offset by ongoing investments in our go-forward business, which we view as imperative to driving healthy and sustainable top line growth. As a percent of total revenue, we levered SG&A expense by 90 basis points to 41.2% compared to 42.1% in the prior year, benefiting from revenue growth, diligent expense management and a modest shift in timing of expenses. During the quarter, we recognized $12 million in asset sale gains. This compares to our expectation of $20 million and $66 million last year. We remain committed to closing underproductive stores and are being disciplined with our approach to transactions. The strength of our balance sheet provides us with the patience and flexibility to ensure we are achieving the best value. Core adjusted EBITDA, which is adjusted EBITDA, excluding asset sale gains, was $273 million or 5.6% of total revenue. This was above our guidance of 3.3% to 3.7% and last year's result of 4.2%. Adjusted EBITDA was $285 million or 5.8% of total revenue compared to 5.6% last year. Third quarter adjusted EPS of $0.09 was also well above our guidance of a loss of $0.15 to $0.20 and compared favorably to $0.04 last year. Inventory dollars were up 0.7% to last year, in line with our expectations, reflecting tariff-related cost increases. On a unit basis, inventories were down, and we are well positioned for holiday. We continue to take a disciplined approach to our cash flow and balance sheet. Year-to-date operating cash flow was $247 million versus an outflow of $30 million last year and free cash flow was an outflow of $183 million versus an outflow of $492 million last year. Capital expenditures were $525 million, down from $649 million spent last year. And monetization proceeds were $95 million compared to $187 million last year. We returned $350 million to shareholders through $149 million of consistent quarterly cash dividends and $201 million of share repurchases, including $50 million of buybacks in the third quarter. This leaves approximately $1.2 billion remaining on our buyback authorization. And we ended the quarter with $447 million of cash on our balance sheet compared to $315 million last year. Thomas Edwards: Turning to end-to-end operations. We continue to improve our network and make strategic investments to increase speed of delivery and reduce costs. We believe further opportunity remains with the recent opening of our new customer fulfillment and store replenishment center in China Grove, North Carolina. Outfitted with the latest automation solutions, it is the company's largest and most technologically advanced distribution center. Positioned in the Southeast, the 2.5 million square foot facility expands our reach, enabling faster, more efficient service for millions of customers. By supporting all product categories from apparel and beauty to home and toys, more orders can be shipped from a single location, helping customers receive everything they need faster and in fewer boxes. The China Grove facility is initially supporting customer fulfillment and store replenishment for the Macy's nameplate with plans to expand to additional nameplates. Thomas Edwards: Now I'd like to turn to guidance. We entered the fourth quarter well positioned. We are confident we have a compelling mix of categories and brands across a variety of price points to satisfy our customers' holiday needs and wants. These are supported by exciting marketing campaigns, events and experiences designed to activate and engage customers. As Tony mentioned, we are pleased with the start of the fourth quarter. With the majority of our sales volume still ahead, our guidance continues to incorporate a more choiceful consumer, assumes that the current tariffs remain in place and provides flexibility to respond to changes in consumer demand and the competitive landscape. For the fourth quarter, we expect net sales of approximately $7.35 billion to $7.5 billion. As a reminder, last year's store closures contributed about $200 million to sales in the comparable period, comparable sales to be down approximately 2.5% to flat with go-forward comparable sales down 2% to flat. Core adjusted EBITDA as a percent of total revenue of 9.4% to 10.1% and adjusted EPS of $1.35 to $1.55. We are now expecting fourth quarter asset sale gains of roughly $15 million to $20 million compared to our prior expectation of $38 million. This impacts fourth quarter adjusted EPS by approximately $0.05 to $0.06 relative to our prior expectation. Based on fourth quarter guidance, our revised full year 2025 guidance assumes net sales of approximately $21.475 billion to $21.625 billion. As a reminder, fiscal 2024 store closures contributed roughly $700 million to net sales. Comparable sales to be flat to up 0.5%, with Macy's, Inc. Go-Forward comparable sales to be flat to up roughly 1%. Other revenue of approximately $830 million to $840 million, with credit card revenues expected to be roughly $635 million to $645 million and Macy's Media Network to be approximately $195 million. Gross margin as a percent of net sales to be 37.7% to 37.9%. This is better than our prior expectation reflecting effective tariff mitigation efforts, including shared cost negotiations, vendor discounts and strategically raising tickets. We now estimate a 40 to 50 basis point tariff impact to gross margin which equates to roughly $0.25 to $0.35 of EPS. This is below our prior expectation of 40 to 60 basis points and $0.25 to $0.40 of EPS. SG&A to be down low single digits on a dollar basis to last year, with fourth quarter dollars also down low single digits, as we maintain our disciplined approach to expenses, we will continue to invest in areas that are contributing to our growth profile. Asset sale gains of about $60 million to $65 million compared to our prior expectation of $90 million and $144 million last year. Core adjusted EBITDA as a percent of total revenue of 7.5% to 7.7% and adjusted EBITDA of 7.8% to 8%, interest expense of roughly $100 million, reflecting our recent financing transactions. And finally, we have raised our expected adjusted EPS to $2 to $2.20. The previously mentioned change in asset sale expectations has a roughly $0.07 to $0.08 impact on annual EPS relative to our prior guidance. Our guidance does not include additional share buybacks. In conclusion, we are encouraged by recent results. We have a healthy balance sheet, including ample liquidity and a disciplined capital allocation strategy. We remain committed to thoughtfully navigating the near term as we execute against our long-term goals. Now let me turn the call back to Tony. Antony Spring: Thanks, Tom. Changes come to Macy's, Inc. We are giving our customers even more reasons to shop with us. I encourage you to visit our stores, our website or the apps. The difference from when we first embarked on the Bold New Chapter, 20 months ago are palpable. The strategy is gaining traction, and our teams across nameplates are energized and fully committed to delivering long-term growth. And with that, operator, we're now ready for questions. Operator: Our first question is coming from Matthew Boss of JPMorgan. Matthew Boss: Great. And congrats on the improvement. So Tony, with two straight quarters of positive comps, could you speak to traction that you're seeing with your reimagined store initiatives as it relates to traffic versus basket? And could you elaborate on November comp trends and customer behaviors that you're seeing maybe relative to the third quarter? Antony Spring: Sure, Matt. Thanks for the question. We are definitely seeing traction in the R 125. That's positive growth in both the first 50 and the next 75, that sequential improvement, a 2.7% comp. It's a reaction, I think, of customers to new brands, to better presentation, to more colleagues in the right place at the right time. We've seen consistent traffic in our stores and in digital business, frankly. And continued improvement in AUR. So we come out of the third quarter. And as we said, the fourth quarter, pleased so far, but we obviously have a very big part of the fourth quarter in front of us. So we're taking that choiceful approach to this aspirational customer that shows up in force to the latter part of the fourth quarter. So I just had an echo in here, apologies. So I just want to make sure that the guidance, obviously, is not a ceiling. It's intended to show the guardrails of how we're thinking about the business. And we come out of the month of November as we came out of the third quarter, confident in our strategy. Operator: Next Question is coming from Brooke Roach of Goldman Sachs. Brooke Roach: Tony, what are the most important drivers in the business that you think can sustain the momentum as you look ahead into 2026? As you continue to execute the Bold New Chapter strategy, how are you thinking about the opportunity for core adjusted EBITDA margin delivery? Do you see the recent tariff margin pressure as recapturable into 2026? Antony Spring: Thanks, Brooke. Appreciate the question. The drivers of the business are not unlike what we've been talking about. It's having the right product assortment that is less redundant and more variety. It's having the right balance of good, better, best across the entire matrix of our assortment. It's having the right balance as an omnichannel retailer of having a good physical business and a good digital business, which, by the way, we had a good digital business and a good physical business across all three nameplates. It's making sure that we shed underproductive stores, which again, when you look at the third quarter comp, you don't have $170 million of closed store volume in that number, which is why the go-forward comp is so important to measuring our performance quarter-to-date, year-to-date and what we've guided for the fourth quarter. In terms of core EBITDA, I'm really pleased with the core EBITDA result because if you look at the shortfall in asset sale gains, our performance is better than a year ago and better than our guidance. And it's better than a year ago with $170 million less in sales. Same is true for the fourth quarter. So I look at the opportunities being navigate the tariffs. They don't go away. So they are a part of how we have to operate in 2026 unless something changes with the courts. And we have the ability as a multichannel, multi-category, multi-brand, multi-price point retailer to offer the customer what and where and how the way they want to shop. I think this is a perfect opportunity for a department store to lean into what we're very best at, which is offer a broad range of assortment and not let the tariff impact get in the way of our comp performance. Thomas Edwards: And Brooke, I'll add in here. When we look at our full year guide, which we were really pleased to raise as we beat Q3. We're now in a range where we're equal to where we were at the beginning of the year, and that's with a tariff impact of $0.25 to $0.35 built in and a slightly lower ASG around that $0.07 to $0.08. So it really reflects the strong fundamental performance of the business. When you speak about the drivers, it's the Bold New Chapter initiatives that are really delivering this comp growth, an accelerated comp growth. And as we look at tariffs, we're pleased that the impact for tariffs for this year are lower than we previously anticipated. We had been looking at a 40 to 60 basis point impact. It's now 40 to 50. That has flowed through to the bottom line in Q3. And it's really due to the great proactive mitigation efforts of our teams for shared cost negotiations, vendor discounting, raising pricing, if needed. And we're seeing that play out. So as we look to next year, we're going to continue those same efforts and look to mitigate tariffs and certainly keep an eye out on the ongoing tariff situations to what they will be. So we plan on delivering for the customer, first and foremost, and we'll manage through as we have done with tariffs this year. Operator: The next question is coming from Blake Anderson of Jefferies. Blake Anderson: Congrats on the nice results. So I wanted to ask 2 questions. One on the aspirational customer. So Tony, just curious if you can talk a little bit more about their behavior in Q3? And then what you're expecting for Q4? I know you said there's uncertainty there. How are they shopping? I guess, what are you expecting there for maybe Macy's versus the Bloomingdale's banner? Curious how they show up at each banner. And then as we think about next year on the store closure strategy, how do we think about flowing through SG&A savings versus reinvestment needs? Antony Spring: Sure, Blake. Thanks for the questions. Let me take the first, and I'll let Tom take the second. The aspirational customer is a good thing. It suggests that we talk to a broader number of customers in the fourth quarter than we talk to the remainder of the year. And so our job is to make sure that the breadth of our assortments, value, promotions, price points cater to that customer. I think what we're implying, again, in our guidance, which is not a ceiling, it's a guardrail is that we see more of these consumers, which have been choiceful all year long in the fourth quarter. And we want to make sure that we see how they show up, what they buy, how we react to that as the quarter unfolds. I have every confidence in the team, confidence in our marketing approach, confidence in our inventory levels. We come into the quarter with markdowns in good shape, inventory in good shape, hiring in good shape, digital and physical in good shape. We are well positioned to deliver the quarter. I think we're just acknowledging the fact that when you have more customers shopping who are not your core customer, their interests are slightly different. And so we want to make sure that we understand that customer as the quarter unfolds. Thomas Edwards: And Blake, I'll add on in terms of the stores and the savings from them and really start with Q3 because you saw what top line growth will do and allow us to lever the P&L. So we were able to lever SG&A by 90 basis points in the quarter, and we're down low single digits year-over-year on an absolute basis, benefiting in part from the benefits of store closures, but also from strong cost disciplines and savings. And we expect Q4 also to be down low single digits year-over-year. So we are seeing that benefit. As we move forward, we do expect to continue to optimize our store fleet for underproductive stores. We make those announcements at the end of the year. As we move forward, we'll certainly achieve those savings. But it's also important to note that this year as well as next year, we are investing in the business to drive that top line growth. So it is a balance that we really look forward to talking about more on our fourth quarter call. But rest assured, the savings from SG&A do flow through, but we will look to balance because top line growth is key, and we saw how it impacted beneficially the business and allows us to lever SG&A on a go-forward basis. Operator: The next question is coming from Chuck Grom of Gordon Haskett. Charles Grom: Congrats on a good quarter, guys. On the consumer front, I'm curious if you're more or less confident today than you were, say, 90 days ago. I'm just trying to reconcile the fourth quarter guide, which is lower than your third quarter guide at the midpoint despite the positive comp that you just had last quarter. And then maybe if we could double-click on traffic versus ticket and then within ticket, AUR versus UBT? And then finally, any additional color on category performance, particularly in the key areas of apparel, home and footwear? Antony Spring: Thanks, Chuck. Let me take the first part, and I'll let Tom add his comments as well. I'm more confident today in our strategy than I was 90 days ago. I'm more confident in the delivery of our results and the quality of our inventory and the quality of our marketing and the representation that we have across the 3 nameplates. Full stop. Our guidance for the fourth quarter is actually higher than our previous implied guide. It just represents the reality of a more choiceful consumer based on the breadth of aspirational customers who shop our brands during the fourth quarter. I hope we are wrong, but it's my nature as a leader to be thoughtful, methodical, informed, sensible. And so that's always going to inform my guide. The less I know about something, the more I'm going to be more prudent in how I approach it. But I feel really good about the results. When you have physical and digital growing, when you have your best quarter in 13 quarters, when you have growth across all 3 of these nameplates, when you have inventory current, when you have inventory levels relative to sales in a healthy position, there's lots of reasons to feel very good, and we are pleased with the start of the fourth quarter. So please do not read into the desire to be prudent in our guidance that we have any less confidence in this strategy. We frankly have more confidence in the strategy today than we had 90 days ago. Thomas Edwards: And Chuck, I'm going to add in, you had asked about the traffic ticket AUR. When we look at Q2 versus Q3, one of the biggest drivers in the accelerated momentum is a change in traffic. So we were positive in traffic for the quarter. And that's a very important indicator of how customers and consumers are reacting to our new strategies. Ticket and overall basket was also up. Within that, AUR was up versus prior year. And that's important as well. It's not a tariff-related impact. It's something that has been going on quarter-over-quarter. And over the past years as the Bold New Chapter has been in place as we continue to drive great value and our consumers are reacting and responding positively with improved and higher basket sizes. So we're pleased with our performance there and the traction as well as the momentum. When I look at our Q4 guide, I'd point out that we both raised and narrowed the range versus our implied guide previously at the top line. So we're pleased to be able to do that. And we look forward to continue to deliver against consumer expectations. Operator: The next question is coming from Alex Straton of Morgan Stanley. Alexandra Straton: Perfect. Congrats on a nice quarter. I've got one for Tony and then one for Tom. Maybe, Tony, just the performance of the business stands out, I think, particularly when you stack it against other department store peers. So can you just talk about how the department store competitive landscape has evolved in the last year? And maybe where you see it going next year and beyond? And then for Tom, just on guidance, I think from a gross margin perspective, it embeds the worst compression of the year in the fourth quarter. So what's changing from 3Q to 4Q that makes that pressure a little bit more outsized? Antony Spring: Thanks, Alex, for the questions. I'll take the first, and Tom can obviously take the second. Look, it's hard for me to talk about the competitive landscape. I can talk about our business and how I think we are performing relative to prior year and prior quarters. We look good right now. I'm in stores every week. I was in a dozen stores Thanksgiving weekend. Our pricing is sharp. Our presentations are sharp. Our colleagues are engaged. I think we stand up very effectively in every store that I was in, in the mall against the competitive landscape. We are better than a year ago. We are well positioned for the holiday season with -- about 50% newness in terms of gifting for the holidays, a good balance where the cold weather is helpful to our cold weather categories, but we're not reliant on cold weather. So we have a nice, broad distribution of variety across other categories in terms of fragrances and gifting and the strength of the handbag business now are coming back again. So I think we are very well positioned for the holidays. I think we're very well positioned against other department stores for the holidays. And I think as we've seen in the prior quarters, we're taking share. Thomas Edwards: Alex, when I look at our Q4 gross margin, let me just start and ground us in Q3 and work through. So in Q3, we were better than expected. Tariffs were a 50 basis point headwind. But excluding those, we'd be up versus prior year. So the headline number was down about 20 basis points. And that's up even more versus our expectations. In Q4, my math at the midpoint, down around 100 basis points, but 70 to 100 basis points is due to tariffs. So I noted that in the prepared remarks, and that is a little lower as a range than what we previously were expecting based on our mitigation efforts to reduce tariffs. The remainder is the flexibility to respond to competitors and the overall environment in Q4, and that's something that we had noted in our Q2 earnings call. So that's not new. That's just continued to be in there. I would also point out for the full year, our prior guidance for gross margin was down 60 to 100 basis points year-over-year. Our current is to be down 50 to 70 basis points. So we have improved on the overall for the year, partially due to lower tariff, but also partially due to a better business results. So we're pleased with that performance. Operator: The next question is coming from Rob Drbul of BTIG. Robert Drbul: Just 2 questions for me. I think the first one is, can you expand a bit more sort of on pricing increases or ticket increases and the response of the consumer as well as vendor support, just sort of how that's working together? I think the second question is just on the credit business, I think you have an initiative with new applications and higher credit spend. Can you just talk through how that's trending and the expectations into the fourth quarter into '26? Antony Spring: Sure, Bob. Thanks for the questions. I'll take pricing. And obviously, Tom will talk about the strength of the credit business. In terms of pricing, I think based on what we've shared in terms of the mitigation impact, the consumer continues to spend -- the pricing, I think, on newness and on fashion has had little to no impact on consumer appetite, particularly when you're looking at the breadth of our customers from middle to upper income. So we're excited about that. That's better than what we had expected, and it's delivering a result on the top line and the bottom line better than we had expected for the quarter and frankly, now for the year. I think there is certainly on basics and on an aspirational customer, there is more of a waiting game that occurs for the best value and best promotion. And the nature of our business as a department store is we offer a variety of prices. We have some terrific promotions planned for the remainder of the year, all within the guide that allow us to capture our fair share of the business. So I think tariffs created some noise and some challenge relative to margin and to pricing that the consumer has experienced, but it hasn't stopped an interest in consumption. And I think that as a business, across 3 different nameplates, we are extremely well positioned for the fourth quarter. Thomas Edwards: And Bob, as I look at the credit business, it's performed well throughout the year in Q3, up a little over 30%. And for the full year, based on our guide, up approximately 20%. And that's really due to the great work our teams and colleagues have done building that portfolio into a really strong credit profile. We've improved our net credit loss results very significantly, which is helping drive the revenue benefit. And when you talk about app -- going forward, you had mentioned growing the business. We are seeing higher applications year-over-year. So that is a great sign and indicator for the future of this business that people are interested, and we're getting our customers to buy into the franchise. I think as I look at it more broadly going forward, credit is a part of the broader ecosystem. And we have 40 million customers we speak to on an annual basis. Credit is linked to loyalty. It's an integral part of that. And we're going to continue to manage this in a very disciplined way, grow acquisition, grow usage and make sure it is linked to the broader engagement with our customer. Operator: The next question is coming from Paul Lejuez of Citigroup. Tracy Kogan: It's Tracy Kogan filling in for Paul. I had 2 questions. First, just on your store closure program, I think you had said 150 stores to close over 3 years. Just wondering where you expect to be at the end of this year with that overall total? And then overall, do you expect to close fewer or more than that 150 over the 3-year period? And then just I don't think I heard you address the Macy's Media Network reduction. So if you can maybe give details on that. Thomas Edwards: Sure. Thanks, Tracy. With regard to store closures, we closed 64 last year. We announce store closures at the end of the year. So we're not in a position right now to do that, but we'll share that new information on our fourth quarter call. We do want to be respectful and move through holiday with all of our stores and engage with all of our customers in the most positive way possible. We remain committed to our store optimization program, and we'll certainly provide with more details on the broader program at that same time. With regard to Macy's Media Network, we did reduce the guidance slightly, and that's really a recalibration of advertising spending. Macy's Media Network is still growing strongly versus prior year. We expect even with this slight recalibration for Q4 to be up strong double digits versus prior year, and the full year to be up low double digits. And as I mentioned, with the credit card and the overall ecosystem around Macy's, this is a key part of it. As we speak to our 40 million consumers and the strength of the brand, as evidenced by the amazing Parade, which I thoroughly enjoyed with my family, it was amazing in-person. I think there's power here, and we expect to continue to build and grow this business as we have this year with things like the Amazon partnership and leveraging, of course, our brand partners and access to those consumers in our loyalty and broader ecosystem. Operator: The next question is coming from Michael Binetti of Evercore ISI. Michael Binetti: Congrats on the improvement. Just one quick one and then a longer-term question for you, Tony. I think in the prepared remarks, you said active was a weaker category. Maybe just a little bit of detail there. I think that's obviously been a multiyear strong category for you, surprised to hear that. And then I guess if we just look at the Macy's Reimagine 125 versus the rest of the Macy's nameplate stores in the Go-Forward portfolio. When you -- I think the Re 125 have been pretty consistently out comping to go forward by 120 basis points, 3 quarters in a row, very consistently actually. Can you put that level of outperformance into perspective relative to the hurdle rates you want to see for those investments in the Reimagined stores? Is that how you'd frame the opportunities as you start to look beyond the Reimagined doors and look at the rest of the Go-Forward fleet? Or what are some of the more portable strategy you can take out to the rest of the fleet now that you're a few years into the strategy versus what initiatives may not be as much of an opportunity past the first 125? Antony Spring: Thanks, Mike. Great questions. First, yes, active was a little softer. We still believe in the importance of the category, the partnership with Nike, the importance of the breadth of both the third piece and the opportunity in the business as it relates to Bloomingdale's and other active brands like Varley and Vuori. So I think that it's a business that simply gets impacted by the breadth of what we also are selling. So we're in a dress up cycle right now. We're selling tailored clothing really well. We're selling dresses really well. We're selling career sportswear really well. We're selling evening and dress shoes really well. So I just think it's the ebb and flow of the nature of our business. We are prepared and will stay committed to a strong and healthy active business. But it just happened to be softer for the category. And as it relates to the R 125 investments, we feel pretty good in looking at the second year, particularly of the first 50 and the first year of the R of the 75 or the R 125 in total in terms of the payback that we're getting. We don't expect it on day 1, but we have an arc and architecture to what our expectation is. And I think in the next 75, our investments were different than our first 50 based on the learning that we had from the first year of experimentation. And remember, we did some additional stores last year in the fall to try to make sure we could jump start the 75 with more learning and more prescriptive investment strategy in the next doors. And as Tom talked about, we'll talk on the fourth quarter call about the expansion of the R 125 program. We'll clearly do more stores next year based on the outperformance and based on the payback curve. Thomas Edwards: And I just wanted to jump in and add. You had mentioned about 120, 130 basis point differential. And in our presentation, we do note the R 125 was up 2.7% comp. The Go-Forward stores were up 1.5%. That Go-Forward piece does include the R 125. So the differential is actually greater. And when I look at the investments we're making and the learnings that we are taking ahead and moving into the next investments, very comfortable with the payback and how we are looking at these stores to drive the top line with an appropriate investment in the store experience in other areas like brand and category expansion. Operator: The next question is coming from Nicholas Sylvia of TD Cowen. Nicholas Sylvia: This is Nick on for Oliver Chen. Congrats on the quarter. I wanted to ask about SG&A as you revised your guidance from what I see, it looks like it is now 40 to 50 basis points over the full year. Could you just elaborate on the planned SG&A increases? What that is going to be allocated to in terms of digital store formats or other areas? And then more broadly, or I guess more specifically speaking on digital, how do you see the mix of digital versus in-store evolving over 2026? Thomas Edwards: Thanks, Nick. I'll start with SG&A. And I think from a -- for the full year from a percent of revenue basis, we've actually moved it down. So it was up 60 to 80 basis points. It's now up 40 to 50. So it speaks to the leverage we're bringing to the business. And one of the reasons it's up on a dollar basis is our sales are higher. So we're happy from a point of view of having some variable costs related to selling. And as I look at Q3, we were down low single digits, and we levered by 90 basis points. Q4 is down low single digits, really reflecting the same discipline and benefits as well as increased variable costs related to the higher revenue and a little bit of a timing shift. But overall, I think for the year, I feel like we're in a better spot based on our leveraging the business. And as I mentioned earlier, I want to make sure we want to invest in the business to drive that top line growth. So that's always a balance that we are doing. Antony Spring: And as it relates to digital, Nick, we're pleased with the growth of the business. We're pleased with the replatforming and the enhancements that the digital team has made to the overall experience on our app, on our home page, on our category pages, the work we've done in personalization. Obviously, we mentioned the important investment we made in China Grove to not only support our store network in terms of delivery of inventory, but also fulfillment of our digital business to the consumer. But I'd be remiss if I don't mention the omnichannel business, which is the focus we have as a company is winning market by market with what we offer physically, what we offer digitally and making sure that we don't get enamored with a digital penetration that may go up or go down and we end up not having a bigger business. Our focus is on a bigger business, a healthier customer base, where the customer decides how, where and when they want to shop. Operator: Next question is coming from Dana Telsey of Telsey Advisory Group. Dana Telsey: The newness is definitely evident in the assortment as you walk through the stores, whether it's at Macy's or Bloomingdale's. Tony, how do you see this path of newness continuing? Where do you want to take it either by category, price point? How do you see that opportunity and in capturing new customers and getting more from existing? And then, Tom, when you think about the opportunity for the puts and takes of gross margin going forward, given that tariffs have been maybe a little bit less of a headwind lately. Where do you see opportunity? Antony Spring: Thanks, Dana. Appreciate the questions. We are excited about the amount of newness that we have coming into both Macy's and Bloomingdale's. And I think newness is important across good, better and best price points. I'm a big believer in balance that our overall assortment architecture has to be right for the customers who shop each of our brands. In the case of Bloomingdale's, that's adding more designer and more advanced contemporary to our overall assortments while still remaining an aspirational store. In the case of Macy's, it's making sure that we are not undershooting the customer. So adding brands like Reiss and Rodd & Gunn and Theory and MFK and Expanded Barbour and Mackenzie-Childs really feels the better and the best price points where we didn't have a compelling or a large enough assortment. So I remain challenging of myself and our merchant team to make sure that we're shopping the markets and that we're continually looking at what the customer is looking at -- and that we're refreshing and updating our assortments. Areas like women's ready-to-wear is an opportunity for us at Macy's. We've had some nice growth, as I said, in career sportswear and dresses and in the contemporary zone. We think there's much more opportunity in our effort to try to learn from each other without becoming one another. We know there is a bigger contemporary market for Macy's and the merchant team is leaning into that opportunity. Thomas Edwards: And Dana, from a puts and takes in the future perspective, first, I think we're really well positioned to deliver top line growth and bottom line growth. On a top line basis, we've seen the contributors here. The R 125, our go-forward business at Macy's Bloomingdale's strong growth and our overall system working across all different channels, categories and brands. From a margin perspective, on gross margin, we had mentioned NPS, and it really speaks to customer satisfaction. So as we continue to improve our customer satisfaction, I believe that will support better regular price sell-throughs. We have great opportunities to continue to improve brand assortment variety, reduced redundancy, maintain our inventory discipline and continuing to lever tools like Hold & Flow and other activities that are going to make our systems more efficient. And speaking of that, end-to-end efficiencies including our planning activities, I think there is opportunity across all of these areas to continue to build on our gross margin. And from an SG&A perspective, the top line growth will help lever. And of course, our cost discipline as we're always on cost discipline view as well as additional end-to-end savings there. So I believe there's great opportunities top and bottom line going forward. Operator: The next question is coming from Jay Sole of UBS. Jay Sole: Tony, my question is about the customers who shop at the closed stores. Have you got an analysis on how many of those shoppers you're able to recapture in other stores or online? And if so, what your thoughts about that? Antony Spring: Sure, Jay. We have a recapture plan that we put in place every time we close a store. It's a slightly different model if it's a single-store market versus the multi-store market. And if it's a digital or omnichannel customer versus single channel customer. And what I would say is, so far, we are pleased with the retention that we've seen. It's consistent with what we've experienced in the past. And I would say we're on or slightly above our retention expectation so far. So it's always something that we try very hard to retain and particularly if the store is closing a few miles away from another store. We have a better shot at retaining more of those customers. And the longer and the further away you are from that customer, the harder it is to retain more of the sales. We tend to see also more of the business in areas like big ticket, where the customer normally will travel a little bit more to outfit their home and in select beauty categories, where, again, we may move the colleagues, both in beauty and in fine jewelry, I would say, we tend to move the colleagues from the closing store to another neighborhood store and they come with either client book or with a relationship with customers that tend to shop with those associates. Jay Sole: Interesting. And would you say most of the time those customers become shoppers of other Macy's stores? Or they just end up shopping more Macy's online? Antony Spring: 3 Both. And again, it's really proximity. You probably have a 15- to 20-minute drive horizon. And obviously, based on traffic in certain markets, it's different how long or how many miles that is. But if a store is closed by and as I said, if they're already shopping multiple Macy's, in some cases, the stores were closing where the store that they did the returns at, where the store they might have run into for a replenishment item and they already shopped another store, we're likely to retain that customer. If they were shopping online and only that store and the other stores a little bit further away, it's harder for us to retain that customer. But we are always through our personalized marketing efforts, doing outreach to those customers, the loyal and credit card customers that we have a longer relationship with, we're also more likely to hold on to. Operator: The next question is coming from Janet Joseph Kloppenburg of JJK Research. Janet Kloppenburg: And congratulations. Tony, I got on late because I'm traveling, but what do you see as the opportunity for Macy's and for Bloomingdale's -- some of the turbulence is going on I think where some of your [indiscernible] customers. And also, you spoke to the weakness of relatively [indiscernible] in the active category. Maybe I missed this, but these to the uptrend that you're seeing in the handbag categories? Antony Spring: Thanks, Janet, for the question. Yes, we did speak to the softness in the active category and really talked about the fact that consumer is investing into dresses and career sportswear and our contemporary collections and denim, so other kind of active-ish casual categories, just not active per se. And not the case in the Bloomingdale's brand where they've been enhanced by the strength of their overall active assortment. We certainly are in a better position today than we were a year ago as a department store or a multi-brand, multi-category retailer. I feel great about our assortments. I feel strongly about the quality of the team. We are well positioned with our marketing for the fourth quarter. All 3 of our nameplates have opportunities to take share in the marketplace. Both Tom and I were out Black Friday weekend visiting stores. I like how we're showing up, I like the way we're engaging the customer. I see the Net Promoter Scores as a wonderful indicator of our opportunity to grow this franchise, grow this portfolio across each of our nameplates. Janet Kloppenburg: Okay. And in terms of the customer being very -- having great appetite for fashion apparel. Do you think that's because the brands are presenting better products, more innovative? Or do you think some of this TikTok marketing, et cetera, is exciting the customer more than they normally would have been? Antony Spring: Thanks, Janet. All of the above. There's no doubt that social media is having an impact on people all across the country wanting to know what's in vogue, what's in fashion, what's in style and wanting to partake in the trends. And whether they buy the designer, they buy something that's inspired by the designer, it's again, another advantage of being a multi-brand and multi-price point retailer. We have something that looks like that from that designer or from something that may look like that. And I think the opportunity to participate in trends to feel like you're fashionable for whatever you're posting on social media is a great advantage of a department store. And I just would give a shout out to our visual teams in the stores. We are showing up well. We are telling stories. We are communicating ideas. We are inspiring customers to buy trends and new fashion, I think, better than we've done in the past. Thomas Edwards: And Janet, I'll add on to your question on how we work versus competition. I just say that we're really well positioned with a very strong balance sheet, robust cash flow, no debt maturities. We're a great partner and a sought-after partner. And we have the ability to invest and return in our business and return cash to shareholders. So I believe we're well positioned from that perspective as well. Operator: At this time, I'd like to turn the floor back over to Mr. Tony Spring for closing comments. Antony Spring: Thank you very much. I appreciate all the questions. I hope that everyone has a magical and successful and enjoyable holiday season. And if you still are missing things on your wish list or have some gifts you have to give, I know 3 places, Macy's, Bloomingdale's, and Bluemercury, where you can find gifts that will satisfy every single person on your list. Happy holiday, everybody. We'll talk to you on the fourth quarter earnings call. Operator: Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines and log off at this time. Have a wonderful day.
Operator: Good afternoon, and welcome to Tilly's, Inc. Third Quarter 2025 Earnings Conference Call. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on the touch tone phone. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Gar Jackson, Investor Relations. Please go ahead. Gar Jackson: Thank you, operator. Afternoon, and welcome to the Tilly's, Inc. fiscal 2025 third quarter earnings call. Nate Smith, President and Chief Executive Officer, and Michael Henry, Executive Vice President and Chief Financial Officer, will discuss the company's business and operating results and then host a Q&A session. For a copy of Tilly's, Inc. earnings press release, please visit the Investor Relations section of the company's website at tillys.com. From the same section, shortly after the conclusion of the call, you'll also be able to find a recorded replay of this call for the next thirty days. Certain forward-looking statements will be made during this call that reflect 2025, and actual results may differ materially from current expectations based on various factors affecting 2025 third quarter earnings release, which is furnished to the SEC today on Form 8-Ks as well as our other filings with the SEC referenced in that disclaimer. Today's call will be limited to one hour and will include a Q&A session after our prepared remarks. I will now turn the call over to Nate. Nate Smith: Thank you, Gar, and good afternoon to everyone joining us today. I have now been with Tilly's, Inc. for three and a half months. Having spent a good portion of my career on the brand side of the industry, I've always viewed Tilly's, Inc. as a powerful retailer with a lot of opportunity, which is what attracted me to join the company. I've had the opportunity to get to know our team, familiarize myself with our processes, and participate in fiscal 2026 departmental budget meetings. We have a highly experienced and talented team that is incredibly passionate about this business and is hyper-focused on efforts to get Tilly's, Inc. back to a profitable and sustainable growth model. I've been impressed by the level of effort and commitment I've seen from our team not only since I've arrived, but also by how hard they work to try to turn this business around prior to my arrival. We believe we are now seeing green shoots of progress from those collective efforts. I'm very excited to announce that 2025 produced our first positive quarterly comparable net sales result since 2021, with positive comps in each month of the quarter, and positive comps in stores for each week of the quarter. Coming on the heels of a profitable second quarter, our third quarter performance gives us confidence that we have started to stabilize our business and are moving in the right direction. It is also worth mentioning that the positive sales trend in the third quarter has continued into the fourth quarter with double-digit store comps and an accelerating sales trend overall in October and November compared to August and September. We believe that these results are a direct byproduct of our strategic initiatives around merchandise assortment, inventory planning, marketing, and expense management, and our team's ability to execute them. We are very encouraged by our progress yet still have a lot to accomplish to reach our goal of producing profitability on a consistent basis. First and foremost, we must continue to grow sales in healthy ways. We plan to increase the sales penetration of our proprietary brands to approximately 40% on an annualized basis, an increase of approximately three points from our current year-to-date penetration, to seek to improve product exclusivity and control over logistics, pricing, and product margins. Our customers have been choosing our proprietary brands to a greater extent this year than in the past, and we believe more opportunities exist. We must consistently remain on trend and produce a high-quality assortment to accomplish our goal. While doing that, we will continue to source and support lifestyle-relevant third-party brands, which has always been at the core of our multi-brand business and what our customers love about us. This is not expected to change. We do not plan to over-index on proprietary brands to the detriment of our important third-party brand partners, but we believe there is a better balance to be found that can generate greater sales and product margins for us overall. Additionally, we are leaning heavily into social commerce, and we've already seen rapid growth in sales this year from our TikTok shop launched back in March. As we aim to build stronger connections and consideration for Tilly's, Inc., it's important that we clearly understand who our customers are, and how we think about building our merchandise assortments for them. To that end, we recently completed an extensive consumer segmentation survey that defined six primary consumer profiles that currently exist in our customer demographics and drive a substantial majority of our business. We serve a variety of consumer types, not just one, and we must carefully plan how our assortment choices speak to these consumer profiles to help them define their look and build greater following for Tilly's, Inc. over longer periods of time. We must now work to operationalize our understanding of these consumer profiles into our assortment building and marketing processes, to help us to continue making progress towards improving our business. We will continue to invest in exclusive opportunities to build awareness, consideration, and following for Tilly's, Inc. We have been very active in this regard recently and plan to continue to be going forward. For example, in late October, we launched a brand ambassador campaign featuring one of the original and most followed TikTok content creators, Lauren Gray, who has over 50 million TikTok followers in addition to being an actor, singer, and Tilly's, Inc. customer while growing up. We will be hosting a VIP customer experience with Lauren in our Irvine store this Saturday on December 6. We believe she is a great representation of our brand ethos, of fostering self-confidence and mental wellness through expression of personal style. We also held an exclusive pop-up event in our Irvine Spectrum store in late October with Malibu Sky brand founder and CEO, Tia McKenzie, which was livestreamed via TikTok. We believe these impressive and successful young women aligned with our brand very well, and we're looking forward to seeing the impact of these kinds of engagements can have for us as we continue to evolve how we think about utilizing our marketing resources. On the operational side of things, we are in the process of both implementing and evaluating various technological upgrades that we believe will improve our performance going forward. In September, we launched an AI-driven price optimization tool. Early indications are that this tool is leading to improved average unit retail selling prices with sharper, more surgical pricing decisions leading to improved product margins and sell-through rates. In 2026, we plan to launch an AI-driven merchandise replenishment and allocation tool to improve inventory efficiency in our stores and online. We also plan to launch RFID in our stores to improve inventory accuracy, customer experience, and in-store efficiency. Finally, we are exploring the use of agentic AI in our business and believe there are some exciting opportunities to improve operational efficiencies through automation in certain aspects of merchandise planning and allocation, distribution, store labor planning, and marketing campaign development. In closing, it's an exciting time to be here at Tilly's, Inc. with ample opportunities to continue improving the business. As I said before, the team has worked very hard to get to this point, yet we have so much more in front of us that can be accomplished to continue building upon the momentum we are currently seeing and the progress made thus far. I'm excited to be here. The team is enthusiastic, and I look forward to discussing our progress with you as time goes on. I will now turn the call over to Mike to share the details about our third quarter operating results and our fourth quarter outlook. Michael Henry: Thanks, Nate. Details of our third quarter operating results compared to last year's third quarter were as follows. Total net sales of $139.6 million decreased by 2.7%. Comparable net sales for the thirteen-week period ended 11/01/2025, including both physical stores and e-commerce, increased by 2% with an increase from physical stores of 5.3% and a decrease from e-commerce of 9%. Total net sales from physical stores decreased by 0.9%, primarily due to a 6.5% reduction in year-over-year store count. Net sales from physical stores represented 79% of total net sales compared to 77.6% last year. The net sales decline online was primarily attributable to a 51% reduction in clearance sales compared to last year's third quarter, indicating a much healthier full-price quality of online sales this year. E-commerce net sales represented 21% of total net sales compared to 22.4% last year. Gross margin, including buying, distribution, and expenses, was 30.5% of net sales, an improvement of 460 basis points compared to 25.9% of net sales last year. Product margins improved by 390 basis points as a result of higher initial markups and lower total markdowns associated with operating with reduced and more current inventories than a year ago. Buying, distribution, and occupancy costs improved by 70 basis points and were reduced by $2 million in the aggregate, largely due to lower occupancy costs associated with our reduced store count. Total SG&A expenses were $44.5 million or 31.9% of net sales, a reduction of $6.7 million compared to $51.3 million or 35.7% of net sales last year. Primary SG&A reductions compared to last year's third quarter were attributable to store payroll and related benefits of $1.5 million, e-commerce fulfillment labor of $1.5 million, lower non-cash impairment charges of $1.1 million, and a variety of smaller reductions across several line items. Pretax loss improved to $1.4 million or 1% of net sales compared to $12.9 million or 9% of net sales last year. Income tax expense was $25,000, a negative 1.8% tax rate compared to an income tax benefit of $5,000 last year, a near-zero tax rate. Both years include the continuing impact of a full non-cash valuation allowance on our deferred tax assets. This quarter's income tax expense, despite our pretax loss position, was attributable to state net margin taxes. Net loss improved to $1.4 million or $0.05 per share compared to $12.9 million or $0.43 per share last year, representing an improvement of $11.5 million or $0.38 per share versus last year's third quarter. Turning to our balance sheet, we ended the third quarter with total liquidity of $100.7 million, comprised of cash of $39 million and available undrawn borrowing capacity of $61.6 million under our asset-backed credit facility. Net inventories decreased by 12.8% compared to the end of the third quarter last year. Total year-to-date capital expenditures for the first three quarters were $3.4 million compared to $6.7 million last year. Turning to 2025, Fiscal November marked our fourth consecutive month of comparable net sales growth. Through 12/02/2025, quarter-to-date comparable net sales increased by 6.7% relative to the comparable period ended 12/03/2024, including comparable net sales growth of 9.3% from Thanksgiving Day through yesterday. Based on current and historical trends, we currently expect the following for our fiscal 2025 fourth quarter operating results. Total net sales to be in the range of approximately $106 million to $151 million, translating to a comparable net sales increase of 4% to 8%, respectively. We currently expect to generate product margin improvements of approximately 300 to 350 basis points compared to last year's fourth quarter. SG&A to be approximately $50 million to $51 million before factoring in any potential non-cash store asset impairment charges which may arise. Pretax loss and net loss to be in the range of approximately $5.6 million to $3.5 million respectively, with a near-zero effective income tax rate due to the continuing impact of the previously disclosed full non-cash valuation allowance on our deferred tax assets. And loss per share to be in the range of $0.19 to $0.12 respectively, compared to a loss per share of $0.45 in last year's fourth quarter with estimated weighted average shares of approximately 30.1 million. We currently expect to close seven stores near the end of the fourth quarter to bring our total store count to 223 at the end of the fiscal year, a net decrease of 17 stores or 7.1% from the end of fiscal 2024. The actual number of store closures may still increase by fiscal year-end depending on the outcome of remaining store lease negotiations. In closing, we're encouraged by the forward momentum we've been building during fiscal 2025 as evidenced by our sequential improvement in quarterly comparable net sales trends since the end of fiscal 2024, into positive territory for 2025. We believe we're on the right path to continue delivering improvements relative to the prior year in the fourth quarter and on into fiscal 2026. Operator, we'll now go to our Q&A session. Operator: Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touch tone phone. If you are using a speaker phone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then 2. The first question will come from Matt Koranda with ROTH Capital. Please go ahead. Matt Koranda: Hey, good afternoon, and congrats on the return to positive comps. I guess, let's start there. I wanted to hear a little bit more on how much do you attribute to the better assortment that you're holding, sort of the different marketing posture that you've been talking about for a quarter or so? Maybe just unpack what you think the key drivers were to the return to positive comps and then the acceleration into the fourth quarter. Wanted to hear more about what may be enabling that because given the product gross margin guide, it doesn't look like it's heavily promotion-driven. Just wanted to hear a little bit more on what's driving the recent acceleration. Nate Smith: Yeah. Thanks, Matt. So I think your question of what components are driving the positive comps, I truly feel it's a combination of both the assortment and the marketing. I would say our head merchant and his team have done a really great job bringing in third-party brands that are trend-relevant. And then obviously mixing that in with proprietary brands and collections that really resonate with our customers. But I have to give equal weight to our marketing team. They've done a really great job promoting Tilly's, Inc. and what we stand for. So I would say, you know, short answer, I would call it fifty-fifty. And then, I'll add in here, Matt, on your question about the acceleration into the fourth quarter. It definitely has not been promotionally driven. Generally speaking, product margins in the fourth quarter are the lowest of the fiscal year because of the Black Friday promos and deals around Christmas that occur. However, you know, that's always been the case in the fourth quarter. And as we noted, we're anticipating improving our product margins by 300 to 350 basis points for the quarter. We just did 390 improvement in Q3. And we've been on this path of improving our product margins all through last year and this year, if you'll recall. Our fiscal 2023 product margins were the lowest in company history. And so that was certainly a focus of ours of starting the pathway towards improvement during 2024 is to start regaining some of that lost ground on product margin and we certainly accelerated that this year and particularly these last couple of quarters, which I think, again, speaks to the quality of the merchandise assortment, the brands we've been building in, all the work the merchant teams have done, to improve our business. Matt Koranda: Okay. That's good to hear. And then maybe just a little bit more on the composition of the improving comp. Are you seeing positive traffic embedded in that positive accelerating comp that you're talking about? I guess, how much is in ticket as well? I was just curious about the decomposition of that. Michael Henry: Sure. So it's mostly driven by an improvement in conversion rate, a conversion improvement in average sale value, and an increase in transaction count. Traffic has been roughly flat quarter to date in the fourth quarter. We did have positive store traffic on Black Friday itself. But quarter to date through yesterday, we're sitting just slightly below flat, minus 0.4%. It's really been a 6% to 7% increase in each of our conversion rate, our average sale transaction value, and transaction count. Matt Koranda: Okay. Alright. Helpful, Mike. Thank you. Wanted to hear a bit more on the private brand penetration that you're talking about. It sounds like you're ratcheting up the targeted percentage of revenue that may be coming from private label. How soon can you get to the penetration you're talking about? And I guess, why are you confident that that's the right approach? Seems like the environment where, you know, maybe you have a bit of a trade down. Consumers looking for value. So they may be looking to trade in a private label for now. But then if the environment shifts, you know, there's maybe some risk to inventory strategy. So I just wanted to hear a little bit more about why you think it's the right way to proceed. Nate Smith: Well, I think I can start, and then, Mike, maybe you've got some thoughts. I mean, we have seen really strong sell-through on our proprietary brands year to date. So we've seen that trend continue. And I think the expansion we're doing, Matt, is really not on call ever so slight, but I don't think it'll be noticeable at the store level. It will happen over time. I would say over the next three to five months. But, you know, I don't think it's a dramatic shift in our business, but I think the team has really seen, and we have seen really great sell-through and seen our proprietary brands resonate with our consumers. Yeah. And I just say, I think our merchant teams have done a really solid job at developing RSQ, our number one brand, has been our number one brand for the last couple of years, and they've continued to grow it. I think we've done a good job of being on trend with good quality product. Overall. Our year-to-date private label penetration is just under 37%, so we're talking about moving it three points, as Nate noted in his prepared remarks. And there are actually weeks right now where we're already north of 40%, quite honestly. So we're talking on an annualized basis. It does fluctuate through the year up and down depending on the season. But it doesn't seem like a far stretch for us to go ahead and increase that by a couple of percentage points. And that's also some of the impact that you're seeing into the improvement in product margins as well as private label increases. Generally speaking, product margins will go along with it. Matt Koranda: Yeah. Okay. That's helpful. For context, I guess, have you said publicly, guys, on sort of the margin spread between your private label versus third-party brands, and how should we be factoring that into sort of the margin improvement over time? Michael Henry: We haven't really given any details, because it's different by product category. So you'd have to get a lot more granular, which obviously, we don't want to do that in a public setting like this. Matt Koranda: Okay. Fair enough. Then, I guess, one of the other things you mentioned was the e-commerce headwinds in the quarter were really driven by less clearance selling. Remind us when we started the newer strategy on the e-commerce channel in terms of just, you know, fewer clearances? When do we lap that in potentially, I guess, that becomes a bit less of a drag on the top line, going forward. Michael Henry: It's been an effort of ours all year long, really, entering this fiscal year. You'll recall, you know, we had much higher inventory levels than we would have liked exiting last back to school and going into the holiday season. Certainly, had a very disappointing holiday quarter last year. And so we had to work our way out of inventory early this year through discounting as well as, you know, jobbing some things out to get rid of what didn't work. And as you'll know, having followed us as long as you have, you know, we tend to once products have lived their healthy life in stores and have been through reg price selling, first markdown, and then clearance, we tend to transfer things back to online. And online over the history of our company has proven more effective at working through clearance items than stores. We want the latest and greatest to be sitting in stores in the physical space. As well as online. But online has generally proven to be a little more efficient at handling clearance business. There was too much of it last year, just quite frankly. And that was really the driver of the negative on the online comp in Q3. There's still a meaningful reduction in the percentage of clearance business this year in the fourth quarter compared to last year. And that will continue to be something that will go up against through the first quarter, especially given how much clearance we were doing at the time. Matt Koranda: Yeah. Okay. Alright. That makes sense, Mike. Thanks for the context. And then, I guess, just maybe one or two more. But on SG&A, it looks like really good control on the SG&A expense. And, you know, pretty notable store payroll reduction. Some pretty notable fulfillment reductions as well, I guess. How sustainable are those, on a go-forward basis? How should we think about, you know, maybe some operating leverage in the model go forward if the positive comp sustains? Michael Henry: Yeah. The leverage will really come from improved sales square foot productivity in stores. That's ultimately what we need. I mean, we're trying to be as thoughtfully sharp on our store payroll usage as we can. And, you know, in the third quarter in particular, our stores used on average 7% fewer hours than they did a year ago while producing a positive comp. That's a tremendous effort, a great deal of improved efficiency there. It's something that we pay strict attention to every single week, all year long. It's a constant battle trying to be as efficient as we can, trying to project individual store volumes as tightly as we can to make sure that we're putting our best effort at being as efficient as possible. That's going to continue. Assuming that we continue to deliver improving comps and improved productivity, some of the raw dollars will continue to go up. We're gonna continue to have minimum wage increases in certain jurisdictions. Those are pretty constant these days. Every year, we have another round of them. But we're doing everything we can to be as sharp as we can from an efficiency standpoint. And our store teams have just done a fantastic job in that regard if you ask me. Matt Koranda: K. Okay. Great. Maybe just last one. I'll make it two-pronged and leave it for whoever else wants to pick up the Q&A here. But on the capital allocation and footprint front, one, store posture seems like are we done with store closures for the near term, or is there more we could do heading into next year? To kinda rightsize the fleet? And then on the RFID implementation that you guys mentioned, just curious is there incremental cost associated with that heading into next fiscal year, I guess, or even in the near term? So I want to hear a little bit more about that may impact, capital expense going forward. Michael Henry: Yeah. So we noted that we have seven store closures coming up towards the end of the fourth quarter. There's still some more that could happen depending on the outcome of remaining lease negotiations here in the last couple of months. We've been taking action on stores as we can at natural lease expiration or as available lease kick-out clauses come up that we can execute, that's gonna continue. So if a store is not acceptably profitable and we can't get the lease structure reset to be more reflective of where our current reality is, we're gonna have to close stores as those opportunities present themselves. That's been a consistent effort of ours. For the last few years. I think this year, you've seen more closures than at any time in the company's history previously. Just so happens there have been quite a number of stores coming up that were not acceptably profitable or cash generating, and we've been getting rid of them we have the opportunity to do so. And then on RFID, not a major spin there that would move the dial as you look at the total business. These technology investments, that we're talking about have been in the works for some time. We've already initiated some of the preliminary work this year, so some of that spend is already in this year. And there will be some that'll be added into next year. But not in a way that should create any meaningful expense increase that you'd notice. Matt Koranda: Okay. Alright. I'll leave it there, guys. Great job. Thanks. Nate Smith: Thank you. Operator: This concludes our question and answer session. I would like to turn the conference back over to Nate Smith for any closing remarks. Nate Smith: Thank you for joining us today. We look forward to sharing our fiscal 2025 fourth quarter results with you in 2026. Have a good evening. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and welcome to the Five Below Third Quarter 2025 Earnings Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Press star then one on your touch-tone phone. Please note this event is being recorded. I would now like to turn the conference over to Christiane Pelz, Vice President, Investor Relations. Please go ahead. Christiane Pelz: Good afternoon, everyone, and thanks for joining us today for Five Below's third quarter 2025 financial results conference call. On today's call are Winnie Park, Chief Executive Officer, and Dan Sullivan, Chief Financial Officer and Treasurer. After management has made their formal remarks, we will open the call to questions. I need to remind you that certain comments made during this call may constitute forward-looking statements and are made pursuant to and within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, as amended. Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements. Those risks and uncertainties are described in the press release and our SEC filings. The forward-looking statements today are as of the date of this call, and we do not undertake any obligation to update our forward-looking statements. In this presentation, we will refer to our SG&A expenses. For us, SG&A means selling, general and administrative expenses including payroll and other compensation, marketing and advertising expense, depreciation and amortization expense, and other selling and administrative expenses. Additionally, we will be discussing certain non-GAAP financial measures. A reconciliation of these items to U.S. GAAP are included in today's press release. If you do not have a copy of today's press release, you may obtain one by visiting the Investor Relations page of our website at fivebelow.com. I will now turn the call over to Winnie. Winnie Park: Hello, and thanks so much for joining us. We're excited to share our third quarter results which exceeded our expectations. Before we do, I want to extend a warm welcome to our two new leaders, Dan Sullivan, our Chief Financial Officer, who you'll hear from shortly, and Michelle Israel, our Chief Merchandising Officer, both of whom joined us in early October. Dan and Michelle are seasoned, highly experienced executives who've integrated into our amazing Five Below management team incredibly well. We're excited to support their contributions, as we continue to grow and redouble our efforts to amplify our unique value proposition. I would also like to thank Ken Bull who served as interim CFO for his amazing partnership. We're excited to have Ken transition back into his role as COO as we enter the critical holiday season. Now turning to our fantastic results. In Q3, we delivered our second consecutive quarter of over $1 billion in sales and double-digit comparable sales growth. Our customers continue to recognize Five Below as the destination for the kid, and the kid in all of us. I'm really proud of the work our teams are doing in support of our boss, the customer. We are seeing clear proof points that our customer-centric strategy is working. And as a result, we've taken up our outlook for the remainder of the year which Dan will discuss in more detail shortly. In Q3, net sales grew 23% with comparable sales growth of over 14% driven by both transactions and ticket. With disciplined expense management, adjusted diluted earnings per share grew 62% over last year to $0.68. Store growth continued to be strong at 9% over last year. We welcomed 49 net new stores to the Five Below family, including our new store in Rogers, Arkansas, which became our best ever fall grand opening. And we ended the quarter with over 1,900 stores. The success of our new store openings continued into the fourth quarter with our entry into the Pacific Northwest, where each of our eight new stores set all-time grand opening records. Notably, all these grand openings were supported by marketing and in-store activations that drew thousands of customers on opening day. The strong positive reception to Five Below in these new markets strengthens the conviction we have for the significant growth ahead of us. The results in the quarter again exceeded our expectations, and we were very excited to see broad-based growth across merchandising departments and our entire network of stores. This growth is a result of maniacally executing our customer-centric strategy, which is supported by three core pillars: The first pillar is a sharpened focus on the customer, the kid. And for us, this means understanding the trends, life stages, and how to influence Gen Alpha, Gen Z, and millennials. We deepened our understanding of what our customer wants, how we can build connections with them, and ultimately, how they shop our stores. This relationship with the customer is our true north and underpins our merchandising, marketing, and store operations approach. The second pillar is delivering a connected customer journey. Acknowledging that awareness begins on digital channels and social media and ends with an amazing in-store experience. By curating compelling stories in social, that lead our customers to pre-shop on our website, culminating in a trip to our stores, the customer should see our big ideas come to life with a consistent look and feel. The third pillar is coordinated cross-functional execution. In our go-to-market for our six curtain-up moments from New Year's and Valentine's to holiday, the way we work has fundamentally changed as the team aligns earlier resulting in the full engagement of our 1,900 plus store managers prior to launch on merchandising, marketing, and the critical flow of newness to our stores. Underpinning these pillars is a mindset of operating with urgency and discipline as we saw in our tariff mitigation efforts earlier in the year while also remaining relentless in our focus on efficiency. We now operate with an approach of test, learn, and ramp to quickly introduce new products, price points, and processes. Test, learn, and ramp ensures that our bias towards action is also informed by insights and analysis. To achieve our results, the crew across Five Below pulled together as a unit, a true team who shared one focus, the customer, our boss. I'm incredibly grateful for our team's passion, grit, and all-in engagement on working cross-functionally in service of our customers. Their hard work and commitment delivered these results. Thank you, Five Below crew. In Q3, our customer-centric strategy allowed us to deliver a sharpened value proposition. Our merchandising teams were unleashed to deliver a continuous flow of newness across product categories. We weren't reliant on a single trend, as the majority of our departments comped positive. Also, we took a disciplined approach to curation and managing the breadth and depth of our buys, resulting in better in-stocks for our big ideas throughout the season, like Halloween decor. With the focus on big ideas such as hero license programs, the merchandising teams coordinated to deliver unified statements like Wicked, which incorporates products from nearly every merchandising category. Also, our merchandising teams are relentlessly focused on value and simplifying our pricing. Today, value is not just about $5 and below, but ensuring we pack value into $7, $10, and $15 plus items. We are able to incorporate these multiple price points throughout the department and the store to simplify the shopping experience. And our customers have responded well. This change allowed us to disband the Five Beyond area and leverage this space to drive seasonal business. For example, we featured the last Gas of Summer in that area, with back to school in the front when we kicked off the quarter. The newness and curated product stories that our teams merchandised were amplified by more effective marketing as we shifted our marketing channels and content to be more relevant for our target customers. We increased our investment in social media, moving spend away from traditional channels, resulting in traffic growth both online and in our stores. We also changed our content development strategy from studio-produced to creator-produced, engaging social influencers and amplifying user-generated content. We also renewed our creative online and in stores to deliver a single campaign with a distinct brand-right look and feel. The third quarter results are a real testament to our store crew who have embraced the mantra that the customer is our boss. The stores are where customer experiences come to life. We improved the store experience in several ways, namely better collaboration with our store teams, garnering better feedback from customers, simplifying operations, and investing in labor to ensure our shelves are stocked, enabling the product stories to come to life. The execution of our strategy accelerated from Q2 to Q3. This flywheel effect is evidenced in our sales results, which were driven by growth in transactions and ticket. We packed the quarter with two big curtain-up moments, back to school and Halloween. We flowed newness throughout the store, with a focus on ideas we're able to test and ramp. Again, the key to our execution is the way we work cross-functionally, with tight coordination between merchandising, supply chain, distribution, marketing, and stores. This tight coordination also made the difference in our growth by new stores. Our 2025 fleet is exceeding expectations as we worked as a close-knit team for the ultimate curtain-up, a store brand opening. We invested in grand opening marketing and activations in stores that were fully merchandised and crews who are well-staffed and better trained. Looking ahead, the strong performance over the previous three quarters serves as a valuable proof point that our customer-centric strategies are starting to work. As we prepare for the holidays, we will continue to surprise and delight our customers with unbelievable deals for decor, gifts, and stocking stuffers from gingerbread houses and advent calendars to an army of large nutcrackers, beauty bundles, toys, and candy. Our performance is a testament that our unique place in retail of being the destination for the kid and the kid in all of us is a compelling, sustainable value proposition. While we are at the early stages of our journey, our progress to date is clear. And the team and I are highly committed to and extremely excited for the growth that lies ahead for our business. With that, I will turn it over to Dan to discuss more details about our results and updated outlook for the fourth quarter and year. Take it away, Dan. Dan Sullivan: Thanks, Winnie, and good afternoon, everyone. I'm thrilled to be joining the Five Below team and excited to contribute to its continued success. I look forward to working with everyone on this call as well as our investor community. I'll begin my remarks with a review of our third quarter 2025 results, and then discuss our outlook for the fourth quarter and full year. My comments will refer to results on an adjusted GAAP basis. As Winnie mentioned, we were very pleased with our third quarter performance, which exceeded our expectations for both the top and bottom line. In the quarter, we saw accelerated comparable sales growth that was driven fairly equally by transaction and ticket gains. Importantly, the improving effectiveness of our marketing spend was evidenced in our traffic gains, which accelerated as we exited the quarter. Operational execution across our stores and distribution centers was also strong, and we saw the benefit of better inventory flow and improved in-stock positions on shelf. We allocated additional labor both in support of the stronger growth and as a part of our pre-holiday preparations. We also saw a solid improvement in shrink results from our August counts, reflecting the initial benefits from our broader mitigation initiatives. The heightened sales growth converted well, delivering 110 basis points of adjusted operating income margin gains and 62% adjusted earnings per share growth year over year. Now turning to the results for the quarter. Net sales increased 23% to just over $1 billion, underpinned by a strong comparable sales increase of over 14%. We were pleased to see this growth was led equally by increases in both comparable transactions and comparable tickets. In the quarter, we successfully drove more traffic to our stores, which led to better than expected transaction growth. Comparable ticket growth was fueled by AUR gains reflecting the successful execution of our rounded whole price strategy, while also curating great value above $5 as we move these items in line with their departments. Our comparable sales growth was widespread across most departments, new and retained customers, and all household income cohorts. Our new store performance was equally compelling with productivity levels in the mid-80s, which was in line with our expectations. We opened 49 net new stores across 26 states compared to 82 new stores in the third quarter last year. Year over year, we grew our store count by 9% and ended the quarter with just over 1,900 stores. As our performance in Arkansas and even more recently in the Pacific Northwest affirms, we remain bullish about the growth opportunities that lie ahead. Adjusted gross profit increased 26% to $352 million or 33.9% in rate of sale, an increase of approximately 70 basis points compared to the third quarter last year. Adjusted gross margin accretion was driven primarily by fixed cost leverage and improved shrink results, that were partially offset by the net impact of unmitigated tariffs. Adjusted SG&A expenses totaled $307 million in Q3, 29.5% of sales, which represented a 40 basis point decrease compared to last year's third quarter. This was driven by fixed cost leverage on the strong comp sales partially offset by higher incentive costs. Adjusted operating income grew over 63% in the third quarter to $45 million versus $28 million in the third quarter last year, and adjusted operating margin increased approximately 110 basis points to 4.3%. Net interest income was about $6 million for the third quarter or approximately $3 million above last year, due mostly to a higher average cash balance throughout the quarter. Adjusted net income was $38 million and adjusted earnings per share was $0.68, and both grew 62% year over year. We ended the third quarter in a strong cash position with approximately $536 million in cash, cash equivalents, and investments. Inventory was approximately $1.1 billion and average inventory on a per store basis increased nearly 25% versus the third quarter last year. As we had expected, this increase was primarily due to our strategic decision to accelerate receipts in response to the global trade environment. We're very pleased with our inventory position as we head into the holiday season. We expect that the growth in our average inventory per store will begin to moderate by the end of the fiscal year. Now turning to our outlook. Based on our strong performance to date, we are increasing our outlook for the fourth quarter and full year. We now expect total sales in the range of $1.58 to $1.61 billion or growth of 14.7% at the midpoint versus last year's fourth quarter. Comparable sales are expected to increase between 6-8%. While it's early, we are pleased with the start to the holiday season, underpinned by Black Friday weekend sales that were in line with our expectations. Adjusted operating margin at the midpoint is expected to be 15.8%, inclusive of higher incentive costs and unmitigated tariff costs. We have not changed our assumptions for shrink associated with the results of the January physical inventory counts. Net interest income is expected to be approximately $5 million. Assuming an effective tax rate of about 26% at their respective midpoints, we expect adjusted net income to be $192 million and adjusted diluted earnings per share to be $3.45 on 55.6 million diluted shares outstanding. As a reminder, this does not include the impact of share repurchases, if any. For the full year, sales are now expected to be in the range of $4.62 to $4.65 billion with a comparable sales increase of 9.4% to 10.1%. On a two-year stack basis, this represents an approximate 7% comparable sales growth at the midpoint. Adjusted operating margin is expected to be approximately 8.9% at the midpoint. Net interest income is now expected to be approximately $22 million with a 26% effective tax rate. Adjusted diluted earnings per share for fiscal 2025 is now expected to be $5.8 at the midpoint, representing growth of 15%. Capital expenditures excluding the impact of tenant allowances are expected to be approximately $200 million, which reflects 150 net new store openings and continued investments in systems and infrastructure. We're proud of the work the team has done over the past year to drive meaningful year-over-year top and bottom line growth and a much-improved outlook for fiscal 2025 versus the beginning of the year. As we head into the critical holiday season, we are confident in our ability to execute our customer-centric strategy and continue to deliver growth in the years to come. And with that, I'll turn the call back over to the operator to start the Q&A session. Operator: Thank you. We will now begin the question and answer session. You may reenter the question queue. And our first question for today will come from Chuck Grom with Gordon Haskett. Please go ahead. Chuck Grom: Hey, thanks very much. Congrats on a great quarter. Winnie, your sales per store are on track to hit about $2.4 million this year. That's getting you back to 2021 levels. Can you remind us how your best stores perform today on sales productivity and what opportunities you see to drive sales even higher in the coming years? Winnie Park: Hey, Chuck. Thank you so much. We are very excited to see our average store productivity return to historic highs. And I think that for us, what's been exciting to see is that across our network of stores, we're actually seeing really great performance regardless of kind of age of store or type of store. And I would say that there is consistency in what we're seeing in terms of the broad-based growth and what's driving that growth within the stores. That broad-based growth is really being driven first by a focus on the customer. And with that focus on the customer comes a really great focus on what they want. I think our assortments are geared towards younger customers, geared towards trends. And, again, I use the word assortment. It's not about a single item, but it goes across a broad range of categories and departments. So we're excited for that. We finally have the ability to actually talk about it vis a vis marketing, and that's worked, especially what we've planted within social media has driven traffic to the stores, and we've seen really nice traffic growth and growth both in new customers as well as retention. So that's been terrific. And then finally, I think that what's really worked in terms of growth is our expansion of the idea of what value looks like. We still curate a great assortment roughly 80% of the assortment. It's $5 and below. But we took a lot of attention for those items that were above $5. And specifically packing a ton of value at seven, ten, fifteen, and we inserted those items in line and really disbanded the five beyond area. We're getting more productivity with the disbanding of five beyond because we're able to offer more seasonal stories and other things that are relevant to the customer. And we basically put the product in line with how they shop. So those are the real drivers of what's getting us to those great productivity levels. Christiane Pelz: Thanks, Chuck. Operator: Next question. The next question will come from Matthew Boss with JPMorgan. Please go ahead. Matthew Boss: Thanks and congrats on a great quarter. So Winnie, could you speak to the monthly progression of comps over the course of the quarter? Maybe help bridge the upside drivers to the 14% comp relative to the 5% to 7% guidance initially. Then if you could elaborate on the start to the fourth quarter? And if there's the potential for a similar scenario. Meaning guidance for the fourth quarter implies a sequential moderation. Have you seen that yet? Is that embedded over the rest of the holiday season? Winnie Park: Thanks so much for that question, Matt. Dan's gonna lean in here. Dan Sullivan: Hey, Matt. How are you? Thank you for the question. I'll start with where you ended, which is how we thought about the fourth quarter. Largely over the course of the quarter, the monthly year-over-year growth is fairly consistent. If you think about it relative to our guide range and our midpoint, you don't see month-over-month spikes. A lot of that, obviously, is what we're cycling from a year ago, but it's a fairly consistent growth pattern. That's number one. I would say number two, and we talked about this in the opening remarks, we're really pleased with the start to the season. That start is essentially the month of November and then obviously Black Friday weekend. And again, from a pure performance basis relative to how we're thinking about the holiday we're pleased. So we sit here today, certainly not chasing anything that didn't happen over the weekend and a pretty consistent month-over-month comp growth profile. If I go backwards to the start of your question on Q3, you would see actually a very similar trend in terms of comp growth. And I think what excites us the most is that our performance, and I'll define that particularly I think about traffic growth, actually strengthened as the quarter went on. So we exited the quarter with traffic growth month over month, the highest level we had seen. So all in all, we're in a really good place, and we think we've got a really good view on the fourth quarter. Christiane Pelz: Thanks, Matt. Next question, please. The next question will come from Edward Kelly with Wells Fargo. Please go ahead. Edward Kelly: Yes. Hi, good morning and congratulations on a great quarter. Winnie, I wanted to start, your results have been phenomenal, obviously. And it obviously begs the question around, you know, how you're thinking about lapping all of this next year. I know you talked about the strength being, you know, broad-based. But could you call out maybe some of the bigger trends that you think have been helping results? How you think about, you know, how those trends roll into next year and any continued benefit that you might see. And then, you know, what's out there that you're excited about? And I guess what I'm really kinda trying to ask at the end of the day is do you think you could comp the comp, you know, even against some of these results next year? Thank you. Winnie Park: Thanks so much, Ed. Thanks for the question. And I want to start actually with what we put in place this year and we've seen with each quarter an acceleration of this flywheel effect. It really starts with customer focus. And with the customer focus, I think what we've done is really leaned broader trends and ideas that resonate with Gen Alpha, Gen Z, as well as millennials. So that it's really leaning into lifestyle statements as opposed to a single item. That thought process in terms of how we merchandise and how we go after trends has lifted across our departments, and it's something we will continue to pursue. And I think the second piece is when with that focus on the customer is being highly aware of the fact that their journey with our product and with our product stories starts in digital and online through social. And so how do we, you know, we just started doing this. We started to redirect our marketing spend away from traditional channels into social. And as we learn more, and as we generate more content both from users as well as influencers, and align earlier between merchandising and marketing, we think we've seen this beautiful flywheel effect that has driven traffic to stores as well as introduction to new customers. And so those two pieces, as a one plus one equals three. And I think next year, how much more can we do on that customer connected journey? We haven't touched on omni. We're really just beginning. And on marketing even, you know, getting down to the individuals, we've just begun to capture customer records. And so we haven't really in earnest done anything in marketing in terms of reaching out one to one or personalization, much less really directing even, hey, new product launches. You bought beauty last year. Here's something else that's happening. So those are the types of things that we have we're seeding for next year and that we've begun this year. And then I will finally say that, you know, the customer has given us license to play in price points beyond $5. And this was a concerted effort to move items above $5 back in line in their department and we really wanted to test and see what the reset would be, and it's been very good. We're excited about this. And as long as the team stays focused on relative value and packing a ton of value within the products, that are above 5, at seven, 10, 15. We think that there is a lot more we can do there. In terms of customer giving us permission to really do more outside of the price bands we traditionally have played in. Thank you so much, Ed. Operator: Thank you. Next question will come from Michael Lasser with UBS. Please go ahead. Michael Lasser: Evening. Thank you so much for taking my question. Is there any scenario where you would start off the year next year guiding to a negative comp? And even if you started out the year thinking your comp was gonna be flat given the performance this year, what would be the puts and takes of the model, especially as you anniversary and have to incorporate things like tariff costs in the first half of next year? Is there a framework you can give us as we try and calibrate our models for 2026? Dan Sullivan: Yes. Hey, Michael, it's Dan. Thanks for the question. Look, it's obviously at this stage premature to get ahead of ourselves for next year, let alone on a quarterly basis. But totally appreciate your question. I would say a couple of things. One is just the principle at which we are operating this business which is with a clear growth orientation and I think you've heard the prepared remarks and in Winnie's answers, the underlying drivers of that. Secondly, Winnie talked a lot about the importance of what this price action has signaled to us in terms of response of customer. We also have to remember, we don't lap the price increase until half two of next year. So mechanically that's going to be a tailwind for us. For most of first half of the year. So look, we'll have a lot more to say about the business when we get to March and really talk in detail about next year. But I think where we sit today is confident in our ability to grow on top of growth. And you're right, we will navigate a tariff headwind as well in the first half of the year. There's a lot of puts and takes that we're going to have to face into when we build the plan and ultimately share the details. But I certainly want to emphasize the growth orientation we have and ultimately, the operating profit leverage that we expect that growth to deliver. And again, we'll have more to say on that in March. Christiane Pelz: Right. Thanks, Michael. Your next question will come from Simeon Gutman with Morgan Stanley. Please go ahead. Lauren: Hi, this is Lauren on Simeon. Thanks for taking our question. Our question is on traffic versus ticket. You mentioned they were fairly equal for the third quarter. You share if the strength was driven by maybe new customers versus returning customers? Winnie Park: Thank you. Hi, there. So actually the growth was equal between transactions and ticket. And one of the drivers of transactions certainly was traffic growth. And we saw growth about equal between the new customers and our ability to retain customers and bring them back. So and we've seen that pattern actually in the last two quarters, pretty consistently. And then beyond that, of course, you know, I think that we've been really excited with the tickets increasing, specifically with customers accepting price and really shopping across the range of price. It's been terrific to see that and not limiting themselves just to items at $5 and below. Lauren: Thanks, Lauren. Christiane Pelz: Next question. The next question will come from Kate McShane with Goldman Sachs. Please go ahead. Kate McShane: Hi, good afternoon. Thanks for taking our question. We wanted to ask a little bit more about licensing. It's very clear that licensing has a much bigger presence in the store across all different price points. We just wondered if there was a way to quantify how much that's been integrated into the assortment, if it's attracting a different customer, and if any of these products are how many of these products are exclusive to Five Below? Winnie Park: Thanks so much, Kate. Licensing has always played a really critical role in terms of adding not just a branded element, but something really special that the customer looks for within Five Below. I will say that what is different about how we approach licensing is looking at how we collaborate with licensees and bring full assortments across multiple types of product. So, you know, a good example of this is wicked and the fact that you can find everything from beauty products to ready-to-wear products within the same assortment. And so this takes, you know, kind of working all the way back to the team at Wicked and Universal and thinking through with them how do we bring the story to life. That's an approach, this collaborative approach, that I think is gonna be meaningful to us on a go-forward basis. And so for us, it's constantly monitoring what new releases, especially with films. And with shows are coming out. And then staying very, very close to other trend ideas and things that are happening out there. And I'm just the one thing I can say about my team is they get trend. They live on trend. And we now are kind of orchestrating all of that energy into single statements. Thank you so much, Kate. Operator: Next? The next question will come from John Heinbockel with Guggenheim. Please go ahead. John Heinbockel: Winnie, two things. Can you talk about sort of your product priorities over the next year right? I know product development has been a key one. And then secondly, right, are you now finding vendors who or is there a big opportunity vendors who would not have sold to you before either because now you've got brand awareness or scale and are now sourcing that product? Winnie Park: Thank you so much, John. So I'll start with your first question around product priorities. I am super excited to have Michele Israel join the team. And I think that, you know, it's gonna be wonderful to get a new perspective with an amazing team that I said, you know, lives and breathes trend and has really, really close historical relationships with our vendors to kind of bring the best app to market. I think on a go-forward basis, our duty as merchants is really leaning into the broader lifestyle trends that we see out there. And not getting caught being too reliant on a single item. And that really has been one of the underlying success factors of the quarter. And will certainly be something that we want to pursue on a go-forward basis. We also think there are new opportunities and new ideas that frankly, we house them currently, but we don't do a lot to distort them. Ideas like party and celebration. And so we're always looking for how better can we serve the customer and their needs. And with that as our beginning point, we're constantly curious about what's out there and what more we can do. And a good example just of this past quarter was lounge. You know, it was a small idea that we distorted. And it certainly has taken off. In terms of vendors, we are seeing I've mentioned before, we've got some great relationships, but we're definitely seeing more vendors come to the table with greater brand recognition and our ability to really do a three sixty marketing effect so that we can play up new ideas. And it's not just about putting the product on the shelf, but it's great in-store display. And it really works back from how we tell the story in digital and social. And working in partnership with them. So we're really pleased with some of our new vendor introductions like LEGO and also, again, working more closely with licensed product. And so it's a journey, but there's a lot more to come. Thank you for your question, John. Next question? Operator: The next question will come from Zhihan Ma with Bernstein. Please go ahead. Zhihan Ma: Hi, thank you for taking my question. So first of all, near-term question just on Q4. Can you talk about the near-term trends you're seeing relative to the guidance? Is there still an element of conservatism in the Q4 guide? And secondly, longer term, if the current trend continues, right, if you manage to comp this comp next year and going forward, does that change your view on the pace of new store openings from here? Thank you. Dan Sullivan: Yes. Thank you for the question. Look, no, I wouldn't say there's conservatism in the guide. I think what we've tried to do here is be thoughtful. And what we're balancing is two distinct forces, right? A business with clear momentum that exited the third quarter with a pronounced growth profile to it. But we all know that the holidays are just different. The size and scale and magnitude of the business, the time period upon which it happens, the competitive lens, which this all needs to be viewed through, and a bit of uncertainty around the ultimate consumer. And where they are at as well and where will they be across the holidays. So there's always going to be clear puts and takes within a guide, hence the range. But I wouldn't want to categorize anything at this point as conservative. We've tried to be really thoughtful. In terms of the new store growth plan for this business, I think what you're seeing right now is what really good execution looks like. And it's not about how many stores can we open. It's about how many great stores can we. And when you see the results that we described in this quarter, particularly in the Pacific Northwest, which was just staggering what really, really good execution looks like and how the customer responds. That's what we're going after. We think that number is one fifty. That's the number today. Could it change? Of course. But, ultimately, we wanna be great at launching new stores and that's going to dictate the pace. Christiane Pelz: Great. Thank you. Next question, please. The next question will come from Scott Ciccarelli with Truist. Please go ahead. Scott Ciccarelli: Good afternoon, guys. One question and hopefully one clarification. First, can you provide more details or maybe some examples around the marketing changes you've made because it sounds like there's a real step function change on that front. And then secondly, one more question about the 4Q comp cadence. You know, are not expecting much monthly volatility in your guide. Does that mean November was in that 6% to 8% range? Dan Sullivan: I'll take the second question, Scott, and then I'll hand it to Winnie on the marketing. The short answer is yes. The month and the holiday have lined up to where we would have expected them to be. Going into now that the second half of the holiday season in line with our guide. Winnie Park: And then in terms of the marketing change, Scott, what we've done is actually redirect the spend into channels that we think are most relevant with young customers. And so while we were doing social, for instance, before, we've just we've distorted the spend in social and really gone after better curated storytelling in conjunction with our merchandising team. So it's really merchandising and marketing working in unison. And so that has actually been terrific. We also tested a catalog for Q4, a toy catalog which we're super excited about. It went to our best customers. And again, this is about marketing mix, and evaluating what works, what resonates, and getting the best possible ROAS. And we're doing all those things currently. Thank you, Scott. Operator: Thank you. The next question will come from Spencer Hanis with Wolfe Research. Please go ahead. Spencer Hanis: Good afternoon. Thanks for the question. You mentioned that traffic accelerated as you exited the quarter. Can you just talk about what is driving? And then in terms of elasticities from the price increases you've taken, have you seen any change in sort of the customer response to that? Winnie Park: Yes. So I'll take the traffic question. So we have seen really great acceleration of traffic and it is we started this journey with moving marketing spend into social. And into digital, and it really was starting in Q2. And as we saw the results in the ROAS and the traffic increase, week in, week out, we continue to pull that. And that's really what we believe has driven the traffic. And it's not just about the level of spend, but it really is about the content. And generating good, good content. So we went from more studio-produced content to creator content and, again, seeing really great results. We also really pay attention to what's happening in social and user-generated content. And play into things that, you know, consumers are excited about, like the rainbow challenge. And leaning into this. So it's really at trying to speak to Gen Alpha and Gen Z and millennials in the most effective way. Dan Sullivan: And then to the second part of your question on unit performance over the quarter, we didn't see any real trends from what we saw in Q2. So said another way, the consumer response, the unit degradation, it remains well above what we had originally modeled, which is super encouraging for us and no material change from the second quarter. Winnie Park: I will say the only difference in terms of what we saw was we did make the move this quarter in terms of inserting items that were above $5 in line. And saw good response to that as well. Operator: The next question will come from Paul Lejuez with Citi. Please go ahead. Paul Lejuez: Hey. Thanks, guys. Can you quantify the performance in products that are priced above $5 just curious about the year-over-year change? And then I think you mentioned that the majority of the departments comp positive. With such a strong comp for the quarter. I was kind of surprised to hear that. So curious what was not comping positive? And then last, just curious how you're thinking about traffic versus ticket for the fourth quarter within that comp guidance? Thanks. Dan Sullivan: Yes. So I'll let me try to unpack it from where you ended. In the fourth quarter, we've essentially expect current trends to continue. It will be a ticket-driven growth profile as a headline, I would say that first. Think transactions though will provide growth in the quarter. But it will be ticket-led. And we've essentially contemplated a very similar trend as what I spoke about earlier. In terms of what drives the ticket and overall unit performance. So I'll start with that. Winnie, did you want to? Winnie Park: No, I was just going to respond to the point in terms of what didn't comp. So we had less than a handful of departments that didn't comp, and these were, in large part, intentional. In terms of we were seeing that the residents of these particular departments were down trending, and so we intentionally said you know what? We're gonna go ahead and comp them down so that we can put the dollars into things that really work. The other piece of it was we were hit in certain areas, by tariffs and where we couldn't source product that we thought had the right price value equation. And again, that landscape continues to change. With the global trade environment and how it changes. Christiane Pelz: Great. Thanks, Paul. Next question, please. Operator: Next question will come from Michael Montani with Evercore ISI. Please go ahead. Michael Montani: Hey, good evening. Thanks for taking the question. I just wanted to ask a two-parter. First, if you could just unpack a little bit in the third quarter, the dynamics with shrink. We thought there could have been some upside to the reserve there. It doesn't sound like that happened. And then also SG&A, in the quarter, we thought there might have been a bit more leverage given the strong comp. And then for 4Q, if we're correct, looks like two forty bps of EBIT margin contraction at the midpoint. And I think maybe tariffs could be 200 bps of that. But just wanted to see if there's any offset there from leverage given the 7% comp is well above 3% that we think you'd need to lever? Dan Sullivan: Yes, let me take them in order. So in terms of shrink, Mike, we did have a pickup in the third quarter. It was about 70 basis points of a tailwind in the quarter. Which we're super encouraged by. That is a great initial indicator that a tremendous amount of energy and focus and effort of this organization bore bear some fruit in the quarter. It's early. Shrink is a challenge, of course. And we're going to stay on it, but we were really encouraged, to see that performance. It was about two-thirds of our fleet that was counted in the quarter. And we'll hit the other third in January. So encouraged by that. In terms of the fourth quarter, look, I think we have to go back and sort of remind ourselves what was our initial view of the quarter. What we had initially profiled was low single-digit growth, and with that low single-digit growth, about three twenty points of year-over-year operating margin declines. That was our initial view. We've updated that view now. We're calling for mid-single-digit growth and about, you're right, two forty basis points of year-over-year decline. So the two drivers of the decline are not news, of course. Right? It's the higher incentive cost, which got higher in the fourth quarter. That's what that third quarter comp will do for you. And the tariff headwinds year over year, it's actually got a little bit better. So the way I would think about the fourth quarter is the year-over-year headwinds are not new. It's something we've certainly been transparent and talked about. We're now delivering about $70 million of incremental sales and that $70 million is flowing through the mid-thirty percent, which we think is a really good number for us. So I'll leave it there. Thanks. Winnie Park: Thanks. Next question, please. Operator: Your next question will come from Jeremy Hamblin with Craig Hallum Capital Group. Please go ahead. Jeremy Hamblin: Thanks. And I'll add my congratulations on the impressive results. Just want to come back here to the gross margins a little bit. So I think 33.9% adjusted gross margins maybe the best the company's ever had in a Q3 70 basis points year over year. I think you'd come into the quarter expecting 160 basis point impact from tariffs. Just trying to understand as we look forward and think about the implications here, and some drag for Q4, but we've also had a change in tariff policy as it relates to China and I think about 10 percentage points there of change. As we look ahead, has the gross margin outlook gotten a little bit better? And then just in terms of what's kind of gone on here in Q3 in record gross margins, just trying to understand that a little bit given you haven't had kind of a pickup yet on the shrink accrual rates? Dan Sullivan: Yes, great. Thank you for the question. I appreciate that. Look, let me start with the tariff piece of it. Because you're right. Based on the executive order signed in early November, there is a 10% reduction in the reciprocal tariff, if you will. That does not affect our 2025 results. Because, you know, we're obviously already baked in terms of products and what will flow through in COGS. So there'll be no tailwind from that. I think your point is fair, though, on the margin profile itself. And I think what I would say is in both the third and the fourth quarter, the tariff headwinds, while meaningful year over year, were a bit lower than what we had profiled. And I think that speaks to the amazing work the team has done in attacking this topic all through the cost lever and through the strategic price discussion that Winnie mentioned. And so we're really pleased with that. The overall tariff headwind is looking smaller than what we had profiled most recently, let alone initially in the year. So you've got a lot of puts and takes, happening in the margin profile. I think ultimately, what you saw in the third quarter is the shrink benefit. Flow run through. That's your 70 basis points of year-over-year gains. I think everything else leverage and some of these headwinds was a push. We don't have any shrink assumptions baked into our fourth quarter preview. So you're not seeing any pickup there nor are you seeing any headwinds. So that's the margin story. Hopefully, that's answered your question. Thank you. Christiane Pelz: Next question, please. The next question will come from Anthony Chukumba with Loop Capital Markets. Please go ahead. Anthony Chukumba: Thank you so much for taking my question and congrats on a very, very strong quarter. I guess my question so you said that the comp was roughly split between traffic and ticket. Maybe this is a difficult to parse on the ticket side, but how much of that was your price adjustments as opposed to maybe like mix shift to some of your higher-priced items, particularly the above $5 items? Thank you. Winnie Park: So, hi, Anthony. Thanks for your question. So, yes, the pickup was in our comps was attributed to both increase in transactions and ticket that were about equal. On the ticket front, I should kind of unpack a little bit what we're seeing. We are seeing higher AURs and it's being driven by a mix of different factors. One is we did have a strategic pricing strategy that rounded up and down the simplification of price. Actually, we were able to maintain through that the same level of product that was being offered at five and below from the same quarter last year. So there was no change there. However, the receptivity at the five and above, we saw really nice momentum and growth. Double-digit growth in terms of the pickup there. And it's thus leading to our higher AUR. And when you look at that, it really is coming from, one, smart decisions about where we did price up packing enough value so the relative value of the items were really great. And then secondly, again, putting those items in line. So if you're in the room department and you're shopping for, you know, pillows, you might see a $35 mirror. And by putting that in the line as opposed to putting it in the 5 beyond area in the back of store, the customer definitely responded better. And so those are some of the kind of strategic actions that we took, and the customer voted for, you know, growth in those five and above items. Hope that answers your question. Thank you so much. Operator: The next question will come from Joe Feldman with Telsey Advisory Group. Please go ahead. Joe Feldman: Yes. Thanks for taking the question guys and congrats on the quarter. I wanted to ask where do you see opportunities in the merchandise mix? Like I'm curious now with the new chief merchant Michelle Israel, coming in, you know, what her initial feedback might be, like, where there are some opportunities to lean in more, maybe pull back? If you could share any color on that would help. Winnie Park: Thank you so much, Joe. And, you know, we're excited to have Michelle on board. She started in October so early days. And I think what's really exciting is the fact that the team, the merchandising team that we have here who are working with Michelle are really just experts and pros. They're amazing. And I think what we did with that team is something that Michelle would continue which is to unleash their energy and their excitement over chasing down the best trends in the market and the best value for money that they can find. And, again, focus on that kid. And so I, you know, early days in terms of what take the assortment on a go-forward basis, but there are always opportunities. Within the current assortment that we've got in terms of levels of product, looking at the depth of buys and refining that. But we're just excited to see that the customer is, again, responding to so much of the assortment, and we really have taken much more of a broad-based approach as opposed to trying to hang our hat on one thing, and a wide range of prices and value. And so we're gonna continue to push the envelope on all those fronts. And the last piece I will say is the team has done a great job of bringing newness into the assortment in a disciplined fashion. And that constant flow of newness is what customers want. Thank you so much. Operator: Next question. The next question will come from David Bellinger with Mizuho. Please go ahead. David Bellinger: Hey. Thanks. Really nice results. I got the toy catalog, by the way. So it says a lot about where my kids are spending our money. Another question on the branded items. We've seen much more of that in the stores lately, LEGO, LEGO Stitch, SpongeBob. As you get more into those, how do you think about the competitive forces, especially as you break above, you know, the $5 price point, some $10.15 dollars items? You start moving into this area where, you know, a Walmart or a Target does very well. So it's how do you plan to keep your edge versus those larger value-oriented players? Thank you. Winnie Park: Thanks so much, David, and thank you for being a loyal customer and thank your kids for that. Branded items have always been part of the mix. I think what I'm really amazed by is the discipline with which our teams look at price value and relative value. And so for us, that is achieved through a lot of exclusive and working very, very closely with the vendors. And being very precise about if it's a Lego, if it's a Stitch, what do our customers want? What do they respond to? And then, again, it's bringing a presentation together. So that it's not just another item on a shelf, really, it there's a wow statement. And we've been working very closely with the vendors to bring together, you know, visual merchandising marketing visual marketing in the stores that create presentations and ranges. So that approach, I think, is kind of our special sauce. And it really goes back to value and how to get that relative value and be the best value in the marketplace. Thank you so much. Christiane Pelz: Next question. The next question will come from Seth Sigman with Barclays. Please go ahead. Seth Sigman: Hey, everyone. I wanted to ask about the trends that you're seeing throughout the quarter in terms of seasonal events versus just everyday business? Maybe help us understand the growth that you're seeing across through those different types of periods? And then I also just wanted to clarify on the quarter to date commentary, I think I heard a comment that traffic accelerated exiting the quarter, but then you also said quarter to date is in line with the comps range, the guidance for the fourth quarter. Which would be a deceleration. So I think investors are just trying to reconcile that. Thank you. Dan Sullivan: Yeah. Hi, Seth. Thanks for the questions. I'll start and then I'll hand it to Winnie. Two distinct comments and I apologize if it was unclear. So what we were saying was the traffic performance across Q3 built month over month. We exited the quarter with traffic growth that had accelerated and it was our biggest month-over-month traffic gain that we had seen. I was not making that comment about the holiday, the fourth quarter that we're in. What I was saying with respect to the fourth quarter was now one month in and with Black Friday and Black Friday weekend behind us, I was answering the question that our performance is in line with our expectation and in fact in line with how we had contemplated the guide. So hopefully, that clears that up. Winnie? Winnie Park: Trends in terms of seasonal events versus everyday business. We have these six curtain-up moments that really celebrate these moments in the customer's life. But we take advantage of those curtain-up moments to really drive newness throughout the assortments. And so for us, it's less episodic about seasonal events and activations and much more about the everyday business. We know looking forward to the fourth quarter, that we're a destination for that last-minute gift and the last-minute stocking stuffer. So we do we're looking forward to that surge the last couple of weeks before the holiday, which, you know, is kind of a pattern that we've been able to repeat. So looking forward to all of that, but it's the everyday business that really drives us. Hope that answers your question. Thank you, Seth. Operator: Next question will come from Brian Nagel with Oppenheimer. Please go ahead. Brian Nagel: Hi, good afternoon. Great quarter. Congratulations. So I'll ask two really quick questions here. The first, just with respect to tariffs, as we're looking at the results now or the tariffs or at least the tariffs that are now known, are those fully reflected in what we're seeing in trends at Five Below? Then my second question, you know, looking recognize you've done a fantastic job of really repositioning the job, the business internally. But from an external standpoint, have you has there been any shift in the competitive environment that's helped to bolster results at Five Below lately? Dan Sullivan: Well, I'll start with the tariff question. I want to make sure I understand it correctly. But look, our guide certainly contemplates further tariff pressures and headwinds in the fourth quarter. I think we've put an original guide out that we expected that number to be about two twenty-five basis points in the quarter. We think it'll be slightly less than that now going back to the comments made earlier about the tremendous work the team has done mitigate this. And of course, the great results we're seeing on receptivity to the price actions that we took. So it'll be a bit less of a headwind. So it is contemplated in the quarter. I think as we're thinking about the future here, even in this operating environment, I would just remind everyone that while we have largely mitigated these tariff implications at the unit level, which is a tremendous result, some of the costs that we have incurred are trapped in inventory obviously, and we'll release as we get into half one of next year. So we're not out of the tariff woods by any means, but it is fully reflected in both our actuals to date and in our fourth quarter outlook. Winnie Park: And then, Brian, with regards to the external environment and the competitive environment, I think what has actually shifted is our approach and we have redoubled our efforts to be a destination for kids. It is resonant in everything we do from product to marketing, and I dare say there is not a player out there like us in retail that focuses on kids at great value. And I think that that is a competitive differentiator that we're now shouting about. And we're telling the customers what we offer. And we're telling them in a way in which they listen. And so I think that's been the big shift for us is, you know, adding that bit of marketing and redoubling and doubling down on kids. As our core. Thank you so much. Operator: Thank you. Your next question will come from Philip Lee with William Blair. Please go ahead. Philip Lee: Thanks everyone and happy holidays. So it sounds like the improved inventory flow and in-stock levels has been a nice driver of some of the upside you've seen this year. How do you think about ways to further optimize inventory from here to keep that momentum rolling? And then should we be embedding some sort of more meaningful improvement in turns over the next year or so? Thank you all. Winnie Park: Thanks so much, Philip. We've been I'm really proud of the team in terms of what we've been able to do with inventory, especially in the back half of the year. Actually, throughout the year, the flow has gotten better and better. That's come through a lot of alignment between the teams, a live discussion about when we secure product and literally when does it land in the stores and how is it gonna land in the stores. And I think for us, there's always room for improvement. And we'll look at this even further. We are leveraging AI in terms of inventory management, but I think there's a lot more we could be doing even further upstream between merchandising and planning. And so that's part of what we're looking forward to with Michelle joining us is connecting all the dots along that journey. Thank you so much. And I think that is our last. Operator: Yep. Concludes our question and answer session. I would like to turn the conference back over to Ms. Winnie Park for closing remarks. Please go ahead. Winnie Park: Thank you so much. We are really excited to bring the magic of Five Below home for the holidays. And I really believe that Five Below is the destination for the kid and the kid in all of us. We aspire to be the greatest little toy, candy, and gift store in America. This holiday. And we're also really proud to continue our partnership with Toys for Tots for the sixteenth year so that we can make holiday special for even more kids. I really want to thank all of you for your continued support and we're looking forward to seeing all of you all in our stores and wish you and your families a wonderful holiday. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Greetings, and welcome to the Guidewire Software, Inc. First Quarter Fiscal 2026 Financial Results Conference Call. As a reminder, this call is being recorded and will be posted on our Investor Relations page later today. I would like to now turn the call over to Alex Hughes, Vice President of Investor Relations. Thank you, Alex. You may begin. Alex Hughes: Thank you, Grace. Hello, everyone. With me today is Mike Rosenbaum, Chief Executive Officer, and Jeff Cooper, Chief Financial Officer. A complete disclosure of our results can be found in our press release issued today as well as in our related Form 8-Ks furnished to the SEC, both of which are available in the Investor Relations section of our website. Today's call is being recorded, and a replay will be available following its conclusion. Statements today include forward-looking ones regarding our financial results, products, customer demand, operations, the impact of local, national, and geopolitical events on our business, and other matters. These statements are subject to risks, uncertainties, and assumptions based on management's current expectations as of today and should not be relied upon as representing our views as of any subsequent date. Please refer to the press release and the risk factors and other documents we file with the SEC, including our annual report and quarterly reports on Forms 10-K and 10-Q for information on risks, uncertainties, and assumptions that may cause actual results to differ materially. We also will refer to certain non-GAAP financial measures to provide additional information to investors. All commentary on margins, profitability, and expenses are on a non-GAAP basis unless stated otherwise. A reconciliation of non-GAAP to GAAP measures is provided in our press release. Reconciliations and additional data are also posted in the supplement on our IR website. And with that, I'll now turn the call over to Mike. Mike Rosenbaum: Thanks, Alex, and good afternoon, everyone. Thanks for joining the call. We're off to a great start to our fiscal year, delivering results ahead of expectations across all key financial metrics. We're seeing continued momentum in our business. Five years ago, we launched Aspen, the first release of Guidewire Cloud Platform, with the goal of enabling property and casualty insurers to engage, innovate, and grow efficiently. Today, with NoSECCO, our fourteenth release, we're experiencing tremendous success across the industry and around the world. We continue to see accelerating adoption of our cloud products and services. Reflecting on this success, we got four important things right. We met insurers where they were in terms of their operational complexity and the investments they had already made. We designed agility and extensibility into the platform to unlock innovation. We invested in and fostered an ecosystem of partners to help drive our vision for a cloud-based core system powering the P&C industry. And we worked tirelessly to ensure every project and customer was successful. Our Q1 outcome and continued momentum are direct results of these decisions and hard work. Additionally, the timing of our platform maturity aligns us well and leaves us well-positioned for the advent of generative AI. The potential for generative AI in the P&C insurance industry marries extremely well with our platform's extensible design and now creates opportunities for us to unlock greater productivity, platform value, and new products that leverage our vertical data and business process expertise. We believe these elements together position us to dramatically improve insurer outcomes and fulfill our enduring mission of enabling insurers to innovate and grow efficiently. This means our platform can now go wider and deeper with a greater portfolio of applications and tools that harness data and AI. In October, we hosted Connections, our annual customer conference. This year, over 3,500 attended from across the industry, and we laid out this next phase in our plan, which we see as a logical next chapter for Guidewire now that we are confidently through the most difficult part of our cloud journey. As we go forward, our goal is to focus more and more of our energy on this new opportunity. We've spent many quarters discussing Guidewire Cloud and our progress transforming our company and customer base. Effort will, of course, continue, and we have a lot of runway left. But we will also begin to focus more of the conversation on everything we are positioned to deliver for the future. So today, I'll spend a minute giving you a high-level update on the continued strength we saw in our core business through Q1, and then elaborate on our new products and opportunities. Jeff will then discuss our financial results and updated outlook. So let me begin by mentioning a few key highlights from the quarter. Following a record Q4, we saw continued momentum with another eight cloud deals in Q1. ARR grew 22% year over year, and 21% on a constant currency basis. We had five significant deals in North America led by major insurers, the Hartford and Sampo. We had three international deals, including a major win at one of the UK's most respected mutual insurers, a significant migration at a major insurer in Japan, and a great win at a large Australian-based insurer. It was also great to see six of these eight wins expand to include one or more of our data and analytics offerings. All this momentum was driven by the factors we've shared before: our cloud maturity, track record of customer success, and a resilient global P&C insurance market that continues to modernize. Based on this success, we now have the opportunity to go wider and deeper with our applications targeting our customer base. Two areas where we are excited to extend our platform are in pricing and underwriting. InsuranceSuite will include new applications, PricingCenter and UnderwritingCenter, alongside PolicyCenter, BillingCenter, and ClaimCenter. Both new applications represent significant market opportunities that address the industry's need to overcome very fragmented and manual processes that negatively impact their speed to market, loss ratios, and growth. By building PricingCenter and UnderwritingCenter on our unified cloud foundation and connecting each seamlessly with our other InsuranceSuite applications and analytics products, we believe we can significantly improve insurers' agility and performance. With PricingCenter, actuaries can bring models to market faster, with greater precision and control. And with UnderwritingCenter, underwriters can improve risk selection, streamline operations, and accelerate quote turnaround times. And with generative AI capabilities infused in both these applications, insurers have the potential to dramatically improve on long-standing business constraints. One aspect of this new product portfolio that I'm particularly excited about is the potential to combine generative AI, data, and critical workflows that run on our applications. Our recent acquisition of ProNavigator is an excellent example of this. ProNavigator is an AI-powered knowledge management platform trained and tuned specifically for the insurance industry. By integrating ProNavigator into Guidewire applications, we can now deliver instant context-aware guidance and answers to the people using our applications. This sort of in-context guidance is a first step in generative AI deployment to ensure its workflows can upscale every user of Guidewire applications. In addition to providing us the opportunity to launch new products, it was also an opportunity for our broader ecosystem to come together. As I have said many times before, this ecosystem of partners and the innovation we have developed together have been a significant factor in our success to date. ProNavigator, in fact, is a great example of this as a graduate of our InsurTech Vanguard program, which is our initiative to identify and mentor promising startups. Before handing it over to Jeff, I'll just summarize my key takeaways from the quarter. We continue to see accelerating adoption for Guidewire Cloud Platform and have plenty of runway to continue growing our core business. At the same time, we are extremely excited about the opportunity it unlocks for us in new products, innovation, and generative AI, and these new product areas are very much where we are focused now. We are thrilled with the early reception that our expanded product portfolio has received and look forward to sharing more with you over time as we progress with these new offerings. With that, I'll turn it over to Jeff to walk you through the financial results. Jeff Cooper: Thanks, Mike. We are off to a great start. Q1 saw record sales activity for a first quarter and a clean beat across ARR, revenue, and profitability expectations. We continue to be thrilled with the momentum we're seeing in the business. ARR ended at $1.063 billion, up 21% year over year on a constant currency basis and ahead of our expectations. Total revenue was $333 million, up 27% year over year, reflecting strong performance across all segments. We continue to see strong subscription and support revenue growth as customers migrate to cloud and new insurers adopt our cloud products. In the first quarter, subscription and support revenue grew 31% to $222 million. Counterintuitively, license revenue grew 12% to $42 million. In general, we expect license revenue to decline as we continue to migrate customers to cloud and drive subscription revenue growth. However, in the first quarter, licensing benefited from a large annual term license renewal after the end of a multiyear commitment entered into in 2020. As a reminder, revenue related to multiyear term license contracts is generally recognized upfront, and as a result, no additional license revenue is recognized until the committed term expires. Professional services revenue finished well above our expectations at $68 million, reflecting high utilization and effective collaboration with our SI partners. Now let me turn to profitability for the first quarter, which we'll discuss on a non-GAAP basis unless stated otherwise. Gross profit was $219 million, up 32% year over year, with a gross margin of 66%. Subscription and support gross margin reached 73%, continuing to track ahead of expectations. And professional services margin improved to 23%. We are seeing higher services demand and have a healthy backlog that we are executing against, which will require a bit more investment and utilization of subcontractors for the remainder of the year, but this is strategic for us as we ensure every cloud program is successful. Operating income finished at $63 million, up 83% year over year. Overall stock-based compensation was $43 million, up 14% from Q1 of last year. Operating cash flow ended the quarter at negative $67 million. As a reminder, annual employee bonuses and commission expenses related to Q4 sales are paid out in Q1, and Q1 cash flow finished consistent with our expectations. We ended the quarter with over $1.4 billion in cash, cash equivalents, and investments. Now let me go through our updated outlook for fiscal year 2026. Starting with the top line, we are very pleased with our first quarter performance and the continued strength and quality of our pipeline. As a result, we are raising our annual outlook for ARR to be between $1.22 billion and $1.23 billion. For total revenue, we now expect between $1.403 billion and $1.442 billion. We expect approximately $891 million in subscription revenue and $948 million in subscription and support revenue. We now expect services revenue to be approximately $245 million given the better-than-expected services revenue in Q1 and our higher utilization rates. We expect our acquisition of ProNavigator, which closed early in Q2, to add $4 million of ARR and $2 million in revenue. Turning to margins, we are increasing our expectations for subscription and support gross margin to be between 72-73% for the year. We expect services gross margins to be between 13-14%, which is lower than Q1 as we are investing in additional capacity, building our AI initiatives to improve efficiency in the future, and leveraging a bit higher subcontractor levels. Overall gross margins are expected to still be 66% for the full year, as higher subscription and support margins are offset by higher services revenue mix. As a result of raising our revenue outlook, we are also lifting our outlook for operating income. We expect GAAP operating income of between $72 million and $88 million and non-GAAP operating income of between $266 million and $282 million for the fiscal year. We are raising these expectations while also absorbing the incremental costs associated with the acquisition of ProNavigator. We expect stock-based compensation to be approximately $185 million, representing 13% growth year over year. We are adjusting our expectations for cash flow from operations for the year to be between $355 million and $375 million. Our CapEx expectations for the year are between $30 million and $35 million, including approximately $18 million in capitalized software development costs. Turning to our outlook for Q2, we expect ARR to finish between $1.107 billion and $1.113 billion. Our outlook for total revenue is between $339 million and $345 million. We expect subscription and support revenue of approximately $229 million and services revenue of approximately $58 million. We expect subscription and support margins of approximately 73%, services margins to be around 9%, and total gross margins around 66%. Our Q2 outlook for non-GAAP operating income is between $68 million and $74 million. In summary, this Q1 saw record sales activity for our first quarter of the year, which is a great start, and we are very excited for what is ahead. Alex, you can now open the call for questions. Alex Hughes: Great. Thanks, Jeff. Our first question is going to come from Dylan Becker of William Blair. Hey, guys. Dylan Becker: Hey, Dylan. Appreciate it here. Maybe, Mike, starting with you, we've talked a lot about the idea of operational agility, and it's evident with the new products and PricingCenter and UnderwritingCenter. Maybe wondering if you could dig a level deeper and give us some or maybe a sense of what those opportunities look like and maybe if there's an unlock as you go deeper in that domain to kind of tether and attach more momentum across the existing core suite? Maybe thinking PolicyCenter in particular as that feels like a logical area of kind of attachment between those two segments. Mike Rosenbaum: Well, sure. For sure, the strategy around both of these products is to target our customer base. And I think that the integration that we're building and the fact that they're built or being built to run on our platform and seamlessly connect with the applications, but also the data platform, is a real important differentiator for these products and something that helps drive the agility that you were talking about. But if you want to sort of understand why this matters for an insurance company, these companies are, number one, sometimes trying to grow, sometimes trying to expand with new products, and also always trying to just get their prices right. And the more flexibility we can provide them about modeling and estimating with their actuarial teams what the right structures are for pricing the insurance products and getting those things into actual production deployment, the more effective an insurance company they can be. Now that gives them flexibility to, like I said, expand into new markets or add or change the existing products that they have. I think it's been pretty frustrating, I think, for the industry in general just to have such a long lag time between the concept that you need to make a price change to where you can actually affect that price in market, and that's what PricingCenter is designed to help alleviate. I think it's going to have a direct impact, a very direct and positive impact on our customer base and the customers that choose to deploy that with us. On the underwriting side, the thing that's super exciting here is just giving the industry in general this ability to respond more quickly and more effectively to submissions that they receive from brokers. It's a real frustration across the board. You talk to every insurance company, and they have great teams of underwriters. But dealing with all the manual paperwork and reading a document and assessing risk, it just takes so much time. And modern systems, especially with generative AI, are going to make a big improvement in terms of the operational efficiency of these underwriting departments. And so that's kind of how it affects the industry and how I think we're well-positioned to be able to attach it to new PolicyCenter, but also to existing PolicyCenter implementations. Dylan Becker: There we go. Sorry. I was stuck on mute there. No. That's very helpful. Thank you, Mike. And then maybe, switching over to Jeff. If we think about the incremental investment you called out on services, obviously, there's a lot of opportunity, it sounds like, here. How should we think about the outsized momentum you're seeing on the services front? Is that a good indication of some of the subscription momentum that's expected to come as you're doing more of this process change work? And really maybe indicative of the underlying demand environment and how sustainable that is at the end of the day? Thank you. Jeff Cooper: I think Q1 in particular was benefiting from a couple larger programs that the teams have been working hard on. I think the services organization has done a great job partnering with the SIs to meet the demand environment that we're experiencing. It's hard to read through to just our services revenue line and take that as an indication of overall demand for what we're trying to accomplish because it really is spread across the entire ecosystem. And we do that very purposefully. I think one thing that we are there's a couple areas where we're making investments. We do believe that over time, generative AI can help us bring down the cost of implementation. And that can have a pretty meaningful pull-through to demand for our products. So we're investing in that, and we're excited about the early potential that we're seeing there. And then there's also new product areas. You know, our services organization often has to act as the tip of the spear around new products. So investing to make sure that we're ready for that demand, and then we'll work in concert with our partners to enable them as we work through that early demand that we see with some of these newer products. So that's what's driving a lot of the investments we're making, and we feel very good about those investments. It is shifting a little bit. You know, we are seeing some higher services revenue expectations this year than maybe we would have thought a couple years ago. And we think that that's generally healthy. Alex Hughes: Great. Thanks, Dylan. Our next question is going to come from Alexei Gogolev of JPMorgan. Alexei Gogolev: Thank you, Alex. Hello, everyone. Mike, in recent quarters, you had a number of very large customers migrate to the cloud. Are you seeing more consumption of all three key products simultaneously rather than business line by business line, and what is driving the change in the consumption pattern? Mike Rosenbaum: I'll start by answering the second half of your question. I think what we're seeing is the benefits of the actualization of a lot of great hard work in close partnership with our tier-one customer base around what it would take to convince them that we could deliver a cloud at scale that was reliable and secure enough for their mission-critical workloads. We have worked tirelessly over many, many years at many releases to earn that trust, and you're seeing that now pay off in these deals materialize. Now with respect to migrations, a lot of that relates to either what they're already running with Guidewire and their commitment to move that to the cloud. I would say more often than not, it involves the complete landscape of what they're running with us, just because it makes sense to negotiate the whole thing all at once. Very often, if it makes sense for them strategically to look at another component of their architecture, say claims if they're running policy or policy if they're running claims, that is very often the case. But we only see a few of these every quarter, so it's tough to say that there's a pattern emerging. The biggest pattern that I'd say is now very clearly happening is that we are showing that we can run this at scale for the largest insurance companies in the world, and we're earning that trust. And we're kicking off these incredible programs with these companies. We're excited to deliver on them. And I think it's going to be a great thing for the industry. It's going to be a great thing for these customers. It's going to be a great thing for Guidewire. These are commitments that we expect to last for decades. And we're very happy that we've been able to earn this trust, and we're excited to step up and deliver on behalf of these customers. Alexei Gogolev: Thank you, Mike. And, Jeff, if I could, maybe ask you on the ARR guidance. Exactly a year ago, you kept ARR guidance unchanged. This year, you're raising it after Q1. I'm just wondering if there are any components in your current growth guidance where you may be prudently, but still somewhat conservative, and what might those components be? Jeff Cooper: Yeah. No. I appreciate the question. It is atypical for us to raise our outlook at the end of Q1. You know, we kind of think about our progress towards some of our annual targets. This Q1 was a little bit unique in terms of the size and scope and the deal activity we were able to close in Q1. So I think there are elements of that that informed how we thought about adjusting the guidance. Obviously, we took a deep look at the pipeline and feel confident in the strength of the pipeline. The third component is we made an acquisition in ProNavigator, and we expect that to add about $4 million. So that's part of the incremental raise is related to that acquisition of ProNavigator. And then, you know, finally, just some of the early market feedback. It's still very early, so these won't contribute in large ways. But some of the feedback we're getting on the newer products is exciting, and that gives us a little bit of confidence as we think about the guide for this year. Alex Hughes: Alexei. Our next question comes from Ken Wong of Oppenheimer and Company. Ken Wong: Fantastic. Thanks for taking my question. Maybe building on that last note, and this could be for Mike or Jeff. On the interest for UnderwritingCenter and PricingCenter, how should we think about the timeline for adoption there? Like, would it mirror something like PolicyCenter, which was a heavier lift and did require customers to take a kind of a longer look at it? Or could it be closer to something like ClaimCenter where there was much faster adoption in the early days? What's the feedback you've been getting? What are some of the stumbling blocks that could stall that particular path to migration? Mike Rosenbaum: Yeah. Thanks, Ken. I would say it's slightly different. I think there's an opportunity for us to position this a little bit more incrementally or greenfield than maybe ClaimCenter or PolicyCenter where you're very clearly replacing a system of record. Certainly, there's something that we're replacing. But I think that the go-to-market motion, while new for us, I think it'll evolve to be its own kind of unique and maybe a little bit faster than either of those other two core products. Now we still got some work to do to prove that out. But as Jeff said, the initial response and the receptivity to the architecture and the concept and what we're setting out to do has been very positive and certainly giving us enough interaction with customers and prospects to be able to validate that we're on the right track. And, you know, so I would say just to kind of repeat what I said is, like, I expect it to be slightly faster. It's certainly not going to be something that's super fast, and these are big decisions for companies to make. But it doesn't have to be a sort of all-or-nothing complete replacement of something the way these big core system, core system of record implementation and decisions are. Ken Wong: Fantastic. Super helpful, Mike. And Jeff, just on the subscription and support gross margins, saw a really nice uptick this quarter. Is that just kind of further efficiency gains or is there some timing of AWS credits or any other one-time items that we should be aware of? Jeff Cooper: There was a very small contribution of some one-time items that did impact the quarter, but not in a significant way. Those are becoming less and less meaningful. I think it was just good progress that we've made in driving efficiency. And we're pleased to be able to raise the guide for the year as well. So the team has done a lot of work here across the finance organization, engineering organization, and customer success to help us tackle the efficiencies there. And so I think that's what you're seeing. Ken Wong: Fantastic. Thanks a lot, Jeff. Alex Hughes: Great. Our next question comes from Michael Cohen of Wells Fargo. Michael Cohen: Hey. Thanks very much. Appreciate you taking the questions. I mean, the growth rates of the business continued to trend higher. I mean, it's a seasonally lighter period, but you're clearly reaping some of the rewards of the last year. Just maybe help us stack rank the drivers of what you're seeing and if that at all shifts based on early feedback coming out of Connections. And, Jeff, is there anything from a seasonal perspective we should be mindful of as we're just kind of rolling some of the numbers forward from a sequential basis on the top line? Mike Rosenbaum: Yeah. I'll give you a perspective on drivers. So we're very happy with the pace of migration activity. And we continue to be very, very happy with the competitive win rates and just general demand for core deals in the industry worldwide. So those two things together just give us a lot of baseline confidence in the business. And as you can imagine, these sorts of deals are very considered, which gives us a lot of visibility into the forward pipeline and gives us the confidence as we did this quarter to raise the guide based on the perspective around the fiscal year. And then you add on top of that the growing momentum in these new products, and like I said, the reception that we got at Connections to these new products was phenomenal. It creates a lot of excitement in the customer base, but also our sales organization and gives us an opportunity to line up this sort of new vector of growth for the company. And so that's basically how I would stack things up. Migration, general demand for core systems, win rates going in our direction, building momentum quarter over quarter, and then these new products giving us even more confidence in what we can produce as we proceed through the year. Jeff Cooper: And the only thing I'd add on the seasonality is just to reinforce what we talked about at our analyst day at Connections. The one dynamic we're seeing this year is a little bit of a headwind with respect to ARR coming off of the backlog in Q3. So we communicated that to you all at analyst day and wanted to reinforce that message. Nothing new coming out of Q1 to highlight. Michael Cohen: Great job. Let's start it here. Thank you. Alex Hughes: Thank you. Great. Thanks, Michael. Our next question comes from Adam Hotchkiss at Goldman Sachs. Adam Hotchkiss: Great. Thanks so much for taking the questions. I wanted to ask another one on AI. You think about some of the non-core software vendors that have come out with AI use cases for insurance. And I think we've all seen headlines of those in the last number of quarters. Maybe just talk about what your philosophy is in terms of competing versus partnering or allowing access to some of these third-party AI use cases? And just more broadly, your sort of view and stance towards competitors from an AI perspective? Mike Rosenbaum: Yeah. I appreciate the question. And for those of you who are closely following us, this was one of the key messages that we attempted to articulate very clearly at the Connections user conference. The most important thing for you to understand about Guidewire as an investor or as a customer or as a partner is that our job, our mission is to be the core system of record for the P&C insurance industry worldwide. And we need to be an open platform. We need to invite these InsurTechs to build against our system of record if that is something that they want to do. We want our customers to feel confident that a decision to move to Guidewire does not curtail them, does not constrain them at all. Now, obviously, we are going to build first-party generative AI capabilities and features and products on top of our platform. And we'll offer those to our customers. But this is a space that is moving and evolving so quickly that it just doesn't make strategic sense for us to not take an open approach. And so what you're going to see from us is this kind of philosophy that the most important thing is to win the core. The most important thing is to invite the innovation in and around our core, continue to create a strong ecosystem, and use everything in our power to deliver as a first-party generative AI-powered features and capabilities that bring our customers more value based on their investment in Guidewire. That's going to come from us, and it's also going to come from the ecosystem. And so I tend not to think of these companies or these headlines really as competition to Guidewire as much as an opportunity for us to really lift all boats in the industry. There is so much potential for generative AI in this industry that it's not going to be a winner-takes-all kind of situation with respect to GenAI and automating workflows and making the insurance industry more efficient. There are going to be many companies and many people and many organizations that benefit from that effort over time, and our goal is to foster that innovation in the industry, not compete with it. Adam Hotchkiss: That's really helpful. Thanks, Mike. And then I wanted to talk about just at your existing customers, propensity or increasing propensity to actually move more quickly across lines of business. I think we talk a lot about the three suites and the increase in full suite adoption a lot, but maybe the part that gets missed is the willingness and the rapidity in which customers are willing to move more wall-to-wall across policy types. So Mike, maybe just talk a little bit about how that's evolving, particularly post you put up with Liberty Mutual, that would be helpful. Thanks. Mike Rosenbaum: Sure. The way that that discussion or decision happens in our customer base is really all about business priorities. Something is driving the effort to modernize the core system. There's a business objective that is driving the decision to be on a more agile, modern platform. And so, especially when we have already established a successful implementation and a successful foothold, it becomes logical that that customer will eventually move the other lines of business that are not yet on Guidewire to Guidewire. What we try to do is align ourselves to the business objective that they have for that line of business, whether or not it's expanding to another, let's say, state very often in some of our US-based insurance companies, or whether or not it's modernizing pricing, modernizing packaging, adding new distribution channels. It's those kinds of business priorities that align to the necessity to have a modern platform, and that's what creates the deal cycle that we can go attack or fulfill almost based on the successful track record that we've already established. And this is kind of why I stress with everybody why you hear me talk about it in the remarks every quarter. It's like, the most important thing for us is every single one of our customer projects is successful. And if we can make sure that we're successful, that there is an attitude that the next program that they decide to do, logically, they would do it on Guidewire because we're the ones that they can trust, and the program's going to succeed. So, hopefully, that gives you a sense of how it's like a business-driven expansion to the other lines of business. Alex Hughes: Great. Thanks, Adam. Our next question goes to Parker Lane. Please, Stifel. Parker Lane: Guys. Thanks for taking the question. Mike, just wanted to double down on generative AI here. How often are you hearing in your conversations with insurers that this is a primary catalyst for their desire to move to the cloud or adopt cloud solutions outright? And do you think it's accelerating the timeline for those that would have been looking maybe five years in the future? Are they now starting to sort of compress that timeline in anticipation of their peers adopting some of these generative AI tools? Mike Rosenbaum: I do think it's a driver, and I do think it's a factor. And I do think it's helping us, especially around the migration discussion. I think it's becoming more and more clear that being on a cloud platform, being on Guidewire Cloud is going to put these companies in a better position. I wouldn't say it's necessarily the primary driver. In that, there's a lot of experimentation going on. There's a lot of activity going on in the customer base. And because the core programs, the core projects often take so long, it's more like the long-term view is we're going to be better on Guidewire, but often there's other activity around generative AI that's happening independent of Guidewire just because there's a necessity for really every company in the world to be learning how to use these tools and seeing what's out there and how they might impact them. So definitely, it's a positive. Definitely, it's driving that conversation and increasing the velocity of the migration and modernization. I just wouldn't necessarily say it's like maybe not the primary driver. It's more like a long-term positive influence. Parker Lane: Makes sense. And, Jeff, one for you. Just on the pipeline that you see here over the remaining three quarters of the year, anything to call out about the North American versus international split? I think you mentioned five North American deals and three international this quarter. Expecting a pretty even split, skewing in either direction, anything there would be good. Jeff Cooper: Yeah. I think that in general, we're pretty pleased with the breadth of the demand. So seeing healthy demand in Europe, we made some investments, and we're optimistic about the demand in the pipeline in Asia Pac. North America continues to do really well. So nothing specific to highlight right now, and we feel confident that the pipeline is pretty broad-based and global. Parker Lane: Great. Thanks for taking the questions. Alex Hughes: Thanks, Parker. Our next question comes from Rishi Jaluria's team at RBC. Max: Hey, guys. This is Max on for Rishi. Thanks for taking the question. As we think about the generative AI and the agentic AI features that are being embedded within the PricingCenter and the UnderwritingCenter, maybe could you just remind us how those features are currently being monetized and how that could change or evolve over time? And then just a follow-up to that, as usage and adoption of these new features scales, could that potentially have an impact on gross margins over time? And maybe what does that look like? Mike Rosenbaum: The baseline approach we have for pricing almost everything at Guidewire is based on a percentage of direct written premium, and we try very much to build, define, and articulate the value proposition of a Guidewire product to an insurance customer as a ratio to their direct written premium. And we feel very, very we've been very successful establishing that baseline with ClaimCenter, PolicyCenter, and BillingCenter. And our expectation is that that will also work for PricingCenter, UnderwritingCenter, and other products that we sell at Guidewire. I think this is a key characteristic of our approach and partnership with our customers that the cost of these products generally scales at often improving economies as the customer grows. But it scales with their growth. And so our incentives are aligned. And the generative AI, think of generative AI as being key capabilities or features that are embedded within those new centers. Such that they're not really specifically priced. We'll obviously have to create constraints because in some circumstances, these things can be expensive to support at scale. But in general, we feel comfortable that the DWP-based pricing models that we have for our other products will apply to these generative AI-based products. And, certainly, your comment about the potential impact on gross margin is something we think about and factor into the structures that we create for not just the new GenAI products, but also the core cloud platform itself. We have constraints established that protect us from those kinds of impacts. I would say, though, on the generative AI component of this, the improved efficiencies of these models sort of quarter over quarter and year over year are astounding. So the circumstances that exist today in terms of how much these things cost to run, I have every expectation that they will improve over time. Just as they have over the past couple of years, and that's kind of how we're thinking about designing for the use and embedding of these features within our products. Max: Very helpful. Thanks for the question. Mike Rosenbaum: Thank you very much, Max. Alex Hughes: Thanks, Max. Next question comes from Aaron Kimson of Citizens Bank. Aaron Kimson: Great. Thanks, guys. Jeff, I want to try and dig into the growth algorithm a little. If I understand correctly, John commented at the analyst day that last fiscal year expansions with existing customers drove more net new revenue than migrations. You have the nice slide on the analyst day deck that outlines cloud migrations, modernizations, new products, marketplace, and potential M&A as growth drivers. When we think about the 17% to 18% ARR CAGR through FY '28, can you help us ballpark what each of the organic components could contribute and look like that for migrations as a percentage of growth over time? Jeff Cooper: So there's a lot in that question. Right? Look, I mean, the way I generally think about this and the way we look at this is that there's a variety of different levers that we have at our disposal as we think about achieving the growth algorithm that you just talked about. Obviously, migrations and it's hard to it's even really hard to decouple migrations from expansions because migrations often come along with expansions into new areas and new modules. And so migrations right now are certainly contributing in a very healthy fashion. We have a long runway still to go in terms of migrating our install base to our cloud products, and we're doing a great job of executing against that. As we migrate, we've also seen a very healthy expansion. Mike commented on this, but just that impulse to commit more rather than less in this environment has been very healthy. So if you're a ClaimCenter on-prem customer thinking about migrating to the cloud, adopting PolicyCenter at the point of migration is a trend that we've seen a bit more of. There's still a lot of white space out there in terms of legacy systems, and the team does a good job just doing the blocking and tackling of winning new customers. And there are a number of new customers that we expect to add this year, and I expect that to continue in a healthy pattern. And then some of these new product areas, that will take a little bit of time to incubate but very excited about the potential that exists there. So I'm not going to get into the exact percentages we're expecting from each of those component areas, but I think the takeaway is that it's pretty broad-based when we think about the algorithm that will drive that growth. And there's a variety of different growth levers that we can pull. Aaron Kimson: Yeah. That was an ambitious question. I appreciate that. And then on the new products, I guess, specifically UnderwritingCenter, can you talk a little bit about UnderwritingCenter for personal versus commercial and how you think about that? Are they essentially two separate sub-modules from a developer perspective? And does it make sense to invest more heavily in one than the other first? Mike Rosenbaum: Yeah. The same underlying framework, different use cases. And I think you almost could consider personal. Each line of business in commercial will have slightly different requirements and a slightly different approach. And personal versus commercial is one way to segment it, but there's going to be a lot of nuance to how this actually gets built and rolled out and which lines of business it'll be most useful for at the beginning and versus over time. We're certainly approaching it like we do everything at Guidewire from a platform-first perspective, and so try to share as much componentry across all of those use cases as possible. And then, with advanced product designer, we can model the product for that specific line of business, personal or commercial or whichever commercial line of business we're talking about. And then with respect to the tweaking and training of the prompts and the approach we take to the models and the text of documents we have to ingest in order to feed into the business workflows, each of those will be tweaked by line of business. Our choice of where to invest in the sequencing of the investment is a lot a little bit to do with what things we need to focus on in order to, like, think stress test the whole system, but also which customers we've had the opportunity to work with in order to really test this out in conjunction with a real use case. So that's how we're currently thinking about it. But the objective overall is for there to be one underwriting platform that's going to work across lines of business. And the complex commercial lines as well as all the commercial lines business. Super question. Thank you. Alex Hughes: Thanks, Aaron. Well, that's our last question. So I'll turn it over to you, Mike. Final comment? Mike Rosenbaum: No, just thanks, everybody, for joining. I'd just reiterate, we couldn't be happier with the start to the fiscal year and the momentum that we're seeing with cloud. Very significant amount of runway left in the core business for the company and positive visibility into the pipeline, and we're excited to increase our focus quarter over quarter on these new products. And excited to share more about that progress with you in future quarters and conversations throughout the rest of the year. So thanks again, everybody, for joining.
Operator: Good afternoon. Thank you for attending today's Snowflake Inc. Q3 Fiscal Year 2026 Earnings Call. My name is Jayla, and I'll be your moderator for today. All lines will be muted in the presentation portion of the call with an opportunity for questions. At this time, I'd like to pass the conference over to our host, Catherine McCrekin. Please proceed. Catherine McCrekin: Good afternoon, and thank you for joining us on Snowflake Inc.'s Q3 Fiscal 2026 Earnings Call. Joining me on the call today are Sridhar Ramaswamy, our Chief Executive Officer, and Brian Robbins, our Chief Financial Officer. During today's call, we will review our financial results for the third quarter fiscal 2026 and discuss our guidance for the fourth quarter and full year fiscal 2026. During today's call, we will make forward-looking statements, including statements related to our business operations and financial performance. These statements are subject to risks and uncertainties, which could cause them to differ materially from our actual results. Information concerning these risks and uncertainties is available in our earnings press release, our most recent Forms 10-K and 10-Q, and our other SEC reports. All our statements are made as of today based on information currently available to us. Except as required by law, we assume no obligation to update any such statements. During today's call, we will also discuss certain non-GAAP financial measures. See our investor presentation for a reconciliation of GAAP to non-GAAP measures and business metric definitions, including adoption. The earnings press release and investor presentation are available on our website at investors.snowflake.com. A replay of today's call will also be posted on the website. With that, I would now like to turn the call over to Sridhar. Sridhar Ramaswamy: Thanks, Catherine. And hi, everyone. Thank you all for joining us today. As every company transforms to embrace the AI era, Snowflake Inc. remains at the center of today's AI revolution. We have delivered yet another strong quarter thanks to the hard work and dedication across our team, to help our customers realize value throughout their end-to-end data life cycle, and effectively harness AI's potential every step of the way. Our continued focus on operational rigor and close-knit product and go-to-market execution has helped us maintain strength across our core business and innovate rapidly to bring new capabilities to market. We are executing with urgency and focus and maintaining deep partnerships with our customers that enable us to capture the opportunity in front of us and sustain durable momentum. Product revenue in Q3 was $1,160,000,000, up 29% year over year. Remaining performance obligations totaled $7,880,000,000 with year-over-year growth accelerating to 37%. Our net revenue retention remained stable at a very healthy 125%, and we added a record 615 new customers this quarter. As we continue to deliver strong revenue growth and healthy results, we are increasing our growth expectations for the year and reiterating our margin target. As I've shared, Snowflake Inc. is on a mission to empower every enterprise to achieve its full potential through data and AI. And we are making incredible progress against that mission every day. We continue to double down on what makes Snowflake Inc. unique, delivering an AI data cloud that's truly enterprise-ready with a radical focus on our customers. Snowflake Inc. is intuitive and easy to use, seamlessly connected for collaboration, and built with the security and governance that enterprises trust as their foundation. That's why customers like Coca-Cola Consolidated, PayPal, and thousands more are transforming their businesses with Snowflake Inc. And it's why more organizations than ever are going all in on Snowflake Inc. as their foundational data and AI platform. Already, Snowflake Inc. is the cornerstone for our customers' AI strategy. In Q3, more than 7,300 accounts are using our AI capabilities every week. Just recently, Morgan Stanley named Snowflake Inc. its strategic partner of the year, recognizing how our AI data cloud is accelerating their transformation and driving AI innovation across one of the world's leading financial institutions. And with the general availability of Snowflake Intelligence, we are seeing the fastest ramp in product adoption in our company history. Already, 1,200 customers are harnessing next-generation agentic AI capabilities to drive real business impact at scale. Snowflake Intelligence is transforming how businesses interact with their data, turning natural language into real-time, actionable intelligence. For example, CS Imagine, a global SaaS platform for financial services, uses Snowflake Intelligence to build an AI agent that now handles tasks equal to eight and a half full-time employees. The agent helps users manage and query data, make faster trading and risk management decisions, and automate customer case resolution, increasing transparency across teams and with clients. And Fanatics, the global leader in sports merchandise and e-commerce, uses Snowflake Intelligence to connect billions of fan data points across shopping, collectibles, and gaming platforms for more than 100,000,000 fans worldwide. This unified data foundation helps Fanatics better understand its customers, boost sales, and grow its advertising business, powering the launch of the new Fanatics advertising audience network this year. This momentum has enabled us to achieve a major milestone: $100,000,000 in AI revenue run rate, achieved one quarter earlier than anticipated thanks to our pace of innovation, cross-functional collaboration, and early adoption among many of our marquee customers. Because we operate as a consumption-based business, this number reflects real-world enterprise usage. It's a direct signal of how customers are using our AI capabilities in production to create value today. What's more, our AI capabilities are strengthening our customer relationships and the value we deliver across every stage of the data life cycle. AI is a key driver of the strength that we see in our core business. In Q3, we landed a record number of new logos and continue to build strong momentum, with AI influencing 50% of the bookings signed this quarter. We also deepened relationships with existing customers, with 28% of all use cases deployed during the quarter incorporating AI. Being enterprise-ready is not just about innovation; it's also about reliability. When a major cloud service provider experienced an outage this quarter, our disaster recovery capability seamlessly transferred more than 300 mission-critical workloads to backup systems, ensuring business continuity for our customers when it mattered the most. Our commitment to making business-critical capabilities just work continues to resonate with our customers. And so we built on this strength by expanding not only our product capabilities but our ecosystem. This quarter alone, we announced new partnerships with Workday, Splunk, Palantir, UiPath, and more to deepen integration, enable secure and seamless data access to the systems our customers use every day, and unblock new innovations like agent-to-agent collaboration. More recently, we announced a landmark partnership with SAP to unite mission-critical business data with the Snowflake AI Data Cloud. We are already supporting customers like AstraZeneca to access and analyze real-time data. These partnerships amplify our ability to deliver value to joint customers and extend our go-to-market reach. Our progress is clearly resonating with our global community. During Snowflake Inc.'s annual world tour, over 40,000 customers, partners, and prospects joined us across 23 events, a record-breaking turnout representing a more than 40% year-on-year increase in participation from last year. More recently, our annual build developer summit saw a 43% increase in attendance year over year, underscoring the growing excitement and engagement across our global audience. Behind this incredible momentum is our relentless focus and continued delivery against our product strategy. Throughout the quarter, Snowflake Inc. maintained a rapid pace of innovation, bringing our total GA product capabilities to 370 year to date, a 35% increase over last year, with AI being front and center. As I shared, Snowflake Intelligence continues to set the tone for enterprise-grade agentic AI. Just recently, we announced that Snowflake Inc. is the official data cloud provider for USA Bobsled Skeleton, powering their journey to the upcoming Olympic games. The team is using Snowflake Intelligence to unify and analyze data across its performance ecosystem to optimize push performance and equip coaches with data-driven insights to create a competitive edge on the ice for a medal-worthy performance. At the core of our AI philosophy is customer choice and flexibility, empowering organizations to leverage the world's leading models securely on their own enterprise data. As you may have seen a few weeks ago, we announced a partnership with 12,600 plus customers within Cortex AI and Snow Intelligence, further enhancing access and customer choice. To drive even more tailored innovation, we introduced Cortex AI for financial services, a comprehensive suite of AI capabilities and partnerships that empower financial services companies to unify their financial data ecosystem, deploy AI models, applications, and agents securely, and meet the rigorous security and compliance standards for regulated industries. Even as we supercharge the data life cycle with AI, we remain committed to strengthening our core data foundation to ensure that Snowflake Inc. will continue to deliver the trusted, performant, and scalable data platform our customers rely on every day. Key capabilities like Snowflake OpenFlow are making it easier than ever to bring in structured, unstructured, batch, or streaming data into Snowflake Inc. Take EVgo, which is using OpenFlow to simplify and speed up how it ingests data across its EV charging network. By consolidating multiple data pipelines into Snowflake Inc., EVgo has reduced latency, improved reliability, and gained a more complete view of its customers and charging stations. And we are continuing to extend our value through strategic acquisitions. We recently acquired the technology behind Datometry's software migration solution, which will enable our customers to move from legacy data warehouses to Snowflake Inc. at lower cost and with minimal disruption, further simplifying their journey to our AI data cloud. We've also agreed to acquire SelectStar to enhance our Horizon catalog and deliver a more complete view of an enterprise's data estate. We believe this richer context will empower agentic AI experiences like Snowflake Intelligence to better understand enterprise data and uncover deeper insights. As we scale the breadth and depth of our product capabilities, we continue to maintain tight integration across sales, marketing, product, and engineering to effectively launch and scale new offerings and deepen our customer relationships. This alignment is driving tangible results. Q3 marked a strong bookings quarter, underscored by accelerating RPO growth and healthy customer retention. At the same time, we're investing in and strengthening our strategic go-to-market partnerships. In addition to those I've already mentioned, today, we've announced an expanded partnership with Anthropic. This brings native model availability into Snowflake Inc. and also introduces a new joint go-to-market motion designed to accelerate enterprise AI adoption. We also continue to build our strong relationships with major cloud providers. In fact, Snowflake Inc. has already surpassed $2,000,000,000 in sales through AWS Marketplace in a single calendar year and was just recognized with 14 AWS partner award wins, more than any other ISV provider. This underscores the extraordinary demand for Snowflake Inc.'s AI data cloud. Momentum is also accelerating with our global systems integrators. Accenture just launched a Snowflake business group, committing to train over 5,000 professionals on Snowflake solutions to help joint customers realize AI value faster. Already, Accenture and Snowflake Inc. are helping customers like Caterpillar unlock the full value of their operational data. This collaboration is improving quality in manufacturing, providing timely insights for finance, and helping teams share knowledge and solve complex challenges faster. As you can see, it's been a milestone quarter for Snowflake Inc., defined by exceptional advances in product innovation and incredible customer momentum. As we deepen our strategic partnerships with the world's leading cloud service providers, AI model developers, SaaS providers, and global system integrators, they're unlocking new levels of performance, accessibility, and AI-driven insight for our customers while expanding the value and impact of the Snowflake Inc. platform across industries. I'm incredibly proud of our team for the efficiency and discipline they continue to demonstrate across the business. Our operational rhythm remains strong, and as we invest strategically for long-term growth, we are building the foundation for sustained scale and high durable growth. To help lead us through this next phase, I'm pleased to introduce Brian Robbins as our new Chief Financial Officer. Brian brings extensive experience as a CFO across high-growth software companies and a deep understanding of scaling financial operations with discipline. Brian, why don't you take us through some of the financial details? Brian Robbins: Thank you, Sridhar. A truly exciting time for me to be at Snowflake Inc. In Q3, we delivered strong results across revenue, bookings, and margins. Our product revenue grew 29% year over year, fueled by durable growth in our core business and continued expansion into data engineering and AI workloads. Together, these factors contributed to a stable net retention rate of 125%. Financial services and technology verticals led growth in Q3. We continue to see significant opportunity to expand within our existing customer base. Our global 2,000 customers now total 776, with each of these accounts spending on average $2,300,000 on a trailing twelve-month basis. Many of these customers are still in the early stages of their Snowflake Inc. journey, with ample room for further growth. Q3 was an excellent quarter for go-to-market execution. We achieved strong booking results, signing four nine-figure deals. This represents a record number of large deals signed in a single quarter. Our focus on new customer acquisition continues to show yield. As Sridhar mentioned, it was a record quarter for new customer wins, adding over 600 new customers. Our ability to expand with existing customers and bring new ones onto the platform underscores the strength of our business model. Equally important, we continue to operate with financial discipline, delivering healthy margins as we scale. Q3 non-GAAP product gross margin was 75.9%. Non-GAAP operating margin expanded more than 450 basis points year over year to 11%, reflecting our continued focus on driving greater efficiency across the entire company. As a reminder, we intentionally front-loaded our 11%. In Q3, we used $233,000,000 to repurchase 1,000,000 shares at a weighted average price per share of $223.35. We still have $1,300,000,000 remaining on our original authorization for $4,500,000,000 through March 2027. We ended the quarter with $4,400,000,000 in cash, cash equivalents, short-term and long-term investments. Moving now to our outlook. For Q4, we expect product revenue between $1,195,000,000 and $1,200,000,000, representing a 27% year-over-year growth. We expect a non-GAAP operating margin of 7%. We are raising our FY 2026 product revenue guidance. We now expect product revenue of approximately $4,446,000,000, representing 28% year-over-year growth. We are reiterating our FY '26 margin targets. We expect a non-GAAP product gross margin of 75%, a non-GAAP operating margin of 9%, and a non-GAAP adjusted free cash flow margin of 25%. Before moving to Q&A, I'd like to share my perspective on my first sixty days here at Snowflake Inc. Three key takeaways have truly stood out. First and foremost, I've been incredibly impressed by the caliber and energy of the Snowflake Inc. team. There's a sense of winning energy in every meeting and profound pride in their daily work. Specifically, the depth of the bench within our finance organization is exceptionally strong and ready to support our next phase of growth. Second, I prioritized spending my initial weeks meeting with customers. The customers I spoke with were fanatical about Snowflake Inc. and the transformational impact our platform has had on their business. They place the AI data cloud at the absolute center of their strategic initiatives, underscoring our essential role in their future. Finally, the velocity of our product releases and innovation engine is world-class and consistently sets us apart. Snowflake Inc. sits at the intersection of a massive market opportunity, and I could not be more excited to be part of scaling this phenomenal team and seizing the amazing growth ahead. As we look forward, my focus is on continuing to deliver efficient growth. I believe that continued alignment across our finance, go-to-market, and product teams will enable us to balance growth with disciplined execution. With that, I'll now pass the call to the operator for Q&A. Operator: At this time, if you would like to ask a question, it is star followed by one on your telephone keypad. If for any reason you would like to remove that question, it is star followed by two. Again, to ask a question, it is star one. As a reminder, if you're using a speakerphone, please remember to pick up your headset before asking a question. All questions are limited to just one question each. Our first question comes from Sanjit Singh with the company Morgan Stanley. Sanjit, your line is now open. Sanjit Singh: Yeah. Thank you for taking the questions. I had one for Brian and one for Sridhar. Brian, first for you, when we look at the growth rates on product revenue this quarter, really attractive at 29%, it was, you know, just about a 3% beat, slightly below a 3% beat versus the midpoint of guidance. At the same time, when I look at your Q4 guide, it's probably the best sequential guide I've seen from the company in a couple of years. So I was wondering if you could help us square that. Then for Sridhar, like, really impressive in terms of getting to that $100,000,000 AI revenue run rate. You mentioned on the press release that Snowflake Intelligence is one of the fastest adopting products. So I wonder if you could give us a color on the types of customers that are taking on your AI products, some of the use cases that Snowflake Intelligence is unlocking. Also, if you could comment on kind of Cortex AI adoption. Thanks for the time. Brian Robbins: Thanks, Sanjit. I'll answer the first part of the question on financials. We're happy with the performance this quarter. We delivered 29% year-over-year revenue growth. The quarter pretty much played out as expected. There was really only one surprise in the quarter, and that was the hyperscaler outage, which impacted our revenue by approximately $1,000,000 to $2,000,000 within the quarter. I think it's really important with the consumption model not to view quarterly beats as the best signal of the fundamentals within the business. The quarter, as you mentioned, we raised our fiscal year guidance by $51,000,000 to $4,446,000,000, and the FY guide is really the most meaningful signal. And I think the guide really reflects the underlying behavior that we see in our customer base going into the fourth quarter. Sridhar, over to you. Sridhar Ramaswamy: Yeah. Snowflake Intelligence amplifies the investments that our customers have made in putting high-quality data into Snowflake Inc. To take our own example, we created a data agent on all of the sales information that matters for my sales team. Whether it is consumption information, or the Workday hierarchy itself of who is managing whom, information about customers, their use cases, and it's been a magical unlock for several thousand people. Because things that they needed to painfully find dashboards for, they can have answered immediately. Plus, you also get the benefit that unlike a dashboard, which is a 2D representation of a pretty complex space, you can ask questions that cut across any dimension, analyze data in ways that previously were simply not possible before. And so we have a slew of customers, whether it is the USA Bobsled team, or Fanatics, or folks like ServiceNow or CS Imagine, that are using this to create data agents specialized for some areas. So anyone that is working in a particular function, for example, has all of the data that is relevant to them available from a single interface and right on their phone or, you know, or laptop computer. It is that unlock of access to this data that is driving adoption. What I can tell you is, like, whenever I have dinners with CIOs or with CEOs, we are talking about them, often they turn out to be customers. And they end up showing off Snowflake Intelligence on my phone. Usually, to show them information that we have about their company. Like how much they're spending, what use cases they have deployed, the first thing that comes from them is they want this for their own business. That's the attraction of Snowflake Intelligence, which is it puts all of the data that matters to you right at your fingertips. And unlike before, this data is not confined to analysts. This is to every single business user within a company, and that's the big unlock for us. Appreciate the thoughts, Sridhar. Thanks. Operator: The next question comes from Kirk Materne with the company Evercore ISI. Kirk, your line is now open. Kirk Materne: Yeah. Thanks very much, and thanks for taking the question, guys. Sridhar, I was wondering if you could just talk about the go-to-market. You guys mentioned you had a real nice quarter, and I was particularly interested in the 600 new customer wins. And I realize you all land small and then grow with your customers. But with AI coming on and Snowflake Intelligence, are you landing with more products now? Meaning, is it still landing with the core data warehouse and then expanding, or are you all able to land with multiple products at once and then grow from there? I'm just kinda curious whether your surface area is growing within some of these new customers. Very much. Sridhar Ramaswamy: Hey, Kirk. Thanks for the question. Well, I think things like Snowflake Intelligence now play a key role in making the power of data come alive every single time you're pitching a new logo. One of the magic of recent advances in AI is our ability to do demos or POCs, proof of concept, that are hyper-customized for each customer. Often, we'll generate a synthetic dataset that, say, will mimic an oil producer or a pharmaceutical company and show them the art of the possible. Previously, when people, you know, got onto Snowflake Inc., it was for an abstract need. It was to make data more efficiently accessible so that it could do more analytics. Now we do the work to show them what is possible with a product like Snowflake Intelligence on top of their data. It just makes the value of the transition from previous systems onto Snowflake Inc. even more clear. And those are some of the stats that we've been sharing with you, which is AI having a helping hand. It's not the dominant thing, but definitely having a helping hand in more than in close to 50% of the new logos that we acquire. I would say it definitely opens up our aperture. On the other hand, I would add that, you know, products that are lower down the stack, products like OpenFlow, are taking off because they actually help make the other side of the data life cycle more efficient. I've used OpenFlow. It's pretty magical to be able to sync data, whether it's from an Oracle OLTP system or from Google Drive onto Snowflake Inc. I think shrewd investments like that are also helping us substantially in just what people do with us. Previously, we used to be just the analytics provider. But we can be there from soup to nuts with products starting with OpenFlow, but then things like Snowpark. Obviously, our analytics engine, then ML, and then AI. It's where this breadth of offering and the complete data offering will end up playing a larger and larger role. Operator: Our next question comes from Brent Thill with the company Jefferies. Brent, your line is now open. Brent Thill: Thanks. Sridhar, good to hear the news on AI bookings influenced. I guess, many are now turning to the go-lives. And when do you expect this batch of go-lives to go up that then, you know, helps re-influence even more excitement on the platform? How do you think about the trajectory, and does that have a bigger ramification back half to '26 then as those deals go live? Sridhar Ramaswamy: Well, you're seeing it live. Right? We gave guidance for Q4. It's a pretty hefty beat and raise. And that is driven by what we see in consumption trends. As you know, we tend to be pretty disciplined about how we forecast and guide. These are based on machine learning models, unsurprisingly, that predict the future. And we are disciplined in following that. On the other hand, we track the other side, which is how many use cases are we winning, what is the time duration from a win to a technical implementation or to a go-live. And accelerating go-live will continue to be a priority, and we're using AI pretty heavily in making some of these use cases go live a whole lot faster as well. And all of these feed into the forecast and guides and the general optimism that we convey to you. Brent Thill: Right. And if I can just for Brian, on the topic, the $200,000,000 partnership, great to see. Is that in backlog, or what goes into backlog from that relationship? Brian Robbins: The $200,000,000 is a buy-side that we're buying from Anthropic. And in some ways, the next question, obviously. Our confidence in being in AI drives more and more of our revenue. It is a commitment. But as you see the front side of things like the AI consumption revenue ARR that we announced, the $100,000,000 ARR, that's what gives us confidence that partnerships with Anthropic, which include Avaya, but also a broader go-to-market motion, will continue to accelerate the overall business. Operator: The next question comes from Brad Zelnick with the company Deutsche Bank. Brad, your line is now open. Brad Zelnick: Hey, guys. This is Dan on for Brad. Just wanted to ask maybe, Sridhar, to start. Just if you can kinda help frame the impact that migrations had to product revenue this quarter versus last quarter. I know there were some kind of unique circumstances last quarter where some positive things came together to drive a pretty strong result. But just in general, you know, I think across all of the cloud names, we've seen pretty strong momentum this year. And just as you look at kind of the visibility and pacing here that you have into that, maybe just the sustainability of what you're seeing on that side. And then maybe one for Brian just on operating margins. I think 4Q operating margin was guided maybe a couple of points below where you guided 3Q. And maybe a little down from what was implied in the guide last quarter. Anything just to unpack on op margins into Q4 for us to think about as we build our model? Thanks. Sridhar Ramaswamy: I'll start. We're super early with migrations. I think you folks heard Matt Garman say today that he thinks maybe, like, they are 15 to 20% of the way through kind of on-prem legacy migration. And that's positive news for Snowflake Inc. And I see AI. I see products like Snowflake Intelligence exert both a powerful tool because the data that's in Snowflake Inc. just became more valuable because it can be used to drive business a whole lot more effectively. But I also see AI play a big role in pushing migrations forward. In other words, making the act of migrating from legacy systems go faster. And this is where tuck-in acquisitions, the acquisition of the telemetry, which makes products that make migrations go faster, easier, are also helpful. We keep a close watch on migration through the entirety of the use case life cycle, and it is something that we are continuously looking to accelerate, bring better techniques. It's an area that I've been personally involved with throughout the year. And we continue to make very solid progress. Brian Robbins: Yeah. Just real quickly on the 4Q guidance. All I would say is that 4Q is a little tricky in the sense that we give the 4Q guidance and the annual guidance at the same time. And so don't read too much into that. There's nothing intended by meant to read into that. Operator: The next question comes from Raimo Lenschow with the company Barclays. Raimo, your line is now open. Raimo Lenschow: Thank you. One question, stick to that one question. Sridhar, zero copy comes up a lot in the conversation. Yeah. And, like, every vendor is now talking about, like, oh, we're doing zero copy. That helps to kind of has us play better with everyone else in the ecosystem, etcetera. Do you think that will impact you? And is it kind of does it drive more adoption? Does it impact how much you can monetize? Can you speak to that, please? Thank you. Sridhar Ramaswamy: Yeah. Zero copy generally comes up in the context of SaaS vendors who are under a lot of pressure from their customers to share data. Many of them are busy creating data products on top of the data as a way to monetize, and zero copy or sometimes bidirectional data sharing agreements come up in that context as a faster, more efficient way for people to share data with each other. We see these as a win-win. We have these agreements with, see, ServiceNow, Salesforce, SAP with the recent partnership, as well as Workday. These products continue to drive our broader mission to be at the center of all of the data needs that our customers have, and they just make the process of data collaboration between the SaaS vendors and Snowflake Inc. just a whole lot easier. And we are very happy with these agreements. And what this means is that Snowflake Inc. will continue to be the place for our customers to get, like, that single pane of glass sort of view on everything that matters to them. And, obviously, with agentic AI and agentic systems now, the value that you can get from the data is tremendous. I can tell you from personal experience that, you know, I'm not thinking when I'm looking at my sales data agent about whether this data comes from Workday or from Salesforce or from our own systems. I can focus on the logic of what needs to get done. And the rest of the stuff works as though it is magic. And so zero copy agreements just make data flow more smoothly, and I think are a big step forward for everybody involved, Snowflake Inc., but most importantly, our customers. Raimo Lenschow: Okay. Perfect. Thank you. Very clear. Operator: The next question comes from Mark Murphy with the company JPMorgan. Mark, your line is now open. Mark Murphy: Hey. This is Arty on for Mark Murphy. Congrats on the strong quarter and continued momentum. I know you've touched on this thing throughout the call here, but we spoke to a Fortune 150 customer recently, and they described Snowflake Inc. as the most important piece of their AI and data strategy. And explicitly stated that Snowflake Inc.'s budget is now tied to their AI budget. And they're kind of broadening their adoption of products on the Snowflake Inc. platform. So my question is, are you kind of seeing that sort of, you know, tying explicitly from customers of their Snowflake Inc. investments to the AI investment? And if so, how is this influencing the buying habits? Are they entering into larger or longer-term contracts? Are they adopting more products or just any new customer patterns you're seeing emerge? Thanks. Sridhar Ramaswamy: The strongest pattern that we have had to work hard and earn this year is to be that genuine player when it comes to enterprise AI. And no amount of talking can make you that. You need products that produce the magic. And so building on earlier products like Cortex Analyst as well as Cortex Search, Snowflake Intelligence, the agentic platform that can use these different sub-products flexibly, is the big unlock for us. And what you're also seeing is a number of our number of these customers have tried to string together agentic systems by, let's say, creating NCP servers on tables, sticking them into a foundation model, and then they realize that solutions like that don't actually work all that effectively. Part of what we provide are systems that can help them thoughtfully structure the data that then needs to be exposed to an AI agent and a careful amount of tuning that makes sure that these systems are fail-safe, that they're reliable and can actually answer the questions they're supposed to. We also work with our customers on things like unheralded, but really important things like eval, where they can judge ongoing performance that they know that they're actually making their systems better. It's a combination of all of this expertise. Yes. The partnership with the big foundation model providers to bring the best models as part of combined with our unrivaled expertise in data and modeling to help them create AI products that deliver value. And if you combine that with products like Snowflake Intelligence that now, like, are clearly valuable and useful for every business user, I think that's the narrative shift that you're seeing in a number of these companies. And the agent AI is still evolving. We have a lot more to do. That's part of the reason why I keep repeating being in the center of enterprise AI. Because we are already the holders of the most valuable data that many of these enterprises have, and then we are bringing the power of AI to get even more value from this data. Mark Murphy: Thanks so much. Very insightful. And narrative shift, I think, a great way to describe it. Operator: Our next question comes from Kash Rangan with the company Goldman Sachs. Kash, your line is now open. Kash Rangan: Hey. This is Matt Martino on for Kash. Sridhar, I wanna stick with the AI topic here. The number of customers leveraging Snowflake Inc. AI is accelerating very, very quickly within the installed base, and you were able to pull forward that $100,000,000 in AI revenue. Very few of your peers have been able to do. You know, from your perspective, what about the Snowflake Inc. platform is allowing customers to really accelerate their AI journeys? And, you know, maybe secondarily, do you see the market increasingly standardizing around a smaller subset of platforms to handle all their data requirements, given your commentary about Snowflake Inc. really sitting at the center of the AI opportunity? Thanks a lot. Sridhar Ramaswamy: Yeah. I think to take on your second question first, I think there is a lot of complexity in the data space. I know of the number of different tools that Snowflake Inc., the company itself, has had to use to have an effective data strategy. And with things like Snowflake Intelligence and Streamlit, which we are very heavy users of, we are just able to do more with Snowflake Inc. And, again, investments like OpenFlow or even Postgres are going to expand the aperture of what we are able to tackle as the data platform. Operator: Our next question comes from Alex Zukin with the company Wolfe Research. Alex, your line is now open. Alex Zukin: Yeah. Hey, thanks, guys, for taking the question. Maybe for either of you, Brian or Sridhar, clearly the momentum that you're describing is showing up in bookings. So I just maybe better understanding the confidence and conviction around and maybe the direction of travel for the expansion rate as we continue to see some of these go-lives and an explanation of how the consumption patterns, particularly as you start to see customers leverage the AI portfolio and the other and the multiproduct portfolio more broadly. And then, Brian, any timing elements? Last quarter, it seemed like there was a little bit more of a one-time bump or boost to product revenues from consumption from some very large deals in the quarter, but then this quarter, you also had four super large deals. So is there something where they maybe happened a little bit later last quarter, happened a little bit earlier that maybe drove that beat magnitude cadence to be a little lower? Sridhar Ramaswamy: I can start with the first one. You know, the virtuous cycle of a Snowflake Inc. customer is one in which they sign a deal. It has a certain amount of, you know, slack capacity that is built into it. That our teams then use to expand into use cases that can deliver value for customers. And to actually address a previous question that I had left unaddressed, that was the first part of the previous question, part of what drives broad adoption of AI with Snowflake Inc. is that we make it easy to do. It's not a brand new system. You don't have to resolve existing problems like governance and access control. And we have made it super easy to first build chatbots and then to build more complex agentic systems like Snowflake Intelligence, which is why some 1,200 customers are already using Snowflake Intelligence. And as we expand and deliver value, these then naturally result in more confidence, in more conviction on the part of the customer that they're getting value from Snowflake Inc. And remember, in all of this, they don't have to make any precommit towards AI. The value that they get is, like, you know, it has to be delivered by the products that they build on top of Snowflake Inc. This risk-free approach driven by our consumption model is what makes AI super attractive for our customers on top of Snowflake Inc. We make it easy to use, we don't require them to commit, and then they naturally the ones that are creating value. Then I'll just touch on the second part of your question, and I'll hand off to Brian. Large deals that we sign don't tend to have immediate impact on revenue within the quarter. If anything, as soon as the large deal is signed, they typically get a better discount. So it tends to be slightly negative with respect to revenue. But as I said, these are long-term cycles. Our customers on average sign deals with us once every two and a half to, you know, two and a half years-ish on average. It's not really directly tied to consumption within a quarter, and I would not read too much into timing constraints like that. Brian? Brian Robbins: Yeah. Absolutely, Sridhar. You know, I guess I would emphasize that product revenue is still the leading indicator of our business, and we saw that in really the migrations and increased use case wins. We're also happy with the, you know, the developments in AI and also the data engineering workloads. We look at the consumption patterns up until today to inform our view of Q4. The quarterly beats are less indicative, especially in a consumption model. I would really look at the FY guidance as the best indication of the long-term business trends for a consumption model. Our view of the business over the last ninety days has improved, and I think you can see that in our annual raise. This is also representing the $7,900,000,000 in RPO, 37% year-over-year growth, and all the new customer adds that we talked about in the prepared remarks. Operator: The next question comes from Patrick Colville with the company Scotiabank. Patrick, your line is now open. Patrick Colville: Thank you for having me on. Guess, Sridhar, Brian, one for both of you, please. You know, past the $100,000,000 consumption threshold, really impressive to see that. I guess, what do you see as the next milestone? And then could you just remind us what does that $100,000,000 actually include? Is that equivalent to the Cortex suite? Or are there other products that go into that $100,000,000 of consumption that you achieved this quarter? Thank you. Sridhar Ramaswamy: The $100,000,000 is primarily the product suite, but it's the whole stack. It is Cortex AI and AI SQL. It's accessible from SQL also as a REST API. And then the products that stack up on top of that, Cortex Search and Cortex Analyst, which are our unstructured and structured data products respectively. And then Snowflake Intelligence, which builds on these building blocks to provide an agentic solution for, you know, for data products. That's roughly the suite. In terms of the next milestone, I think much broader adoption of Snowflake Intelligence is certainly what we are driving. There is no reason for us to not have every single dataset that is in Snowflake Inc. be AI-ready. You're already seeing this play out in the collaboration space where instead of sharing a dataset, you can in fact share an agent on top of that dataset so that the recipient on the other side can straight out just start asking business questions off of this data without needing to build dashboards and so on. Obviously, in many situations, this data flows through programmatically and will be combined with other data. But my point is making all data in Snowflake Inc. AI consumable and making the act of making that AI consumable is something that we will be honestly spending a lot of time on. But the second and the third-order impact that I alluded to earlier, the pull-push analogy that I used, I think that's where the impact is going to be a lot more profound. I think migrating from legacy systems, bringing data into Snowflake Inc. using products like OpenFlow, or being able to write data engineering workloads using our coding agents, all of those are going to get accelerated. I think that's where you're going to see, like, tremendous value that our customers can realize. Tremendous potential for us as a business. Operator: The next question comes from Brad Reback with the company Stifel. Brad, your line is now open. Brad Reback: Sridhar, the results are very impressive. The booking is super great. The op margin, obviously, downticked on the first half sales and marketing. As we look forward into next year and beyond, how do you think about balancing the huge opportunity in front of you and the ability to drive margin expansion? Thanks. Sridhar Ramaswamy: Oh, I think we live in fortunate times where this is not an either-or. We clearly invested pretty heavily in our sales and marketing teams in the first two quarters because we saw tremendous opportunity. And what we are going through now is a maturation of the folks that are here, and we expect them to aid us substantially. But we are also invested equally heavily in how do we make sure that we upscale our own labor force, whether it is engineers or solution engineers. We've rolled out coding agents for the I talked earlier about how we wanna make it super easy for every single rep, every single solution engineer to be able to do custom demos, custom POCs, for our customers. Obviously, we have a big services team as well. Making them AI native is a big transformation. So the way we look at next year is, yes, we will continue to invest in the business, but I think there are also substantial gains to be had in just how efficient we are as a company. And I think of this as an either-or. We have had pretty healthy expansions in things like operating margin, but also things like SBC year over year, and we will continue to press hard on those things. Brian Robbins: Yeah. I'll just echo what Sridhar said. You know, we can do both. It's not one or the other. Obviously, it's a really big market, and we've delivered growth, and we'll continue to do innovations in our product, you know, to drive that revenue growth, but we'll do that responsibly. Operator: Our next question comes from Mike Cikos with the company Needham. Mike, your line is now open. Mike Cikos: Great. Thanks for taking the questions, guys, and, Brian, congratulations again on the new role of CFO over at Snowflake Inc. Forward to working together here. My question comes back to think there's been a couple of different attempts throughout this call at understanding frankly, the magnitude of the product revenue upside relative to the prior quarter. Where to be frank, last quarter was more significant, but I really I attributed it to I felt that you guys positioned it this last quarter really saw some very large customer migrations, which is outside your control. And so the question is when we think about the increased confidence you're talking about for the year, the traction for data engineering and AI, is it fair to think that 3Q here was just a strong execution quarter, but maybe a more normalized return to typical migration activity? And then secondarily, just while we have everyone on the phone here, Brian, we'd love to get your thoughts on whether the guidance philosophy has changed at all at the margin. And thanks again from my side, and we appreciate the questions. Sridhar Ramaswamy: Yeah. Let's start with the first one. We've consistently told all of you that we view a 3% beat as a very good beat. And anytime we do much better than that, we go back. Obviously, the ML models recalibrate. And we calibrate ourselves back to the 3% beat. So and there is also natural variability in a consumption business. Because this is literally the agglomeration of 12,000 plus enterprises deciding what they want to do with their data futures. And so I view the Q3 beat as actually still a very solid beat at some two and a half percent. And, yes, the Q2 beat, and we are upfront with you about it, had some large migrations that also had one-time activities. But we also have cautioned to you that large migrations are lumpy and not all that easy to predict. And that's roughly where we are. And as we look at things like Q4, we approach it the exact same way. We do the best job that we can of trying to figure out where we are going to land. And use pretty much the same guidance philosophy as we have before. Brian? Brian Robbins: Yeah. Thanks, Sridhar. Just to echo what Sridhar said as well. The quarterly variability is not the right way to evaluate the consumption model. Companies that do migrations, they don't do those due to our quarterly earnings calls. They basically we snap the chalk line and, you know, where they're at and their migrations are at. And so we really point you to the full-year guide. And based on the behavior that we've seen up to the earnings call, we have the confidence to raise our full-year guide to $51,000,000. To 28% annual growth year over year. Just from a guidance philosophy perspective, there's a number of things I did when I first joined, but one of the things that they were spent a lot of time with the team that wrote all the AI models that does the forecast on a daily business of our revenue. Super impressive team, very detailed, and I can assure you that there'll be no change to the guidance philosophy. Operator: The next question comes from Matt Hedberg with the company RBC. Matt, your line is now open. Matt Hedberg: Great. Thanks for taking my question. Just a quick one for Sridhar. The $100,000,000 AI run rate is super impressive. Wondering if you could give us just a rough sense for how quickly that's growing, and then maybe more of a detailed question. On the heels of crunchy data, curious if you can comment about just now that you've had more time, how customers are thinking about that long-term balance of OLTP and OLAP within Snowflake Inc.? Sridhar Ramaswamy: Yeah. You know, as I said, AI revenue is predominantly driven by the Cortex product suite, including Snowflake Intelligence. This is among the fastest products to get adopted by our customers. Because as I said, the value is very, very clear as soon as someone uses Snowflake Intelligence. So we expect this to continue to grow quite well. We don't really want to guide to it or hint at that right now. With respect to crunchy data, it will take us a couple of more months to get the product into GA. But all of the early conversations that we have is that customers are very welcoming of Postgres support within Snowflake Inc. They view Snowflake Inc. as an incredibly robust and reliable data platform. And for many kinds of applications, having them be hosted as part of the overall Snowflake Inc. deployment makes perfect sense for these folks. For what it's worth, Unistore, which is our HTAP product, is also doing well. It addresses a different segment of the transactional data space. And we will continue to have both of these. But I think bringing Postgres to market will be an important step forward for us, especially for things like agentic solutions that need an OLTP store to function effectively. So there are a number of those kinds of use cases that we are actively working with our customers on. Operator: Our last question comes from Tyler Radke with the company Citi. Tyler, your line is now open. Tyler Radke: Thank you. Thank you. Thank you. Very much for squeezing me in. I'm really impressed with the, you know, roughly a $1,000,000,000 of RPO bookings in the quarter. Was hoping you could talk a little bit about the $3.09 figure deals that we added in the quarter. How are those structured from a duration perspective, and are you expected to see significant growth in those deals? In other words, are they large expansions? And then just to follow-up for you, Brian. Anything we should be thinking about as it relates to FY 2027, whether it's headwinds or tailwinds in the model, I know you're not giving guidance, but just as we think about meat products, optimization headwinds, anything we'd call out? Thank you very much. Sridhar Ramaswamy: Well, as a matter of fact, Tyler, we had $4.09 figure deals this quarter. All of these folks are customers that are spending significantly with Snowflake Inc. and are very positive about additional value that they can bring. But, you know, bookings are an indicator of how much a customer thinks they're going to spend in the coming years. Product revenue is the best indicator of how our collective customers are going to be spending on Snowflake Inc. next quarter. And so that's the thing that I would look at. Brian, you wanna take the last question? Brian Robbins: Yeah. Tyler, as you mentioned, we'll guide to FY '27 on our next call. But, you know, what's really important is consumption after the holiday season is the most important input for FY guidance for next year. And so we'll need to see the consumption behavior unfold in January, February, that will give us better visibility to deliver that on our next earnings call. Operator: At this time, I'd like to pass the conference back over to our host, Sridhar, for closing remarks. Sridhar Ramaswamy: Thank you, everyone. Snowflake Inc. remains at the center of today's enterprise AI revolution. And we at Snowflake Inc. are focused on empowering our customers throughout the end-to-end life cycle for data. This is an incredibly exciting time for the company as we continue to reimagine what's possible with AI and push the boundaries of innovation to lead in this new era. We continue to execute strongly as evidenced by our product revenue growth and strong outlook for the remainder of fiscal 2026, and we see a long runway of durable high growth and continued margin expansion ahead. Thank you all. Operator: That will conclude today's conference call. Thanks for your participation, and enjoy the rest of your day.
Leila: Good afternoon, everyone. My name is Leila, and I will be the conference operator today. At this time, I would like to welcome you to the sales third quarter fiscal 2026 conference call. This conference is being recorded, and all lines have been placed on mute to prevent any background noise. After the speakers' prepared remarks, there will be a question and answer session. At this time, I would like to turn the call over to Mike Spencer, Executive Vice President of Finance and Strategy and Investor Relations. Sir, you may begin. Mike Spencer: Good afternoon, and thanks for joining us today on our fiscal 2026 third quarter results conference call. Our press release, SEC filings, and a replay of today's call can be found on our website. Joining me on the call today is Marc Benioff, Chair and CEO, Robin Washington, Chief Operating and Finance Officer. We also have Srini Talabhrigada, President and Chief Engineering and Customer Success Officer, and Miguel Milano, President and Chief Revenue Officer, joining us for the Q&A portion of the call. Some of our comments today may contain forward-looking statements that are subject to risks, uncertainties, and assumptions, which could change. Should any of these risks materialize or should our assumptions prove incorrect, actual company results or outcomes could differ materially from these forward-looking statements. A description of these risks, uncertainties, and assumptions, and other factors that could affect our financial results or outcomes is included in our SEC filings, including our most recent report on Forms 10-K, 10-Q, and any other SEC filings. Except as required by law, we do not undertake any responsibility to update these forward-looking statements. As a reminder, our commentary today will include non-GAAP measures, and reconciliations between our GAAP and non-GAAP results and guidance can be found in our earnings materials and press release. And with that, let me hand the call over to Marc. Marc Benioff: Alright. Great job, Mike. And thanks, everyone, for joining us today. Well, as you can see, first of all, great seeing everyone at Dreamforce. We are so happy that you were all with us. And now you can see we've delivered strong results for the quarter across all of our key metrics. We're continuing to execute on the path to our $60 billion dream that we outlined in detail with all of you at Investor Day. And we delivered really strong bookings. Miguel is here. He's gonna talk to you about that. And we've delivered incredible results with AgentForce. It's really exceeding our expectations. We're gonna hit all the details, but I think that you could see 3.2 trillion tokens delivered for our customers. It's all exceeding our expectations. We're gonna get into all of that detail as well. That's the core of our organic innovation. We're making these disciplined strategic acquisitions like Informatica, also now online. In the company. We're really excited about the harmonization, integration, federation, that Informatica plus Dataflow 360 plus MuleSoft is giving us. And that's gonna strengthen our overall leadership in data and, of course, AI. And we're ensuring that we have the distribution capacity that's extremely important for us because we are a direct seller place to support long-term growth. And Miguel has made some fantastic investments over the last twelve months in all of our core segments. We're gonna talk about that as well. And finally, Robin is gonna speak in more detail about the capital allocation strategy and the investments that we're making for fiscal year 2027, which we're getting very excited about. And a very clear focus on our continued path for, you know, I would say, very sustainable, profitable, durable growth and innovation. Now you are all at Dreamforce. You saw that energy, the level of customer success. It exceeded my expectations. And you saw how we're bringing humans, data, AI, apps together to build the Agentic enterprise. And we just couldn't be more excited about that and how customers are receiving the message. Every CEO I met at Dreamforce and I mean, every CEO I speak to just the last couple of days, I had some great meetings. And I'll tell you that everyone knows that they wanna get to the next level in their business to bring AI in, become more productive, become more efficient, become elevated as Matthew said in the opening video. But they all know they now they've gotta become these agentic enterprises. And I don't think for a lot of them, two years, three years ago, maybe even a year ago, they really understood that opportunity, and they are now more motivated than ever to do it. We're gonna hear about that, some story, great stories. From the core from the quarter. And, of course, you know, we've all read that crazy MIT study where, you know, customers went off trying to build their own models and trying to build their own toolkits and this and that and, you know, DIY it. And now they realize the real value from AI is delivering, you know, number one, customer agents, and we have so many examples. But now about $500 million in agent force revenue, talking about customer agents. But, also, and what's really exciting here at Salesforce and some of you have seen it, but probably a lot of you haven't. Is employee agents. And we've really delivered an incredible new framework deeply integrated into our Slack product. Every Salesforce employee already uses it every day. I do, and it's the core of every demonstration we give to our customers to show how we have unleashed with Slack, something new called Slackbot, which is really the heart of our employee agent strategy and you're gonna see that. It's incredible. It is able to go not only through Slack, but and not only through the whole Internet, but also through all of our customers' data that they have basically, you know, provision in a secure way through Salesforce as well and deliver a context. And I'll tell you in now before I do a customer visit or call or whatever it is, I'll I'll just kinda sit right down. I was with a really good friend of mine. Just this weekend. I had lunch with him, and he's a top venture capitalist. And had been a huge investor in a in a Coinbase. And I'll tell you that just sitting there just talking about, hey. Tell me about everything with your venture capital company. Tell me everything about this venture capitalist, and then also tell me everything about Coinbase and the company and our And then bam, you know, it's able to deliver to me a absolute and complete not only analysis, not only a summarization, not only all of the detail, but next steps, how to sell, what I should do exactly for the customer And I love them in this the customers because they don't think it's possible. Then when they see it, they say, wow. This is what AI was meant to be. And I'm like, this is context. This is data. This is apps. This is the best of the large language models and delivering it all to you. Well, anyway, let's get into the quarter. Q3 revenue was up $10.26 billion. It's up 9% year over year, 8% constant currency Our non-GAAP operating margin came in strong. At 35.5%. And CRPO was outstanding. You see already $29.4 billion, up 11%. Miguel's gonna talk about, you know, this great quarter he had the best quarter I think we've had actually in three years, and 11% in constant currency. And RPO is nearly $60 billion, growing 12% year over year. Kinda huge numbers. But very exciting, considering we've also rebuilt all the product as well and, delivering this AI future for everyone. You know, this really is signaling to us that it's a strong pipeline of future revenue as customers ground their AI future in AgentForce And the third quarter operating cash flow was a whopping $2.3 billion up 17% year over year Free cash flow was $2.2 billion, up 22% year over year, and we expect to finish the year with nearly $15 billion in operating cash flow. That was pretty awesome, I think. I think it's more operating cash flow at $15 billion than even Walmart. So that awesome. Agent force and data reached nearly $1.4 billion in ARR in the quarter, up a 114% year over year, including Agent Force ARR ARR. Of about $540 million, 330% year over year, and I think all of our account executives, you know, go we've got about 15,000. I don't know what the exact number is out there, are all selling this now. People really can understand it. We can demo it. We can show it. But I think you've all seen, like, what our customers are doing. And I've the you know, the one I love and that I use because I'm a huge customer, is Williams Sonoma's version of Agent Force, which they call Olive. And if you haven't been on the Williams support, Williams Sonoma's website and seen the, sous chef, that they call Olive. And used it I think the quality is what I'm most impressed with. That it's really very, very good. You don't see hallucinations. You see really kind of the customer personality, the quality, the ability to deliver, you know, value, and they are saying it's about 60% of their chats We've got a whole another level to go with them with voice, which is coming, which is very exciting. You know, this is our fastest growing product ever. And every Salesforce app now, not just, you know, sales, service, marketing, commerce, all of them, Tableau, Slack, our new ITSM, supply chain products, They're all been rebuilt, and Srini is here. He's gonna talk about what we've done to bring AgentForce in to every product we have and make you know, we transform AgentForce from being a product to a platform so that all of our apps can reason, learn, take action, collaborate with users. But it's really about humans and apps and the AI and the data all working together. And that is what's so exciting that every part of our platform is now so deeply integrated. And because all the data is unified and every app shares the same metadata, They speak the same language, and you really get that feeling when you are using the Slack bot Trini will tell you about it. Because all of a sudden, Slackbot is able to, like, read across all of our data, but then talk directly to you and give you that elevated experience. So when an LLM is interacting with agent force, it's getting that strategic context from our data. You know, from the data on the Internet as well, from, you know, the data that it's been trained in. And then how your knows how your business operates. It's really able to give you that. And that's because Salesforce is unique in that we have the data that makes business more valuable. It's that customer data, the service data, the sales data, the marketing data. Then we're able to deliver it in a in a tremendously friendly way. We've rebuilt all of our products to deliver this agentic enterprise, really just getting going. I think Srini will tell you if we were really brainstorming a few years ago when we first created our GPT series, we're starting to begin to integrate the large language models I don't think we exactly knew that at this point, we'll be able to deliver this incredible customer agent experience and this incredible employee agent experience. In fact, six of our top 10 deals in the quarter are now driven by companies that just wanna transform with AgentForce. And that's a big thought because a year ago, we were just trying to ship the product. You know, it was just coming out of beta. It was, like, a very strong, you know, version one. But it's more than a strong version one now. And I think everyone can go and look at that. Example with William Sonoma or with SharkNinja or with you know so I mean, there's so many great examples that I use every day. I know, Miguel's got his remarkable pad in front of him. So you know, I think that in just a year since we introduced AgentForce, we've closed over 18,500 AgentForce deals. 9,500 of them are paid transactions. It's up 50% quarter over quarter. All of our reps now kinda have the acuity. They've got the nomenclature. They're enabled. That that was a huge lift for us start to bring the whole company into this AI revolution and give them the tools and now these great customer examples it's happening around the world. I just got back from Japan and I saw it there. I was in The UK. I saw it there. I've seen it obviously throughout the whole United States It's really a global phenomenon. So agent force is now powered. Here's a few interesting things. AgentForce has powered 1.2 billion large language model calls. That's interactions when agents invoke a model to context and decide the next best action. Across the apps. You've seen the omnichannel supervisor, like, built into the service cloud where all of a sudden, you know, I'm an I'm a customer. I'm coming into the website. Even, like, Salesforce or tohelp.salesforce.com or any of our customers websites. And I'm in there and I'm working. And then all of a sudden, I oh, I've hit kind of the the limit of what the LLM can do. I can escalate immediately. Also write to a human, that's where the humans and the agents and the AI and the data all have to work together. And our top 50 customers, including and Miguel's got this story in his pocket, but, you know, Falabella, Vivint, DIRECTV, there's so many great stories. More than 200 million agent force LLM calls in Q3 alone on on track to power another 2 billion over the next year And those LLMs now are calling these agent force actions such as updating the opportunities, creating a case, handling service inquiry, and the number of average weekly actions has now risen about a 140% q over q. So we're really seeing you know, the adoption and the usage, and that's what's really exciting. Here's a number we really haven't focused on I think, in an earning script that I don't even think we hit it last time exactly. But agent forces process more than 3.2 trillion tokens. So 3.2 trillion tokens for our LLM gateway so far. And we're gonna start talking about that concept. We saw that in OpenAI's recent announcement that we were in their trillion token club. And, of course, we use all of the language models. You know, they're they're all great. You know, we love all of them. We love all of our children, but they're also all just commodities. And we can have the choice of choosing whatever one we want. Whether it's OpenAI or Gemini or Anthropic or what there's other open source ones, they're all very good at this point. We can swap them in and out. The low lowest cost one is the best one for us. Making us, you know, basically the top user of these foundation models. And that point that we did 3.2 trillion tokens let Bilbo Baggins know that we've got you know, adoption and usage happening here with this large language model gateway That was just a cube out to JRR Token himself. But that's that's the end of the jokes for the call. In October alone, token usage was nearly 540 billion, up 25% month over month. And I just don't think any other enterprise software company has stats quite like this. This isn't your Clippy. This is not your kind of a good AI demo. This is real enterprise adoption of AgenTeq AI and capability at scale globally. And those numbers are gonna keep growing as customers put agent force to work across their business, but not every task or step in a workflow needs to call the LLM. We call that determinism. And determinism is really important because for those of us who grew up in software, we used to call it if then statements. But now we call it determinism. But determinism is that, hey. If I need to do this, go to the LLM, but if I probably don't need to go to the LLM, just do that. So that is gonna even reduce our costs further and not hit the LLM as much as we do. And that's why we built hybrid reasoning and agent script, and our AI teams are just crushing it. On that. And we're giving customers the best of both worlds. Combining LM driven reasoning and deterministic precision. We had strong performance across agent for service, agent for sales and Slack, And those three apps are just a powerful combination for test us at Salesforce how you you know, we use those every single day. We live on them. It is really the hat trick for Salesforce with large customers to say, let us show you what we're doing in service. Let us show you what's doing in sales. Let us sort of show you we're doing in Slack. And it is it's a it's a wow experience right now. It's only gonna get better. And in fact, if we included the full contribution of AgentForce just in service we used to call it Service Cloud. Now we call it AgentForce service. But you look at agent for service, we would show an additional point of growth in Q3. Now Mike likes to carve off the agent thing revenue. He wants to have it in his own line, blah blah blah. It's a huge argument between me and Mike. And, you know, the reality is look, you're not gonna have agent for service or agent for sales without the AI. So you know, it's just moving. And Slack is now where it's coming altogether, and that is incredible conversational interface for every app, every agent, every work workflow. I'm gonna get to a really cool point in a second. And when we release this new Slack bot, every you gotta see it. So you've all got friends who are Salesforce employees. Take them aside. Have them show you Slackbot. And just you know, do the do whatever query you want and say, hey. I'm talking to this customer. I'm talking to that. Tell me this. I'm and you're gonna see some incredible things, how it has the ability to search across Salesforce and build agents and create things and do this incredible work on your behalf. Now I'll tell you, and I I'll just tell you that for me, check you know, Slackbot is like chatting with just one of our Ohana that knows everything about Salesforce. So it's pretty awesome. But nearly 90% now of all of the Forbes top 50 AI companies are using Salesforce. Let's just think about that for a second. 90% of all the Forbes top 50 AI companies, those are the Anthropics and the OpenAI's and the blah blah blah companies Okay. That is, or cognition, cursor, Figure AI. Okay. They all average about four clouds each already. And 80% of them are using Slack to run their business So if you're with those companies, hey, Say, hey. Show me how you're using Slack. They may not have Slackbot yet, because we've only turned it on for you know, a small number of customers who are about to hit the switch, everybody's gonna see this employee agent power. So they most people have seen the customer agent power. Now they're gonna see the employee agent power. And they're gonna see how it's built on agent force, how it's built on the apps, and how it's built on the data. Now with all these companies, you know, we're really folk partnering with them. So we can really leverage the best of what they're building, the frontier models, the agents, and even trainees using the coding agents now. And, look, you've heard me say this over the last few years. And, you know, we kind of Miguel's gonna come to this point, but we all know the speed of innovation in the last three years is far outseated the speed of customer adoption. The customers have been racing to catch up to what we've been doing But we do see that changing. And we saw that at Dreamforce. And I know all of you saw that also that customers are really saying, yeah. I'm gonna use this now. I'm gonna do this. I'm gonna put in my customer agents. I'm gonna put my employee agents. I'm gonna get my omni supervisor. I'm gonna harmonize my data. I'm gonna federate my data. I'm gonna upgrade my apps. And customers in production with AgentForce have jumped now 70% year quarter over quarter. So customers in production with agent force jumped 70% quarter over quarter. That's the stats that we're looking for. Great companies like Uber, like Conagra, like LY, like Williams Sonoma, like all these great companies that we've been talking about. And the consumption flywheel is gaining traction. In the quarter, more than 50% of new 50% of data three sixteen bookings came from existing customers expanding their investment, which was awesome. And really showed adoption. And we are very focused on adoption more than ever before, especially as a an agent force. Data three sixty is the foundation. For every agent force deployment, and it's accelerating in Q3 data three sixty. The product formerly known as Data Cloud, In Q3, Data three sixty ingested 32 trillion records. 32 trillion records. Up a 119% year over year, and that includes 15 trillion through zero copy data integration, up 341% year over year, So Dentsu, Moody's, KPMG, Ferguson, Zoom, and dozens more invested in data three sixty in the quarter. And I couldn't be more excited about completing our acquisition of Informatica It's three months ahead of schedule as we like it here at Salesforce. We like things ahead of schedule. And we like them under budget. And I'll tell you, Amit, I know I know all of you know Amit, His team are great. We're thrilled to have them. And you know, when we were doing the due diligence on the company and we saw a lot of things in the labs, that we're looking forward to bring into the market because, look, that data layer I haven't done the math exactly, but I think if you do some of the math, I think it's about a $10 billion business for us next year now. You know, when you look at Data three sixty plus MuleSoft plus Informatica, Micah's doing got his out trying to figure out if I'm right, but I think I am. When you look at a $10 billion business, that's the first layer. That's data. So Informatica with Data three sixty, MuleSoft, I mean, that is taking everything to this new level. And when you get into the world of harmonization, integration, federation, and then you're trying to deliver it to the AI, the intelligence, the accuracy, the reliability to wipe out hallucinations delivering the AI context. Now we're seeing momentum across multiple sectors. We had incredible wins this quarter. Miguel is gonna talk to him about. CVS Health and Telecom Argentina and TD Bank and the IRS, somebody who's gonna be getting a big check from all of us. They're now on agent force, so your IRS agents are AgentForce agents and NG and many more are becoming at Gentec Enterprises. And Costco, we love Costco. It's a well, we love all of our retailer friends equally. They're all of our children. We do love that Costco warehouse experience and it's a great expansion for us in the quarter. We're driving AI and digitization, a everything they do for their members. We're doing some incredible things there. With Google. And we worked with you know, Javier. If you don't know Javier, probably one of the top I don't know. Five, one, two I mean, best CIOs I've ever worked with in the whole industry. Was it Coke? Was it P and G? Was it Mondelez? Now Somehow Costco got him. I still don't know how Costco got Javier, but congratulations to Costco. So many times having great results there. So really excited to see these customers especially these big customers and of course, we know General Motors. We love Mary. Amazing. You know, have one of her new Escalade IQ. She's tired of me telling her how much I love it. Expanding Salesforce across the automotive cloud Data three sixty MuleSoft, agent for sales, agent for service, But really cool, agent force tossed their other collaborative product. We won't talk tell you what name what it is, but you probably know the name. And they're now using Slack. So Mary we're thrilled that you're doing that. We love working with you. You're an incredible CEO, and you're showing the world how to turn an iconic company into an agentic enterprise. Great products and great systems. And with agent force Mary is speeding up case resolution for her call centers Slack is now the company's primary communications hub. Scaling to 96,000 employees in just nine months. Last month, we launched AgentForce IT service or AgentForce ITSM or you know that what company that we're targeting. We never really went after this before. And then all of a sudden, we realized we have the top service product. In the world, and then we've got the top field service product in the world. And customers want this kind of you know, trinity from us that includes IT service. And for whatever reason, because we had certain people in our company, we'll go into the names who didn't wanna build it, And you know, the that building that database that drives it well, already, we're selling product and really doing a phenomenal job there. You know, the former CEO of AI, Sarah Mudu, is running this thing. And you know, PenFed went live with ITSM. With agents for IT service, and we've got all kinds of customers who've bought, you know, products from these competitors who never deployed them or don't you know, like these guys Well, guess what? We are gonna deliver some incredible, capabilities, and you know, we think that well, you look at PenFed. You know, I think they went live with agents for IT service as well as member service and collections. They project in a 30% reduction in operational expenses 2,000,000 in savings with this product. It is killer. So tell your friends who need ITSM. They can get it now from Salesforce. We're seeing incredible momentum also And here's another competitive situation. Life sciences cloud. And with life sciences cloud, with new bookings tripling year over year, always been a strong vertical for us, but we have this partner who decided to become our competitor, Veeva. And, you know, we're taking market share from Veeva. They even had to talk about it in their earnings call that they lost all these deals to us, but they have not seen the losses yet are coming. Highlighted by a notable new win at Haley on this quarter, but just in the new past few months, more than a 120 industry leaders have selected Life Sciences. Glad I was talking to the CEO of one of the top five life sciences companies just yesterday, He's a good friend of mine, and you know, going to life sciences cloud, all led, by the way, with Pfizer and Albert who decided to be the number first one. And so grateful to him. And it's a great product. It includes five of the top pharma five of the top 20 pharma companies already, but you're gonna see them all. Use Life Sciences Cloud. And most recently, Novartis is gone. Salesforce Life Sciences Cloud and I don't know. All all Takeda, all of them are gonna go. And our public sector solutions ARR also grew 50% year over year in Q3, Really cool products. I was just in Washington DC last week. I already mentioned the IRS. I was with the treasury secretary. I was with a number of the cabinet secretary. All of them are rebuilding what they're doing, reautomating and we wanna help all of them. And I'm inspired to see some of the largest and most impactful government agencies running their businesses and their critical workflows and their agents and, their data on Salesforce, including the air force. Army, Dan Driscoll. We're really proud to work with Dan and the army and you know, just told me, came in and delivered, you know, his recruiting goals nine months early using agent for sales and department of Of course, we run the whole veterans affairs. We have a 120 apps there now. And used to be a huge problem at Veterans Affairs for the whole country. And veterans were not getting the service and support they needed. We cleaned that up for them. And as I mentioned also the IRS, but for everyone we're in there doing our best, and we're we're delivering at very reasonable cost and on budget And you know, we're not we're we're really excited to be working with the government and helping them to become Agentic Enterprises. And we're really excited to work with the IRS. I always wanna say the office of the chief counsel has automated up to 98% of their manual activities decreasing the time to fully open a tax court case from ten days to thirty minutes another division saving an estimated five hundred thousand minutes a year, retiring multiple legacy systems And now AgentForce with IRS is gonna be able to further optimize automated accelerate business process across the entire agency and just wanna congratulate secretary Besson for his tremendous leadership and what he's done in transforming the a. The IRS and also the all of the treasury. This week, we launched The UK's first AI police officer, We work with multiple police departments to roll out Bobby, Everybody loves Bobby. It's the agent for service agent that is the public's first point of contact for nonemergency calls. And Bobby autonomously provides instant responses on more than 90 topics and police departments have already seen a 20% reduction in nonemergency demand, and they are just getting started. And this is what real enterprise adoption looks like. No other companies delivering agents to the scale. And when you look at what others in our space are doing, difference is clear. Delivering this capability. To a global customer base, more than a 150,000 Salesforce customers and 1,000,000 companies are now on Slack. Now have the immediate opportunity to work side by side with agents and agent force in the app started using every day to become elevated And that's why we're uniquely positioned for this new era. We have the strategy, the platform, the global scale, And I would say also, you know, our core values very much trust, customer success, equality, and sustainability remain very much intact. Also wanna thank all of our incredible Ohana for everything they've done during the quarter to make this quarter so successful, make Dreamforce so successful, all the world tours that are happening and so many great customer stories. But I especially wanna thank all of our Ohana who've done 10,000,000 volunteer hours to support the communities where they live and work It is we are so grateful to them And now I'd like to throw it over to Robin. Robin Washington: Thank you, Marc, and good afternoon, everyone. It was great to see many of you at my first Dreamforce as COFO, which was unforgettable. The energy was incredible, as Marc just talked about, and carried through the quarter, as you can see from our bookings momentum. We're excited to see our customers' transformation to the Agentic enterprise accelerate. Driven by growth 360 playbook, including multi-cloud, price pricing and packaging, our balanced portfolio, and continued innovation. I just wanna share a few key data points with you. More than 70% of our top 100 wins included five or more clouds. In pricing and packaging, new bookings for agent force one edition and a for x, or as we call it, agent force for apps, our most premium SKU, doubled quarter over quarter. Our consumption flywheel is spinning. Agent force accounts and production increased 70%. Quarter over quarter. And more than 50% of agent force bookings came from customers refilling the tanks. Agent force and data 360 ARR was up a 100% year over year. This is inclusive of agent force ARR, which is up 330% year over year. Clearly, we have the winning formula here. So let's turn to the results of the quarter. Revenue in the third quarter was $10.26 billion. Up 9% year over year in nominal and 8% in constant currency. Driven by the trifecta of agent force Data 360, and AgentForce sales and service performance. This was partially offset by a faster than anticipated mix shift to cloud for Tableau and on-prem revenue timing in Tableau and MuleSoft. As we've shared with you before, the on-prem portion of MuleSoft and Tableau revenue is recognized in period, which creates less predictability revenue quarter over quarter. Subscription and support revenue grew 10% year over year in nominal and 9% in constant currency. Q3 revenue attrition ended the quarter at approximately 8%. In line with recent trends. We delivered another quarter of profitable growth, with Q3 non-GAAP operating margin up 240 basis points and GAAP operating margin up a 130 basis points. The strong performance this quarter was driven in part by timing of expenses. And a bad debt expense adjustment based on our strong collection performance. Current remaining performance obligation or CRPO ended Q3 at $29.4 billion up approximately 11% year over year in nominal and constant currency, inclusive of a $200 million foreign exchange tailwind. This better than expected performance was driven by strong bookings and a modest benefit from early renewals and the timing of on-prem revenue. And I'm pleased to share that for the first time since fiscal year 2022, net new AOV growth outpaced AOV growth. From a geographic perspective, we saw strong business growth in North America and EMEA. Led by France and The UK. While Asia Pacific was more constrained, particularly in Australia and India. From a segment perspective, we continue to see strong performance in our small and mid-market business. And enterprise growth accelerated this past quarter. From an industry perspective, business services and consultancy health care and life sciences, and retail and consumer goods performed well. While comms and media and manufacturing, automotive, and energy were more measured. As committed, I wanted to quickly update you on the progress we made on our three strategic priorities. First, customer success. Repeating what Marc said, our top priority is accelerating agent force. And data 360 adoption. We are relentlessly reallocating our resources to high growth areas and it's paying off. Q3 was one of our biggest pipeline generation quarters ever, and customers leveraging our forward deployed engineers are seeing 33% faster deployment times. Second, operational excellence. As customer zero, our SDR agent has worked hundreds of thousands of leads, generating tens of millions in incremental pipeline. We see that same velocity with agent force on help.salesforce.com. Which passed 2 million conversations this quarter. It took nine months to reach the first million and just half that time to double it. Another clear example of our internal consumption flywheel taking off. The third area I wanna cover is responsible capital allocation. Informatica enhances our trusted data foundation. And it will be accretive within twelve months. We also returned more than $4 billion to shareholders in Q3. We continue to see a meaningful opportunity to invest in ourselves and we are on track for a 50% step up. In share repurchases in the second half of this fiscal year. Turning to guidance. I want to frame our outlook inclusive of Informatica. To help you model this clearly where relevant, I'll give our organic performance, layer in the acquisition impact, and then provide the consolidated figures for Q4 and fiscal year 2026. Starting with subscription and support revenue. We are reiterating our fiscal year 2026 organic subscription and support growth guidance of approximately 9% year over year in constant currency. This is fueled by continued momentum in AgentForce and Data 360, partially off by set offset by weaknesses in marketing and commerce, and the on-prem dynamic for MuleSoft and Tableau. Informatica will contribute approximately 80 basis points of additional growth. Resulting in total subscription and support growth of slightly under 10% year over year constant currency. Turning to total revenue. We are narrowing our fiscal year 2026 revenue guidance on an organic basis. To $41.15 billion to $41.25 billion Growth up approximately 9% in nominal, and 8% in constant currency. This is attributed to a $25 million FX headwind since last quarter and the on-prem dynamic for Tableau and MuleSoft. We anticipate a contribution of approximately 80 basis points from Informatica resulting in fiscal year 2026 revenue of $41.545 billion to $41.55 billion. Or approximately nine to 10% in nominal and approximately 9% in constant currency. Before I turn to profitability, I want to highlight that with our current trajectory of net new AOV growth, we project to finish fiscal year 2026 with half two net new ALD growth ahead of half two ALV growth. Turning to margin. As a result of the close timing of Informatica, we are maintaining our non-GAAP operating margin guidance. At 34.1%. And adjusting our GAAP operating margin to 20.3%. We are raising our annual guidance on operating cash flow growth to approximately 13% to 14% growth as a result of our strong Q3 bookings performance. We expect capital expenditures to remain slightly below 2% of revenue resulting in free cash flow growth of approximately 13% to 14%. Organic CRPO growth for Q4 is expected to be approximately 11% year over year in nominal and 9% year over year in constant currency. As a reminder, we are lapping our acquisition of OWN in Q4 FY 'twenty five which represents slightly under a point of impact. Inclusive of Informatica, we expect CRPO growth of approximately 15% year over year in nominal, including a $500 million FX tailwind. Resulting in approximately 13% constant currency growth. Consistent with our Investor Day outlook, we remain on track to reaccelerate revenue. In twelve to eighteen months. In closing, our momentum is building fueled by agent force. We are executing against our FY30 framework and investing with discipline, positioning us incredibly well for the future. Finally, a big thank you to all our employees for their dedication And hard work delivering a successful Q3. I'll turn it back to you, Mike. Mike Spencer: Thanks, Robin. And with that, we're going to move to the Q&A portion of our call. Operator, can we please move to the first question? Leila: We will now begin Q&A. For today's session, we will be utilizing the raise hand feature. If you'd like to ask a question, simply click on the raise hand button at the bottom of your screen. Once you've been called on, please unmute yourself and begin to ask a question. Please limit to one question. Thank you. We will now pause a moment to assemble the queue. Your first question will come from Keith Weiss with Morgan Stanley. Please unmute and ask your question. Keith Weiss: Excellent. Thank you guys for taking the question, and congratulations on a really solid quarter. And, also, great to you guys putting your money where your mouth is and the accelerated share buybacks. Expressing your conviction in in sort of the value of Salesforce's stock where it is. I had a question for Miguel, and, it tried to sort of tap into your experience in talking to these large customers, because there's still a very big mismatch in the marketplace in terms of what we hear from investors in terms of the expectation that generative AI is going to be injurious to the SaaS based application layer, that enterprise customers are going try to build their own functionality or gonna try to replace solutions like Salesforce with DIY solutions that they could build around these models versus what we're seeing in the inflection in your business. So you talk to us a little bit about what you're hearing from customers and their appetite or or desire, if they have one, of building out their own applications versus going to a vendor like Salesforce to try to get to this generative AI function or capabilities? Miguel Milano: Keith, thank you. Thank you so much. That's spot on question and is the heart I think it's the heart of the matter, and I think there is there is a a really different perspective on what is really happening. This past quarter, I was in three continents, 12 countries, I talked to 400 customers, many one on ones, many one to several at dinners. And the reality is very different. There is something very large, very important, and I wanna emphasize this. I don't think we've made and Robin, enough justice to what is happening right now in front of us. This is there is a new very large secular demand trend, which is the agentic enterprise. Every single company in the world small, medium, large, wants to become an agentic enterprise some a company that is conversational, that is much smarter that empowers employees by giving them extra information that is able to execute autonomously but also probabilistically on one side when AI wants to execute, deterministically when you want when you want the current current workflows to be executed. And this is to increase growth to reduce costs, to improve customer satisfaction, and every customer wants to do it. Now the problem is they've been experimenting. Been experimenting for two years. They've gone from experimentation now to frustration a little bit, and now they're all saying, you know what? This is hard. This is much harder than we thought. But they all want to go to scale because the the opportunities, which is a multi trillion multi trillion market cap opportunity, It's in front of us. The TAM is multi trillion for them, for us. And they want to go all in. They know it's hard because LLMs cannot do this alone. And now to answer your question, the last mile is hard. And the last mile is hard because companies need the context. For enterprise AI to be successful and accurate in the enterprise, you need the context. You need the data. You need the metadata. You need the term deterministic workflows. You don't want the agents to be essentially executing based on what they found in an LLM You want the agents to execute in a deterministic way the same workflows that that company had already codified in the apps for the years that humans are already using. And they need AI that is embedded where the humans are. That's why it's so important to have the data with the context to have the apps, the deterministic workflows, to have the AI where the humans are, and only Salesforce. Can do that. And we are seeing an incredible increase in demand ahead of us. We are winning. You're seeing the bookings. I'm very proud of the quarter that we delivered. I'm very thankful to my team, the whole employee base of Salesforce. I'm also very thankful to our customers. And I'm very thankful to our partners. Mark, do want to add anything to that? Marc Benioff: No, think that was great. Thanks, Miguel. Hold on. Mike Spencer: Thanks, Keith. Operator, we'll move to the next question, please. Leila: Your next question will come from Raimo Lenschow with Barclays. Raimo Lenschow: Mikhail, can I stay on that subject a little bit? You you've been expanding the sales your your sales rep quite a bit, and that's, you know, still part of the plan. How how do you think about the ramping of those, and and how do you also think about productivity for those extra reps coming on? Thank you. Miguel Milano: I have to credit Mark for that. We we are a seminal moment a year ago where where we, particularly Mark, he saw the demand coming. And he told us, let's invest in capacity Let's also invest in enablement. So I became six months ago, so the enablement leader for the company. And we have now today 20% more capacity in place We're going to finish the year with 15% more capacity enabled. Already, we call it ramped. This is fundamental. You know, it takes six to twelve months to, on average, to to ramp AEs. We've done all the hard work. Exactly at the moment that the demand is coming at us. So, I see the pipelines, growing. The top of the funnel is growing. We've never seen a pipe gen quarter like we did in Q3. We've essentially very healthy double digit growth in PipeGen above our expectations. Next year, pipeline open pipeline is again double digit healthy growth on open pipeline. That matching the double digit healthy growth on enabled capacity It is very exciting. We are ready to capture the opportunity. And again, this is not just one more cloud that now we are very excited. Agent four data cloud is gonna add 10%, 20% on the business that we do with every customer. The agentic enterprise is a new paradigm. Customers will have will use Salesforce in a totally different way. They will use Salesforce to be the platform for digital labor, for sales, for service, for marketing. And the impact on the way we can monetize those relationships is exponential. It's not linear growth. It's exponential. Robin alluded to that in at Investors Day. You were talking about three times, four times, the ability to multiply the monetization on on on customers because, by the way, they are getting three or four times or 10 times more value from our products. I'm already seeing a lot of examples of companies that had a great relationship with us, had a multi cloud relationship with us, sales, service, all our core clouds. They were very excited. And then AgentForce and Data Cloud came. They decided to become an agentic enterprise. They understood the last mile problem. They bet on Salesforce. And now the bookings that we do with them, the AUV, had double, triple, in some cases, multiplied by four and five, and we are just getting started. We just wanna get every single one of our 150,000, 200,000 customers through the agentic enterprise journey and for each of them, is going to be a multiplier effect. Mike Spencer: Thanks, Raimo. Operator, we'll move to the next question, please. Leila: Next question will come from Brad Zelnick with Deutsche Bank. Brad Zelnick: Great. Thanks so much. And my congrats on an amazing quarter. Mark, at this point, even without Informatica and and now more so with it, you have one of the largest infrastructure businesses in all of software. Well over $10 billion in scale. What Salesforce's competitive advantage in infrastructure? And how do you not only get credit for it in its own right, but leverage these core capabilities to drive the overall company's success. Marc Benioff: Really appreciate the question, Brad. I think number one, wanna make sure everybody realizes we're not building data centers at Salesforce. We're preserving our gross margins. And our cash flow. But we will use the data centers that are being built and, we will take advantage of the lower costs that we're seeing in the market from the incredible build out of data centers. But, yes, you're right. Our data infrastructure is incredible. We call it our data foundation. And I think you realize it composes as I mentioned, you know, three key things, Informatica, Data 360, our data cloud, and also MuleSoft. And together, you're right. I think it will do about $10 billion next year in business. So this is a very significant software business. But it's fundamental, it's key for every one of our customers to move to this data foundation. And we are still at the beginning of that journey with so many of our customers. And one of the keys to it is its federation. I just came back from Japan, as I mentioned. One of the most important companies in Japan other than Salesforce is IBM. IBM has about 8,000 employees in Japan. We have about 4,000 employees in Japan. We have think we're the largest software company in Japan right now. And the ability to federate Data 360 to the IBM main frame, which is technology that we just introduced in Tokyo two weeks ago at our world tour That idea that you're running agent force, but it is being fueled by not only the data and data 360, but simultaneous the data in your IBM mainframe. So that infrastructure is critical to delivering the AI that is accurate, that is reliable, is low in hallucin hallucinogens, and this is fantastic for the company, and it is not something that is totally independent. It's deeply integrated with everything that we do. So all of our apps, agent force, our customer agents, our employee agents, everything is built on this fundamental foundation. I couldn't be more excited about it. Mike Spencer: Thanks, Brad. Operator, we'll move to the next question, please. Leila: Your next question will come from Brent Thill with Jefferies. Brent Thill: Great. Mark, the halo effect Asian forces having, I mean, it it seems that sales and service were stable at at high single digit growth. Slack accelerated growth. Can you just speak to what you think this is doing for your other clouds and and maybe even drill in on the Slack resurgence. Marc Benioff: Well, you're right on it, Brent. I think that it's an accelerator on the core. And I think that we're you know, to address the question that went to Miguel where there was a false narrative that somehow the core is in jeopardy because of, you know, these large language models. And while the large language models are very important and they will expand in functionality, I'm sure, over time, The reality is is that our ability to take our core applications, extend them, and deliver another level of value beyond what we were doing before. Now had already been doing predictive AI and you know, all the kind of Einstein, you know, AI. But now with Agent Force, it's another level, and you could see it really at Dreamforce when we're demoing you know, agent for service with the omnichannel supervisor and the ability for the agent and the humans to interact autonomously. That was just awesome. Because it's humans and agents and the apps and the data. And that I think, what is really driving this forward, and it's happening in sales. It's happening in service. It's happening in Slack. And I'm confident it's gonna happen in marketing. It's gonna happen in commerce. It's gonna happen across every Tableau, across every single product. Every single product had to be rebuilt, so that took some time. Love for Srini to come in and kind of talk about that. But now that we deliver those agent force products and you saw each and every one of them at Dreamforce how far they are, customers are excited to get to that next level. Srini Talabhrigada: Just to connect those two questions. And if you really look at agents, agents need context. Really, and they need tools. And what is context? Get context you need data across the enterprise. Some in the company, which is in the platform, some you want to federate it, which is what we data copy. Some through ingest, which is by Informatica case. You need to understand where all the data is in the company. You need a catalog. You need a master day metadata. You need to organize all this data, and you need tools This is what is enterprise context. Without having enterprise context, it's very, very hard. And that's what our data foundation gives with Informatica, MuleSoft, and Data 360. On top of that Actually, really drill into that because people still don't understand. So just so you know, just on just on the ingest, for example, in quarter over quarter, on data 360, people have built their leg just in data cloud. Our ingest has increased by 38%. At zero, copy has increased by 52% growth in terms of records. But this is unstructured data. So it's just not the structured data. It's all your documents, all your knowledge articles, all your user manual, That has increased by 109% growth. And then to this is how you create create this unified profile or unified product ID, unified customer master, unified account master. That's what is the unified context you want in a real time profile. That's very hard to do. But just if you have this context is not enough. You need the deterministic place for reasoning, where deterministic, where nondeterministic. Then you need the tools. To the agents have to take actions. Some of the actions are in Salesforce already. The jobs to be over twenty five years per each vertical. We have really deep understanding of not just a sales rep does, We know what a sales rep does in a financial industry. Different from what a sales rep does in a pharma, which is different from what a sales rep does in a telecommunications industry. So that's the jobs to be done. Now imagine you need the context. You need the jobs to be done. You need the tools And sometimes you have back end systems where you need those APIs. That's why MuleSoft is very important. Now if you just think these three are enough, it's not enough because once you go live, you need an eval. You need to know how the agents are performing. You need auditing. You need compliance. You need local data residency tools. This is what we are finding enterprises who did do it yourself for realizing that it's good news actually for me. When I talk to CIOs, I see two types. People who are really advanced, who are visionaries, who started two years back, we do it yourself, they really understand the pain point. They are the ones who are moving fast to the platform. Then there are some people who still think they can do it, and we'll convert them over years. So I see people who have what it takes, and so they know the day two, day three problems. And some people who still think. So to do this, it was not easy. Correct? You had to build a platform. So four years back, we started with the Hyperforce layer. Then we created a data layer. We had to pull the data lake, a lake warehouse, That's what data 360 was. We rebuilt the entire infrastructure on the platform, on the hyperscalers. That rewrite our entire metadata layer to do thousands of records, but millions of objects. Then we had to rewrite all our applications, our score sales, It's no longer a sales cloud. It's agent for sales. So because when I talk to Miguel, he doesn't just want a sale. Transform his function into agentic sales function. Run customer success. Job is not to do customer success. I want to write a agentic customer success. This is why help.salesforce.com is important. That's what you're saying. So imagine each of these applications are changing. But this framework is allowing another thing. When we started doing agent ITSM, normally, they've taken a long time. But because we had the foundation of the data layer, the agent force layer, the metadata layer, Suddenly, building an agentic ITSM became very easy, and that's what you're trying to see, the leverage. Same with life sciences cloud. So you're not trying to build the regular way, but this took time. And now that we have this customer success you are seeing, this is what is gonna make us a differentiator, and that's our promise to our customers. One more slight thing, is our customers two years back, they would ask me, what model are you supporting? Where is it? What hyperscale are on? They don't ask me any of those things now because we abstract all the complexity for them. That's the original promise of Salesforce when we said no software. That's what it is. We bring the customers to the future. We wanna help our customers come go to the agentic enterprise. And that's what we are doing and all our forward deployment motions with our own PS services, with our customer success team also with our SI partners. Heavily invested with Accenture, Deloitte, PwC, and other global partners, to really ensure that we also jointly partner with them and in a lot of places, they we are co selling them. They're having combined FDA training. And this together is what it takes to generate the agentic enterprise. And that's how all these points we are trying to tie together. Hopefully, that answers your question. Mike Spencer: Brent. Operator, we'll take the next question, please. Leila: Your next question will come from Kirk Materne with Evercore Partners. Kirk Materne: Yes. Thanks very much for taking the question, and congrats on the momentum around AgentForce. Miguel, I think this one's for you. When AgentForce first came out, they a lot of questions from partners, customers about pricing just confusion, trying to get a handle on that. You know, it seems with the momentum, you know, people are more comfortable with that. And so the second part of the question is there's still a lot of concern among investors about, you know, as AgentForce helps customers maybe keep headcount stable or even know, lower head count in certain areas. You know, how does Salesforce monetize in that kind of situation? And I was wondering if you could just touch upon that a little bit, because I I think that'd be helpful to people to understand how AOV grows even in, say, a stable or declining headcount situation. Thanks. Miguel Milano: Yeah. Thank you so much. Listen. Agent force is at the heart of the agentic enterprise transformation. The momentum that we saw in Q3 is pretty significant. It's unheard of. It's beyond our expectations. And I want to differentiate between momentum on the bookings, okay? Bookings is one part of the equation. The the hardest part of the equation is the adoption. Now on bookings, we saw the numbers of ARR the 70% more customers in production think there's one statistic that we haven't mentioned, is very powerful. We said that 50% or more of the bookings came from customers refilling the tank, Robin alluded to that. But I don't know if you remember, two quarters ago, I was super excited. I had to dig very deep to find that three customers came and refilled the tank in Q1 In Q3, three sixty two customers refilled the tank. That's an incredible testimony. Of the success that AgentForce is having in a very short in a very short time frame. Now, the other thing that we've learned is pricing matters. It's very complex. We've gone a long ways. We've had different ways of pricing the product. And now I think we have the whole portfolio of different commercial frameworks to meet customers where they are, where they want to be. My favorite one, of course, is the extreme. Those customers that are really you know, determined to become an agentic enterprise before their peers in their industry, They realize that the last mile is very hard. They know that Salesforce is the last mile. With humans, with the with the apps, with the data and the context. They go all they go all in with us. And they ask, Miguel, we don't wanna be trapped here in two or three years. Because consumption you we used to have 10 different metrics. Make it easy for us. And we went to them and we tell them listen, give me a fluffy We'll give you we pull all the power all the power of Salesforce, including IDs from Trini and we will deliver the agentic enterprise promise. We have actually a point of view for every industry that includes hundreds of agents that have already been defined We have a database of agents with their roles, with their workflows that they have to trigger on how they configure them. And we have the phase one, phase two, phase three. And customers just buy on an aela. We did 16 aelas in AgenTeq Enterprise license agreement in Q3 We have about 100 Aielas in the pipeline, and all these are multimillion dollar deals. And it is very exciting, but it gives the customer the predictability that they need. Now there are other customers that are more cautious, and they, I'm going to the other extreme. Drill in on that. So here we have this enterprise Marc Benioff: you know, license agreement. We call this Sogentic enterprise license agreement. You know, when we first started was AgentForce, we were talking about oh, it's gonna be so much per conversation. It was you know, this type of pricing, maybe transaction based pricing, usage based pricing, but customers have pushed for more flexibility We've moved fast to that. How has that really hit the market? Explain why that is so important for customers. Miguel Milano: Because, Mark, good question, by the way. We you and me, came up with the Aeila concept when we visited a few customers in Europe. From Udeliver to PMI. Had great conversations, and we realized that they wanted to move They wanted to transform, they were afraid about all these metrics, consumption, etcetera. So we what we're doing now is very simple. We are putting the whole menu of options to them. We also have a very successful SKUs that we launched which are Agent four for sales or Agent four for service that are seed based SKU People talk about seed based versus consumption based pricing. The reality is there are a lot of customers. That want seat based. Because seed based gives give you the predictability. So we've sold a lot of seed based licenses for AgentForce and Data Cloud in in Q3. In fact, that SKU has doubled year on year. It's very massive success there. And we also have customers from the beginning that they wanna just pay per conversation or per agentic actions. So we have the whole portfolio and we are meeting, and I love the sentence that Robin you know, illuminated me with a while ago is we are meeting customers where they are. Customer is a different point of the journey. So pricing is not is we put pricing away from the table. And by the way, we also have flex pricing. If customers are now going to the second part of the question, if customers are worried, okay, don't want to invest here too much because I already have my you know, service agents in this in the call centers. And my salespeople? And what if that reduces We have flex agreements where if you decide that because the future of is human and agents working together. In most companies, humans are also gonna increase, but if they decrease in some areas, do you redeploy them But they may not need a license of Salesforce. Well, you can use that, that payment to Salesforce into credits into an AILA or into an an asset based license. So we we have the full flexibility. Now humans and agents, I think you guys always ask the same thing on on whether you know, the number of seats is increasing, the price is increasing, Well, for our cloud, we are seeing both increasing, which is exciting. And we have the flexibility for customers if they want to move investment from one area to the other. So far, we are seeing that the power of AgenTek Enterprise is when agents augment humans, and they work together side by side with humans. Mike Spencer: Great. Thanks, Kirk. Operator, we'll take our last question, please. Leila: Your last question will come from Brad Sills with Bank of America. Brad Sills: Wonderful. Thank you so much. Mark, a question for you. I I remember at the analyst meeting that we had at Dreamforce, you referred to some efforts to kinda get back to the basics within the sales channel in pipeline. I think you had mentioned that there were that the leads were there, but you weren't watering the leaves or the seeds were there. You weren't watering the seeds. Would love it if you could elaborate on on that effort to kind of focus back on kind of back to basics lead generation, what impact that has had on the pipeline. Thank you so much. Marc Benioff: Okay. Well, I think that maybe this is our greatest accomplishment of the year. Of course, Srini has done a phenomenal job as well as Steve and the entire technology team in building, Agent Force. There's no question. The product is more exciting than ever before. We went through this in detail today. But I think that probably the most exciting thing that we have done this year from my perspective is not only have we delivered this incredible piece of technology, but we've radically enhanced the capacity of the distribution organization at a level that we have not done in years. This is very important, not for this year, but for the subsequent years. And this investment that we made this year in capacity is gonna pay off across all six segments. I just want you to remember Salesforce sells to companies zero to 200 employees. 200 to a thousand, a thousand to 5,000, 5,000 above, the US government, and across our ecosystem or the software industry. And to really address all six segments, it's critical for us to have the capacity to do that. Miguel, what is your total capacity increase for the year? So far? 20 as of today, 23%. About 23% capacity increase. And then we do four critical things. Not only we delivered more capacity, we have, as Miguel said, trained them enabled them, Obviously, these concepts that we're talking about, AgenTeq Enterprise, we've created this. We're envisioning this. We're defining what the future is with this. We have to enable them and train and give them the ability to deliver that in every one of these market segments. Number two, that core capacity, we have to look at that across every single one of those segments Several of those segments are delivering mid double digit growth a level that we have not also seen in years. Huge shock to us. And we really think that so many of these segments are just on fire and doing incredibly well. And then three is we have to link the compensation plans of these incredible sellers you know, to these goals, all the goals that you've kind of heard us outlined in the script. And the last thing is, we measure the participation of each seller across each segment, across each geo, across every operating unit and find out why are they selling or why are they not selling this product in this geography in this segment. So it's a radical level of management. I would say that our ability to do that today far exceeds where we were even just three or four years ago. And Miguel, I think, is, you know, spent a phenomenal job in making that happen. And I think that when we're running the largest Salesforce in the software industry, which is what we have, and the ability to deliver that across all of these segments with what I think is the most competitive piece of software we have ever had across every industry, every geography, across every segment It's a Herculean task. And Q3 when you look at these numbers and you saw you know, we were guiding, I think, to that we were gonna do you know, two 9% CRPR growth, and it went to eleven. Because Miguel crushed it. And, I'm really excited about Q4, but especially I'm a part excited about fiscal year 2027 and fiscal year 2028. Because of the capacity increases that we're making now. Mike Spencer: Well, thank you, Brad. And thank you everyone for joining us today. Look forward to seeing everyone over the coming weeks. Take care. Leila: Thank you for joining. This concludes today's call, and you may now disconnect.
Operator: Greetings, and welcome to the UiPath Third Quarter 2026 Earnings Conference Call. At this time, participants are in a listen-only mode. A question and answer session will follow the formal presentation. Please note that this call is being recorded. I will now turn the conference over to your host, Allise Furlani, Vice President of Investor Relations. Thank you. You may begin. Allise Furlani: Good afternoon, and thank you for joining us today to review UiPath's third quarter fiscal 2026 financial results, which we announced in our earnings press release issued after the close of the market today. On the call with me are Daniel Dines, Founder and Chief Executive Officer, and Ashim Gupta, Chief Operating and Financial Officer, to deliver our prepared comments and answer questions. Our earnings press release and financial supplemental materials are posted on the UiPath Investor Relations website. These materials include GAAP to non-GAAP reconciliations. We will be discussing non-GAAP metrics on today's call. This afternoon's call includes forward-looking statements regarding our financial guidance for the fourth quarter fiscal year 2026 and our ability to drive and accelerate future growth and operational and grow our platform, product offerings, and market opportunity. Actual results may differ materially from those expressed in the forward-looking statements due to many factors, and therefore, investors should not place undue reliance on these statements. For a discussion of the material risks and uncertainties that could affect our actual results, please refer to our annual report on Form 10-Ks for the year ended January 31, 2025, and our subsequent reports filed with the SEC. Forward-looking statements made on this call reflect our views as of today, and we undertake no obligation to update them. I would like to highlight that this webcast is being accompanied by slides. We will post the slides and a copy of our prepared comments to our Investor Relations website immediately following the conclusion of this call. In addition, please note that all comparisons are year over year unless otherwise indicated. Now, I would like to hand the call over to Daniel. Daniel Dines: Thank you, Allise. Good afternoon, everyone. Thanks for joining us. We are pleased with our performance in the quarter, which was driven by the team's focus, consistent execution, and progress across our strategic priorities. Our automation strategy, combining the reliability of deterministic automation with the intelligence and adaptability of AgenTiKi, continues to align with what customers want most: trusted enterprise-grade automation that delivers tangible ROI fast. We've always believed that our approach to automation agents and orchestration creates a durable competitive edge. This quarter's results reinforce the value of our platform, and the improved execution from our teams, we beat the high end of our guidance across all metrics, delivering third quarter ARR of $1.782 billion, up 11%. Further reinforcing my conviction that our business is stabilizing and being driven by $59 million in net new ARR. Revenue was $411 million, an increase of 16%. Our disciplined approach to operational efficiency continues to strengthen profitability, resulting in our first GAAP profitable third quarter while increasing non-GAAP operating income to $88 million or a 21% margin. And we are on track to be GAAP profitable for the full year 2026 for the first time. The momentum we are seeing in the market isn't just in our results. It's in how customers and partners are engaging with UiPath. You could see that momentum in action at Fusion, where thousands of customers, partners, and developers joined us in Las Vegas to see how AgenTik AI is delivering measurable ROI today. We showcased advancements across the UiPath platform, including new integrations with partners like OpenAI, Microsoft, NVIDIA, Google, and Snowflake. Unreal customer stories where we had leading enterprises across key verticals sharing how they are transforming mission-critical processes with AgenTeq automation. Customers tell us they get the most impact from a unified platform bringing together deterministic automation, agentic intelligence, and process orchestration. And we are seeing that play out as enterprises move quickly from pilots to production. Over 950 companies are developing agents, and there have been more than 365,000 processes orchestrated with Maestro across our platform. A powerful example is one of the world's largest investment management firms, which chose UiPath for Maestro's vendor agnostic and ability to connect systems. They've already demonstrated measurable impact through multiple genetic POCs integrating with ServiceNow, Confluence, and specialized LLMs to orchestrate end-to-end workflows and delivering a 95% reduction in time to value and tens of millions in projected savings. With more than 260, they expanded this quarter to increase their adoption of agentic automation and together with Ashling has identified over 40 high-value use cases expected to generate more than $200 million in savings over the next three years. These stories demonstrate how our innovation is meeting customers where they are and helping them scale. And it's that customer energy that inspires many of the new capabilities we announced at Fusion. One of the most exciting is UiPath screenplay, where we are combining traditional RPA with the power of LLMs to build more reliable automation. Screenplay understands intent, builds multistep plans, and executes them autonomously, giving developers and business users a faster way to automate complex UI tasks. Our screenplay technology is one of the best positioned in the computer use benchmark world OS. We are also helping customers move from pilot to production faster through continued enhancement to agent builder. Including a new visual canvas for debugging and optimization and reusable templates that make automation easier to scale. That focus on usability is driving real customer success. A great example is USI Insurance Services, which selected UiPath because of our multi-agent orchestration capabilities. Working with Lidonia, they are automating a complex workflow where UiPath agents and robots process incoming requests and generate outputs all orchestrated by Maestro. USI expects over $32 million in savings over the next three years. As more customers scale their AgenTik automation programs, we're expanding what agents can do, especially in document-heavy processing. This quarter, we introduced AgenTi capabilities to our Intelligent Extraction and Processing, our iXp product delivers specialized extraction and validation agents that handle complex non-deterministic scenarios and reduce manual review. And with UiPath Autopilot for IX, customers can automatically generate document templates, saving hours of setup time per project. A great example is CoreWell Health, which plans to leverage iXp to automate the processing of referral information into Epic. In addition to improving efficiency and accuracy, they are on track to redirect $1.5 million of labor saving this year and expect over $3 million next year. Studies like this show how our innovation is helping customers turn manual document-heavy work into intelligent automated processes. And these strong results continue to earn us third-party recognition. We were named a leader in the inaugural Gartner Magic Quadrant for Intelligent Document Processing, which we believe highlights our capabilities for data and information extraction to help enterprises unlock value from their documents in the age of AI and agentic automation. We are also recently recognized as a leader in the Gartner Magic Quadrant for AI Augmented Software Testing Tools, which in our view validates our vision for Agenda testing and the results our customers achieved with UiPath Test Cloud. One example is NRG, which adopted UiPath test cloud to address testing challenges across SAP and its digital apps. With agentic testing and autonomous self-healing, they expect 30% better coverage, 1.5 times faster cycles, and almost $2.9 million in savings over three years. And lastly, we are proud to be recognized by Everest Group as both a leader and the star performer in the 2025 Intelligent Process Automation Platform and full suite IPAP peak metrics assessment. This recognition underscores the strength of our end-to-end platform, our innovation in agentic automation and AI integration, and the tangible business impact we are delivering for customers. These recognitions highlight the strength of our unified platform, which connects every layer of automation from discovery to orchestration we bring a single governed system. They also reinforce what we hear directly from customers: the power of our platform comes from how it works together. And at the center of that platform is my our orchestration engine. Maestro builds beyond managing automation. It serves as the control play for how work is orchestrated across the enterprise, powering through end-to-end automation at scale. A powerful example is the leading U.S. Managed care provider that is leveraging UiPath agents, robots, and Maestro to tackle a backlog of more than 140,000 provider appeals. They automated the entire workflow using agents to classify forms, robots to handle processing, and Maestro to orchestrate the process. The result is a streamlined operation targeting 80% autonomy in year one. As Maestro becomes more deeply embedded in customer operations, we are continuing to enhance its capabilities with new features like case management and process apps. Case management helps customers model and manage long-running processes. While process apps enable customers to build tailored end-user experiences with real-time visibility and actionable insights to drive proactive operational improvements. In order to realize the value of Vagintic, customers need a strong foundation in deterministic and this quarter we announced the general availability of API workflows which delivers API-centric automations that complement RPA and agent. We believe this strengthens our position as one of the industry's most comprehensive automation platforms. We are continuing to expand our cloud footprint in important markets like Switzerland, and at Jitex, we announced the launch of Automation Cloud in The UAE. This expansion gives customers the ability to run automation AI agents, orchestration in a secure locally hosted environment, that meets regional data residency and governance requirements. The power of our platform really comes to life when it's applied to industry-specific challenges. We are focused on building vertical solutions that help customers accelerate our constant ROI. The capabilities we gained through our peak acquisition earlier this year are extending these vertical capabilities. By combining their industry-leading pricing and inventory optimization technology with Maestro and our broader platform capabilities, we've created an agentic merchandising pricing and inventory solution with the Debenhans Group. We are taking this joint agentic solution to market with other leading retailers and manufacturers. Expanding the reach of our platform across key verticals. These industry solutions are just one way we are helping customers realize fast value. We're also enabling them through deep collaborations with global technology leaders. At Fusion, this collaboration came to life through new integrations, including with Microsoft Azure AI Foundry, enabling UiPath agents to work seamlessly with Azure agents and models. Using model context protocol, UiPath, expense integrations with Microsoft Copilot, and empowers organizations with the trust and governance needed to run agents at scale. We announced a collaboration with OpenAI to deliver a chat GPT connector bringing OpenAI's Frontier model directly into enterprise workflows simplifying AI agent development and accelerating time to value. We also launched new conversational agent with Google's Gemini models, enabling natural voice-driven automation without complex coding. Additionally, we introduced a new integration with NVIDIA. Allowing organizations to enhance high trust workflows like fraud detection and healthcare with AI models deployed through NVIDIA NIM microservices. And finally, we partnered with Snowflake to combine AgenTik automation with Snowflake Cortex AI, helping businesses turn data insights into fast, autonomous action. While our technology partnerships expand what's possible with our platform, our go-to-market partners make that innovation real for customers. During the quarter, we expanded our collaboration with Deloitte. To help organizations accelerate how they build, test, and release software. By combining the agentic testing capabilities of UiPath test cloud with Deloitte, Ascent. Are transforming the testing life cycle with AgenTiK AI to automate repetitive tasks. Detect changes, and execute tests autonomously. And with autopilot for testers and agent builder, embedded in Ascend. The Loy teams can leverage over 1,500 pre-built testing bots and AI agents. Lastly, we are encouraged by our federal sector performance this quarter where efficiency mandates are creating a long-term tailwind for automation. Highlights this quarter include expansions with the U.S. Coast Guard to modernize core systems and improve mission readiness through automation and AI. The Department of Veterans Affairs, which is automating disability claims and enhancing contact center service for veterans. And the Social Security Administration, which is migrated to the cloud to expand to our IDP solutions to help accelerate benefits processing. Our unified platform and innovation continue to strengthen these partnerships and underscore the significant opportunity ahead in the public sector even as the federal purchasing environment remains dynamic with pockets of strength. Looking ahead, our continued innovation is expanding what's possible for customers and delivering measurable results through the power of deterministic and agentic automation. What continues to set UiPath apart is our unified end-to-end platform architecture delivering one connected experience from discovery to deployment with Maestro orchestrating work across systems and our built-in governance capabilities, ensuring control, compliance, and trust. I am pleased with the progress we are making in improving the execution of our teams and the pace of innovation across product organization is delivering for customers. We feel well positioned as we close out the year and continue executing on our vision for the future. With that, I'll turn the call over to Ashim. Ashim Gupta: Thank you, Daniel, and good afternoon, everyone. Before turning to the financials, I'd like to provide a quick operational update. This quarter reflects the meaningful progress we've made in sharpening execution across the strategic priorities Daniel outlined earlier this year. Including strengthening customer relationships, accelerating innovation, and driving operational rigor across the organization. Through these areas of strategic focus, we have improved performance of our sales team, deepened areas of a strategic focus, we have improved performance of our sales team. Deepened engagement and strengthened alignment with our customers' priorities. We're partnering earlier, co-developing solutions and scaling automation faster. Our broad installed base gives us unique visibility into enterprise workflows helping customers connect people, robots, and AI agents to deliver measurable outcomes at scale. Our pace of innovation continues to accelerate, supported by deeper ecosystems, integrations, and advancements in our AgenTic automation platform. Combined with disciplined execution, these efforts contributed to another solid another quarter of solid top-line and bottom-line performance. Including our first GAAP profitable third quarter, and putting us on track for our first GAAP profitable year. And we're seeing customers lean in, A great proof point of our end-to-end platform is a leading cybersecurity company that expanded to our AgenTeq products, which support from our four deployed engineers, they are leveraging UiPath agents, robots, iXp, and Maestro to create seamless end-to-end workflow. IXB extracts data from purchase orders across 700 vendors robots retrieve quote details from SAP, and agents supply confidence scores before passing the data to sales order creation. Maestro orchestrates the process, ensuring speed, accuracy, and control, which is expected to help them improve their accuracy rate from 50% to 90%. Turning to the quarter, unless otherwise indicated, I will be discussing results on a non-GAAP basis. And all growth rates are year over year. I also want to note that since we price and sell in local currency, fluctuations in FX rates impact results. Rates have remained stable have remained largely stable since the time of our last earnings call through the end of the quarter. And as a result, there is no incremental FX impact to our third quarter results. Third quarter revenue grew to $411 million, an increase of 16%. Normalizing for the year-over-year FX tailwind of approximately $5 million, revenue grew 14%. ARR totaled $1.782 billion, an increase of 11%. This included a $6 million year-over-year FX tailwind. Net new ARR was $59 million ended the quarter with approximately 10,860 customers. We continue to be successful in signing new enterprise logos that align with our strategy of targeting long-term customers with a propensity to invest including new logos like Newfield Health, Research Holding, and an Australian brick manufacturer, which selected UiPath due to the breadth of our AgenTeq automation platform, and they will be leveraging UiPath robots, agents, iXp, Maestro, and process mining to automate sales order processing. As with prior quarters, the vast majority of customer attrition continues to be on the lower end. Customers with $100,000 or more in ARR increased to 2,506 continue to have a strong dollar-based net retention rates. While customers with $1 million or more in ARR increased to $3.30. Dollar-based gross retention remained best in class at 98%. And our dollar-based net retention rate was 107%. Underscoring the durability of our customer base, as they embrace our AgenTic automation solutions. Adjusting for FX, dollar-based net retention rate was 107%. Remaining performance obligations increased to $1.265 billion, up 12%. Normalizing for the FX tailwind, which was approximately $20 million, RPO grew 10%. Current RPO increased to $840 million, up 17%. Turning to expenses. We delivered third quarter overall gross margin of 85%, and software gross margin was 91%. Third quarter operating expenses were $261 million. We delivered our first GAAP profitable third quarter, with GAAP operating income of $13 million, up from the prior year GAAP operating loss of $43 million. GAAP operating income included $71 million of stock-based compensation expense. Third quarter non-GAAP operating income was $88 million, representing a 21% margin, up more than 700 basis points year over year and driven by our continued focus on operational efficiency. Third quarter non-GAAP net income was $85 million, which excludes a nonrecurring noncash tax benefit of $184 million from the release of a valuation allowance on certain deferred tax assets. Third quarter non-GAAP adjusted free cash flow was $28 million. We ended the quarter with a healthy balance sheet of $1.5 billion in cash, cash equivalents, and marketable securities and no debt. Now turning to guidance. We are pleased with the team's execution and what continues to be a variable macroeconomic environment. We continue to maintain a prudent outlook and guide to what we see in front of us. As Daniel mentioned, we are pleased with the progress of our public sector team. As a reminder, while we are encouraged by early traction with our AgenTi capabilities, adoption is still in its early phases. We don't expect a material top-line contribution in fiscal 2026. Lastly, since the end of the quarter, the Japanese yen has depreciated against the U.S. Dollar, creating a headwind to fourth quarter guidance. Turning to the specifics of our guide. Despite the incremental FX headwind from the yen, we are raising guidance for the progress we've made on our operating priorities and the strength we are seeing in the business. For the fourth fiscal quarter 2026, we expect revenue in the range of $462 million to $467 million. This range reflects an approximately $3 million headwind driven by FX rate movements since we provided guidance on our second quarter earnings call. ARR in the range of $1.844 billion to $1.849 billion. This range reflects an approximately $3 million headwind driven by FX rate movements, since we provided guidance on our second quarter earnings call. Non-GAAP operating income of approximately $140 million. And we expect fourth quarter basic share count to be approximately 536 million shares. And finally, we continue to expect fiscal year 2026 non-GAAP adjusted free cash flow of approximately $370 million and non-GAAP gross margin of approximately 85%. Thank you for joining us today, and we look forward to speaking with many of you during the quarter. With that, I will now turn the call over to the operator. Operator, please poll for questions. Operator: Thank you. And at this time, we'll conduct our question and answer session. Your first question comes from Brian Bergen with TD Cowen. Please state your question. Brian Bergen: Hey guys, good afternoon. Thank you. Maybe just starting off here on some of the agentic solution traction. Daniel, I had you mentioned, I think 950 plus clients. Just first, is that comparable to the I think, 450 or so last quarter using AgentBuilder? Or is that a broader kind of view across your agentic solutions? Just trying to get a sense of kind of that quantitative traction, if you could share that. And for the cases where you are seeing scaling past the proof of concepts, is it more about the underlying clients their capabilities or more so about the specific types of use cases that they're pursuing? Daniel Dines: Thanks, Ryan. Yeah, we are seeing really good momentum across our AgenTeq offering. And this creates a pull through across the entirety of our platform. We are seeing some kind of consistent buying patterns emerging from POC to pilots. And to some use cases into production. I would say that it's more you know, the highest ROI use cases are very customer specific. I don't see necessarily a single one across multiple industries or different departments. But overall, it's pretty encouraging to see you know, the movement from, again, from pilots into production. For some of them. Brian Bergen: Okay. And then my follow-up is on the federal business. So you had positive commentary here probably a surprise for some given the shutdown. Just curious, was there any shutdown impact just worth calling out here in October and into November? Daniel Dines: No. There was no direct impact from the shutdown. You know, you got to remember, Brian, a lot of our projects are just funded, you know, through the bills. So and many of them are considered are in critical operations, like, in areas like the Department of Defense, etcetera. So we had no major impact from the shutdown. Brian Bergen: Alright. Very good. Thank you. Operator: Your next question comes from Jake Roberge with William Blair. Please state your question. Jake Roberge: Yes, thanks for taking the questions and nice quarter. Congrats on the results. I know there's some FX impact, your Q4 guide implies that net new ARR could start growing again on a constant currency basis. Can you talk about the driver of that return to growth and just how we should think about the sustainability of net new ARR growth moving forward? Daniel Dines: Yeah. Look, I think my entire business is positive. We are really pleased with how our team executes. We see consistent execution across the board. I would like to nominate especially our teams in Americas. Where we are really see signs of great traction, especially in the agentic. And yeah. I would say it's overall it's things are improving and stabilizing. Ashim Gupta: Yeah, I would just echo what Daniel said as well. I think there is no magic to it. We talked about the improved execution. The focus the launch of the new products, we think is going to continue to help us both you know, definitely indirectly and pulling through our platform and increasing stickiness and getting us deeper in customer conversations. But then, you know, as we go through time more directly, and know, we we look at kinda just as the business stabilizes. A lot of goodness, both the consistency of the leadership, the talent that has been brought in as well. So those are factors that contributed. There's not one single know, magic, magic, button or or one silver bullet that that we're counting. On for that. Jake Roberge: Okay. That's helpful. And then I know you're not expecting a material contribution from AI solutions this year. But for customers like that cybersecurity company that you called out in the script that are starting to put these agents and Maestro processes into production, can you help us understand what type of pricing uplift or monetization that you're seeing once we actually get these these go lives in production. Ashim Gupta: Yeah. It's not about the pricing uplift. I think the first thing to note as we talked about the cyber Jake, is it's pulling through the entire platform. IXp additional robots, process orchestration, so I think that is an important part of this. It's not agentic in isolation. It is agentic paired with the rest of our platform. That really is driving value for our customers. So I see this kind of the monetization, not as a pricing uplift, but increasing stickiness, giving more conviction to deepen our platform into the architecture of our customers. As customers really like the road map and are starting to experiment with AgenTic. And find you know, tangible ROIs through the full breadth of our platform. Jake Roberge: Very helpful. Thanks for taking the questions. Operator: Your next question comes from Mike Turrin with Wells Fargo. Please state your question. Austin Williams: Yes. Hey, this is Austin Williams on for Michael Turrin. Just wanted to go back to U.S. Federal. I'm curious how results in 3Q came in versus your expectations at the beginning of the year related to Doge. And then maybe just as a follow-up, anything you can add on the OpenAI collaboration exactly that could drive for you? I've got Thanks. Daniel Dines: I would say that the federal business continues to be a dynamic environment for us. We've pockets of strength. We are really encouraged by the progress in 3Q and I think it's returning to to a new normal. The deals that we mentioned in the scripts are really are really solid. Team is executing well. We've focus on efficiency positioning as well. The projects are long term and strategic, not short term. We continue to be prudent in our guidance estimations about the sector. On the OpenAI, yeah, we use you know, GPT five across the board in our platform. We highlighted especially the use in one of the most innovative parts of our platform that the product that I mentioned in the script called screenplay. Which is basically our our own version of computer use or operator. But the key thing here is that we can combine the the, you know, the reliability of UI automation with the power of adaptability of LLM driven computer use. And I think to my knowledge, we are the only company that can succeed delivering autonomous UI tasks using using LNMs. You know, using this approach. Austin Williams: Thank you. Operator: And your next question comes from Matthew Hedberg with RBC Capital Markets. Please state your question. Mike Richards: Hey, guys. This is Mike Richards on for Matt. Thanks for taking the question. Yes, kind of building on that last question, there's a ton of excitement around the partnerships you guys announced, and I think it validates your positioning in orchestration. So I was wondering even beyond OpenAI, you could just give some more details around the partnerships just in terms of is there a joint go to market element to any of them? I know it's early, but have you seen any pipeline build as a result of these partnerships? Just just any more details. There's a lot of excitement around Thanks. Daniel Dines: Yeah. I would say that at this point, our the partnership that we announced at Fusion are are clearly into the technology enabling partnerships. And it it they were driven largely by our customer needs. We always we praise ourselves for having an open platform that can can really be flexible and customizable to customer needs. So we we we believe so if you look at kind of our partnership, we we believe that the foundation of delivering reliable AI in in in enterprise have different layers. So it has the data layer on topology layer, so we this is where our partnership with is shining. We offer ourselves the automation the RPA, and API, and agentic layers. But of course, with OpenAI and and Google we we we use the Frontier LLMs. In order to power the agentic. We use Nvidia for you know, security and governance in regulated industry. So I think our our goal is to is to create a set of partnership that offer a very solid foundation to deliver reliable AI into a secure and governed manner. Mike Richards: Super helpful. And then if I could just do a follow-up. Yeah. I think before we talked about in the early days of the orchestration opportunity for you guys, it's been mostly agents created on UiPath. I was just wondering, have you seen more of a shift to third party agents yet? Or is it still you you guys are mostly orchestrating agents built, within UiPath? Thanks again. Daniel Dines: We are seeing many customers interested in in building coded agents. Where we have partnered with companies like Longchain, CrewAI, and Lama Index. And we're seeing right now a mix of agents that are hosted and managed by our platform that are both low code and and coded agents. I think at this point, it's kind of too early to see us managing external agents that are built completely outside of our platform. Austin Williams: Thank you. Operator: Next question comes from Sanjit Singh with Morgan Stanley. Please state your question. Ryan Lances: Yes. Hey, everyone. This is Ryan Lances on for Sanjit. Just with regards to the channel, you mentioned the expansion of your partnership with Deloitte. So can you just provide some additional details around how much incremental pipeline is now partner sourced? Relative to a year ago? And maybe just how these partnerships can help drive additional kind of AI related product deployments next year? Thanks. Ashim Gupta: Yeah. One is, I I think, you know, the quantum definitely increased. But more than the the quantity, it's the quality. So when you look at the s four HANA migrations that are happening, and partners like Deloitte, you know, and and their presence within many of these customers, we're now involved in those conversations. And I think that that is helping pull us through and being in the conversation about larger scale transformation processes. I know I think that is Deloitte has obviously done an a really exceptional job in that partnership has been meaningful for us. But I think that's a motion that we're also seeing with with you know, across our teams with various partners that are there. So the quality for me is sue is is much higher quality pipeline than just a superficial quantum or quantity number that I would tell you about. Ryan Lances: Okay. Great. And then just one follow-up. You guys have driven some pretty meaningful OpEx leverage throughout this year. And I'm just curious if you could provide any additional details around how you're thinking about OpEx investment next year to kind of support this AI product rollout and just broader monetization path? Thanks. Ashim Gupta: Yeah. Of course, I'll I I'm not gonna provide anything specific regarding next year at this time. But I think putting this year in context, give you a sense of the strategy that Daniel and the leadership team here are employing. So I think the first thing is we've gotten OpEx leverage by not austerity, but by discipline. And really being super focused on where we prioritizing. So we are actually hiring in our engineering segment. We are expanding sales capacity. As we talked about earlier this year, and last year, really our focus has been continuing to drive a efficiency across our processes, being selective about overlay functions in terms of where we're investing, And and I think that area allows us to get operating leverage while still being able to invest in key areas. So as we're looking at our platform, whether it's for deployed engineers, you know, whether it is more hands hands and legs at our customer sites. Or just core engineering capabilities. Those are areas that are you know, in our investment zone. When you look at our line items, we're getting leverage across every area. Because we're really going to all of the cost structures that exist outside of those three. And really seeing what are the areas of efficiency and prioritization. And that has not just given us OpEx leverage, it's also enhanced our focus and has contributed to us being better in our execution cadence as well. Thank you. Operator: Your next question comes from Scott Berg with Needham and Company. Please state your question. Scott Berg: Everyone. Nice quarter. Thanks for taking my questions. When I was at conference a couple months ago, some of the partners I spoke with really talked about a high level of pilots and proof of concepts that your customers are are going through right now, you know, with the different types of AI functionality. And I know it's not a big part of the expectations around bookings for this year, but I guess as you've seen some of them convert to actual sales or production, are there any key drivers or levers that you've learned through some of these that you can help maybe use in some of these other deal cycles you're currently going through? Daniel Dines: Yeah. We we we see this patterns emerging. It's I would say that this the landscape it's extremely scattered right now. We we have deployed our teams in various use cases across various industries. We see some particular partners emerging in healthcare, like for instance in revenue cycle management, prior authorization, claims management and financial services, financial crimes it's but again, I think it's a bit too early to mention one particular use case where we see, you know, like, great replicable potential. Scott Berg: Understood. Thank you. And then, Ashim, as you look at the fourth quarter guidance someone else had already mentioned, that the implied ARR number suggests that your net new ARR is up again on a year over year basis. Help us kind of think through maybe the construction of that. Is that just purely a result of the improved execution that you all have been working on this year? Or is there some aspect that maybe deals that were maybe slipped for Q2 and Q3 that kind of moved in you know, to the expectation. And, you know, I know that AI is you know, some of the functionality there is not a big driver this year. But are there some, you know, expectations around maybe some bookings improvements in that category? That's helping kind of drive what your initial guidance here is? Ashim Gupta: Yeah. So let me be super clear on it. There's nothing in terms of, like, slip deals from third quarter or anything that is timing oriented, Scott. In any material or significant way. There's always normal course deals that move back and forth. Right? Deals that were in your fourth quarter pipeline that closed early and deals that closed late. That's just normal course, and nothing out of the usual that I would I would talk about. When you look at the year over year growth implied within our guidance, I think there's there's three main factors for me. The first is execution. We are seeing improved execution. Across the, you know, across the board from our sales team, we it's it is supported by good customer activity. Meaning not one or two deals, but really broad based activities of POCs and pilots and renewals that are coming in with more conviction about our long term, you know, place in in the in the architecture that leads to natural upsells, etcetera. There is macroeconomic environment, as I talked about in the second quarter earnings call around foreign exchange that will play a role in that year over year impact that is there. And then the third one is, I just think momentum I think that we've had a good stable base now in terms of if you look at our sales stability six months, nine months after of the restructuring that we had, you know, completed at the beginning of the year, well as just a little bit of the normalization around areas like the public sector, which we've said is kind of back to a new normal. No catch up, but at least you know, at this time, a new normal. We feel like we're still prudent on our on our overall assumptions on the macroeconomic environment, but it's a confluence of things that to me are at the opposite end of when net new ARR was declining, which poor execution, foreign exchange having a headwind, and frankly, just losing having too much inconsistency in our strategy, as well as our organizational structure. So I'd say all three are contributing to that. To the to the to the stabilization of net new ARR you're seeing. Scott Berg: Understood. Helpful. Thank you. Operator: Your next question comes from Alex Zukin with Wolfe Research. Please state your question. Arsenio: Hi, this is Arsenio on for Alex Zukin. And I guess on the results and also just kind of wanted to expand on what the downtick in NRR was, was it just weakness at the low end or was there anything else? Then kind of unpacked what's driving that stronger new business, but is there that you can kind of give us in terms of Q4 expectations on that new business strength given the three you just talked about? Ashim Gupta: Yes. So look, think there is I think when you look at it, definitely the lower end of the segment we've talked about that. It has a little bit of pressure on the net new ARR. To give you a supplemental metric, our net dollar expansion rate for customers between 100,000 and 1,000,000 was 113%. So that, you know, that can quantifiably show kind of the the the lower cohort having more more pressure. And I think you get a little bit of the law of large numbers as well. But as we stabilize net new ARR, obviously, rest of the metrics begin to stabilize as well. And you can see can see that pattern starting both with our third quarter results and, of course, kind of the guidance that we've provided here. Arsenio: Got it. And then just to kind of follow-up on kind of the same thing, you doubled the number of customers developing agents quarter over quarter and managed to process instances. What's the uplift you've seen in those customers? And is it kind of fair to assume that into next year as that revenue ramps, it can help sustain that NRR and offset some of that low end weakness that we've seen? Ashim Gupta: Yeah. I we we will continue to contend that we're in the early innings of of AgenTek. I think what the the momentum around customer activity, it has both the direct and indirect. I think the indirect definitely can has started to help us and will continue to help us. Customer pulling through other parts of our platform, investing us in us as a longer term part of their enterprise architecture. In terms of direct, you know, scalable direct monetization place for Magentic, you know, we're at this we'll update everybody as we kinda get into next year around assumptions there. But for the immediate short term, there's nothing material as we cited in the script. Arsenio: Got it. Thanks. Operator: Your next question comes from Kingsley Crane with Canaccord Genuity. Please state your question. Kingsley Crane: Hi, thanks. So I think it's interesting if we think about the Code Red moment over the past couple of weeks, it's clear that competition among model providers is healthy. Of course, that makes integration, orchestration even more valuable. Have you seen a shift in perception in the past quarter? And then from an integration activity perspective, how is heterogeneity trending? Thanks. Daniel Dines: I don't think we necessarily see yet a shift I think you you aim at Google Gemini release. We we were using Gemini in our ISP business for quite a few quarters. Somehow. I think we as platform we continue to assess all the Frontier LLMs. We use frankly a mixture of them. In for for instance, in our ISP business, we use we use GPT five to understand better the structure and intent of a document while we can use Gemini for specific extraction, like multiple tables, imbricated tables, This is just an example. But across the platform, we always monitor and use the best of breed LLMs. Kingsley Crane: Great. And then just a quick follow-up. Ashim, you mentioned in your prepared remarks that you're partnering earlier, you're co-developing solutions earlier. This has been a big focus for this year. Just to what extent did this directly translate into proof improved results in Q3? And then do you think that this could be more of a future predictor success next year? Ashim Gupta: I think a leading indicator, yes. I think anytime you're closer to customers, you are innovating with them, you're solving problems. Think it helps. And I I would say what our conviction is is that ROI is going to be where choices are made. And so as we're co-innovating, as we're as we're teaming up with partners around bigger problems, I think we have a chance to have meaningful impact around ROIs, which we feel, you know, we'll continue to do that. Think it also shows the relevance of UiPath. If I can if if I you know, like, in terms of the validation of the agentic framework, you know, it's not market texture. It's it's real product that has real impact that both partners and customers can innovate around. I think that is super important and and a really great validation point for our product team, our sales team, and all of our customer teams combined. Answer your question around third quarter, as we've cited in the script as well in the prepared remarks, there's no meaningful impact from AgenTeq. You know, in our near term results. We feel like this is continued disciplined execution. What AgenTek continues to do is the closer you're to customers, the more you are a part of their long term road map and architecture. The more that they're willing to invest and pull through the existing parts of your platform today, And know, have higher level impacts within their org. And that indirect impact, we're feeling the momentum, and we're excited about it. Operator: Thank you. Your next question comes from Kirk Materne with Evercore. Please state your question. Chirag Ved: Hi, this is Chirag on for Kirk. Congratulations on the strong quarter and traction. Daniel, you've talked briefly about prebuilt agentic solutions, and highlighted strong modernization use cases within certain categories. In the past. Which verticals do you see adopting these prebuilt agentic solutions the fastest? And are you moving more aggressively into industry specific packaged automation at all? Daniel Dines: Yes. Our verticalized approach is getting a lot of traction within UiPath. We put a lot of focus and effort. We actually did recently rework of our product and engineering teams to better address the creation of vertical solutions. In terms of industries, we focus on healthcare, financial and financial services primarily with again with an accent on revenue cycle management in health care, and and in financial services, I would say, I would say financial crimes can be one of the know your customers anti money laundering. Type of use cases we are seeing the the most interest from our customers. Chirag Ved: Okay. Maybe just one more. What are your thoughts on the balance between deterministic automation and agentic or LLM based automation. And do you see this balance shifting materially at any point, you know, over the next few years or a few quarters? Daniel Dines: Look, our thesis is that they are very complementary. And they address different steps in the business process. And in many in many processes as long as you know, a task or workflow is well defined, people will use a deterministic automation. There is zero need to use an LLM based. You use an LLM order to create a deterministic automation or to maintain it to make it to to improve it over time, but you don't use an LLM to drive it. But of course, are so many areas where you cannot have rules are either too complicated or process is too complex, you sift through tons of documents where or it involves conversational aspect of the process. This in all these areas, LLMs are an amazing complement to to to the deterministic automation. And I also want to mention that the orchestration piece that combined the AI based and deterministic with humans in the loop is an essential piece that is required in order to deliver a solution that is secure covered for the enterprise. We continue we have continued saying that orchestration is a key. We announced it our effort a year ago and I'm pleased to see that across the industry, people are talking right now and realize that orchestration is a key technology in order to deliver reliable AI. Chirag Ved: Okay. You very much. Congrats again on the quarter. Operator: Your next question comes from Terry Tillman with Truist Securities. Please state your question. Dominique Manansala: Hi, this is Dominique on for Terry. Thanks for taking my questions. So it was mentioned previously that one of the biggest customer hurdles with agentic consumption pricing is spend predictability. So have early deployments given you enough usage patterns to help customers forecast more reliably? Also just curious as to what else you all are doing to help customers get over that hurdle. Daniel Dines: Look. We are we are constantly evaluating how our customers are adopting AI and we we aim to have a pricing model that really reflects the adoption of consumption of AI. We constantly monitor industry trends and I would say the the entire industry is is dynamic. At this point and is trying to to figure out what what's the best pricing. We We are pretty flexible in our approach. Can price by you know, We also are pretty flexible on understanding and how would outcome based pricing can be for our customers. But again, I think the we are in the early innings of really understanding consumption patterns. Across the GentiKi at scale, I mean. Dominique Manansala: Got it. And then just as a follow-up, has the typical cycle timeframe from an PLC to a production deployment shortened versus earlier in the year? If so, could you just highlight what specific efforts are driving that compression or what you all plan to do to accelerate it? Daniel Dines: Yeah. I I think we, as a company, understand understand a bit better how you know, various use cases. We are building internally solutions, accelerators that can help us you know, replicate experience across industries and verticals. And my estimation is this trend will continue to accelerate within next year. I I strongly believe that the key to unlock huge scale AI consumption in enterprise is the prepackaged solutions where we'll we can meaningfully accelerate the time to to value. This is why as I mentioned before, we put a lot of emphasis in building these solutions. Dominique Manansala: Great. Thank you. Operator: Thank you. And there are no further questions at this time. So I'll now hand it back to management for closing remarks. Daniel Dines: Thank you so much for all the questions. I would like to wish you happy holidays. And as usual, we like to hear from as many as you throughout the quarter. Thank you. Operator: Thanks. This concludes today's call. All parties may disconnect.
Operator: Good day. And thank you for standing by. Welcome to the C3.ai, Inc.'s Second Quarter Fiscal Year 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 11 on your telephone. Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker today, Amit Berry. Please go ahead. Amit Berry: Good afternoon. And welcome to C3.ai, Inc.'s Earnings Call for the 2026. Which ended on 10/31/2025. My name is Amit Berry, I lead investor relations at C3.ai, Inc. With me on the call today are Stephen Ehigian, Chief Executive Officer, Hitesh Lath, Chief Financial Officer, and Tom Siebel, Executive Chairman. After the market closed today, we issued a press release with details regarding our second quarter results, as well as a supplemental to our results. Both of which can be accessed through the Investor Relations section of our website at ir.c3.ai. This call is being webcast and a replay will be available on our IR website following the conclusion of the call. During today's call, we will make statements related to our business that may be considered forward-looking under federal securities laws. These statements reflect our views only as of today and should not be considered representative of our views as of any subsequent date. We disclaim any obligation to update any forward-looking statements or outlook. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations. For a further discussion of the material risks, and other important factors that could affect our actual results, please refer to our filings with the SEC. All figures will be discussed on a non-GAAP basis unless otherwise noted. Also during today's call, we will refer to certain non-GAAP financial measures. A reconciliation of GAAP to non-GAAP financial measures to the extent reasonably available is included in our press release. Finally, at times in our prepared remarks, in response to your questions, we may discuss metrics that are incremental to our usual presentation to give greater insight into the dynamics of our business or our quarterly results. Please be advised that we may or may not continue to provide this additional detail in the future. And with that, let me turn the call over to Stephen. Stephen Ehigian: Thank you, Amit. Good afternoon, everyone, and thank you for joining our call today. Our results in Q2 were solid. Revenue grew 7% sequentially and bookings increased by 49% sequentially to $86 million. High-value deal activity was particularly strong. We closed 17 agreements over $1 million and six agreements over $5 million. You'll remember that we previously warned that a government shutdown would have an adverse effect on our business. No one could have predicted that the shutdown would last 43 days. However challenging we thought it could be, it was far worse. It created headwinds across our federal business. In both the Department of War and in civilian, also affected related markets including shipbuilding, health care, manufacturing, and industrials. Despite these headwinds, we delivered a fine quarter, and I'm proud of the company's execution. We saw significant traction in the federal business. Total bookings across federal, defense, and aerospace increased by 89% year over year and accounted for 45% of total bookings. We signed new and expansion agreements with the US Department of Health and Human Services, the US Department of War, US Intelligence Community, the US Army, the Naval Air Warfare Center Aircraft Division, the Naval Sea Systems Command, the US Marine Corps, and Los Alamos National Laboratory, among others. The federal market continues to be a large growth vector for us. The opportunity there is huge. Across government, agencies are focused on moving away from bespoke government-built solutions and towards commercial off-the-shelf solutions that can deliver production AI quickly and securely. Virtually every agency is now reevaluating its technology stack. Executing the administration's AI action plan, and driving the revitalization of America's industrial base and technology leadership. For example, this quarter, the Department of Health and Human Services selected C3.ai, Inc. to establish a unified secure, and scalable data foundation for enterprise AI. Across the National Institutes of Health and the Centers for Medicare and Medicaid Services, HHS will use the C3 Agentic AI platform to consolidate siloed data environments, improve data quality, and governance, and enable new research, analytics, and applications. While enforcing strict privacy and security requirements. The department will also use C3 Agentic AI to automate complex labor-intensive administrative workflows. We also significantly expanded our contracts with The US intelligence community. For decades, fragmentation in intelligence systems has limited analysts' ability to form a complete operational picture. Intelligence information required by analysts has been historically accessed through siloed legacy applications. Where each application is tied to a unique data type and where the source data is fragmented across disparate systems. This data includes signal intelligence, electronic intelligence, human intelligence, imagery intelligence, open source intelligence, and geospatial intelligence. Using C3.ai, Inc. all types of intelligence contained in those sources are aggregated into a common generative AI application providing one pane of glass to all Intel analysts. This provides a common application for analysis of all data sources and, in addition, accounts for the intersection and combinatorics of all data types. Across space, and time. Importantly, this dramatically facilitates communication and coordination among and across intelligence analysts. Our federal opportunities further accelerating through our partner ecosystem. Government mandates require our partners to provide solutions as commercial off-the-shelf technology. Known as COTS, rather than legacy custom-built government off-the-shelf solutions or GOTS. By enabling our partners to sublicense the applications that they develop using the C3 Agentic AI platform, our federal partners are able to easily meet the federal cost mandate. In Q2, Booz Allen, amongst others, joined the C3.ai, Inc. integrator program for this exact reason. In the private sector, I'm encouraged by the progress made this quarter. Exemplified by the big customer wins with category-leading companies including AMD, GSK, Signature Aviation, Air Products, US Steel, Duke Energy, Cargill, BAE Systems, La Poste, Olsom, and more. These wins are with organizations looking to operationalize AI across the core of their businesses. From finance and R&D, to production and supply chain. GSK is a prime example. They're standardizing on the C3 Agentic AI platform using it as their enterprise AI operating system across the company to drive critical decisions. Addressing strong results in vaccine demand forecasting, accuracy, they're now scaling these benefits enterprise-wide. To drive better decisions, greater efficiency, and faster delivery of critical medicines. Signature Aviation advanced to full production across 20 facilities after seeing strong results in their IPD. Or initial production deployment. They operate some of the busiest private aviation facilities in the world. We're predicting demand optimizing aircraft movement, and ramp space utilization is the key to increase revenue and EBITDA. Their teams can instantly adjust and ask operational questions in natural language, through C3 generative AI. C3.ai, Inc. has built a formidable partner ecosystem including with Microsoft, AWS, McKinsey, Baker Hughes, Booz Allen, and more. This ecosystem is operating at increasing scale. And we're moving decisively to ensure we realize the full potential of these partnerships. As an indication of progress, 89% of our bookings in Q2 were closed with and through this partner ecosystem. Our joint twelve-month qualified opportunity pipeline partners grew by 108% year over year. The Microsoft partnership is scaling rapidly. We celebrated the first anniversary of our strategic alliance, and in that time, we jointly closed more than 100 customer agreements across 17 industries. Generating over $130 million in C3.ai, Inc. bookings. In Q2 alone, we closed 24 joint agreements and expanded activity contributed to a 146% year over year increase in joint qualified pipeline. We're also seeing strong activity with AWS. Closing nine joint agreements in the quarter and hosting multiple C-suite level events that help drive a 172% year over year increase in joint qualified pipeline. Now turning to products. This quarter, we launched C3.ai, Inc. Genetic cross automation. This release materially changes how enterprises will run their operations, and expands the scope of what customers can accomplish with our platform. This innovation enables our customers to encapsulate full business and industrial processes, through autonomous AI agents. They can describe complex workflows in natural language, and the system builds and deploys the result in AI agent in minutes. This substantially increases our addressable market opportunity allowing us to serve the entire robotic process automation market. With Agentic AI software agents rather than rigid and deterministic RPA routines. The functional and technical leadership of the C3 Agentic AI platform and its associated applications was recognized as the leading AI software platform in industrial AI by Verdantex. Awarding us the highest scores of all vendors as measured by technical capabilities, and market momentum. Having spent the last quarter in nonstop meetings with customers, partners, investors, prospects, and employees, it is clear to me that the opportunity at C3.ai, Inc. is bigger than I had imagined. The fundamentals of our business are strong. A large and expanding addressable market. A proven market-leading platform a growing suite of AI native applications. Highly satisfied customers, and a leadership team focused on execution. I've worked closely with my management team to craft a detailed execution plan to return the company to rapid growth and a path towards free cash flow positive and non-GAAP profitable. To do so, I'm focused on two things. First, drive sales execution with relentless discipline and focus on delivering rapid economic value to our customers and two, double down on the products and industries where we have demonstrable leadership and success. On sales, I'm raising the bar of execution with sharper qualification and rigorous deal reviews. IPDs remain our primary landing motion. Many of our major wins, Dow, Wholesome, HII, and GSK, start as IPDs. And this continues to be the most efficient and scalable way to introduce customers to our platform and expand enterprise-wide deployments. I've implemented a comprehensive program to focus on delivering economic value with every engagement. And to elevate both the quality and volume of IPDs our partners. I've established an exacting execution model to ensure each IPD set up for success. I am personally driving these reviews and focus on increasing conversions and accelerating production scale outs. Beyond IPDs. We will prioritize expansions of our strategic lighthouse accounts. On products. I'm sharpening the focus by doubling down on areas where we have demonstrable leadership. Clear customer success, and the right to win, including industrial as performance, supply chain optimization, supply network risk, demand forecasting, production optimization, and generative AI. On vertical markets, I'm concentrating our efforts on our fastest growing sectors, federal, state and local, energy, health care, manufacturing, and other select commercial markets where we are best in class. Enterprise AI is moving from experimentation to full-scale deployment. Customers want to move faster, scale sooner, and embed AI as a core operating capability that delivers measurable economic value. And our platform is built for this moment. Our product roadmap, C3.ai, Inc. data fusion, C3.ai, Inc. vision, C3.ai, Inc. Agentic everywhere, C3.ai, Inc. Agentic Cross Automation, and a C3.ai, Inc. developer hub will dramatically increase both the speed with which customers can develop and deploy applications and the rate at which these applications can be broadly deployed across the enterprise. As we enter Q3, I've completed an exhaustive and detailed planning process with the C3.ai, Inc. leadership team. We have crafted a detailed financial model that precisely allocates every human resource measures and meters every dollar of expense, and details every revenue source by line of business by market. I believe the execution of this plan will facilitate our return to growth and provide a clear pathway to cash generation and non-GAAP profitability. I and the extended management team have written clear and precise operational objectives that fully account for the performance of each business unit and their interdependencies the execution of which will result in the attainment of our financial plan. These company and departmental business objectives, the attainment of which will be measured weekly, have now been assigned across every department to all managers and employees each of whom have written and published their own respective objectives in our company performance management system. All performance incentives and compensation opportunities for every employee and management are now tied to the attainment of these objectives. We have a clear and attainable financial model. A clearly articulated detailed execution plan, Every manager and every employee understands the resource they have available and the obligations for which they are responsible. The market opportunity is huge. The management plan and team is in place. And we're focused on heads down assertive execution with clear accountability. In closing, I will again acknowledge the outstanding efforts of the C3.ai, Inc. team attaining fine economic results and I want to thank you for your time. Now let me turn it over to our CFO, Hitesh Lath, to provide more specifics on the operating results of the quarter. Hitesh Lath: Thank you, Stephen. I will share our financial results and provide additional color on our business. All figures are non-GAAP, unless otherwise noted. Total revenue for the quarter was $75.1 million, a quarter over quarter increase of 7%. Subscription revenue for the quarter was $70.2 million, a quarter over quarter increase of 16.5%, and representing 93% of total revenue. Revenue from the sale of software licenses that do not require maintenance and support services and for which revenue is recognized upon delivery to the customer was $21.9 million during the quarter. Professional services revenue was $4.9 million, of which $3.9 million was revenue from prioritized engineering services or PES. Professional services represented 7% of total revenue during the quarter. Our subscription and PES revenue combined was $74.2 million and accounted for 99% of total revenue. Our bookings during the quarter were $86.4 million, an increase of 49% from last quarter. Non-GAAP gross profit for the quarter was $40.9 million and non-GAAP gross margin was 54%. Non-GAAP gross margin for professional services was 72%. As compared to fiscal 2025, we expect to continue to see moderated gross margins in the near term primarily due to high mix of YPDs. Which carry a greater cost of revenue during the initial production deployment phase. And due to our investments in expanding our support capacity and lower economies of scale. Non-GAAP operating loss for the quarter was $42.2 million. Non-GAAP net loss for the quarter was $34.8 million and $0.25 per share. We remain focused on expense management and improving operational efficiency without compromising our strategic investments primarily in the sales, and customer services organizations. During the quarter, we reduced our non-GAAP expenses by $10.7 million quarter over quarter. This was through a combination of reduction in personnel cost, cloud infrastructure cost, sales and marketing, and through improvements in overall operational efficiency. Free cash flow for the quarter was negative $46.9 million. We continue to be very well capitalized and closed the quarter with $675 million in cash, cash equivalents, and marketable securities. During the second quarter, we signed 20 IPDs including six GenAI IPDs. At the end of the quarter, we had cumulatively signed 394 IPDs of which 269 are still active. This means they are either in their original three to six-month term or extended for some duration, or converted to ongoing subscription or consumption contract, or are currently being negotiated for conversion to ongoing subscription or consumption contract. Now I'll move on to our guidance for the next quarter. Our revenue guidance for 2026 is $72 million to $80 million. Our guidance for non-GAAP loss from operations for Q3 is $44 million to $52 million. Our revenue guidance for fiscal year 2026 is $289.5 million to $309.5 million. Our guidance for non-GAAP loss from operations for fiscal year 2026 is $180.5 million to $210.5 million. Our guidance for Q3 and fiscal year 2026 reflects sequentially higher sales and marketing expenses in Q3 and Q4, due to major marketing events, including World Economic Forum, and Transform. With that, I'd like to turn the call over to the operator to begin the Q and A session. Operator? Operator: Thank you. To ask a question, please press 11 on your telephone. And our first today comes from the line of Patrick Walravens of Citizens. Your line is open. Patrick Walravens: Oh, great. Thank you very much. And, Stephen, nice job stepping in here and driving the bookings. I thought it might be helpful if you could just, sort of take a step back. I mean, two quarters ago, this company was, you know, growing in the 70. And now the business is shrinking and the gross margins are down and the losses are big. And I think some of us understand sort of the setup that you walked into. But if you could just take a minute and explain, you know, why the business fell off by so much and then, the steps you're taking to bring it back picture, think that would be really helpful. Stephen Ehigian: Patrick, thank you very much. The biggest thing I would say is sales execution and Tom hit on this last quarter, fell off. It was totally unacceptable, and Tom would probably acknowledge that his health contributed towards that. So I think he spoke at that at length on the last call. That was attributed towards the poor performance. But I can say this, being in here for ninety days now, the demand for C3.ai, Inc. and enterprise AI is only accelerating. I've been actually surprised coming in here how much bigger the opportunity was than when I first came in. So the market's there, the product itself, I've spent countless meetings with customers and prospects and partners. We have a world-class product. And I hear this. I see the NPS scores but I'm also, seeing this in the amount of economic value we've been delivering. And I think that was maybe lost sight earlier this year. When we actually focus on delivering real value the actual results come. I think GSK is a great example of that. That started off as an IPD to do, like, demand forecasting accuracy. They saw real value, and that converted, into an enterprise-wide agreement. So, you know, from my perspective, we need to focus on more of those opportunities, be very disciplined, I, you know, I can tell you what I'm seeing going forward. We have the plan in place, and the operational rigor to go deliver on this. Last thing I'll highlight is we have the talent density. I've been part of a lot of great teams. This is the best team I've been a part of, not just pure intelligence, but people who truly care about the customer. And I see that every day. I hear that from our customers how much they love not just the technology, but the people. And then last thing on my side, I would say Tom Siebel. Obviously, everyone knows Tom. He's a phenomenal businessman, entrepreneur, philanthropist. Also been a phenomenal mentor and supporter of mine. So I want to say thank you, Tom. It's an incredible ninety days and very excited for Q3. Patrick Walravens: Alright. Fantastic. And then just a follow-up, and I know you're not guiding to it, but just in general, how is your confidence in getting this business back to growth and profitability? Stephen Ehigian: I would say Q2 execution was very strong. It was solid results. I'm confident in the opportunity ahead of us. We gotta execute that. I mean, there's no there's work to be done. Yeah. So I'm not gonna say it is easy, but I know the market there, the technology can deliver. It's purely, like, I gotta drive this business is what you're hearing from me. And I believe we have the plan in place to go do so. Patrick Walravens: Fair enough. Alright. Thank you very much. Stephen Ehigian: Thank you. Operator: One moment for the next question. And our next question will be coming from the line of Mike Cikos of Needham and Company. Your line is open. Matt Calitri: Hey, team. This is Matt Calitri on for Mike Cikos over at Needham. Thanks for taking our questions. I want to start with a clarification, Hitesh, you mentioned $21.9 million during the quarter. I forget exactly how you described it, but was that from demo licenses? Was that what that was? Hitesh Lath: That is correct. Matt Calitri: Okay. Great. And then sticking on the revenue line, it was quite a big change and mix between subscription and ProServe. I know you've talked about professional services generally staying within 10% to 20% of revenue long term. Any changes to that outlook? Is there any reason I should stay at these levels or anything to think about there? Hitesh Lath: Yeah. I would say in the long term, we would expect our gross up mix to continue to stay between 10% to 20%. Our professional services mix this quarter was on the lower side. That was primarily due to lower PES revenue. And PES, we sell these prioritized engineering services on an opportunistic basis, to some of our large customers. So that is we had a lower PES revenue just because of the low demand this quarter. But on a go-forward basis, we would generally expect to be between 10% to 20%. Pro cell mix as I mentioned. Matt Calitri: Got it. Okay. Thank you. And then maybe on the public sector, pretty strong bookings growth despite some of the headwinds you guys spoke about. Just wondering what your view is there for the rest of the year going forward and obviously, any lingering impacts of this extended shutdown? Stephen Ehigian: The strength of the federal business is gonna be a durable growth engine for C3.ai, Inc. There's multiple factors, and I'm kinda related to my time in government, and the other side of this, there's a big push within the government to buy more commercial off-the-shelf solutions. So moving away from government-built. So that's one big tailwind. The other is this push to drive AI adoption for the AI action plan. And I think there's a every single almost virtually every agency is reevaluating their AI, their AI of what solutions are in place, and they're doubling down on areas where they can actually get real value. And I would say the third big piece is the reindustrialization such things as the maritime industrial base. These are multiple years of generational changes in terms of investments to prepare ourselves, and we are benefiting from all three of those trends. COTS focus, the AI action plan adoption, and then the reindustrialization of the maritime industrial base. I expect that to continue. Operator: As a reminder, if you would like to ask a question, please press 11 on your telephone. And one moment for the next question. Our next question will be coming from the line of Brian Esses of JPMorgan. Your line is open. Brian Esses: Hi. Good afternoon. Thank you for taking the question. Stephen, great to see that color that you provided on how you're approaching maybe getting the company back on its feet. I guess if we think about facilitating a pathway to better growth, and I think you gave us some nice detail around incentives or initiatives that you've done with the management team to maybe drive accountability. Are there a few north stars that you could point to where, you know, you're setting expectations and holding management accountable for delivering better execution going forward? Stephen Ehigian: Yeah. Honestly, it's starting the small things, and a big driver of our growth is gonna be the IPD motion. That is the most efficient way for us to deliver value to the market and our customers. So it's the qualification IPDs. It's the rigorous evaluation and setting milestones. And working very closely with our customers. If I had to say the one thing we need to do better, it's to continue to drive a rigorous evaluation and delivery of value as fast as possible. I find when we actually deliver economic value quickly, it converts much faster. So I think there's a direct correlation. You can expect my focus will be on that, going forward. The technology is there. It's literally demonstrating value as fast as possible in these sales cycles. So that's my North Star. Brian Esses: Are these initiatives to tie back to, I guess, discrete metrics that we can see kind of, like, looking from the outside, whether it's, like, bookings or subscription revenue or, you know, how might we kind of evaluate progress as you kind of execute on your plan over the next number of quarters? Stephen Ehigian: I would say bookings are gonna be the leading indicator of how to evaluate C3.ai, Inc. As well as the growth in the IPD, in production revenue. Brian Esses: Got it. Super helpful. Thank you so much. Operator: At this time, I would like to turn the call back to Mr. Ehigian for closing remarks. Please go ahead. Stephen Ehigian: Thank you all for joining us today and for your continued engagement. We appreciate your questions and look forward to updating you on our progress next quarter. Thank you. Operator: Thank you all for joining today's conference call. You may now disconnect.
Operator: Greetings, and welcome to Torrid Holdings Third Quarter Fiscal 2025 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Chinwe Abaelu, Chief Accounting Officer and Senior Vice President. Thank you. You may begin. Chinwe Abaelu: Good afternoon, everyone, and thank you for joining Torrid's call today to discuss our financial results for the third quarter of fiscal 2025, which we released this afternoon and can be found on our website at investors.torrid.com. With me on the call today are Lisa Harper, Chief Executive Officer of Torrid; and Paula Dempsey, the Chief Financial Officer. Ashlee Wheeler, our Chief Strategy and Planning Officer, is also present and will be participating in the Q&A session. Before we get started, I would like to remind you of the company's safe harbor language, which I'm sure you're familiar with. Management may make forward-looking statements, including guidance and underlying assumptions. Forward-looking statements may include, but are not limited to, statements containing the words expect, believe, plan, anticipate, will, may, should, estimate and other words and terms of similar meaning. All forward-looking statements are based on current expectations and assumptions as of today, December 3, 2025. These statements are subject to risks and uncertainties that could cause actual results to differ materially. For further discussion of risks related to our business, see our filings with the SEC. With that, I'll turn it over to Lisa. Lisa Harper: Thank you, Chinwe. Hello, everyone, and thank you for joining us today. I'll review our third quarter performance and provide an update on our strategic initiatives, including the enhancement of our product assortment, our commitment to the growth of our sub-brands, the expansion of opening price point strategy and execution on our store optimization plan. Then I'll turn the call over to Paula to discuss the financials. We are clearly disappointed with our overall performance this quarter. Despite some areas of strength, it was more than offset by missteps in our overall assortment mix that we are addressing head on with decisive corrective actions, and I'll discuss that shortly. For the quarter, while sales came in at the low end of our guidance, profitability was dampened by deeper promotional activity than we had planned, impacting our adjusted EBITDA. We delivered third quarter sales of $235 million and adjusted EBITDA of $9.8 million. I want to be clear, these results largely reflected execution issues that are within our control. Let me walk you through the factors that influenced our results. This quarter delivered strong performance in several key categories with denim, non-denim, dresses and intimates meeting our expectations, all generating positive comparable growth. However, this improvement was more than offset by missteps in our tops and jackets category. Tops represented approximately half of the year-over-year sales miss this quarter. Specifically, we shifted too heavily towards fashion-forward designs at the expense of our core assortments and established franchises. While innovation is important, the shift moved us too far from the functional replenishable items. Our customer feedback has been invaluable in guiding our course correction. We are successfully attracting and reactivating consumers who embrace our elevated fashion and lifestyle offerings across our sub-brands. However, our loyal long-standing customers continue to rely on us for their core ward drove essentials and their solution-oriented products and trusted fabrics with evolutionary rather than revolutionary style updates. Our denim category exemplifies the balanced approach we're implementing going forward. In Q3, we successfully integrated fashion elements while preserving our core franchise DNA, delivering mid-single-digit growth on top of last year's double-digit performance. This demonstrates our ability to innovate within our customers' expectations, and we're applying those learnings across all categories moving forward. We are taking decisive action to address these challenges with clear time lines and measurable outcomes. First, we've strengthened our merchandising foundation by implementing enhanced guardrails in our merchandising process and building a more robust assortment planning function. I'm personally overseeing both initiatives to ensure rapid execution and accountability. Secondly, we're actively addressing near-term assortment gaps. We've initiated chase orders for our key franchises, focusing on the core fabrications and silhouettes our customers expect in both knits and woven tops. These products will begin arriving in January, positioning us to see sequential improvement in knit and woven performance by the end of Q4 with accelerating momentum into Q1 2026. Looking ahead, we've completed a comprehensive review of our spring/summer 2026 buying strategy. We're rebalancing our investments to deliver the right mix across categories, fits, fabrics and end users, ensuring we meet our customers where they are while maintaining our innovative edge. These actions reflect our commitment to operational excellence and customer centricity. We have clear visibility into the path forward and confidence in our ability to return these categories to growth. Shifting to footwear. Our strategic decision to pause the footwall category in response to tariff-driven cost pressures was sound, but we underestimated the attachment rate impact. The loss of this anchor category resulted in lower overall basket sizes and transaction frequency, leading to what we estimate as an approximate $12.5 million in lost sales this quarter, of which $10 million was contemplated. The timing amplified the impact as October represents our peak boot selling season, which historically drives some of our highest attachment rates of the year. We've taken decisive action to quickly course correct. We reintroduced a carefully curated footwear assortment in mid-November and early performance has been encouraging. We've restructured our sourcing and SKU mix to mitigate tariff exposure while maintaining the category's ability to drive attachment. Based on what we're seeing, we expect to scale footwear back to historical sale levels of approximately $40 million in 2026, but importantly, an improved profitability given our more disciplined approach to the category. This positions us to recapture both the direct footwear revenue and the attachment-driven sales we lost during the temporary pause. Now turning to our strategic initiatives. We are focused on enhancing our product offering by expanding sub-brands and strategically introducing an opening price point strategy designed to increase market share through customer acquisition and increase frequency among our loyal customers. Our sub-brand strategy is working and is on track to deliver approximately $80 million in sales this year, attracting new, reactivating lapsed and increasing spend among our high-value customers. These lifestyle concepts offer unique collections that provide newness and excitement while broadening our customer base. Importantly, sub-brands create a halo effect, driving attachment rates to core categories and supporting customer reactivation through targeted community and influencer marketing. Looking ahead to 2026, we're implementing a more strategically balanced assortment architecture. Approximately 30% of our assortment offering will be opening price points, developed in close partnership with our merchandising design and product development teams to ensure we maintain our quality standards while delivering accessible value to customers. We are excited about momentum in our intimates business with 3 new bra launches planned for 2026, our first substantive bra introduction since 2019, representing significant innovation in this important category. Bras as a category drives strong customer acquisition and loyalty and engagement, and we believe there is significant runway in this business. On the marketing front, we are committed to a balanced approach with emphasis on both mid- and upper funnel awareness and acquisition as well as lower funnel conversion and retention. This includes increased digital media investment, a robust influencer strategy and several in-person activation. In 2026, you will see even greater expansion of these community and brand-building engagement efforts. Our popular model search campaign ran from September to November this year and was done through our digital channels, supporting a broader reach. We had an incredible response again this year, so much so that we selected 5 top models, one from each age demographic ranging from 18 to 50-plus, showcasing the range and relevance of our brand and community. Additionally, we have improved the value proposition of our loyalty program and our private label credit card, which drives significant expansion in customer lifetime value. We remain committed to our store optimization strategy, and I'm pleased to report we're executing exceptionally well against our plan. As consumer preferences continue to shift toward digital channels, we're proactively rightsizing our physical footprint to deploy capital more efficiently and enhance shareholder returns. Our execution remains on track. We closed 15 stores in Q3, bringing our year-to-date total to 74 stores, and we continue to expect approximately 180 closures for the full year. Importantly, we're seeing strong retention metrics aligned with our expectations that validate our approach. Customer retention from this year's closures is running in line with our expectations, demonstrating the strength of our omnichannel ecosystem, the success of our enhanced retention strategies, including multi-touch communication plans and our ability to successfully migrate customers to nearby locations and digital channels. With 95% of customers engaged in our loyalty program, we remain well positioned to effectively migrate customers to nearby stores and digital channels. The financial benefits are substantial and will accelerate as we move through this optimization. These closures are expected to contribute significant adjusted EBITDA margin benefit in 2026, while also generating significant free cash flow improvement that will provide increased flexibility for future strategic investments. Now I'll turn the call over to Paula to discuss the financials. Paula Dempsey: Thank you, Lisa. Good afternoon, everyone, and thank you for joining us today. I'll begin with a review of our third quarter financial performance and then provide our outlook for the remainder of fiscal 2025. While sales landed at the low end of our guidance, softer demand in our digital channel required higher-than-planned promotional activity, which has pressured adjusted EBITDA. At the same time, we continue to realize meaningful benefits from our store optimization initiatives, resulting in 11.5% year-over-year reduction in SG&A. We remain committed to disciplined inventory management and ended the quarter with inventory down 6.8% compared to last year. Net sales for the third quarter were $235.2 million compared to $263.8 million in the prior year. Comparable sales declined 8.3% and our tariff-related pause in the shoe category drove approximately 400 basis points to this overall decline as we temporarily scaled back while navigating elevated import costs in the category. Gross profit was $82.2 million versus $95.2 million last year. Gross margin was 34.9% compared to 36.1% in the prior year, reflecting higher promotions and deleverage on the lower sales base. SG&A expenses continue to reflect the disciplined cost structure we're building across the enterprise. SG&A was favorable by $8.6 million, resulting in $66.3 million for the quarter compared to $74.9 million a year ago. As a percentage of net sales, SG&A leveraged 30 basis points to 28.2%. This year-over-year improvement is a direct result of our multiyear transformation to structurally reduce operating expenses. Benefits from our store optimization initiatives and our focused approach to organizational prioritization are enabling us to reduce fixed costs. These gains reflect more than store closures alone. They represent a broader shift towards a more efficient, more variable cost structure designed to flex with demand, strengthen margin resilience and enhance free cash flow. As store optimization progresses, we expect further SG&A leverage and incremental liquidity benefits in fiscal '26. Marketing investment increased by $2.7 million to $15.7 million as we leaned intentionally into customer acquisition and brand visibility during the quarter. These investments support our long-term plan to strengthen top of the funnel, improve brand relevance and drive traffic. We continue to refine our marketing mix towards higher return channels with more personalized targeting and improved attribution. The timing shift of our model search event from Q2 to Q3 also drove this increase. This event continues to deliver high engagement and long-term customer loyalty. Net loss for the quarter was $6.4 million or $0.06 per share compared to a net loss of $1.2 million or $0.01 per share last year. Adjusted EBITDA was $9.8 million, representing a 4.2% margin versus $19.6 million and a 7.4% margin a year ago. We ended the quarter with $17.2 million in cash compared to $44 million last year. As of November 1, we had $14.9 million drawn on our revolving credit facility with approximately $86.2 million of remaining availability. Inventory totaled $128.8 million, down 6.8% from last year, reflecting both lower receipts and our reduced store base. Turning to store optimization, which remains a cornerstone of our multiyear transformation. During the quarter, we closed 15 stores and remain on track to close up to 180 stores in fiscal 2025. Customer retention from these closures continue to perform consistently with historical levels. The stores we're exiting are structurally unproductive and closures are aligned with natural lease expirations, minimizing exit costs. On a Q3 year-to-date basis, we have realized approximately $18 million in lower operating expenses from closing 74 stores this year and 35 total stores in the prior year, and these savings are already reflected in our performance. As we move through Q4 and complete the planned closures for fiscal '25, we expect even greater savings in fiscal '26, which will enhance our liquidity position. This initiative is both a structural realignment, reflecting where our customers increasingly choose to shop with about 70% of demand originating online and a proactive liquidity strategy designed to protect the business, strengthen our balance sheet and enhance the resilience of our operating model. Overall, we believe store optimization will deliver substantial adjusted EBITDA margin expansion in fiscal '26. We are updating our outlook for the remainder of the year to reflect third quarter performance and current trends. We now expect full year net sales in the range of $995 million to $1.002 billion and adjusted EBITDA in the range of $59 million to $62 million for the full year. Capital expenditure is expected in the range of $13 million to $15 million. In closing, we're executing a disciplined and deliberate transformation of our retail footprint. By taking advantage of natural lease expirations to rightsize our store fleet, we're structurally improving our cost base and strengthening the long-term health of the business. The combination of lower fixed costs, enhanced digital capabilities and a more productive store base is expected to drive sustainable margin expansion and generate meaningful incremental liquidity as we move into fiscal 2026. Now we will open the call to your questions. Operator? Operator: [Operator Instructions] Our first question comes from Janine Stichter with BTIG. Janine Hoffman Stichter: Could you elaborate a bit on some of the product missteps that you talked about? What cues are you getting from the consumer to tell you that this is where the challenge is and this is what needs to be fixed? And then you talked about the promotions being higher on the digital channel. Maybe elaborate on why that is or why you think that is and what you saw in the stores during the period. Lisa Harper: Thanks, Janine. It's Lisa. The merchandising missteps were very focused on tops, as we mentioned. So tops were about half of the total revenue miss for the quarter. Shoes were about 40% and then jackets because of their seasonal importance were about 10% for the quarter. So it's pretty -- we've talked through the shoe situation, which is a pause based on the tariffs. We've reintroduced shoes and boots recently are having a great response to them. We'll continue to build that business back up and recapture that revenue as we move into 2026. But for the quarter, the biggest miss and the biggest action was really focused around the tops category. What I would say from a merchandising miss perspective was the advocation of a couple of our core fabrications and core kind of entry point solution-based products for the customer. And so we've been able to chase that product very quickly. It's longer tops, more tunics, brushed waffles, super soft knits and Sally in the woven category. So it's very focused on a few fabrications, very focused on a few end uses. And because we are able to platform that fabric, we're being -- we're back into some of those businesses in the fifth week of December and throughout January and February in terms of receipts. So we expect to see improvement in those categories as we move into early first quarter as we'll have, I think, chased the bulk of what we feel is missing in the assortment right now. So what we've done to avoid that in the future is really enhance, although we have pretty substantive guardrails to this, this was a merchandising this was obviously very disappointing and frustrating for the organization for the quarter. And so we put enhanced guardrails around the process. We've put in a robust assortment planning, multifunctional approach to the categories, particularly. And we are just increasing oversight, and I'm involved in every step of that. I would say that as an organization, they were able to effectively kind of innovate and balance product assortments in all areas except for tops. So I would say that -- I would -- all areas except for tops and jackets. The benefits of that innovation and expansion to the core product is present in denim, non-denim dresses and intimates. And so those areas were able to positive comp. As we mentioned in the prepared remarks, they weren't able to offset the detriment of the tops miss. So if you think about the total miss for the quarter, I'll restate it, it's about 50% tops, about 40% shoes and related transactions with shoes and then about 10% in jackets for the quarter. And I'll turn it over to Ashlee to answer the promotional conversation. Ashlee Wheeler: Janine, I'd say that the accelerated promotional activity was in large part correlated to the miss in the top space. So as Lisa noted, in the absence of some of those core franchises, entry price point solution-based items and a swing into more highly novel or more fashion-oriented assortment. It put a little more pressure on promotional activity, AUR, for example, in the absence of those entry price point categories. That said, I think we've done a really nice job making sure that we're coming out of the season clean. So there are no inventory issues to speak of related to some of these missteps in assortment. Janine Hoffman Stichter: Perfect. And then maybe just one more for me. The full year guidance implies, I think, a mid-teens revenue decline in Q4. Anything you can share about where you're tracking quarter-to-date versus that guidance? Lisa Harper: Obviously, we are able to incorporate current performance into that guidance. We don't anticipate a recovery, substantive recovery in either tops or shoes for the balance of this quarter. We'll start to see some improvement in tops in first quarter. We'll still be -- have a drag in shoes as we go through the fourth quarter and the first half of next year. So contemplate -- all of that is contemplated into that guidance. Operator: Our next question comes from Brooke Roach with Goldman Sachs. Brooke Roach: Lisa, for a couple of years now, the balance of fashion versus basics and opening price point versus stretched product has been something that the business has been chasing. What's changing in the processes to ensure that you have both those opening price points and balance items in your assortment and planning architectures? And other than oversight, how do we ensure that this is something that's more systematic on a go-forward basis as we look into 2026 and beyond? Lisa Harper: Thanks, Brooke. I just called you by your last, I apologize. Thanks, Brooke. So I would say that the issue -- the overall issue and opportunity in this business was -- is about innovation and remaining relevant and commercial. That is balanced against the need of the customer and the request of the customer -- the focus of the customer on price point. And so as we go into first quarter of next year, we will be in terms of opening price point, close to 30% of sales and assortment associated with those categories of businesses that service our customer in terms of core products, solution-oriented, high quality at a price that she has shown us that she reacts to and values. That is built into the architecture, the assortment architecture as we move forward. It is something that we are -- have embedded in that process. Both sides of this are important. First of all, we have to move forward and remain relevant. I think that we've been able to do that with sub-brands. We've been able to do that in the categories that I mentioned before, denim, non-denim dresses and intimates. And the miss really is in the tops area, which had advocated and exited through merchandising direction to many of the core programs. Those core programs are bought and will be -- already have been planned to receive as we get into January receipts going into 2026 sales, and it's part of the assortment architecture. So the need for the business to move forward and innovate with product was important as our customer feedback had been that -- our styling was not keeping up with their demand. We've balanced that, I think, in every area, except for the misstep in tops, where we will be going into first quarter with a much stronger opening price point strategy across the board, but primarily the highest level of opening price point will be in tops as we move forward. It's built into the assortment architecture of the business. I don't know, Ashlee, do you want to add anything? Ashlee Wheeler: Brooke, I might add, if we take a look at the categories where we executed well in the third quarter, so denim as a proxy is a place where we stayed committed to the franchises that the customer knows us for, the Bombshell franchise, for example. We stayed very committed, but we expanded upon that, gave her more innovation through leg shape, wash treatment, finish. And that system has worked very, very well. It's worked well for us in dresses where we've stayed committed to end use covering every aspect of her life and been very focused on multi-end use, it's worked well. Tops where we misstepped in the third quarter, we did not do that, and we walked away from very critical end use and solutions. We have to get back and stay focused on the same balance that we applied in denim and in dresses to our tops category, which is the largest category of the business. Brooke Roach: That's really helpful. As a follow-up, have you seen any larger or outsized shifts in engagement among any specific income demographic or age cohort of your consumer? Maybe said another way, are you seeing any changes in the demographic makeup of your businesses which customers are engaging with you the best? Lisa Harper: In terms of customer demographics or income cohorts, performance has stayed consistent across all of those. What we observed in the third quarter, very different from previous quarters is our most loyal, our most engaged customers pulled back, and we saw that come through reduced frequency and fewer purchases in the tops departments in particular. Operator: Our next question comes from Corey Tarlowe with Jefferies. Corey Tarlowe: Leslie, can we just talk a little bit about the sub-brand momentum and any updates there as that's continued to build in the assortment and how you think about this quarter's results may alter or change the approach in the sub-brand strategy? Lisa Harper: Thanks, Corey. No change in the sub-brand strategy. I think that we have a clear winner in the [indiscernible] brand and think that, that will expand. Nightfall and retro are continuing to perform very, very well. Belle Isle is more -- we've identified it more as a first half brand than a back half brand. And so we'll be adjusting kind of the sales momentum associated with Belle Isle to be probably more 60% first half, 40% back half. And then we've introduced Tru in our active business, which we're very happy with the results there. And Lovesick is still kind of, I would say, in test mode. We don't have a lot of revenue associated with that as we move into next year as we're able to refine that assortment moving forward. I think in general, very, very pleased with the sub-brand momentum and expect it to continue to grow dramatically as we go into 2026. Corey Tarlowe: Great. That's really helpful. And then just a follow-up. Can we talk about the leverage profile and how that changes with all the store closures and what the perhaps new leverage profile might be as we think about easier lapse in 2026 and what that could mean from a margin perspective? Paula Dempsey: Corey, this is Paula. So as we think about 2026 with the store closures, what's going to happen is our profile will be more flexible from an expenses standpoint. So of course, less fixed expenses, and we'll have the ability to be more dynamic from that standpoint. I think from a gross margin, the profile may be staying closely the same to where that total enterprise is today. But what you're going to see is a substantial EBITDA margin expansion in 2026 with the store closures. So currently, we are seeing the store closure optimization work really well. We have delivered over $18 million of cost reductions this year alone. We expect that number to be much greater mid 2026 when we annualize 180 stores. And so that will also strengthen our liquidity substantially for 2026. Operator: Our next question comes from Alex Straton with Morgan Stanley. Alexandra Straton: Maybe for Paula, I think you said you expect significant EBITDA margin expansion next year. I'm not sure if I heard that right. But if so, can you just elaborate more on that and what type of level is in reach? And then just on -- as a follow-up to the sales guidance for the fourth quarter, worse pressure than the third quarter is what's implied. So is that reflecting what you've seen quarter-to-date? And what areas is that are getting worse from a quarter-over-quarter perspective? Paula Dempsey: So going to Q4 guidance, we are all in for Q4 guidance. So what you're seeing is essentially accounting for what Lisa had mentioned before, the miss in tops along with shoes. There is also a seasonality impact in our business typically in Q4. So it goes along with that seasonality impact. As we moved into fiscal '26 with store closures and EBITDA margin growth, what you're going to see there is, if you recall, a lot of these stores that we're closing, actually, most of them are very highly unproductive stores. So by closing them, we're essentially giving money back to the business through reductions in many items in the P&L, right? So such as store payroll or store occupancy, et cetera, et cetera, et cetera. So we're going to see a greater amount of savings from that standpoint. And just to touch base again, we're seeing retention, customer retention, sales retention from these store closures to be well aligned with our historical rates, which is a great sign for us. So everything is going really well from that standpoint. I would say as we are on track to closing up to 180 this year. And I think that's all we have from a store optimization at this point. Operator: Our next question comes from Dana Telsey with Telsey Advisory Group. Dana Telsey: As you think about the current merchandising adjustments that are being made, what are you seeing in the competitive landscape? Do you think of this more as an internal issue that Torrid needs to fix? Or is there changes in the competitive landscape and whether it's product assortment, price point or where your customer is going? Lisa Harper: Thanks, Dana. I do think there's a seasonal aspect to it. I think, obviously, a lot of this is self-inflicted driven by really advocating core products in the knit and woven top categories. I do think seasonally, there are a lot of options that other brands have extended sizes, and it's more sweat shirt-oriented, sweater oriented that are not as fit specific. We certainly didn't see this impact in the tops business in the first half of this year. So it really did accelerate as we go into third quarter. I think we have a real opportunity to build back with the opening price point strategies that we discussed and keep fabrications that our customer really values. More tunics in the mix, more kind of figure flattering solution-oriented products in the knit category and then more kind of wear-to-work and blouse business in the woven categories. But I do think that in the third quarter, there is an ability to choose tops among a broader range of retailers because just the seasonal impact of being less fit specific and more oversized. I don't -- while we -- to that end, we didn't see the degradation in any of our bottoms businesses, which are more fit specific or our dress business, which also we were able to have great representation of end uses and fit solutions. So I feel like it's isolated, very clearly isolated. I do think it could be -- could have been -- I don't have any data to really support it, but just broadly from a mindset, it could have had a larger impact because of the seasonal nature of the products in the knit and woven categories during the time. So again, quickly move to address it. When I think Ashlee mentioned earlier about our less frequency in terms of tops purchases in the third quarter, tops really are a frequency driver for us so that they don't buy denim as often or dresses as often, but they do buy tops more often. And I think that opportunity to by tops other places might have been enhanced by that timing. I do think anything that we've seen in terms of surveying with our customers, they're still very dedicated to Torrid. They're very interested in shopping at Torrid. They're still maintaining their strong relationship and our loyalty program continues to be very highly penetrated. So we have a lot of opportunity to communicate and connect with this customer and understand exactly what's missing. And as I mentioned, the one thing that continues to come up is opening price point that I would say we did have fits and starts with over the last several years, but very deeply invested and committed to based on the analysis and of our previous OPP programs and the expansion related to that. So I think we're going to be able to recapture her tops purchase in addition to maintaining the denim and dress purchase from her as we introduce -- reintroduce these core businesses at an opening price point. Did I answer the question, Dana? Operator: This now concludes our question-and-answer session. I would like to turn the floor back over to Lisa Harper for closing comments. Lisa Harper: Thank you for joining us today. We look forward to sharing the progress on the store optimization program and the remerchandising of our tops area as we join you for the fourth quarter and fiscal '25 conference call. Thank you. Operator: Ladies and gentlemen, thank you for your participation. This concludes today's conference. Please disconnect your lines, and have a wonderful day.
Operator: Good day, and welcome to the HealthEquity Third Quarter 2026 Earnings Call. All participants will be in listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Richard Putnam. Please go ahead. Richard Putnam: Thank you, Dave. Hello, everyone. Thank you for joining us this afternoon. This is HealthEquity's third quarter fiscal year 2026 earnings conference call. My name is Richard Putnam. I do investor relations for HealthEquity. Richard Putnam: Joining me today are Scott Cutler, President and CEO; Dr. Steve Neeleman, Vice Chair and Founder of the company; and James Lucania, Executive Vice President and CFO. Before I turn the call over to Scott for prepared remarks, we note that a press release announcing our third quarter financial results was issued after the market closed this afternoon. It included certain non-GAAP financial measures that we will reference here today. You can find a copy of today's press release, including reconciliation of these non-GAAP measures with comparable GAAP measures on our Investor Relations website, which is ir.healthequity.com. We also note that our comments and responses today reflect management's views as of today, December 3, 2025, and will contain forward-looking statements as defined by the SEC, including predictions, expectations, estimates, or other information that might be considered forward-looking. There are many important factors relating to our business which could affect our forward-looking statements. These forward-looking statements are subject to risks and uncertainties that may cause our actual results to differ materially from statements made here today. We caution against placing undue reliance on these forward-looking statements. We also encourage you to review the discussion of these factors and other risks that may affect our future results or the market price of our stock, as detailed in our latest annual report on Form 10-K and in subsequent periodic reports filed with the SEC. We assume no obligation to revise or update these forward-looking statements in light of new information or future events. With that out of the way, let's go to Scott. Scott Cutler: Thank you, Richard. Happy holidays, and welcome, everyone. I'll start with the key metrics that reflect our continued strong fiscal 2026 results and the progress we're making on our strategy. Steve will then speak to the regulatory environment, and Jim will walk through our third quarter financials and our raised outlook for fiscal year 2026. The team again delivered strong year-over-year growth and margin expansion across our key metrics in Q3, including revenue up 7%, net income up 806% year over year, a result that Jim will explain in more detail in a moment. Adjusted EBITDA up 20% driven by gross margin of 71% and adjusted EBITDA margin of 40%. HSAs grew 6%. CDB accounts up 3%, driving total accounts up 5%, and HSA assets up 15%. Behind these numbers is a clear strategy. Helping our members better save, spend, and invest for health and strengthening the flywheel in each of those areas. We are operating against a real affordability challenge for American families and employers. Health care costs continue to rise faster than wages, and both households and enterprises are looking for more practical ways to budget for health care today while preparing for tomorrow. HSAs sit at the center of our solution to that challenge. They are a proven engine for consumer-directed health care and long-term health savings. On the Better Save side of the flywheel, we are helping more members build tax-advantaged health savings and making it easier for them to contribute. HealthEquity ended Q3 with more than 17 million total accounts, including more than 10 million HSAs. We grew net CDB accounts by over 200,000 year over year, and Team Purple opened approximately 175,000 new HSAs from sales in the quarter. The average HSA balances grew 8% year over year, contributing to the 15% increase in HSA assets. We remain optimistic about new account growth in Q4. That optimism is grounded in the work we're doing with employers and partners on plan design to support HSA adoption, new employer clients, including those offering HSAs for the first time, and the large new opportunity to open retail HSAs for those choosing bronze plans on the ACA exchanges. To support this opportunity, we launched a new direct HSA enrollment platform with a streamlined digital experience enabling individuals to open and fund HSAs directly through HealthEquity's mobile and web platforms. This positions us well as millions of households consider Bronze plans in the months ahead. The better spend flywheel is about helping members stretch their health care dollars further and gaining greater access to health resources. Last year, more than $40 billion was spent by Americans through HSAs on eligible medical products, programs, and services. We are pleased with the early momentum of the HealthEquity Marketplace platform, which is providing access to affordable healthcare solutions, including our first program supporting weight loss through GLP-1s. Early adoption from subscribing members has been encouraging, and the early retention data is positive. By offering GLP-1s through the HealthEquity Marketplace, members experience a coordinated journey from within the HealthEquity app web portal to an HSA-eligible program that supports healthier outcomes and helps employers mitigate rising cost pressures. Payments made with HSAs may be tax-advantaged, providing additional savings for members. Later this month, we will be expanding our marketplace further, providing greater access to health care solutions for our members. The Better and Best flywheel is about securing our members' assets and helping them grow health care savings for the future. Our HSA members now hold over $34 billion in HSA assets, up $4.5 billion year over year. The number of our HSA members who invest grew 12%, and HSA invested assets grew 29% to $17.5 billion. As more members move from saving to investing, they build long-term tax-advantaged health wealth that can support care needs well into retirement. We are entering our busy season well prepared to welcome new members with an enhanced member-first secure mobile experience and market-leading products and services. Our members benefit from advanced security features, including passkey technology, and from our integrated network of leading health plans and our growing marketplace, all accessible through our intuitive HealthEquity app and web experience. Our investments in security are delivering strong results for our members. In the third quarter, fraud costs totaled approximately $300,000, well below our run rate target of one basis point of total HSA assets per year. We continue to invest in additional security measures and technologies to protect our members' health savings while maintaining a simple, seamless experience in our secure mobile channel. We are proving that we can deliver industry-leading security and a remarkable experience at the same time. We are committed to continually strengthening our defenses as threats evolve. We also see significant potential in AI. We believe AI will unlock a more personalized, efficient, and empowering future for health care consumers, and HealthEquity is uniquely positioned to lead that transformation. Our expedited client claims solution is already providing quicker and more accurate payments to members while reducing service costs. HSA Answers and HealthEquity Assist, along with our work with CX leader Parloa, are building an integrated AI experience that supports members wherever they are, through voice calls, support lines, chat, or web-based conversations. These capabilities are designed to improve service, reduce friction, and help members save, spend, and invest for health. Taken together, these experience enhancements—our mobile platform, our fraud and security investments, our marketplace, and our emerging AI capabilities—are essential to HealthEquity's broader strategy and to the flywheels that drive our growth. On the legislative front, our leaders in Washington continue to focus on expanding the use of HSAs to address health care affordability. Steve and our government affairs team continue to do a remarkable job of educating our legislators and their staff about the benefits of HSAs and the growing demand for greater access from American families and employers. With that, let me turn it over to Steve to walk through the policy landscape and how HSAs are being discussed in Washington. Steve Neeleman: Thanks, Scott. Let me touch on the public policy environment and how HSAs are being talked about in Washington. First, as the nation's leading custodian of HSAs and one of the first companies to launch them after their enactment over twenty years ago, we are strong believers in HSAs and the role they play in empowering healthcare consumers, helping employers focus their healthcare investment, and supporting a broader health system that delivers more value through lower costs and better outcomes. We are encouraged that policymakers in Washington are considering options that make HSAs available to more Americans and to use them as a key mechanism for delivering government support to improve affordability. We support President Trump's proposal that aligns with our long-standing belief that every American should have an HSA. At the same time, our core business is not predicting public policy or legislative outcomes, which specific bills will or won't pass, how ACA subsidies may change, or which legislative mechanisms might carry them. Our mission is to save and improve lives by empowering healthcare consumers. We stand ready to assist policymakers who are considering ways to expand the ability of more Americans to benefit from HSAs. As we shared during our last earnings call, we were encouraged for the first time in roughly twenty years there was meaningful expansion of HSA eligibility this summer. We view that change as a sign of growing recognition that HSAs are a powerful tool to help Americans prepare for current and future health care needs. There is a real affordability challenge affecting many American families, employers, and the health care system overall. A recent third-party study with some of our largest employers, representing nearly 1,000,000 employees, showed that those employers with higher HSA adoption experienced significantly lower per employee health care costs than those with lower adoption in HSAs, while their employees save more on premiums and taxes while growing their HSA balances. That is what consumer empowerment looks like in practice. Our position is straightforward: expand access to HSAs and strengthen consumer control. Our focus has been and will continue to be on helping policymakers understand how HSAs work in the real world, why they are a practical consumer-focused tool, and how HealthEquity, as a leader in this space, can help more Americans use HSAs to better save, spend, and invest for health under a variety of policy scenarios. We are encouraged by the elevation of HSAs in the national healthcare discussion and view this as a very positive development. And whatever form future legislation takes, our job does not change. I'll pass over to Jim now to discuss our financials. Jim? James Lucania: Thanks, Steve. I'll review our third quarter fiscal 2026 GAAP and non-GAAP financial results. As always, we provide a reconciliation of GAAP measures to non-GAAP measures in the press release. Third quarter revenue increased 7% year over year. Service revenue increased 1% year over year to $123.1 million. Custodial revenue grew 13% to $159.1 million in the third quarter. The annualized yield on HSA cash was 3.53% for the quarter, as a result of higher placement rates and continued increase in balances and the number of accounts participating in enhanced rates. Interchange revenue grew 6% to $42.8 million, again, ahead of our 5% total account growth. Gross profit of $228.1 million resulted in a 71% gross margin in the third quarter, up from 66% in the third quarter last year. Service costs declined $10 million year over year in the quarter, even more than the $8 million in elevated service costs that impacted the third quarter last year. The third quarter of this year included approximately $300,000 of fraud reimbursements to members. And as Scott mentioned, we are ahead of our goal to achieve a run rate of one basis point of total assets in fraud costs per year. Our investments in fraud prevention and detection capabilities, AI service technologies, and our member-first secure mobile experience are delivering greater member functionality and satisfaction while improving margins at the same time. The actions we're taking are expected to drive efficiency in our operations not only this year but into fiscal '27 and beyond. Net income for the third quarter was $51.7 million or $0.59 per share. As Scott mentioned earlier, net income is up 806% compared to the third quarter last year, which included a $30 million one-time legal settlement. The settlement was backed out of last year's non-GAAP measures, so non-GAAP net income increased 26% to $87.7 million, and non-GAAP net income per share grew 29% to $1.01. Adjusted EBITDA for the quarter was $141.8 million, up 20% compared to Q3 last year, and adjusted EBITDA as a percentage of revenue was 44%, up 460 basis points compared to 39% in the third quarter last year. Turning to the balance sheet as of October 31, 2025, cash on hand was $309 million as we generated $339 million of cash flows from operations in the first nine months of fiscal '26. We ended the quarter with approximately $982 million of debt outstanding net of issuance costs, after paying down $25 million on the revolver during the quarter. We also repurchased approximately $94 million of our outstanding shares during the quarter, and we have approximately $259 million remaining on our previously announced share repurchase authorization. For the first nine months of fiscal '26, revenue was $978.8 million, up 10% compared to the first nine months of last year. GAAP net income was $165.5 million or $1.88 per diluted share. Non-GAAP net income was $268.1 million or $3.05 per diluted share. And adjusted EBITDA was $433.1 million, up 19% from the prior year, resulting in a 44% EBITDA margin for the first nine months of this year. Before I detail our raised guidance and assumptions, let me briefly update you on the interest rate forward contracts we've discussed on prior calls. As a reminder, we expect these contracts to have little to no impact on our FY 2026 income statement, and we expect they will further derisk potential interest rate volatility on future HSA cash deposit contracts. To date, we've entered into U.S. Treasury bond forward contracts with a notional amount of approximately $2.3 billion tied to basic rate contract maturities between January 2026 and August 2027, and a blended rate lock of 3.94%. Not including the negotiated premium that we receive above the five-year treasury benchmark on our enhanced rates placement. We expect to execute additional interest rate hedges depending on market conditions. We expect the average yield on HSA cash will be approximately 3.54% for fiscal '26. As a reminder, our custodial yield assumptions are based on projected HSA cash deployments and rollovers, which are detailed in today's release. We also consider a range of forward-looking market indicators, including the secured overnight financing rate and mid-duration treasury forward curves. These indicators are, of course, subject to change and are not perfect predictors of future market conditions, but they provide a consistent framework for how we set our outlook. Our fiscal 2026 guidance reflects the expected carryforward of current trajectories for revenue and margins over the remaining of this year, along with continued investment in technology and security as we enhance our Member First secure mobile experience, and deliver innovative products across the platform. We expect to continue closing fraud attack vectors and to support our members in securing their assets while investing in sales and marketing to drive HSA adoption on the ACA exchanges. For fiscal 2026, we now expect revenue in a range between $1.302 billion and $1.312 billion, GAAP net income in a range of $197 million to $205 million or $2.24 to $2.33 per share. We expect non-GAAP net income to be between $341 million and $348 million or $3.87 and $3.95 per share based upon an estimated 88 million shares outstanding for the year. Finally, we expect adjusted EBITDA to be between $555 million and $565 million. We're pleased with how we exited the third quarter and expect to make additional progress as we finish fiscal 2026. Our guidance also assumes continued capital return and a strong balance sheet. We expect to make additional share repurchases under the remaining $259 million repurchase authorization and may reduce borrowings on our revolver during the fiscal year. With continued strong cash flows and available revolver capacity, we will maintain ample flexibility for portfolio acquisitions should attractive opportunities arise. We assume a GAAP and a non-GAAP income tax rate of approximately 25%, and a diluted share count of 88 million including common share equivalents. As in prior periods, our fiscal 2026 guidance includes a reconciliation of GAAP to the non-GAAP metrics and a definition of all the non-GAAP metrics can be found in today's earnings release. While we exclude the amortization of acquired intangible assets from non-GAAP net income, the revenue generated from those acquired intangible assets is included. We'll provide our initial outlook of fiscal 2027 at the JPMorgan Healthcare Conference in January. Now let's go to the Q&A operator. Operator: We will now begin the question and answer session. If at any time your question has been addressed and you would like to withdraw your question, please press star and then two. Our first question comes from Stan Berenshteyn with Wells Fargo. Please go ahead. Stan Berenshteyn: Yes. Hi. Thanks for taking my questions. On the direct HSA enrollment platform that you set up for qualified ACA members, what are your marketing plans there? And how should we think about the progression of your marketing expenses over the coming quarters pertaining to that? And maybe just a quick follow-up. Regarding your forward contracts, do you plan to derisk any longer duration assets beyond August 2027? Thank you. Scott Cutler: Great, Stan. Thank you. I'll take the first two, and I'll let Jim talk about the forward contract strategy. So first, as it relates to the direct HSA enrollment, we call it the new retail enrollment flow. Obviously, to take advantage of the expansion provided by legislative activity over the summer. As we look at how we're going to compete for those new eligible HSA accounts, we want to make sure that number one, the enrollment experience is seamless, frictionless, and easy. And so we rolled out a new experience to make sure that we make it as easy and frictionless as it can be. So we're really pleased with that new experience flow. We also know that the new experience flow will roll into the core business as we go into the open enrollment season here. We believe that we've got the most competitive offer in the industry with a $25 match for a new account, and so that's one of the marketing features we're using. Going to market with integrated plan partners, and so we think with the power of our distribution platform that going to market with integrated plan partners helps to enhance the value proposition. And then last, as we look at the marketing expenditures, we've been leaning in on brand marketing, sort of upper funnel awareness and consideration as well as what I would call growth initiatives from paid search to key terms as well as the appearance of an education of HSAs in social channels to be able to drive awareness around this new opportunity. As we look at the opportunity overall, consistent with what we've talked about, we believe that this is a marathon, not a sprint. We think that these new enrollees are going to come in over time. We look to our plan partners, they're still early in terms of having integrated marketing plans and integrated technology to be able to bring in these new enrollees. And so we're taking a longer-term look at it. I'd say the early results on some aspects are encouraging. When I look at contribution levels as one example, the average contribution level of these new retail enrollees is about $1,550 versus industry-wide, your average contribution to an HSA would be about $1,800. So I think we're pleased with the quality of the retail members that are signing up. And again, we're going to be continuing to work with our plan partners to expand that. As it relates to the progression of the expenses, again, as we've looked at how to make sure we're going after that efficiency, as we had communicated before, in terms of quarterizing the sales and marketing expenditures, we're ramping that spend here in the fourth quarter to be able to go after coincident with open enrollment. Continue to lean into our brand and marketing activities and go-to-market rhythms to attract these new members. Maybe, Jim, you can talk about the forward contract strategy. James Lucania: Yeah. Yeah. Sure. So, obviously, as you can see, we reached out a little bit further into the future here. In the previous quarter, we talked about we had hedged maturities out the furthest out was January '27. Obviously, during the last quarter, we stretched a bit into the summer of '27, and those deposits were like, we have a little mid-year bolus because of further migrations that came over. So there are some basic rates maturities in the middle of fiscal '28 for us. And then, yeah, I think you can sort of expect we'll reach out into the future a little bit to chip away. But as you can see, the updated maturity schedule, like, it's materially less that's maturing in fiscal '28 and fiscal '29. So the heavy concentration of what we've done had been on the front end. Stan Berenshteyn: Appreciate the color. Thank you. Operator: And the next question comes from Alan Lutz with Bank of America. Please go ahead. Alan Lutz: Good afternoon, and thanks for taking the questions. I want to follow-up to Stan's question around the bronze Exchange plans. Scott, you talked a little bit about going to market with integrated plan partners. Can you talk about the split between how much contribution you would expect from those plan partners? And would there be a material contribution from sort of standalone HealthEquity going direct, or is the vast majority or all of the growth going to come from HealthEquity with those integrated plan partners? Thanks. Scott Cutler: Yeah. Thanks, Alan. You know, when we look at the core business, as you know, we have a very efficient distribution channel, and we receive the majority of our business through a partner, and that could be through an integrated plan partner or a relationship that we might have with brokers. And so we're going to continue to leverage that distribution channel. I wouldn't say I know exactly what that's going to look like for the retail channel because, again, many of these are coming individually to the market one-to-one and not coming with an associated file with an employer as an example, which is what the core new member acquisition looks like on our platform. And so that's why we've made such a significant investment in the retail experience to make sure that we're actually going to market with an attractive marketing message that we're educating the market around eligibility of bronze participants. I don't know if all Bronze participants know that the new enables them to have access to an HSA. And so there's awareness around what the product is, their eligibility, that would again as we're focused on our market activities, we're focused on targeting those places and those regions where we believe is the largest concentration of those potential members. And so again, I think as we look at it, we want to make sure that A) that we have a really strong integrated offering, and when I say integrated, it might be an offer that's got a click-through screen in that plan partners as well as our own and links directly to a sign-up on our own retail flow, as well as showing up as a retail offering out to a general member. And so again, as we think about how that's going to progress, that's another reason why we think this is going to be a market that yes, it's expanded, but it's going to grow over time as both awareness and consideration and then enrollment evolve for, again, what I would call a retail member. Alan Lutz: Really helpful. And then for my follow-up, either for Scott or for Jim, the average cash per account has been pretty consistent around $1,700 per account. As you think about all the inflation we've seen over the past ten years or so, it seems like the minimum threshold before investing hasn't really changed much. Either for HealthEquity or at the industry level. We think about all the inflation that's gone through the market over that time period, is there an opportunity to increase that minimum threshold before HSA consumers can invest? Is that something where the market's moving? There an opportunity? Is that something you think about? Any color would be helpful. Thank you. Scott Cutler: Yeah. So if I understand you correctly, the minimum threshold typically is set by our enterprise client. We want to make sure that people are taking advantage of the save, spend, and invest aspect of the product of the HSA. I think as we look at and take a step back and look at the industry overall, we still have a small percentage of members that are contributing at the max that they could allow. And so there's a big opportunity to effectively drive engagement in the actual HSA product as an example. And then if you look across the industry, only about 9% of HSA account holders are invested, and that's irrespective of what a minimum threshold would be. That number hasn't moved significantly over the years. And so on both of those things, we have strategies to drive how we can effectively try and move that. Number one, we really need to be able to educate the market as the market leader around what are the advantages of having these accounts. I think given the healthcare affordability crisis that all are experiencing today, I think that value proposition is very strong. In our conversations with our clients, given that the affordability is also hitting the enterprise, and that the enterprise can save on their annual increases in health care cost by driving greater adoption, we think we can have great partnership with our clients in driving that education awareness of one, sign up for a high deductible health plan and number two, contribute so that you have put more power and ownership over your dollar. The other thing is we think about bringing people along that progression of the flywheel from save to spend, which I'm sure we'll talk about later, to invest, we recognize that an investment actually contributes significantly more than a non-investor. And so we're actually looking at our own experience flow in the app to make sure that the setup for investing is easy, is seamless, that you know how to do this. That the investment choices and the lineup is attractive. Because we know a lot of people if they could be made aware at the time of setting up an account that also to think about how that account can be used can really drive that outcome over time. So I guess, Alan, I would just say it's on us to be able to drive those numbers. I think for the industry overall, raising awareness of the product, but also driving enrollment engagement what we think is through a great digital experience is the way that we can, you know, bend that curve over time. Alan Lutz: Thanks, Alan. Operator: And the next question comes from George Hill with Deutsche Bank. Please go ahead. George Hill: Yeah. I have two quick one quick one and one not so quick one. So I guess, number one, on the last earnings call, you guys had talked about seeing a slowdown in HSA market at a high level. I guess, number one, could you kinda provide some more like, an updated version of what you're seeing? And I'd be interested if you could comment on your conversations with employer sponsors around like, is the will they we're seeing a shift like, an acceleration benefit buy down from the commercial space are you seeing any greater shift towards HSAs in 2026? Versus 2025, kinda like the greater rate? And then my second question is kinda like a Scott, it's like, given some of the macro news that we've seen, there would seem to be other large custodial opportunities that have the potential to present themselves going forward as new markets develop? Is that anything that you guys would look at or And I'm kinda talking about, like, the Dell stuff and what we see more stuff that looks like the Dell stuff. Thank you. Scott Cutler: The what the what stuff? Sorry? George Hill: The Dell stuff. You're talking about more make dollars on 25,000,000 children's accounts. Like, is that like, are there gonna be more of these opportunities to kinda create new markets for you guys? And how are you thinking about that? Scott Cutler: Okay. And on your first part of your question, because you had a two-part on the first part, you said something about seeing something but you broke up. Just wanted to make sure. I've got your employer sponsors. Wait. George Hill: Yeah. Are you seeing in the oh, this is still my question. Are you seeing employer sponsors move people towards HSAs at an accelerating rate for 2026 given that we're seeing because utilization is so high, we're seeing benefit buy down at a higher rate than we've seen kind of in the last decade. Is that driving an acceleration of moving beneficiaries HSAs and just kind of what are you seeing in the commercial market? Scott Cutler: Okay. Yeah. So I think I've got it. So on the commercial side or we call the client side, right now, what we're really driving towards is just the realization across the entire industry that health care costs are rising significantly for the enterprise as well as the consumer. Those health care costs are rising significantly more and multiples faster than wages are. And so as any enterprise and this is a CEO and a CFO level, conversation, when you look at those health care costs, which is one of the most significant input costs for your organization, you have to start to think about what are the strategies that we can address that. And so when we're talking affordability with our clients, we've been going with our analyzer product which actually helps an enterprise to be able to compare, for example, their enrollment rates, their contribution levels, what percentage of their employees are investors, what are the balances that they hold, and compare those to their industry average as well as what best in class would look like. What best in class looks like for our large enterprise clients are clients that are driving high deductible adoption or only providing that as an adoption, north of 75-80% and in fact, we've been working with the industry where we've done studies that have actually shown that employers that drive a strategy like that can save in the thousands of dollars per employee per year by driving that type of strategy. So the affordability strategy right now we think is resonating. In terms of it showing an accelerating rate, I think we're going to see that this year because we're having a lot of conversations with our clients around this and, you know, I think we're hoping that we will see greater adoption, this year over last year and so we'll see that in open enrollment which is happening right now. In terms of the macro news around Trump accounts or, you know, Michael Dell's contributions just the other day. I think, again, what we're seeing is that when you look at the triple tax advantage nature of an HSA account, and the massive needs that Americans have to handle their future healthcare needs as well as the fact that 40% of Americans can't even afford a $400 unexpected medical cost that the need for an HSA for all Americans is quite significant. And so this is actually why we're so active in Washington why this topic of health care affordability is on the desk of the president as well as senate and congress. In terms of driving solutions to address the affordability crisis. And we really do think that at HSAs, in terms of empowering healthcare consumption and preparing more Americans for their future healthcare needs is one of those solutions that's actually getting a lot of focus and attention in DC. I don't Steve, would you add anything more to that? Steve Neeleman: I think you're right on. I mean, we just as I mentioned in my comments, we just keep seeing the same thing overall. Over and over again when you see large populations of people going into HSAs. They spend less, and yet the people save more. I mean, obviously, you follow our custodial asset report pretty carefully, and you see how much money are in these assets. There's a lot of money. Not our money. We get a chance to manage it for a while. It's people's money. I just think that this concept of people having their own accounts, spending their own money, is working. And so the more we get that message out to employers, this study that was done just really has been done in the last month. We're gonna start spending more time with employers helping them understand that if they can take their adoption 30 or 40% adoption to 60 or 70%, then we're talking about thousands of dollars a year in savings per employee, which is pretty remarkable. Especially in this time where people are really struggling to pay health right now. So we're all in. George Hill: Thanks, George. That was comprehensive, guys. Thanks. Operator: The next question comes from Mark Marcon with Baird. Please go ahead. Mark Marcon: Good afternoon, and thanks for taking my questions. With regards to just the enhanced yield product, Jim, can you remind us where we are with regards to what percentage of the CAS assets are currently in the enhanced yield? And where do you anticipate that that would be by the time we get to January '27? And August '27. That's the first question. And then, Scott or Jim, the margin improvement continues to be really impressive. How much further can we continue to improve the efficiency and the in terms of the cost per account? How should we think about that because it has been quite impressive, but I'm wondering if you're if you think there's some pricing pressures that would come from employers that would, you know, slow down that rate of increase that we're seeing on the margins. Thank you. James Lucania: Yep. Yeah. So as you know, we have not provided that number on a quarterly basis. So I'm not gonna say anything other than we started the year around $50.50. I would expect we'll give you an update when where we end the year. And as you know, like, there weren't a ton of maturities during '26. So our ability to move that number was not great. For the first three quarters of this year. And then obviously, we would expect a nice cash inflow in January that would with all the new accounts and employee employer matches, etcetera, that would help drive that number up a bit. The target we had set was to be at $60.40. By the end of next year. And, obviously, we're in very good shape to achieve that target. So I'd say stay tuned for our fourth quarter when we would give you that breakdown. Scott Cutler: Mark, the only other thing I would add on the enhanced rate side, and then we've talked about this, when we look at the maturities that are rolling over into the enhanced rates, we do have about 90% plus adoption of enhanced rates as those things roll over. So as we look at this progression, it really is a business as usual in terms of what that progression is going to look like. We feel very strong about how that's going to naturally just evolve as those contracts mature. On margin improvement side, yeah, thanks for highlighting that. You know, we're really focused on making sure that the service that we provide is a great service, that we're continuing to improve that service and we truly do believe and know that, you know, for example, the use of more technology, more automation, we're in the early phases of deployment of AI across our service center. That we can do both things, both deliver a better experience and to be able to deliver it more efficiently. And so when I look at, for example, the early wins that we've had, in AI, whether that is in claims automation, how we're trying to get more people to engage in answers or in chat. And then now how we're rolling out more agentic experiences across our service center, we see significant opportunity for further efficiencies across how we serve our customers, but ultimately, are very much aligned to the idea that we can do it in a better way. And so take a typical phone interaction, if that's phone interaction, for example, is based on data it's a routine call, these could be things like checking a balance, replacing a card, trying to get into a password. These can be phone conversations today that might last five to ten minutes. That can be automated through an IVR to an agentic experience in less than a minute, resolve that issue, have that self-serve by a member, that's a better experience for the member and a much more efficient experience as well. And so again, strategically we look at the use of these technologies to drive that efficiency and we still believe that we're in the early innings of what that is ultimately going to look like across services as one example. Mark Marcon: Great. Thank you. Scott Cutler: Thanks, Mark. Operator: And the next question comes from Brian Tanquilut with Jefferies. Hey, good afternoon, guys. Maybe as I think about as I think about the competitive nature of the HSA space, I mean, you guys have continually gained market share and maintained high client retention rates. So just curious, are you seeing any shift in pricing or competitive behavior, particularly as you expand to smaller employers and new exchange-based accounts and leveraging the scale and the product breadth to sustain that growth in margins in face of competition? Scott Cutler: Yeah. Yeah. Thanks. So I'll take that. Yeah. It's a competitive market. We're pleased with our leading position in the marketplace. I think as we look at, the importance of the strategy and the flywheel of better save, spend, and invest, for health we truly believe that that's a differentiator in the strategy because it's not just about acquiring assets. It's really about how do we leverage the effective use of this savings vehicle for all three of those strategies. For example, on the spend side, you know, we have $40 billion that is spent in the industry today on programs and products and services that are HSA eligible. Increasingly more and more places where these products are being sold are advertising the use of use your HSA dollars to power up your purchasing power for this program or service. What we know and this is part of our strategy around marketplaces is that if we can provide greater, more seamless access to the spend part of the flywheel, we also know that that member is likely to contribute more. All this is also very much integrated into a four health value proposition which for us, since we're integrated with the most plan partners, and that's the entire focus of our platform, I think that drives greater differentiation for us in the marketplace. In terms of where we see the pressure, of course, are competitive processes. I think as we see the shift of our business go towards, HSA accounts, there's obviously a different revenue profile associated with that. Pricing pressure is typically seen at the high end of the market. And that's where there's a lot of competition more on the other types of accounts. But again, we feel very well positioned given the focus that we have on the platform being the leader in the space, to be able to drive a differentiated solution. I think when we look at our retention rates as one example of that in the high nineties percent, we're also really pleased that the quality of the service that we're providing to our clients also is showing up in the way we're able to retain clients in the business. Brian Tanquilut: Awesome. Thank you. Operator: And the next question comes from Sean Dodge with BMO Capital Markets. Please go ahead. Sean Dodge: Yeah. Thanks. Maybe just going back to the AI and automation investments and coming at it from a little bit of a different angle. What percent of your cost structure can you address with these new capabilities or enhancements? Like high level, you're spending $320 million to $330 million a year on service cost. How much of that's labor? How much of that's like physical card cost? So what proportion of that can you go after? Then maybe conversely, like, what proportion is, like, technology and infrastructure spend that you really can't do much about? Or is that just not the right way of looking at it? Should we be thinking about these kinda long-term savings opportunities in a different way? Scott Cutler: Yeah. Well, first, Sean, welcome back to the fold. We're excited to have you back. So yeah. So as you think about it, you know, AI has broad application across nearly all functions of our business. And so we're deploying agentic AI in, you know, again, across all of our functions. So if I break it down into a couple of areas to get to your question, so take on the services side, you know, we would kinda look at it as maybe a third, a third, a third between member services, client services, and then sort of like the back, back office type of operations. All three of those areas have slightly different needs and slightly different applications that AI can be deployed against. Most of our efforts today have really been focused on the member services portion of that. Because that's where a significant amount of call volume has when I think about that opportunity where we're starting from, and you should go back and look at the press release that we just put out in terms of our partnership with Parloa. We're looking at a lot of those voice interactions and trying to figure out how can we improve those interactions with an agentic experience. And so Parloa as an example will be our partner in terms of go-to-market there. On the client side, there's a lot of work that we do in terms of integrating files, taking large data sets in. A lot of that work we actually believe that we can automate with AI. So those are like a couple of things that, a, we have in market, we're thinking about, in addition to Claims AI as an example. When we look at product and technology slightly different, we certainly can see efficiencies that can be derived from AI in our product and tech team. But our product and tech team, we're really looking at AI to think about how is it that we can drive greater productivity. That productivity enhancements can show up in, you know, the speed and quality with which we can deploy code. But it also can be represented by the number of agents that we have deployed that are actually helping to create the next new product or the next new experience or the next new integration in a more seamless and integrated way. I think that's also where we have, you know, where we've really been focused on APIs and data to expose, again, those experiences that we can, you know, that we can roll out AI against. So, you know, as it relates to AI, we again we think we're in the early innings of a longer marathon. That we're optimistic because we're focused on it as a company and as each function to find those opportunities to, again, improve the experience, do it in a more efficient or a faster way. Sean Dodge: Okay. That's great. Thanks again. Scott Cutler: Thanks, Sean. Operator: And the next question comes from Scott Schoenhaus with KeyBanc. Please go ahead. Scott Schoenhaus: Hey, guys. Thanks for taking my question. Wanted to follow-up on the app downloads. We're seeing close to 400,000 downloads in the month of October alone. We'll get the November reading here shortly. That's a big spike up, from what you've seen. Throughout the rest of the year. I'm wondering how that impacts your not only your new clients, but obviously your legacy clients on downloading the app, on loading the app? Pushing them towards enhanced rates. And then maybe to put a fine tune on the margin expansion since October was the last month of your quarter and you saw this big spike up. Can you attribute what that what those app downloads during open enrollment contributed to the margins or the person in the app versus a person not in the app, what that contributed to margins for the quarter, if so. Thanks. Scott Cutler: Okay. Yeah. So first, as it relates to our app strategy, it starts with, you know, really our belief of creating a member-first secure mobile experience. You know, we've obviously made great strides this year on the security side. And I would say the security issues that we experienced early in the year was the first thing that said, hey. We really need to be able to provide a secure experience, and we know that we can do that best through the app. What we also know is that the app particularly for the younger generation of workers, remember that 75% of the workforce in the next five years will be millennial and Gen Z. I think their expectation of a digital experience is app-first or app-only. And so all of those things inform us to say driving towards app engagement is one of the most important things that we can do in the product experience itself. We've been rolling out passkey which effectively for the HealthEquity app any active members. So you wanna do anything in your app. You wanna sign in, log in, you wanna check your balance today. You have to download the app. And you have to authenticate via passkey. So that's driving the app adoption because it's required to authenticate through the platform itself. And so what I would expect is it will continue to drive app downloads. We're seeing really great success in terms of passkey and its success rate. Because in that experience as well, an app download via passkey, you don't have to remember your password anymore. Which again is a top call driver into our service center. So we do believe that with greater app adoption, with passkey adoption, one of our top call drivers goes away, which is I forgot my password. I wouldn't say that we have a, you know, a one-to-one relationship of app downloads to margin expansion. Although, again, in the example that I just provided, you know, we're eliminating those call drivers that certainly does contribute to a lower cost to serve for those members. So again, I think for us it's just a strategic priority but it also is gonna be a more efficient channel to serve members with either questions or engagement or education. So I think for us in looking at, you know, how many active users we have in the app, how many people are downloading it, is gonna be for us kind of a key indicator of, you know, how engaging the experience is for our member. And certainly most of the investment that we have or a lot of the investment that we have in product and tech that's incremental is going into making that app experience, that product experience truly remarkable. Scott Schoenhaus: Thanks, Scott. Operator: The next question comes from Steven Valiquette with Mizuho Securities. Please go ahead. Steven Valiquette: Hi. Thanks. Yeah. Good afternoon. Thanks for taking my question. I guess I just want to follow-up on your positive comments about remaining optimistic on the new account growth in the fiscal fourth quarter. Kinda grounded on the work you're doing with employers. So I certainly get all the higher demand by employers that wanna reduce rising medical costs. But I guess given the last couple of quarters, you were talking about some of that macro uncertainty soft labor market. So I want to just isolate just on that part in particular. I guess the question is, are you still worried about the soft labor market there's just such strong demand to control medical costs as more than offsetting that? Or are you much less worried about the macro end markets and the impact from that versus what your view was, like, six months ago? Just trying to hone in on that part of the know, the overall outlook. Thanks. Scott Cutler: Yeah. So our view on the macro hasn't changed. In fact, our story around the macro has been consistent over the course of the year. Where we see the macro showing up is effectively, you know, maybe less job growth or job churn for remember, only this cohort of members that bring in. You know, we've got over twenty years of cohorts of members. The least valuable cohort is the members that signing up this year. Typically, they're coming in new with zero balances. So it will have no impact on our near-term financials overall in terms of, you know, what Q4 looks like or quite frankly, even over the course of this, of the course of this year. So our view on the macro is unchanged and I think all of this you know, is of balanced because while the macro might be weak, the value proposition for enterprises is quite large given the affordability challenges with health care costs rising. Also have the benefit associated with the first expansion of the HSA market through we've talked with the Bronze plan and the retail expansion. And we're going to market in a new rhythm with a really strong value proposition. Again, it's tied to affordability, that's essentially going and educating, you know, our enterprise clients around here are the strategies that you can be using to drive adoption. So Steve I think it's all of those things you know, we see optimism in the quality of the enterprise pipeline that we see. kinda combined. But, again, as we look at our optimism coming into Q4, we're optimistic around the retention rates, with our clients that we've seen going into Q4. And Q4 is always the biggest quarter of the year always, you know, and effectively, we drive a strategy over the course of the entire year to make Q4 selling season as strong as it can be. Steven Valiquette: Okay. Thanks. Scott Cutler: Thanks, Steve. Operator: And the next question comes from Greg Peters with Raymond James. Please go ahead. Greg Peters: Hey, good afternoon, guys. Thanks for taking my question. Is there any update you could provide on what you're seeing in the M&A environment for additional HSA portfolios? And could you provide us an update on how you're thinking about capital allocation in fiscal twenty seven? Scott Cutler: Yeah. So as we think about capital allocation, you know, unchanged. We have had a very strong cash-generating profile in the business. In fact, first nine months of the year exceeding what we did all of last year, you know, as we look at what we're going to do to deploy that, you know, we'll look at continuing stock buybacks, continue to pay back debt, and we'll look at M&A from an opportunistic perspective. And when we say opportunistic, we just really have a high bar in terms of what is gonna be an acquisition that would make sense. You know, certainly, portfolio acquisitions are quite attractive to us. Pretty much down the fairway, so we would look at those. And so, again, I would say all of that remains unchanged. And I think as we look at the earnings profile of the business and the cash generation profile of the business, and the strength of that, we're excited with what we can do with respect to shareholders with that cash in a disciplined and shareholder-friendly way. Greg Peters: Thanks for the color on that. Scott Cutler: Thanks, Mitch. Operator: And the next question comes from David Roman with Goldman Sachs. Please go ahead. David Roman: Thank you. Appreciate you're taking the question. Jim, I heard we heard the comments that you're going to give 27 guidance. At JPMorgan in January. But just one dynamic that sticks out here is the magnitude of HSAs expected to reprice in '27 versus both what's remaining here in '26 and also what will occur in '28 and '29. You maybe just give us some parameters how to think about that repricing that's coming and in comparison to the current yield that just sitting under 2%? James Lucania: Yeah. Well, yeah, nothing's really changed with the story there. Right? They will reprice they will reprice higher. Obviously, we've hedged some of those for pricing. So you have with sort of much more certainty than you've had in prior years where they're going to reprice. But as for the sort of orderly outlook, it's not numbers that we've provided. So I can't sort of can't get into that. But, yeah, like, as Scott sort of said to the earlier question, there's no risk to the actual migration. Right? The basic rate to enhance rates, migration. We're up to, like, the thirtieth wave of contracts migrating. So it's I'm not gonna call it autopilot. It's work. There's notices that go out. Communications to all those affected members. But we, like Scott said, sort of 90-ish percent adopt in. So it's going to happen. Obviously, we do have large Q4 flows into our business. So that's always gonna be part of the math. So you gotta wait for the full year to get the actual impact of that. Where you have in the bag numbers for '27 is what we're gonna reprice here in Q4. And to get the full benefit of what's repricing in '27, that's really a '28 revenue uplift item. So I will tell you what our yield forecast is in a few weeks. At JPMorgan. David Roman: Okay. Look forward to that. And maybe just a follow-up. One of the earlier questions addressed the significant improvement you're seeing in cost to service members that obviously is coming through in the gross profit improving here year over year. Can you maybe just go into a little bit more detail, Scott, where you are redeploying some of that top line and gross profit upside back into the business? What are some of the key investment priorities for you both from a T&D perspective as well as headcount standpoint? And when how that starts to show up driving a return in the business either in fiscal twenty seven or thereafter? Scott Cutler: Yeah. So, you know, a couple of things. You know, one, we're obviously showing, you know, some of that actually just dropping all the way through to the bottom line. So, you know, I would expect for us to continue to seek to do that. I think when it looks at, you know, our operating expenses as an example, I don't expect a significant change in the framework, for example, as to percentage of revenue that we allocate towards sales and marketing and product and technology. So we want those efficiencies, but we also see that opportunity as we're also growing on the top line to be able to reinvest back in the business. I think consistent with the earlier question that I highlighted below, that I highlighted before, on the service side, as it relates to gross margin. You know, that's where we're gonna continue to focus on the efficiency gains. And that's going to be through, you know, we highlighted some of the actions that we took earlier this year to drive those efficiencies. We've obviously had a tremendous amount of success on the efforts around reducing fraud. And even outside of that when you look at taking out the year-over-year benefit that we had from fraud savings but essentially just looking at how much more efficient that we can be on the service line with top line growth we're gonna continue to drive that through the deployment of AI and deployment of technology across that. When it gets down to our product and technology side, as I look at what are our big priorities going into the year, you know, I really think it starts with the app experience. How is it that we can create a product experience that is engaging for our members, to make that app experience great. We've gotta be able to invest in the data and in the APIs to be able to expose all of that information and that data to our members in a better way. I think of the opportunity that we're going to continue to invest around service center modernization. Which again is investment in technologies that will deliver experience savings. So as I look at how those strategies play out I think you're also going to see us continue to make investments. We haven't talked much about it in this call on the quality of that marketplace experience. So this is the center of the flywheel around spend. And this is going to be continued investment that we have in the marketplace platform. And so what you're going to see, for example, just literally in the coming weeks is continued expansion of what that experience looks like. So the addition of programs, potentially products, how that shows up in terms of a carousel of experiences that would be in the app in the web version. So that we can, again, provide a more engaging experience. And so we think about that investment in the product experience showing up in terms of how we can potentially drive other opportunities that would show up in service revenue over time. So those are kinda a couple highlights that we're really excited about, David. David Roman: Thanks, David. Thanks so much. Operator: And the next question comes from Aleksey Gavalev with JPMorgan. Please go ahead. Destiny: Hi. Thanks for taking my question. This is Destiny on for Aleksey. You mentioned encouraging early adoption of the GLP-1 program. I just wanted to touch on what's the revenue sharing opportunity for HealthEquity, like, referring members to the agile platform and if this is a material revenue opportunity for the company. Thanks. Scott Cutler: Yeah. So certainly right now, it's immaterial to our current results. And I would say that we're really pleased with the uptake effort. You know, I think as we look at why we think we're in a strong position, we have 10 million members. They're spending significantly across these on products and services. So bringing those experiences into the platform itself is something that we're excited about. You know, over time, this would show up in service revenue much like our marketing arrangements we have today with FSR HSA store show up there. You know, we think the model is going to evolve over time kind of a combination of the recurring administrative fee associated with members signing up to programs. You can look to other direct-to-consumer healthcare platforms in terms of what that looks like. As well as essentially the administration fees or fees that we could get by promoting product or providing affiliate links to other platforms. So again, I think that the model is going to evolve over time. Really driven by a tailwind of member adoption. Member adoption of these, again, programs, products, and services. Destiny: Thanks, Destiny. Operator: And the next question comes from David Weissen with BTIG. Please go ahead. David Weissen: Hi. Can you just size the TAM expansion with the brand product opportunity? I think there's, like, 7 million people enrolled in bronze. Compared to the 10 that you have in HSAs now. It sounds a very significant opportunity. Just any color on like, how to quantify this? Maybe I think, Steve, you may have quantified this in the past. Thanks. Steve Neeleman: Yeah. Sure. Thanks, David. Yeah. So 7 million is what's in it now. And you know, the question is what happens with these premiums going up and what's gonna happen with the subsidies? And, of course, you've all read all about that. We don't know the answer to that as we said earlier, but there is a possibility we're starting to see some people and some reports from our health plan saying that people are going from silver to bronze. Which is, you know, a good opportunity because people that are in silver go down to bronze, they're probably more likely to fund the account. Accounts. We started to set up some of these accounts. It's very early innings, but we're starting to see account contributions being stronger than we frankly thought. People are putting money in these accounts, which is exciting. So, look, whether all now and remember, it's 7 million people and so our estimate is that's probably closer to a couple two or 3 million households, if that makes sense. The question is, what percentage of those with migration from silver would the industry be able to capture? I know there's a CMS report out there that's been circulated that things they think there'll be 1.6 million people in these HSAs coming out of this open enrollment cycle that we're gonna we're doing everything we can to get more than our fair share of those. But it's really hard to know exactly what it's gonna be like. I can tell you though that it's gonna be one of these journeys, David, because the beautiful thing about the health savings account in helping people pay for their out of pocket, Scott mentioned that crisis people have. Most people accept those who have HSAs, obviously. Don't have the ability to pay a $500 expense or a $400 expense without going into debt. HSA has totally changed that game. But the beautiful thing about these is is that they start to let's say they sign up for a bronze plan, goes effective January 1, 2026. They start to use their health insurance throughout the course of the year. We're gonna be reminding them, of course, if you haven't signed up for an HSA, sign up for it now. Because if you have an out of pocket roll the money through the HSA, I will gladly take that money, help them spend it wisely, and then we're gonna make some transaction fees and things like that on it. But the beautiful thing to them is they're gonna save probably twenty, 30%. It depends on what their tax rate is. It could be as high as 40%. On the cost of that care. And so I would say that even though we're gonna have obviously a lot better numbers in the next few months than we do today, it's gonna take several months before the market really understands. I mean, we've been trying to educate people on HSAs for years in the commercial market, and this is a whole new market for us. But we don't know exactly what the TAM will be, but, Scott, I don't know. And you looked at these numbers a lot. And, you know, I think we're hopeful they'll be a lot more HSAs coming out of this channel than there ever was. When the law passed, back in and was signed into law back in July, July 4. We looked at it then and about 90% of the plans that were bronze at that moment were not HSA qualified. January 1, 2026, they'll all be HSA qualified. So there is gonna be this hopefully, steep, but fast learning curve where we can get people to understand that. David Weissen: Can you use HSA dollars to pay the premium? So can you buy the premium, like, pay the in premium on a tax-advantaged basis? Steve Neeleman: Oh, there's only a couple situations where you can use HSA dollars to pay premium. One is if you're just unemployed. The other one is if you're formally on COBRA. But I'm talking about and other lawmakers they're saying why not roll money into HSAs change the law. It doesn't take a lot of change. Just to say you can use it for premiums more broadly speaking, and we're completely supportive of that. We are the technology is there. Obviously, our expertise would be that, yeah, the money comes in. To the HSA. They wanna use on premiums. Let them use it on premiums or let it use it let them use it on their out of pockets. Let them use it on our marketplace. You name it. So right now, you cannot unless you're unemployed. And on COBRA. David Weissen: Thanks a lot. Steve Neeleman: Thanks, David. Operator: This concludes our question and answer session. I would like to turn the conference back over to Scott Cutler for any closing remarks. Scott Cutler: Thanks a lot. It's been a year since I was first introduced to everybody here on our last Q3 earnings call. I joined HealthEquity knowing the company by reputation only and I've just been so humbled and honored to be able to be side by side with our passionate Purple teammates. Over the last year. We really have a significant opportunity ahead of us. We're gonna be going after that aggressively. We think as we can reach and influence more employers, and more families turn to HSAs to address affordability, and take control of their health care spending that we're gonna be closer to achieving the mission that Steve set out for us to so ambitiously many, many years ago. So we welcome you, our shareholders, and everybody to help continue on this journey with us. So thank you today. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: 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. Our first question comes from Janine Stichter with BTIG. You may proceed with your question. Janine Stichter: Hi. Good afternoon. Thanks for taking my question. Can you elaborate a bit on some of the product missteps that you talked about? What cues are you getting from the consumer to tell you that this is where the challenge is and this is what needs to be fixed? And then you mentioned about the promotions being higher on the digital channel. Maybe elaborate on why that is or why you think that is and what you saw in stores during the period? Thank you. Lisa Harper: Thanks, Janine. Hi. It's Lisa. The merchandising missteps were very focused on tops as we mentioned. So tops were about half of the total revenue miss for the quarter. Shoes were about 40% and then jackets, because of their seasonal importance, were about 10% for the quarter. So it was pretty significant. We've talked through the shoe situation, which is a pause based on the tariffs. We've reintroduced shoes and boots recently and are having a great response to them. We'll continue to build that business back up and recapture that revenue as we move into 2026. But for the quarter, the biggest miss and the biggest action was really focused around the top category. What I would say from a merchandising perspective was the abdication of a couple of our core fabrications and core kind of entry point solution-based products for the customer. And so we've been able to chase that product very quickly. It's longer tops, more tunics, brushed waffles, super soft knits, and challi in the woven category. So it's very focused on a few fabrications and very focused on a few end uses. And because we are able to platform that fabric, we're back into some of those businesses in December, and throughout January and February in terms of receipts. So we expect to see improvement in those categories as we move into early first quarter, as we'll have, I think, chased the bulk of what we feel is missing in the assortment right now. So what we've done to avoid that in the future is really enhanced. Although we have pretty substantive guardrails to this, this was a merchandising miss that was, obviously, very disappointing and frustrating for the organization for the quarter. And so we put enhanced guardrails around the process. We've put in a robust assortment planning, multifunctional approach to the categories particularly. And we've increased oversight, and I'm involved in every step of that. I would say that as an organization, they were able to effectively kind of innovate and balance product assortments in all areas except for tops. So I would say that and I would all areas except for tops and jackets. The benefits of those innovations and expansion to the core product are present in denim, non-denim dresses, and intimates. And so those areas were able to positive comp. As we mentioned in the prepared remarks, they weren't able to offset the detriment of the tops miss. So if you think about the total miss for the quarter, I'll restate it. It's about 50% tops, about 40% shoes and a related transaction with shoes, and then about 10% in jackets for the quarter. Now I'll turn it over to Ashlee Wheeler to answer the promotional conversation. Ashlee Wheeler: Hi, Janine. I see that the accelerated promotional activity was in large part correlated to the miss in the top space. So as Lisa noted, in the absence of some of those core franchises, entry price point solution-based items, and a swing into highly novel or more fashion-oriented assortment, it put a little more pressure on promotional activity, AUR, for example. In the absence of those entry price point categories. That said, I think we've done a really nice job making sure that we're coming out of the season clean. So there are no inventory issues to speak of related to some of these missteps in assortment. Janine Stichter: Perfect. And then maybe just one more for me. And, you know, the full-year guidance implies, I think, a mid-teens revenue decline in Q4. Anything you can share about where you're tracking quarter to date versus that guidance? Lisa Harper: Obviously, we are able to incorporate current performance into that guidance. We don't anticipate a substantive recovery in either tops or shoes for the balance of this quarter. We'll start to see some improvement in tops in the first quarter. We'll still have a drag in shoes as we go through the fourth quarter and the first half, and that's next year. So all of that is contemplated into that guidance. Janine Stichter: Alright. Thank you very much. Lisa Harper: Thanks. Operator: Our next question comes from Brooke Roach with Goldman Sachs. Brooke Roach: Good afternoon, and thank you for taking our question. Lisa, for a couple of years now, the balance of fashion versus basics and opening price point versus stretch product has been something that the business has been chasing. What's changing in the processes to ensure that you have both those opening price point and balanced items in your assortment and planning architectures? And other than oversight, do we ensure that this is something that's more systematic on a go-forward basis as we look into 2026 and beyond? Lisa Harper: Thanks, Brooke. I just called you by your last name. I apologize. Thanks, Brooke. So I would say that the overall issue and opportunity in this business is about innovation and remaining relevant in commercial. That is balanced against the need of the customer and the request of the customer focus of the customer on price point. And so as we go into the first quarter of next year, we will be in terms of opening price point, close to 30% of sales and assortment associated with those categories of businesses that service our customer in terms of core products, solution-oriented, high quality at a price that she has shown us that she reacts to and values. That is built into the architecture, the assortment architecture, we move forward. It is something that we have embedded in that process. Both sides of this are important. First of all, we have to move forward and remain relevant. I think that we've been able to do that with sub-brands. We've been able to do that in the categories that I mentioned before, denim, non-denim dresses, and intimates. And the miss really is in the tops area, which had abdicated and exited through merchandising direction too many of the core programs. Those core programs are bought and will be already had been planned to be received as we get into January receipts going into 2026 sales, and it's part of the assortment architecture. So the need for the business to move forward and innovate with product was important as our customer feedback had been that our styling was not keeping up with their demands. We've balanced that, I think, in every area except for the misstep in tops. Where we will be going into the first quarter with a much stronger opening price point strategy across the board, but primarily, the highest level of opening price point will be in tops. As we move forward. It's built into the assortment architecture of the business. I don't know. Ashlee, you wanna add anything? Ashlee Wheeler: Brooke, I might add. If we take a look at the categories where we executed well in the third quarter, so denim is a place where we stayed committed to the franchises that the customer knows us for, the bombshell franchise, for example. We stayed very committed, but we expanded upon that, gave her more innovation through leg shape, wash treatment, finish. And that system has worked very, very well. It's worked well for us in dresses where we've stayed committed to end use, covering every aspect of her life, and been very focused on multi-end use. It's worked well. Tops, where we misstepped in the third quarter, we did not do that, and we walked away from very critical end use and solutions. We have to get back and stay focused on the same balance that we applied in denim and in dresses to our tops category, which is the largest category of the business. Brooke Roach: That's really helpful. As a follow-up, have you seen any larger or outsized shifts in engagement among any specific income demographic or age cohort of your consumer? Maybe said another way, are you seeing any changes in the demographic makeup of your business of which customers are engaging with you the best? Ashlee Wheeler: In terms of customer demographics or income cohorts, performance has stayed consistent across all of those. We observed in the third quarter very different from previous quarters, is our most loyal, our most engaged customers pulled back and we saw that come through reduced frequency and fewer purchases in the tops department in particular. Brooke Roach: Great. Thanks so much. I'll pass it on. Lisa Harper: Thanks, Brooke. Operator: Our next question comes from Corey Tarlowe with Jefferies. You may proceed with your question. Corey Tarlowe: Great. Thanks and good afternoon. Lisa, can we just talk a little bit about the sub-brand momentum and any updates there as that builds in the assortment and how you think about, you know, this quarter's results may alter or change the approach in the sub-brand strategy? Thanks so much. Lisa Harper: Thanks, Corey. No change in the sub-brand strategy. I think that we have a clear winner in the Festi brand and think that that will expand. Nightfall and Retro are continuing to perform very, very well. Belle Isle is more we've identified it more as a first-half brand than a back-half brand. And so we'll be adjusting kind of the sales momentum associated with Belle Isle to be probably more 60% first half, 40% back half. And then we've introduced true interactive business, which we're very happy with the results there. And LUPSEC is still kind of, I would say, in test mode. We don't have a lot of revenue associated with that as we move into next year as we're able to refine that assortment. Moving forward. I think in general, very, very pleased with the sub-brand momentum and expect it to continue to grow dramatically as we go into 2026. Corey Tarlowe: Great. That's really helpful. And then just to follow-up, can we talk about the leverage profile and how that changes with all the store closures and what the perhaps, new leverage profile might be as we think about easier laps in 2026 and what that could mean from a margin perspective? Thanks so much. Paula Dempsey: Hi, Corey. This is Paula. So as we think about 2026 with the store closures, what's gonna happen is our profile will be more flexible from an expenses standpoint. So, of course, less fixed expenses, and we'll have the ability to be more dynamic. From that standpoint. I think from a gross margin, the profile may be staying closely, the same to where that total enterprise is today. But what you're going to see is a substantial EBITDA margin expansion in 2026 with the store closures. So currently, we are seeing the store closure optimization work really well. We have delivered over $18 million in cost reductions this year alone. We expect that number to be much greater in 2026 when we annualize 180 stores. And so that will also strengthen our liquidity substantially for 2026. Corey Tarlowe: Okay. So much, and best of luck. Operator: Our next question comes from Alex Stratton with Morgan Stanley. You may proceed with your question. Alex Stratton: Great. Thanks so much. Maybe for Paula, I think you said you expect significant EBITDA margin expansion next year. Not sure if I heard that right, but if so, can you just elaborate more on that? And what type of level is in reach? And then just as a follow-up to the sales guidance for the fourth quarter, worse pressure than the third quarter is what's implied. So is that reflecting what you've seen quarter to date? And what areas is out here getting worse from a quarter-over-quarter perspective? Thanks a lot. Paula Dempsey: So going to Q4 guidance, are all in for Q4 guidance. So what you're seeing is essentially accounting for what Lisa had mentioned before. The miss in tops along with shoes. There is also a seasonality impact in our business typically in Q4. So it goes along with that seasonality impact. As we moved into fiscal 2026, with store closures and EBITDA margin growth, what you're going to see there is, if you recall, a lot of these stores that we're closing, actually, most of them are very highly unproductive stores. So by closing them, we're essentially giving money back to the business through reductions in many items in the P&L. Right? So such as store payroll or store occupancy, etcetera, etcetera, etcetera. So we're gonna see a greater amount of savings from that standpoint. And just to touch base again, we're seeing retention, customer retention, sales retention from these store closures to be well aligned with our historical rates, which is a great sign for us. So everything is going really well from that standpoint. Alex Stratton: I would say as, you know, we are on track to closing up to 180 this year. And I think that's all we have from a store optimization at this point. Alex Stratton: Great. Thank you. Operator: Our next question comes from Dana Telsey with Telsey Advisory Group. You may proceed with your question. Dana Telsey: Hi. Good afternoon, Lisa and everyone. As you think about the current merchandising adjustments that are being made, what are you seeing in the competitive landscape? Do you think of this more as an internal issue that Torrid Holdings Inc. needs to fix or are there changes in the competitive landscape and whether it's product assortment, price point, or where your customer's going? Thank you. Lisa Harper: Thanks, Dana. I do think there's a seasonal aspect to it. I think, obviously, a lot of this is self-inflicted driven by really advocating core products in the knit and woven top categories. I do think seasonally, there are a lot of options that other brands have extended sizes and it's more sweatshirt oriented, sweater oriented that are not as fit specific. We certainly didn't see this impact in the top business in the first half of this year, so it really did accelerate as we go into the third quarter. I think we have a real opportunity to build back with the opening price point strategy that we discussed and keep applications that our customer really values. More tunics in the mix, more kind of figure flattering solution-oriented products, in the knit category and then more wear to work and blouse business and woven categories. But I do think that in the third quarter, there is an ability to choose tops among a broader range of retailers. Because just the seasonal impact of being less fit specific and more oversized. I don't while we've, you know, to that end, we didn't see the degradation in any of our bottoms businesses, which are more fit specific or our dress business, which also we were able to have great representation of end uses and fit solutions. So I feel like it's isolated. Very clearly isolated. I do think it could be could have been I don't have any data to really support it, but just broadly from a mindset. It could have had a larger impact because of the seasonal nature of the products in the knit and woven category during the time. So, again, quickly move to address it. When I think Ashlee mentioned earlier about, you know, our less frequency in terms of top purchases in the third quarter. Tops really are a frequency driver. For us so that they don't buy denim as often or dresses as often, but they do buy tops more often. And I think that opportunity to buy tops other places, it might have been enhanced by, you know, by that timing. I do think anything that we've seen in terms of surveying with our customers, there's still very dedicated to Torrid Holdings Inc. They're very interested in shopping at Torrid Holdings Inc. They're still maintaining their strong relationship and our loyalty program continues to be very highly penetrated. So we have a lot of opportunity to communicate and connect with this customer and understand exactly what's missing. And as I mentioned, the one thing that continues to come up is opening price point that would say we did have fits and starts with over the last several years, but very deeply invested and committed to based on the analysis and of our previous OPP programs and the expansion related to that. So I think we're gonna be able to recapture her tops purchase in addition to the denim and dress person from her as we introduce these reintroduce these core businesses at an opening price point. Did I answer the question, Dana? Dana Telsey: Thank you. Lisa Harper: Thanks. Operator: This now concludes our question and answer session. I would like to turn the floor back over to Lisa Harper for closing comments. Lisa Harper: Thank you for joining us today. We look forward to sharing the progress on the store optimization program and the remerchandising of our tops area as we join you for the fourth quarter and fiscal 2025 conference call. Thank you. Operator: Ladies and gentlemen, thank you for your participation. This concludes today's conference. Please disconnect your lines and have a wonderful day.
Operator: Good day, everyone, and welcome to nCino's Third Quarter Fiscal 2026 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. Now it's my pleasure to turn the call over to the Vice President, Investor Relations, Harrison Masters. You may begin. Harrison Masters: Good afternoon, and welcome to nCino's Third Quarter Fiscal 2026 Earnings Call. With me on today's call are Sean Desmond, nCino's Chief Executive Officer; and Greg Orenstein, nCino's Chief Financial Officer. During the course of this conference call, we will make forward-looking statements regarding trends, strategies and the anticipated performance of our business. These forward-looking statements are based on management's current views and expectations, entail certain assumptions made as of today's date and are subject to various risks and uncertainties described in our SEC filings and other publicly available documents, the financial services industry and global economic conditions, nCino disclaims any obligation to update or revise any forward-looking statements. Further, on today's call, we will also discuss certain non-GAAP metrics that we believe aid in the understanding of our financial results. A reconciliation to comparable GAAP metrics can be found in today's earnings release, which is available on our website and as an exhibit to the Form 8-K furnished with the SEC just before this call as well as the earnings presentation on our Investor Relations website at investor.ncino.com. With that, I will turn the call over to Sean. Sean Desmond: Good afternoon, and thank you for joining us to discuss nCino's Third Quarter Fiscal 2026 Results. Before reviewing our third quarter performance, I wanted to remind you of nCino's value proposition and the mission-critical role we play for our customers. Financial institutions continue to struggle with legacy fragmented systems that limit growth, hinder financial performance and create poor user experiences, nCino solves this problem with AI-powered intelligent automation on a unified, scalable platform. We are the only platform for managing lending, onboarding, account opening and portfolio management across all major business lines for financial institutions across the globe. This is why nCino serves as a system of record for the most critical operations of banks, credit unions and IMBs of all sizes in over 20 countries. During my first earnings call as nCino's CEO in early April, I spoke about the tremendous confidence I had in our team, our technology and our market position. I noted that the foundation was in place and that it was all about execution, that we needed to execute at a level that reflects the strength of our market position and the ambitions we have for this business. As you can see from our financial results, that is exactly what the company did in the third quarter. I'm extremely proud of the accomplishments of our team this past quarter. Sales and product development both picked up momentum in Q3, and I'm very pleased with the level of demand we are seeing from our customers and prospects across market segments, geographies and products. The traction we are seeing in the business has further increased my conviction in not only achieving our sales and financial goals for fiscal '26, but also in the journey ahead for nCino. The successful outcomes our customers are seeing continue to reinforce that nCino's platform and strategy are resonating more than ever in an end market that is seeking significantly greater operational efficiency paired with providing exceptional user experiences and continuous product innovation, nCino customers routinely report improvements in standardization and consistency on the platform, including a $5 billion U.S. bank eliminating 86% of duplicate data entry and a $1.2 billion institution automating 100% of their policy exceptions, nCino customers also report compressing time lines dramatically, including $25 billion farm credit institution achieving 91% faster decisions, a $2 billion bank achieving 93% faster booking utilizing auto decisioning and a $5.2 billion institution reducing underwriting from 23 days to 2 days. The nCino Research Institute recently conducted a comprehensive analysis of 112 nCino customers and compared them to 378 peer institutions across the United States and determined that nCino's customers exhibit on average a 64% better return on average assets and a 75% superior return on average equity relative to their non-nCino peers. While it would be difficult to isolate nCino as the sole contributing factor to these impressive results, one thing is clear from this analysis. Financial institutions using nCino demonstrate significant market outperformance across critical profitability metrics as compared to their peers, nCino is a competitive differentiator and a difference maker for our customers. We believe this will be even further reinforced as we leverage the vast amount of data we have and inject more AI, automation and intelligence into our products and platform. Our AI strategy is rapidly expanding the opportunity we have to partner with our customers. I spent quite a bit of time on the road meeting with customers this past quarter and heard time after time that financial institutions don't just need AI tools, they need an AI partner, a partner they trust who deeply understands banking, has a proven ability to drive industry-wide change, possesses the data foundation necessary to build truly differentiated banking-specific AI capabilities and can guide and support them on their AI journey at whatever pace they are comfortable with, while taking their credit policy and risk tolerance level at the highly regulated environment they operate in into account, nCino is that partner, and we are beginning to feel a bit of a halo effect as a leading AI innovator in the industry. We are seeing this in the form of new customer wins with financial institutions that are excited by the AI solutions we already have live in the market and by our AI strategy and road map. We are also seeing this halo effect in the form of early renewals of customers that want access to our AI features immediately instead of waiting until their standard renewal dates. We saw increasing adoption of our AI capabilities in the third quarter within the over 110 customers that have now purchased Banking Advisor intelligence units. This includes seeing an early cohort of customers advance through the stages of first deploying Banking Advisor skills and test environments and then making the tools more widely available to their employees. While we are, of course, looking forward to the incremental subscription revenues we expect will come from broader consumption of intelligence units, including from the introduction and usage of nCino agents, for the time being, our primary focus continues to be on simply getting our customers familiar with and comfortable using our AI technology and driving adoption of our capabilities. We are advancing AI capabilities at a pace well ahead of customers' ability to adopt them, given our customers, which operate in some of the most highly regulated environments, a clear and steady road map for adopting next-generation technology as they are ready. As an example of that pace of innovation, we expect to have approximately 100 Banking Advisor capabilities available by the end of the fiscal year, up from the 18 we announced in late May at our inside user conference. AI is becoming so embedded across our platform that Banking Advisor is shifting from a set of stand-alone features to a pervasive experience. In that context, the number of discrete Banking Advisor capabilities is becoming a less useful measure than the outcomes and total value they deliver across the nCino platform. We also continue to receive great feedback on our new operational analytics functionality. For those of you who are not familiar with it, nCino Operations Analytics is the only banking-specific analytics tool that transforms operational data into strategic intelligence with peer benchmarking from our data community of global financial institutions. Through this functionality, nCino customers are able to uncover bottlenecks, analyze their impact on key metrics and drill down by role, employee or stage, measure employee KPIs to identify opportunities for optimization and performance improvement, measure cycle times, volume, win rates and other critical metrics to assess performance and drive improvements, compare performance against industry peers to identify strengths and drive competitive advantage with anonymized data and evaluate the time and resources spent across processes to identify inefficiencies and streamline workflows. The actionable intelligence offered by nCino Operations Analytics not only provides our customers with a blueprint for continuously improving their operational efficiency, it also informs the development and flows of our AI agent strategy. As you may have seen shortly after the close of Q3, we announced the release of the first in a series of role-based AI agents we intend to bring to the market over the next year. These agents, which we refer to as Digital Partners are trained on the usage data of over a majority of our lending customers from which we can correlate greater processing consistency and enhanced loan processing speed to superior financial results among peer institutions. AI has helped us further harness the data we've been intentionally accumulating for over a decade on how to optimize the processes behind financial services products, and we are making that the cornerstone of a ready-built Agentic AI strategy, specifically for financial institutions of all sizes on a global basis. Before I turn the call over to Greg to walk you through our financial results, I did want to mention at least a few sales highlights from the third quarter. In the U.S. community market, a $5.5 billion bank that started their relationship with nCino as a customer for mortgage and indirect lending added commercial, small business and consumer lending, which more than doubled their annual commitment to nCino and brought them over the 7-figure ACV mark. In the U.S. enterprise market, we saw healthy expansion opportunities across our existing customer base, including 2 top 15 banks increasing their commercial commitments intercontract, 2 renewals with top 100 banks to expand adoption of nCino mortgage and another top 100 bank expanding their adoption of our consumer lending solution. Strong sales traction was also visible outside of the U.S. with our newest customer in Japan, one of the largest regional banks in the country, signing with nCino for mortgage lending. This new customer win, along with 3 expansion deals with existing Japanese customers in the third quarter continues to reinforce our excitement about the opportunities we see ahead for nCino in this market. In EMEA, our Integration Gateway API infrastructure solution acquired with Sandbox Banking at the start of this fiscal year is demonstrating global applicability across our customer base and was included as part of a renewal with a $90 billion bank in the Czech Republic, the first Integration Gateway deal outside of the U.S. Our Integration Gateway solution was also included as part of a renewal with a $9 billion credit union. These 2 deals gave us ACV uplifts on existing contracts of 13% and 48%, respectively, underscoring our confidence in how additive the Integration Gateway API infrastructure can be to our existing suite of solutions. With that, I'll hand the call over to Greg. Gregory D. Orenstein: Thanks, Sean, and thank you all for joining us today. Please note that all numbers referenced in my remarks are on a non-GAAP basis, unless otherwise stated. A reconciliation to comparable GAAP metrics can be found in today's earnings release, which is available on our website and as an exhibit to the Form 8-K furnished with the SEC just before this call. Total revenues in the third quarter were $152.2 million, up 10% year-over-year. Subscription revenues were $133.4 million, up 11% year-over-year on a reported basis and 7% organically. As a reminder, our third quarter year-over-year organic subscription revenues comparison is negatively impacted by an approximately 3% headwind resulting from onetime subscription revenues that occurred in the third quarter of fiscal '25. As noted on Slide 15 of our third quarter earnings presentation, of the approximately $3.9 million over-performance against the high end of our third quarter subscription revenues guidance, approximately $1.4 million reflects successful execution against our plan and about $1.8 million was from our U.S. mortgage business, where we saw subscription revenues of $21.1 million, up 2% year-over-year against a tough compare. While bank M&A has continued to be a healthy tailwind for nCino, we did have one deal in the quarter that went against us. This resulted in a contract buyout, which contributed approximately $500,000 of the overperformance. Finally, approximately $200,000 of our third quarter overperformance was from favorable FX relative to plan. Professional services revenues were $18.8 million, a decrease of 1% year-over-year. As I have addressed in previous quarters, our focus is on gross profit growth in our professional services business rather than revenues growth. We continue to make progress with our internal efforts to incorporate AI tooling and have more prescriptive deployments in our professional services practice, and we continue to expect this will start to translate into better professional services gross margins in the second half of next year. Non-U.S. total revenues were $33.6 million, up 13% as reported and in constant currency. Non-U.S. subscription revenues were $27.9 million, up 21% as reported and in constant currency and 3% organically. Non-GAAP operating income was $39.9 million or 26% of total revenues, representing 600 basis points of operating margin expansion, both year-over-year and quarter-over-quarter. As noted on Slide 17 of our earnings presentation, of the approximately $6.4 million overperformance versus the high end of our prior non-GAAP operating income guidance, overperformance against our subscription revenues guidance contributed approximately $3.1 million of incremental gross profit, the realization of net savings from the May restructuring contributed an additional $2 million and approximately $500,000 was timing-related spend that we now expect to incur in Q4 instead of Q3. The remaining $800,000 balance of our overperformance in the quarter reflects ongoing efforts to drive greater efficiency and cost discipline across the organization, including from leveraging various AI tools and initiatives. Non-GAAP net income attributable to nCino in the third quarter was $35.8 million or $0.31 per diluted share. We ended the quarter with $87.9 million in cash, including restricted cash and $203.5 million outstanding on our line of credit. As a reminder, free cash flow generation is seasonally lower in the second half of the year, and we expect a meaningful influx of cash in the first quarter of fiscal '27. We repurchased approximately 1.4 million shares of our common stock in the third quarter at an average price of $27.71 per share for total consideration of approximately $39.7 million. When added to the stock we repurchased since announcing the buyback in April, we have completed the $100 million authorization, repurchasing approximately 4 million shares at an average price of $25.02 per share. We will continue to assess on an ongoing basis how best to allocate capital, whether by purchasing additional shares of nCino stock, reducing the amount of debt outstanding on our credit line, building up additional cash on our balance sheet or some combination of the 3. This assessment will be done in the context of maintaining a balance sheet that provides us with an appropriate amount of flexibility and optionality in the dynamic and quickly evolving technology landscape we are operating in. Our platform pricing transition continues to proceed quite well and according to our expectations, including price uplifts, and we have now converted approximately 27% of our ACV to platform pricing, up from 21% last quarter, with about 1/4 of that attributable to our U.S. mortgage business. We continue to see a desire from various customers to renew early and adopt our new pricing framework, which we believe is due in large part to demand for our AI capabilities and AI strategy. Turning to guidance. For the fourth quarter of fiscal '26, we expect total revenues of $146.75 million to $148.25 million and subscription revenues of $130.75 million to $132.25 million, an increase of 4% and 5% year-over-year, respectively, at the midpoint of the ranges, including approximately $1.1 million of inorganic subscription revenues from Sandbox Banking. As a reminder, our fourth quarter year-over-year subscription revenues comparison is negatively impacted by an approximately 3% organic headwind resulting from onetime subscription revenues that occurred in the fourth quarter of fiscal '25. Referring to Slides 15 and 16 of our earnings presentation, you will see that for the fourth quarter, we are flowing through approximately $700,000 of the third quarter execution-based beat and increasing our full year subscription revenues guidance by $4.5 million. We are increasing our outlook for U.S. mortgage subscription revenues growth for the full year by the approximately $1.8 million overperformance in the third quarter. In keeping with our guidance philosophy this year around U.S. mortgage, we are not extrapolating this overperformance to the fourth quarter. We expect U.S. mortgage subscription revenues to be down sequentially in the fourth quarter, consistent with historical seasonality, but now expect year-over-year U.S. mortgage subscription revenues growth of approximately 7% for fiscal '26, up from our prior guidance of 5%. Non-GAAP operating income in the fourth quarter is expected to be $32.5 million to $33.5 million. And non-GAAP net income attributable to nCino per share is expected to be $0.21 to $0.22 based upon 116.5 million diluted shares outstanding. Please turn to Slide 17 of our earnings presentation for additional details regarding our non-GAAP operating income guidance. Note that the sequential step down represented by our fourth quarter non-GAAP operating income guidance is due to the following factors: First, our total revenues guidance implies a seasonal step down in professional services revenues of approximately $2.8 million, which directly impacts the bottom line. Second, we assume the impact of the gross profit benefit from the mortgage overperformance, FX and contract buyout in the third quarter does not repeat in the fourth quarter. Third, as previously noted, we expect to incur approximately $500,000 in spend that shifted from Q3 to Q4. And finally, consistent with our guidance philosophy this year, we are going to continue to hold back savings from the May restructuring to preserve operating flexibility as we finish out the year and continue to position the company for growth in fiscal '27 and beyond. For fiscal '26, we now expect total revenues of $591.9 million to $593.4 million, up from our prior guidance of $585 million to $589 million, representing growth of approximately 10% at the midpoint of the range and 10% in constant currency. For fiscal '26, we now expect subscription revenues of $520.5 million to $522 million, up from our prior guidance of $513.5 million to $517.5 million, representing 11% growth at the midpoint of the range or 7% organically and 11% in constant currency. We now expect our fiscal '26 non-GAAP operating income to be $127.2 million to $128.2 million, up from our prior range of $117.5 million to $121.5 million, representing an approximately 33% increase over fiscal '25 at the midpoint. Non-GAAP net income attributable to nCino per diluted share is now expected to be $0.90 to $0.91 based upon a weighted average of approximately 117 million diluted shares outstanding, which does not factor in any additional share repurchases beyond those we have made to date. This guidance assumes interest expense incurred under our credit facility of approximately $15 million for the fiscal year. Finally, our fiscal '26 outlook for ACV remains $564 million to $567 million, representing growth of 10% in constant currency at the midpoint of the range. Our guidance represents net additions to ACV of $48 million to $51 million in the year, including $4.5 million from the acquisition of Sandbox Banking. Recognizing, of course, that we must continue executing and timely close the Q4 opportunities in our pipeline, our bookings progress year-to-date, along with the level of sales activity we see in the market, position us exceptionally well relative to our ACV guidance. In closing, we are very pleased with our execution and the results we achieved in the third quarter, including in both bookings and operating margin expansion. We remain confident that we are on track to achieving Rule of 40 around the fourth quarter of fiscal '27 as stated on our fourth quarter fiscal '25 earnings call. With that, we will open the line for questions. Operator: [Operator Instructions] It comes from the line of Michael Infante with Morgan Stanley. Michael Infante: Greg, I just wanted to ask on margins. If I look at the incremental AOI margins in the quarter, I think they were close to 90%. If I look at fiscal 4Q, at least as it relates to the high end, it's close to 130%. That would basically put your full year incremental AOI margins around 60%. Like how should you -- how should we be thinking about the leverage you're driving in the business this year? And whether or not some of those AI efficiencies give you some incremental confidence in terms of delivering on your medium-term free cash flow and operating margin targets even faster? Gregory D. Orenstein: Yes. Thanks for the question, Michael. Going where I just ended my prepared remarks in terms of our confidence in hitting our Rule of 40 target around the fourth quarter of next year, we continue to see opportunities in the business for further efficiency. And yes, we're seeing it from AI as well as, again, I think just very healthy cost discipline across the organization. And so that is part of what the success that you see in the third quarter as well as, again, what we would expect to be able to continue to drive from an efficiency standpoint. The other thing I think is just from a mix as it relates to gross margin, that continues to be an opportunity for us, not just from a platform perspective in terms of some of the things that we have on AWS. But also, as you've heard me talk about going back to the May Investor Conference at our Insight user conference, the gross margins from professional services, which is something we're very focused on leveraging initiatives like project [ Sev Zero ] that you have heard us talk about. And so I think the team has done a very good job focusing on becoming more efficient. And I think one of the things that we've learned post the difficult May restructuring is operating leaner, you can actually operate more efficiently and quicker. And so I think that mindset is throughout the organization right now, and we're going to continue to execute with that mindset. Michael Infante: That's helpful. And then just for my follow-up, obviously, you made the comment just in terms of having conviction in your ability to deliver on the full year ACV target. But as we think about both fiscal 4Q and beyond, like how are you thinking about your level of visibility into, call it, NTM subscription revenue just based on what you see either already contractually committed and the associated sort of backlog conversion to subs revenue. I'm just thinking about not only fiscal 4Q, but beyond and how you think about your level of visibility at least relative to what you've characterized as your historic visibility into forward subscription revenue? Gregory D. Orenstein: Yes. Thanks, Michael. I think in terms of forward visibility. Obviously, we're going to refrain from talking about next year until our Q4 call. But I think you would have heard in Sean's remarks as well as mine. In terms of the sales activity we're seeing on a global basis, we feel good. We feel good about the business right now. And the pipeline, I think as we sit here and talk today, we feel incrementally better than the last time we spoke with you. And so we have to continue to execute. That's the drum we continue to beat here. We saw the team respond incredibly well in the third quarter, and we expect that to continue to be the focus is just execution. But the business is out there. And again, I think the story is resonating. I think what we're doing from an AI standpoint, leveraging the customers that we have and the innovation that this company has always been front and center on really is resonating right now in the marketplace. And so we feel, as Sean noted, somewhat of a little bit of a halo effect from that. We want to keep driving that innovation, keep driving discussions with customers so they can understand more and more how we can help them become more efficient. And that's the focus right now of the entire organization. Operator: Our next question is from Saket Kalia with Barclays. Saket Kalia: Sean, maybe just to start with you. I want to dig into Greg's comments a little bit about feeling good about the ACV guide for the year, which is great to hear, right? So you clearly feel good about underlying demand. I was wondering if we could just add some color to that. Is that coming from big customers around commercial lending? Is it international? You had some great examples of Japanese banks in there. Is it consumer banking? Clearly, we don't need to talk about the guidance and the numbers as much, but just some color contours around what you're hearing from customers? What's the health of the underlying base? Because I know you spend a lot of time with customers. Sean Desmond: Yes, sure. Thanks, Saket. Appreciate the question. Listen, firstly, I would call out that the team across the board here is from an execution standpoint, laser-focused on not only building our pipeline, but converting that pipeline. And so the activity across sales, marketing, product and service and the collaboration we have is really the goal that we set out this year from that execution cadence, and I'm seeing that just come together really nicely. Secondly, yes, I have visited with over 25 customers in Q3 alone, not only here in the U.S., but in several countries in Europe as well as in Japan. What they're telling us is that banks remain very aggressive on their tech investment with AI driving the narrative. In fact, most of the customers we talk to have an increase in their IT budgets this year. And the strategic imperative for those banks is pretty clear, it's efficiency and modernization. So while discretionary spending is hard to come by, banks are viewing technology as absolute table stakes for competitive survival in this landscape. And so we're seeing a shift from what I would consider like the legacy mindset of multiyear transformations to very precision implementations, which plays exactly into our strategy. You've heard us talk about project [ Sev Zero ] and deploying solutions more quickly to the market and delivering outcomes. Listen, on the macro environment, while there's still a narrative on the credit concentration risk in commercial, we're not seeing that impede our results whatsoever. In fact, the most disciplined banks are doubling down on risk management infrastructure right now as well as automation, right? And while everybody else is talking about AI gratuitously, we're talking about automating outcomes. And so these credit pressures are actually driving some of the imperatives here. And then I guess the other narrative I would share with you that I'm hearing in the market is, while early in the year, the conversation was more about what is AI, right? And you heard me both at Investor Day and at Insight talk through our 3-pillar strategy around Banking Advisor Agents and the Integration Gateway. I was on a call yesterday with a customer who said, guys, we don't need to talk about what it is. We just need to talk about how you can get it in my environment as fast as we possibly can consume it, right? So that shift feels a little bit similar to the early days of nCino when we're explaining to people what is the cloud and how can I operate securely there. And then we crossed that chasm. So I'm excited about all of those things driving momentum into our execution and conversion of pipeline into ACV. Saket Kalia: Got it. Got it. That's super helpful. And maybe on banking deposits, that's a good segue, Greg, for my follow-up for you. I think this is the second quarter that we've talked about customers renewing early, which is great. But I'm curious, does it surprise you just given the uplift in spending that would correspond to that? And maybe relatedly, is there anything from -- it's deliberately an open-ended question. Are there any modeling impacts that we should think about -- that we should keep in mind with those early renewals as we go into next year? Gregory D. Orenstein: Yes. Thanks, Saket. I don't want to say -- I don't think it's surprising because, again, I think what our customers see from us, and I think it differentiates us from a lot of the competitors in the marketplace is continuous innovation. And if you look back over the years, as you're aware, prices were fixed on our old seat-based pricing during the term of the contract. and they did not go up. And so over the last few years, as inflation was obviously very top of mind, we didn't see the benefit of that or get compensated for that. And so that's really a starting point from a discussion standpoint is kind of making up for lost time, if you will. And I think when you combine that with the innovation that we've brought to our products and to our product portfolio, it really does lay the groundwork for a productive discussion. Obviously, some of those discussions can be more difficult than others. But overall, again, I think we work very closely to partner with our customers and really work with them, as Sean noted in his prepared remarks, about the outcomes that they can get using nCino. And you heard some of that with some of the statistics that Sean noted, and that's really what the focus is. And so we really focus on the value that they get from nCino. And again, I think that they appreciate that, and I think they appreciate the way that we approach those discussions. Operator: Our next question comes from the line of Alex Sklar with Raymond James. Alexander Sklar: Sean or Greg, just first on the 2 top 50 bank commercial expansions, both really significant increases. Could you elaborate a bit more on what those banks were using nCino for before within the commercial loan space and what they're doing now with the expansion? And how much white space do you still see within kind of the core enterprise commercial lending within your U.S. installed base? Gregory D. Orenstein: Thanks for the question, Alex. Yes, those are -- we consistently talk about that even if we have a logo for part of a bank, even within that business line that there's opportunities for expansion. And I think this is just reflective of that. And so 2 customers where, again, they have more need for us in the business line that they were operating in. And so happy to get those deals closed in the quarter with 2 very good customers. Alexander Sklar: Okay. Great. And then maybe, Greg, sticking a follow-up for you. Just on customer M&A. So the end market dealmaking has obviously picked up here in the last 6 months. Can you just talk about how it's going to impact nCino over the next 1 to 2 years as some of those deals start to close? Gregory D. Orenstein: Sure. We've historically discussed M&A, specifically bank M&A being a tailwind for nCino. We did call out one transaction this quarter, which we called it out because we got some onetime revenue that we wanted to make sure was visible to you guys, but also really because it's an anomaly for us [Technical Difficulty] actually nCino Research Institute recently did an internal study of nCino Bank customers that have been involved in M&A over the past 10 years. And there's over 270 M&A events that they tracked. And out of those, we had about 95% where we were the go-forward platform. And that could be an nCino customer buying an nCino customer, an nCino customer buying a non-nCino customer and a non-nCino customer buying an nCino customer. And so we feel good about the environment. And it really goes back to something that you've heard me discuss before, which is our platform has demonstrated uniquely the ability to scale to support institutions of all sizes and in all sizes on a global basis. And so the financial institutions that are forward-looking and that ultimately are looking to grow, we really are, I think, the default platform for them, the platform of choice. And I think that statistic, which is specifically around U.S. banks, that 270 number that I quoted, over 270, I think that reinforces that we are the platform of choice for banks that want to grow. Operator: Our next question is from the line of Joe Vruwink with Baird. Joseph Vruwink: I wanted to ask on the execution-based upside in 3Q, $1.4 million. I guess that's $5.6 million if we give credit for 4 quarters, so almost 1 point of growth. Can you maybe contextualize where that's coming from? I would imagine the deals in your pipeline are very visible. So are the deal sizes coming through bigger or were the conversion rates higher than you budgeted? And then just related to this execution factor, why doesn't it all flow through fully the 3Q magnitude becoming the 4Q magnitude? Sean Desmond: Yes, yes, so from an execution standpoint, and listen, just referring back to the script and the diversity of our portfolio, where we focus on our solutions across onboarding, account opening, portfolio monitoring and loan origination and doing that across the major lines of business of commercial, consumer and mortgage and doing that globally, right, across 2,700 customers, we do really value the platform value proposition and the platform wins in the end. And so having a balanced portfolio of solutions and geographies is something that we [ covet ] and mitigates our risk of being wildly up or down in one particular area. We continue to mitigate churn as well with the outcomes that we deliver and read back to our customers, and we could do that in a more rapid fashion with the AI solutions and the agents we're bringing to bear as well. And so we feel good about that balanced portfolio, and while we don't necessarily call out specific sizes per solution area, we have a healthy mix and that concentration across the entire portfolio. Gregory D. Orenstein: And just to add to that, Joe, we have -- I think the team has done a very good job on the churn front. We've talked about our expectations going into this year that churn would continue to trend down towards historic norms. That's what we've seen. And so we're very pleased with that trajectory to date. And then just in terms of the flow-through, I think you should just assume it's consistent with the guidance philosophy approach that we've taken all year to manage to achievable expectations. And we like the approach this year that we've taken and the feedback that we received on that approach from investors. Joseph Vruwink: Yes. No doubt about that. I wanted to ask, you shared a lot of good stats about banks that are on nCino end up doing better financially and now you're taking that experience and making it the foundation of understanding that powers your AI and digital partners. I mean the 110 customers, are those primarily some of your larger customers? Is there really no issue with scaling even down to the smallest customer? And does there come a point where if you're not part of the 110 and you're part of the other thousands that are out there, you kind of look over and start paying attention that you're maybe being left behind by not adopting, our early renewals going to become kind of an increasingly important factor here if you are delivering kind of the ROI that's possible? Sean Desmond: Yes. Across those 110 customers, and we expect beyond, we're seeing adoption at all market segments at all sizes. Top-tier banks have been live and in production and gone through intense testing phases and now are deploying widely to their users in mass as well as some of the smallest community banks and credit unions in the marketplace that are looking at Banking Advisor and looking to our thought leadership on Agentic solutions. The reality is we're providing the same capabilities, and they're just being deployed at different scale, right? When you think about a proactive portfolio risk monitoring and early warning detection, this is something that we're going to deploy in a similar fashion across the landscape. And Banking Advisor can transform banks from being in a reactive position to being in a much more proactive position. And so while traditionally, folks are doing this in a very labor-intensive way, it's just not scalable for even a small bank to monitor thousands of accounts nightly for covenant breaches, for collateral deterioration, for credit score changes, you name it. So what we're doing is, we're allowing those relationship managers to have Banking Advisor and our Agentic solutions do that work while they sleep, right? And they wake up in the morning and they get prompted on where exactly they should spend time with their customer the next day. And that's exciting, and it's scalable, it's deployable, like I said, at every segment in our customer base, and we're seeing that. Operator: Our next question comes from Charles Nabhan with Stephens. Charles Nabhan: I wanted to unpack the mortgage business outperformance this quarter a little bit. Clearly, consistently outperformed expectations through the year. And I know some of that is a bit of conservatism built in. But could you talk about some of the drivers of that outperformance, whether that's coming from new logos, same-store sales within your existing customer base? And any -- I know there's a bank component to that customer base, a nonbank component and you moved into the homebuilders as well. Any areas of strength or weaknesses conversely that you could call out? Just looking for some color around that business. Sean Desmond: Yes. So we are seeing, as we called out in the script, some expansion in top 100 banks into mortgage. So we're excited about the interest there and the problem we're solving and how that resonates. In the IMB space, we're seeing traction and continued momentum as well at the top end of that market as well as pretty evenly distributed. We had some normalized revenue growth in line with industry volumes that we've seen this year, and we expect that to continue. And that means that some customers are outperforming depending on where they are in that spectrum. So we remain very focused and committed to our mortgage solution across the IMB as well as the traditional bank segments. Gregory D. Orenstein: And you may recall last quarter, we talked about during some of the more difficult times in the mortgage market over the last couple of years, the team doing a fantastic job of getting logos and taking market share. And I think we're seeing some of the benefits and fruits of that effort now as volumes go through those customers and get on our platform. Charles Nabhan: Got it. And as a follow-up, I just had a high-level question on AI adoption in the bank space. Clearly, we're still in the very early stages, and we're a little further ahead than we were last quarter. But as we think about the path ahead, do you envision sort of a slow adoption curve? Or as we think about '26, calendar year '26, calendar year '27, do you see adoption of AI ramping up more rapidly in the bank space? Just curious how you think about the curve going forward. Sean Desmond: Yes. And listen, again, pointing out that the conversation is turning for what I would call the most progressive and early adopter from what is AI to how can I deploy it quickly, right? And then you're going to have the next wave of banks that are going to follow. And then at some point, I think when you get that middle wave, you bring everybody along. So I do expect we will have a spike in the adoption over time. We're still in the early days. We are very aggressive in our posture in terms of sending our field forward deploy engineering resources on-site with some of our early adopter customers who we've had conversations with just in this past several weeks and collaborating with them on the adoption of Banking Advisor and being the first to go to market deploying our digital partners across the executive analyst service processor and client channels. Operator: Our next question comes from Ryan Tomasello with KBW. Ryan Tomasello: I wanted to ask about DocFox, if you can provide an update on the pipeline there and when you might start seeing that contribute more meaningfully to ACV? And then on implementation and the sales cycles, how long are those typically for DocFox? And I think relative to some past numbers you've given for the typical ACV uplift, if there's any update on what that could look like as DocFox rolls out? Sean Desmond: Yes, sure. And listen, as you know, we [ covet ] the onboarding experience from the DocFox acquisition. We have integrated the technology, and we called that out as 1 of our 5 core growth initiatives at the beginning of the year. What I'm really pleased about is at this time in the year, since we put our growth initiatives in place, all 5 of our core growth initiatives have been accretive to either pipeline or ACV beyond the pace of the overall company growth, which means that that's a tailwind and that's pulling us forward. Onboarding specifically has been a year-over-year pipeline increase, specifically the back half of this year as we've been more aggressive in the story about integrating the technology, and we expect that to convert into ACV next year. Those are about 3- to 6-month sales cycles. And we remain very excited and here onboarding come up as a problem that the majority of our customers, specifically down market, have not solved. Ryan Tomasello: Great. And then also on the new credit union sales force, if you can just provide an update what you're seeing there. And then I think last quarter, you called out the number of wins and cross-sells in that space. So if there's any way to give us an update on that category. Sean Desmond: Yes. Very pleased with the traction of the credit union go-to-market team. We activated that team in the beginning of the year. They are on track to meet the internal targets that we set, and that's exciting for us. I also -- and just very pleased in terms of the posture that I feel like we're gaining in that market being relevant at all the right industry events and in all the right conversations in the credit union space that I don't feel like we're fully entrenched in prior to putting a focused team together. And so we are seeing good activity there. As far as specific number of deals, I don't think we're calling that out today. We might be able to follow up on that offline. Gregory D. Orenstein: And I think the other thing, Ryan, with credit unions, I think one of the things that has really resonated over the last couple of quarters is just the platform sale. I think the platform resonates to those institutions being able to standardize on nCino across the institution. And so that's something that's been very encouraging to us as the years progress, seeing that feedback. Operator: To the next question. It comes from the line of Adam Hotchkiss with Goldman Sachs. Adam Hotchkiss: Great. Sean, I wanted to go back to your comments around the intelligence units and the 110 financial institutions now purchasing. Could you just maybe take a step back and give us the common playbook that you've observed from testing the functionality and test environments to actually going out and deploying and buying intelligence units. What's the time frame that you've seen that take place in for maybe some of your earliest cohort customers? And then any commonality around the skills that are resonating most would be helpful. Sean Desmond: Sure. Yes. Listen, I think the common playbook is we have a very quick deployment cycle on banking adviser. So we're getting that into test environments in a matter of weeks. And then customers, depending on the size and scale of the financial institution are in testing anywhere from 1 to 4 months and then ready to deploy that at scale. And we saw that at a top-tier bank this year on that 4-month sort of a time frame to get through testing to full deployment. I would say one of the most common in terms of interest around proactive portfolio risk monitoring and leveraging our architecture there to deliver credit analysis. I talked about going from reactive to proactive. We're also seeing a lot of interest just in our general locate and file skill across solution sets in auto spreading as well. But in an area where right now, we're pretty good on the customer pain point of credit risk, I think people are really seeing the light bulb go off on how they can manage that with nCino Banking adviser, and that's an area we're getting the most interest. Adam Hotchkiss: Okay. Great. That's really helpful color. And then, Greg, for you, just -- I know historically, you've talked about the sort of seasonal linearity of bookings through the year. And I know you've made comments historically around first half, second half. Any commentary around now that we're in December, how that linearity has sort of shaken out throughout the year versus maybe what you expected going in? Gregory D. Orenstein: Yes. I think overall, Adam, and thanks for the question. Again, I think we feel good about the progress throughout the year. As you know, Q4 has always historically been our biggest bookings quarter, and this year is no exception. But going back to my prepared remarks, based on bookings to date and based on the sales activity that we're seeing across the globe, we feel like we're very well positioned to finish the year strong and set ourselves up for a good next year and beyond. Operator: Our next question comes from Ella Smith with JPMorgan. Eleanor Smith: So you alluded to this earlier, but perhaps we can go a little deeper. If you parse out your various growth vectors, whether serving credit unions, your mortgage or onboarding products, AI offerings or continued traction in EMEA, are there certain areas that are particularly driving ACV growth? Gregory D. Orenstein: Yes. I mean -- and we're getting momentum across all core areas. I would say our focus and retooling of our EMEA leadership team is bearing results in terms of the growth that we see in the pipeline and the conversion we expect here moving forward. And so the international opportunity, in particular, not only EMEA, I was in Tokyo the week before Thanksgiving. We hosted our Summit event. We had north of 200 customers. I would tell you that it feels very much like Early Day nCino in the U.S. core commercial community bank market in Japan right now, where it's a follow the herd type of a mentality, and it's a small tight knit ecosystem where folks talk to one another. And so we're seeing traction in that pipeline. So the international business in specific, I would say, we expect to outpace the overall company growth line. But there's -- as I mentioned earlier, we called out 5 growth initiatives at the beginning of the year and every single one of them, whether it's in ACV or pipeline is exceeding the growth rates that we have at the overall company level. Eleanor Smith: That's very helpful. And for a quick follow-up regarding your rule of 40, do you expect your path to Rule of 40 to be linear throughout next year? Gregory D. Orenstein: We are committed to being in position that we would approach the Rule of 40 right around the end of next year. And we're very convicted about that, and we can see that very clearly. Some of the bottom line cost management initiatives that we put in place this year put us in a position where I feel like we're leaner, we're more focused and we haven't missed a beat. In fact, we've reaccelerated our bookings growth in a time when we've gotten leaner on our cost. And so we can see a clear trajectory toward the Rule of 40 right around the time that we exit next year. Operator: Our next question is from Chris Kennedy with William Blair. Cristopher Kennedy: For all the detail. Can you just give us an update on your consumer business, kind of how the bookings are tracking relative to your initial plans? Gregory D. Orenstein: Yes. So our consumer business, we continue to see momentum not only in our bank space, we called out in the script expansion into consumer with a top 100 bank. We have interest in the consumer -- continued interest in the credit union market. And so that's an area where we continue to make sure we've got our investments aligned with our returns and where bookings are coming from. But overall, in the current macro environment, consumer credit quality remains generally sound and banks are entering this cycle with pretty strong capital positions. And so we see continued interest in consumer. We don't call out specific bookings by solution. Cristopher Kennedy: Understood. And then just as a follow-up regarding the Rule of 40 target, have the components kind of evolved, whether it's revenue growth or margin? Has that kind of evolved your thinking about reaching that target? Gregory D. Orenstein: The target is the target, right? The 40 remains 40. The reacceleration of this year's bookings and leading to next year's revenue, we would expect to be as aggressive as we can be on the growth side of that. But the target remains 40%, and we are committed to getting there as we really reaccelerate growth. Operator: Our next question is from Aaron Kimson with Citizens. Aaron Kimson: It sounds like driving agent adoption is going to be more of a change management problem than a technology problem for nCino. You've mentioned Project Subzero a few times already. As you're rolling out agents and expanding banking advisers' capabilities, do you see any credence to the idea that vertical software vendors need to hold their customers a bit closer through the implementation process for AI products versus historically? Sean Desmond: Listen, I think my heritage coming from the customer success arena here at nCino prior to stepping into the CEO role, I would say we've always been focused on holding our customers closely and being side-by-side with them on the journey. I would also point out that as we lean into the field forward deploy engineer model, and we send out some of our agent-based resources to sit side-by-side with our customers. That's an area that I think we're going to really be able to teach customers that it's maybe not as hard as they think it's going to be, right? You've always got to get past some of the early day anxiety and some of the mythbusters around what it takes to deploy this stuff. But at the end of the day, for us, our role-based agents are simply purpose-built to work alongside financial institution professionals and create that dual workforce. I think they're actually going to come to the realization that managing the human and the digital partner side by side is going to be the different motion versus actually deploying the technology. The technology itself should work. It's built on 13 years of domain expertise that we've accumulated with a process-centric point of view on real-world curated financial services data. So this stuff works, right? Now banks are going to get into the change management motion of how do I manage my digital partners as my humans are doing the work? And what are the digital partners going to be doing where the humans are out in the field and building relationships with customers. And we're focused on all of that, not only the deployment but the change management aspect. I don't I wouldn't categorically say it's going to be more intense, but we remain focused on our customers. Aaron Kimson: Understood. And then as a follow-up to follow up on Alex's question on the 2 top 50 bank expansions of 30% and 60%. Would you chalk those up to timing? Or is there something broader here investors should be aware of as far as an incremental change in the demand environment that could drive a buying cycle in core commercial for other expansions with large U.S. FIs and maybe even the 20 or so of the top 50 banks you don't have? Gregory D. Orenstein: Yes. Aaron, I think you could chalk it up to timing and specifically, M&A was a tailwind for some of those discussions. Sean Desmond: And as we said before, even within a core commercial line of business at a large enterprise bank, we still have customers that have been with us on the journey that haven't deployed nCino across every single product line within commercial, right? And so we see some of those instances year-to-date as well. Operator: Our next question comes from the line of Ken Suchoski with Autonomous Research. Kenneth Suchoski: Greg, you talked about converting 27% of the company's ACV to platform pricing. I think you said in the past that fiscal 4Q is going to be the biggest cohort this year. So maybe talk about how you're feeling about shifting this cohort of customers to the new pricing model, especially in the context of the demand for AI solutions. And then I guess on the lift that you're seeing on a like-for-like basis, is that still around that 10% level? Gregory D. Orenstein: Yes. On the lift, we continue to feel good about the target that we laid out. As I've noted, we want to get through Q4 to kind of have that solidified, and we can update that as we get into next year and talk about next year. In terms of the first part of the question, we -- I think the team has done a very good job. And each one you learn and you get better and better in terms of the talk track in terms of some of the questions or concerns customers may have. But I feel like the team is doing very well executing, I'd say the playbook. And I think, again, it's been very well received. It's proceeding in accordance with our expectations. Q4 is the biggest quarter. Again, historically, that's our biggest bookings quarter. So it would be appropriate to assume that's our biggest renewal quarter as well. And we go in. We don't just go in and talk about price or the platform. Again, we're always talking about how we can create more value and improve outcomes for our customers across the platform, right? And again, that's unique in terms of what we have from an offering perspective versus other vendors out there. And to Sean's point around us always trying to hold our customers close, we work very closely with them throughout the years, right? This isn't kind of a sale and you move on to the next sale. We work closely with our customers on an ongoing basis. And so I think we've got very good relationships, and I think they appreciate that we really try to do our best by them. And again, I think all that leads to productive discussions. You're always going to have some hard renewal discussions. That's just the way that it is. But I think people get the platform pricing. And I think most importantly, they appreciate the continued innovation that we invest in and the value that we bring them and the outcomes that they're getting because they're an nCino customer. Kenneth Suchoski: No, absolutely. And then I guess as a follow-up, just on the organic FX-neutral international subscription growth. I mean it seems to be tracking in the sort of low single-digit to mid-single-digit growth range. I think it used to grow well into the double digits. And you guys obviously just announced some new wins. So congrats on that. I know you had some personnel changes in Europe, but maybe talk about your ability to reaccelerate growth in this business. What drives the acceleration and any details on when we might see that? Gregory D. Orenstein: Thank you for the question. to Sean's point, I think we feel very good about what we're seeing internationally, both in Japan, which I'll remind folks is the second largest banking market there is out there outside of the U.S. as well as in EMEA. And we've been very pleased with what we've seen with the team in EMEA. We think they're making excellent progress. Again, you mainly have large banks in EMEA, right? And those sales cycles are generally a year long, give or take. We made a GM change there around this time last year. And I think we've been focusing people as we get into Q4 and early into next year, we would expect to see some of the initial fruits of all the efforts, notwithstanding that we got our first deal in Spain in the second quarter already. And so international for us is part of the growth acceleration story for next year, and that's really driven by bookings that we would expect to happen in the fourth quarter as well as what we saw in the third quarter. Sean Desmond: And I think focus matters, right? We did call out at the beginning of the year with an addition of retooling the team, specific geographies in the Spain and Nordics beyond the U.K. and Ireland, where we're going to focus, specific solutions beyond commercial and client life cycle management, onboarding as well as mortgage. And so I think the teams are really focused and lasered in on where those opportunities exist, and that's helped us convert as well. Operator: We have a question from the line of Koji Ikeda with Bank of America. Koji Ikeda: Just one for me, and I wanted to follow up on the expand deal commentary and kind of the questions here. And so I understand that M&A and timing is likely a factor with the expand deals this quarter. So thinking a little bit more high level, what might need to happen that can drive a real shift in mindset from existing customers that could result in even better expansion activity over the next several years? Sean Desmond: \ Yes. Listen, I think that, first of all, M&A has always been a tailwind contributing to nCino. It is not ever anything we put into our forecast models nor did we this year. It's just a reality of consolidation in the landscape over time. There's a narrative out there that M&A may pick up here in the next several years. And we've benefited from M&A from time to time over the years and expect that we will continue to benefit from M&A. But beyond that, just having that balanced portfolio, if we have an existing, let's just say, commercial customer in an enterprise bank that understands the value and the maturity of the intersection of AI and operations analytics and is not fully taking advantage of those capabilities today. We see that as a massive opportunity that's resonating. We're getting a lot of head nodding in the conversations we have with our customers. Folks that have gone with us on the origination journey, but I still haven't solved the onboarding problem. that's a big expansion opportunity for nCino as well. And so I think that portfolio play we called out expanding into mortgage in top 100 banks across the things we do in the lines of business where we operate. The goal is to make every platform -- make every customer a platform customer, right, that they would go across commercial, consumer and mortgage with nCino. And so that playbook is one we're running everywhere. Operator: And we have a question from the line of Terry Tillman with Truist Securities. Connor Passarella: Connor Passarella on for Terry. Just on banking adviser really quickly, just as you think about the focus being getting customers to adopt in the early days, what kind of internal KPIs or metrics are you using to evaluate the success of that product so far within the base? Sean Desmond: Yes. I mean, listen, there's -- from an outcome perspective, what I care most about are the efficiencies the banks actually gaining, right? If they can get a 90% reduction in time to answer portfolio risk assessment questions, that's a win for the customer. They're in turn going to consume more intelligence units over time. If they can get a 20% to 30% average productivity gain, a cost reduction in real-time monitoring, automate their triggers and early warning indicators. These are the things that cause customers to not even think about intelligence unit consumption because getting outcomes for their customers. So we're focused on those. Our forward deploy engineers will be sitting side-by-side with customers, starting with a baseline with operations analytics of where our customers and then trending that over time. And then, of course, we expect that, that will result in intelligence unit consumption and the adoption of that will spike over time as we head into next year and beyond. Operator: Thank you. So this will conclude our Q&A session for today. I will pass it back to Sean Desmond for final comments. Sean Desmond: Yes. Thank you for the questions today. We appreciate your interest in our focus on execution here at nCino. I'm proud of the entire executive management team as well as all our employees globally and contributing to our momentum of reacceleration of growth, and we look forward to talking to you next time. Operator: Ladies and gentlemen, we conclude today's conference. Thank you for participating, and you may now disconnect.
Operator: Good afternoon, ladies and gentlemen, and welcome to Descartes Systems Group Quarterly Results Call. [Operator Instructions] I would now like to turn the conference call over to Scott Pagan. Please go ahead. J. Pagan: Thanks, and good evening, everyone. Joining me in person on the call today are Ed Ryan, CEO; Allan Brett, CFO; and Ed Gardner, EVP, Corporate Development. I trust that everyone has received a copy of our financial results press release that was issued earlier today. Portions of today's call, other than historical performance, include statements of forward-looking information within the meaning of applicable securities laws. These statements are made under the safe harbor provisions of those laws. These forward-looking statements include statements related to our assessment of the future and current impact of geopolitical trade, tariff and economic uncertainty on our business and financial condition, Descartes' operating performance, financial results and condition, cash flow and use of cash, business outlook, baseline revenues, baseline operating expenses and baseline calibration, anticipated and potential revenue losses and gains, anticipated recognition of revenues and incurrence of expenses, potential acquisitions and acquisition strategy, cost reduction and integration initiatives, timing of management changes, the approval and potential share purchase under a normal course issuer bid and other matters that may constitute forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties, assumptions and other factors that may cause the actual results, performance or achievements of Descartes to differ materially from the anticipated results, performance or achievements implied by such forward-looking statements. These factors are outlined in the press release and in the section entitled "Certain Factors That May Affect Future Results" in documents filed and furnished with the SEC, the OSC and other securities commissions across Canada, including our management's discussion and analysis filed today. We provide forward-looking statements solely for the purpose of providing information about management's current expectations and plans relating to the future. You're cautioned that such information may not be appropriate for other purposes. We don't undertake or accept any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements to reflect any change in our expectations or any change in events, conditions, assumptions or circumstances on which any such statement is based, except as required by law. And with that, let me turn the call over to Ed Ryan. Edward Ryan: Thanks, Scott, and welcome, everyone, to the call. Today, we're reporting record strong quarterly revenues and adjusted EBITDA. We're now ahead of our year-to-date plans and focused on a strong end of the year. We're excited to go over these results with you and describe how we're well positioned to help our customers in an environment where they're making many tariff and artificial intelligence investment decisions. But first, let me give you a road map on this call. I'll start by hitting some highlights of last quarter, some aspects of how our business performed and how we're positioned to help customers. I'll then hand it over to Allan, who will go over the Q3 financial results in more detail. After that, I'll come back and provide an update on how we see the current business environment and how our business was calibrated for Q3. And we'll then open it up to the operator to coordinate the Q&A portion of the call. So let's start with the third quarter that ended October 31. Key metrics we monitor include revenue, profits, cash flow from operations, operating margins and returns on our investments. For this past quarter, we again had strong record performance in each of those areas. Total revenues were at a record high of $187.7 million, up 11% from a year ago. Record high services revenues were up 16% from a year ago with our continued focus on generating recurring revenues. Record net income was up 20% from a year ago. Record income from operations was up 24% from a year ago. Record adjusted EBITDA was up 19% from a year ago. Our adjusted EBITDA margin was up 3 points from a year ago to 46%. We generated a record high of $73 million in cash from our operations, up 22% from a year ago. So strong record results across all of these key metrics. At the end of the quarter, we had $279 million in cash, and we were debt-free with an undrawn $350 million line of credit. That included us using $37 million of our cash in Q3 to acquire Finale inventory, an acquisition that we discussed on our September financial results call. We remain well capitalized, cash generating, growing and ready to continue to invest in our business. Our principal growth drivers in Q3 were largely the same as I've described in detail in past quarters. They are as follows. First, global trade data and intelligence. It remains a chaotic tariff and trade environment for our customers. In the last 90 days, our customers have seen these significant changes. One, a truce on tariffs between China and the U.S., extending the tariff status quo while negotiations continue; two, tariff expansions on metals, copper, timber and furniture; three, tariff relief for foodstuffs; four, new reciprocal trade agreements between the U.S. and countries like Argentina, Switzerland and Malaysia; and five, the implementation and temporary pause and enforcement of BIS 50, a regulation that expanded the number of denied parties that the U.S. entities needed to screen against. We continue to be a provider of choice for our customers for tariff data, sanction party assistance and research on trade flows. We help our customers keep their business flowing and help them plan for tomorrow. When things are changing rapidly, they rely on us for timely and accurate updates. In Q3, the changing trade environment provided strong demand for our solutions. Second is foreign trade zones. The uncertain trade and tariff environment has many of our customers needing more of our help to find the most efficient way to import goods. One mechanism that's being investigated by more of our customers than ever before is foreign trade zones or FTZs. These are designated spaces for U.S. companies to import goods on a tariff and duty deferred basis, only triggering payment when the goods are removed from the FTZ for shipment into free circulation. There's a detailed regulatory regime to manage these FTZs, including keeping track of everything flowing in and out of the FTZ and regular government reporting. However, with heightened and uncertain tariffs, it has become an effective way for our customers to manage their imports and cash flow. We've seen higher demand for our FTZ solutions than in previous years, and that was a good driver again this quarter. The third is e-commerce customs clearance. Earlier in the year, the U.S. eliminated the de minimis exemption, which allows foreign companies to ship goods duty-free to U.S. customers where the value of the goods was less than $800. With that exemption gone, foreign e-commerce sellers needed to adapt to a new regulatory structure with new filings and submissions of tariffs. To do this, these sellers and their brokers need solutions that can handle large volumes and velocities of shipments that interact with U.S. customs and get goods cleared quickly to prevent delivery delays. We have market-leading solutions to help these high velocity importers, and it was a strong driver of growth in the quarter. The fourth is real-time shipment visibility. Shippers and brokers want real-time visibility into the location of shipments in transit. Shipment tracking is an expected part of the consumer experience. So this is critical information for customers. In the business-to-business environment, shipment tracking allows for better planning on preparing delivery resources, whether they be loading dock doors or human resources unloading trucks. Getting accurate location information isn't always simple, particularly in the truck market as many smaller independent truckers may not have the technology to provide automated location information. However, our MacroPoint solutions are the best at getting tracking information, leveraging carefully designed mobile applications and artificial intelligence agents. This market-leading tracking rate led to continued strong network performance by MacroPoint in the quarter. So similar revenue drivers to previous quarters have contributed to our record revenue performance this quarter. When combined with the cost rationalization effort we undertook earlier this year, we also had record operating performance. So next, I want to talk about artificial intelligence because it's becoming a bigger and bigger part of our business. I mentioned artificial intelligence helped our MacroPoint business, but I wanted to take a bit more or talk a bit more about how AI impacts Descartes overall. First, let me give some context for when you're thinking about Descartes and AI. Descartes is the network business with a huge network infrastructure. We run the global logistics network. We're built by connecting huge numbers of shippers, carriers, governments and logistics intermediaries together. We are not an enterprise software business. Logistics and supply chain problems are not enterprise problems. They are inter-enterprise problems and challenges. To solve them, you need data from multiple external sources, and that's what we do. We transmit and house massive amounts of data to help our customers source trusted, clean, formatted and real-time data because that's what's most valuable to them. So the questions I've been getting from shareholders, analysts and others is what's the impact of artificial intelligence on Descartes' business? The answer is that the impact is overwhelmingly positive. I'll talk about this in detail, but in summary, AI increases demand for our data and decision-making tools. Our customers want massive amounts of clean, formatted real-time data to help them make decisions on our own network or to power their own AI investments. Data is the fuel for AI solutions. That data needs to be from a trusted source, everyone knows poor data can lead to poor decision-making and execution. AI allows us to offer new solutions and services leveraging our network infrastructure and data and AI allows us to run our network and business more efficiently. Now let me go into a bit more detail. The first GLN data powers AI. AI tools massively speed up the pace of automation for our customers. With AI agents or agentic AI, we expect that most of our customers will eventually be running some form of AI tools to automate processes within their business. These AI tools are powered by data. Businesses that will be the most successful with AI are the ones that can train their tools with enormous amounts of current and clean data. In the supply chain and logistics world, that means that our customers' AI strategies and successes relying on getting more clean data from their trading partners. Our customers need information about things like the location, schedule and amounts of resources not in their control, including inventory, vehicles, vessels and people. This is why AI makes Descartes' Global Logistics Network even more important for the customers. The Global Logistics Network helps our customers get massive amounts of real-time data for an enormous number of global trading partners delivered in a clean manner that can power AI tools. The scale, reach and global nature of Descartes' network has never been more important to our customers. Descartes is a network business, we get paid as we help customers get and process more data. We believe that AI is a huge potential tailwind in demand for our Global Logistics Network. The second is that the GLN data includes the collective intelligence of the network. We expect that our customers will use AI to answer questions about how to best run their own businesses, and the power of AI may mean that they'll be able to answer questions that they haven't even thought of asking yet. But some of those questions will be best answered using the collective intelligence of data available on the Global Logistics Network. Think of it as the difference between predicting the traffic patterns on a particular road using only vehicles in your own fleet compared to being able to get a better answer for traffic patterns using the vehicles of every participant on the Global Logistics Network, where the difference between responding to a shipment delay by limiting yourself to one airline you've worked with versus every possible alternative with an air carrier available over the Global Logistics Network. Collective intelligence, available over a massively scaled network matters when you're solving inter-enterprise solutions and that collective intelligence is another data source that powers AI for our customers. The third area is the GLN fueled AI with real-time information. Further, the most successful businesses will power their AI with current information so that the answers they get aren't stale. For that, our customers really need real-time and constantly updated information from a trusted source dedicated to data, and that's what the Global Logistics Network provides. We're processing shipment moves and getting location information in real time. We're quickly updating compliance rules, sanctioned parties, tariff rates, trade agreements and regulations, shipping rates and schedules. We live, eat and breathe supply chain and logistics at scale. And we believe that's even more powerful business in the AI world. So we believe that just the fact that our customers want to use AI increases demand for the Global Logistics Network, but AI also allows us to make meaningful changes in the services and value we deliver to customers and also in how we make our own operations more efficient and effective. Next area is AI enables new GLN services for our customers. We recently ran an internal employee AI Descartes hackathon with exactly that goal in mind. What are our employees' ideas for using AI to deliver more value to customers or making our business more efficient. We had overwhelming employee interest and participation with more than 50 new suggestions for projects, and this is in addition to the projects we've already completed or have underway. Generally, we leverage AI for customers in 2 ways: One, by delivering new automated services that were too expensive or challenging when they were manual; and two, by allowing our customers to leverage the large amounts of data on the GLN to get better or faster answers that can help them manage their business. An example of new automated services include using agentic AI with our MacroPoint business. MacroPoint helps our broker and shipper customers get location information on in-transit shipments. Oftentimes, we can get this information from direct data feeds to vehicle telematics or trucking company transportation management systems. However, there's still a substantial number of small and/or independent truckers that don't have those technological capabilities. Having a staff of hundreds of people to call these trucks and ask them where they are, just isn't economically feasible for our customers. However, with agentic AI, we can work with them to download and use our mobile app or automate inquiries to truckers and get more tracking information for our customers much more efficiently. In just a few short months, we've had more than 300,000 outreaches using our AI agents, resulting in more than 180,000 drivers joining the MacroPoint network. The result is happy customers, more billable truck loads for our customers. So it's a great example of an enhanced service that just wasn't feasible before AI automation came to the table. Some other things that were already got underway for our customers, natural language searches of our GLN data mine U.S. import information and faster results to get competitive intelligence. Automated logic and denied party screening to deal with challenging match scenarios on parties with ambiguous names and addresses. This allows customers to process large shipment volumes more quickly. Free trade eligibility assessments using AI recommendations based on past practices, helping our customers reduce their tariff bill, automated tariff classification suggestions for goods, using AI agents to interpret lengthy carrier rate agreements and present optimal selection recommendations; and finally, leveraging actual historical delivery service times for particular businesses to allow for better planning decisions. AI also allows us to run our own network more efficiently. AI allows us to make our own internal operations more efficient by automating tasks, minimizing human error and enabling oversight and analysis that wasn't previously possible. For us, AI can help us with these areas such as enhanced network security as we deploy tools to monitor target and even counterattack malicious activity, more intense network performance monitoring to minimize service disruptions, code development by providing engineers with a running start with suggested code and development or maintenance of services. This is something we're already seeing great benefit in. And finally, automated and self-serve customer service, leveraging the enormous amounts of product documentation that we produce. So AI has a great opportunity for Descartes and for our Global Logistics Network. We believe it will spur further demand for our trusted real-time clean formatted GLN data and the collective intelligence of the network. It's already allowing us to deliver additional value to our customers with enhanced services, and it's helping make our business more efficient. We believe that the inter-enterprise scaled network infrastructure of our business puts us in a much better position to benefit from AI than legacy or emerging point or enterprise technology solutions. To sum up before I hand it over to Allan, Q3 was a very strong quarter for us. Trade and tariff uncertainty fuel demand for many of our services. We saw AI have a meaningful impact on our service delivery to customers and we completed an acquisition of our -- in our e-commerce pillar that's already contributing, an excellent job all around by our Descartes team. I'd like to touch on one other item outlined in our press release today, and that is that we're planning on a CFO transition after the end of this fiscal year. Allan has decided that after more than 30 years as a public company CFO, including 12 at Descartes, he wants to take steps towards retirement. So Allan will be handing things over to Ed Gardner in March 2026, consistent with our established CFO succession plan. Allan is going to stick around in the business as an adviser to help us with the CFO transition and also more generally to keep helping our business grow. It continues to be a great privilege to work with Allan. He cares for the business a ton, which I think is reflected in his desire to stay involved with the business going forward. We're also thrilled to have Ed Gardner ready to assume the CFO role, someone that I've worked with for more than 20 years, and Allan has worked with over his entire 12 years at Descartes. Ed has a ton of financial experience with our business and the many acquisitions that we brought on board and will likely already be a familiar face to many shareholders and analysts. With Allan and Ed's long working relationship together, we expect a seamless transition in March. So those are our plans for the future, but we still have Allan in the saddle until March. So now I'll turn the call over to him to go through our Q3 financial results in more detail. Allan? Allan Brett: Thanks very much, Ed. I appreciate those words. So as indicated, I'm going to take you through our financial highlights for our third quarter, which ended on October 31. We are pleased to report record quarterly revenue of $187.7 million this quarter, an increase of 11% from revenue of $168.8 million in Q3 last year. While revenue from acquisitions completed in the past 12 months, including the acquisitions of 3GTMS and Finale inventory completed earlier this year contributed nicely to this growth, our growth in services revenue from new and existing customers from our existing solutions was also a very significant driver of growth this quarter when compared to the same period last year. Looking at our revenue details further. Our revenue mix in the quarter continued to be very strong, with services revenue increasing 16% to $173.7 million compared to $149.7 million in the same period last year representing approximately 93% of total revenues in the third quarter this year. Based on these results, we estimate that organic services growth on an FX-neutral basis came in right around 7% in Q3 after averaging closer to 4% in each of Q1 and Q2 this year. While we saw some reasonable strength in our transaction volumes in Q3, the majority of the growth in services revenue this quarter continue to come from strong results in the global trade intelligence pillar as well as strength in our e-commerce customs filing business and our transportation management solutions, including MacroPoint trade visibility solution again this quarter. As expected, partially offsetting the strong growth in services revenue, license revenue came in at $1.7 million or 1% of revenue in the quarter, down from license revenue of $3.5 million recorded last year in Q3, while professional services and other revenue came in at $12.1 million or 6% of revenue, down from $15.6 million in the third quarter last year. That's mainly a result of the inclusion of approximately $3.7 million of low-margin hardware sales from our ground cloud business in our Q3 results in last year's comparable period. As indicated, these lower license and hardware sales were expected, and we continue to focus on driving growth in services revenue across our business. For the first 9 months of this year, revenue came in at $536 million, an increase of 11% from revenue of $484 million in the same period last year. Again, with revenue from acquisitions completed this year as well as organic growth in our existing solutions, both driving this revenue growth. Again, services revenue drove this growth year-to-date growing approximately 15% over the same 9-month period year-to-date last year. Gross margin came in at 77% of revenue in the third quarter up from gross margin of 74% in the third quarter last year, again driven by the low-margin hardware sales we recorded in last year's results. Excluding these hardware sales, gross margin would have improved slightly over the same quarter last year as a result of the continued leverage we experienced with revenue growth from new and existing customers. Operating expenses increased by approximately 11% in the third quarter over the same period last year, and this was heavily related to the cost coming from the acquisitions completed in the past 12 months, offset partially by the cost benefit of the restructuring plan that we put in place during Q2 of this year. So as a result of continued cost control and the operating leverage we get from both acquisitive and organic revenue growth, we recorded adjusted EBITDA growth of 19% to a record $85.5 million or 45.6% of revenue, up from $72.1 million or 42.7% of revenue in the third quarter last year. For the first 3 quarters of the year, adjusted EBITDA has increased by 15% to $241 million from $210 million in the same period last year, with adjusted EBITDA ratios increasing to 44.9% from 43.4%. If we look at our GAAP financials, net income came in at $43.9 million or $0.50 per diluted common share in the third quarter, up nicely from net income of $36.6 million or $0.42 per diluted common share in the third quarter last year. We should also note that the income tax expense for the third quarter came in at $14.5 million or 24.8% of pretax income which is slightly lower than our blended statutory tax rate of 26.5%, mainly as a result of recognizing some previously unrecorded R&D tax benefits from previous periods. Net income for the 9-month year-to-date period was $118 million or $1.35 per diluted common share compared to $106 million or $1.21 per diluted common share in the last year in the 9 months, again, as a result of higher operating profits from our growing business. With these operating results and strong AR collection offset partially by higher cash tax payments in the quarter, cash flow generated from operations came in at $73.4 million or 86% of adjusted EBITDA in the third quarter, up from $60.1 million or 83% of adjusted EBITDA in the third quarter last year. For the 9 months year-to-date, our operating cash flow has increased 20% to approximately $190 million or 79% of adjusted EBITDA, up from $159 million of adjusted EBITDA in the same 9-month period last year. In these 9-month periods, cash flow from operating activities was impacted by the following: first, in this year, [Technical Difficulty] amortization expense will be approximately $21 million for the fourth quarter, with this figure being subject to adjustment for foreign exchange rates and future acquisitions. Our income tax rate for the first 9 months of the year came in at approximately 24.1% of pretax income which is just below our blended statutory tax rate of 26.5%. For the fourth quarter, we currently expect our tax rate will come in fairly close to our abundant statutory tax rate. And as a result, we should experience a tax rate in the range of 24% to 28% of pretax income in Q4. However, as always, we should state that our tax rate may fluctuate quarter-by-quarter from onetime tax items that may arise as we operate internationally across multiple countries. And finally, after incurring stock-based compensation expense of $14.8 million in the first 9 months of the year, we currently expect stock compensation to be approximately $6 million in the fourth quarter subject to any forfeitures of stock options or share units. So that's it for the financial update. As Ed mentioned, we have a well-planned CFO transition in the works, and I'm excited to be able to work with Ed Gardner on the [Audio Gap]. Edward Ryan: Thanks, Allan. These continue to be challenging business conditions for our customers. From a tariff and trade perspective, I outlined earlier, some of the things that have happened over the past 90 days. Looking forward, the U.S. Supreme Court is considering the lengthy -- sorry, the legality of many tariffs with no identified time line for resolution. Customers are also adjusting to new commodity-specific tariffs and given the speed with which they were implemented, remain uncertain about additional tariff changes they may see in Q4. And there remains ongoing geopolitical tensions impacting trade, whether it's tensions in the Middle East, impacting trade lanes, the ongoing war in Ukraine impacting it and its resulting trade sanctions or the potential [Audio Gap] understanding that how consumers will behave in this economic environment, and the early returns seem positive. This buying reaction will have a big impact on general economic activity and shipping related to inventory replenishment in 2026. For Descartes, we've grown during challenging business conditions in the past. Our plan is to continue to do so now. Some of the things that we believe continue to put us in a good position to do that include we're particularly strong in global trade intelligence. We believe we can provide a ton of help to our customers in an environment where people are looking for information or help managing tariffs, continually updating sanctioned party lists, bursting for competitive intelligence, dealing with increased export licensing complexity and implementing new duty deferred foreign trade zones. We're diversified globally. We've got domestic transportation solutions that can be used around the world and where there's shifting international trade relations, we have an established global logistics network that can be leveraged by our customers. Our network model and processing of large amounts of clean, formatted real-time data put us in a great position to capitalize on AI opportunities. We have a total growth model. We have an extensive track record of acquisition activities to complement organic growth. Changing market conditions often provide us with even more opportunities to add solutions for our customers and grow by acquisition. Finally, we're a well-capitalized cash-generating business. At Q3 quarter end, we had $279 million in cash and $350 million in undrawn line of credit. In our quarterly report, we provided a comprehensive description of baseline revenues, baseline calibration and their limitations. As of November 1, 2025, using foreign exchange rates of $0.71 to Canadian dollar, $1.15 to the euro and $1.32 to the great British pound and including the estimated contribution from the acquisition of Finale inventory, we estimate that our baseline revenues for the fourth quarter of fiscal 2026 were approximately $161 million and our baseline operating expenses were approximately $98.5 million. We consider this to be our baseline adjusted EBITDA calibration of approximately $62.5 million for the fourth quarter of fiscal 2026 or approximately 39% of our baseline revenues as at November 1, 2025. We're currently operating above our expected adjusted EBITDA operating margin range of 40% to 45%. Our margin can vary in any period given such things as revenue mix, foreign exchange movements and the impact of acquisitions as we integrate them into our business. For now, we're keeping our target range at 40% to 45%. However, we'll monitor how we're performing over the coming quarters to consider whether any upward adjustment is appropriate. We've noticed that there's been uncertainty in public market conditions that have contributed to lower than historical valuation multiples for many logistics and supply chain technology companies including Descartes. Considering how Descartes is currently performing, we remain optimistic about our ability to achieve our long-term financial plans. However, it's uncertain how public markets will trade for the foreseeable future given everything going on in the world. With that uncertainty, we believe it's prudent and in Descartes' interest to apply to start a normal course issuer bid to have the option to purchase Descartes shares in the open market over the next 12 months if and when we think it makes sense. Having the normal course issuer bid mechanism available to us will allow us to react quickly and appropriately to differing public market conditions. These remain uncertain times for our customers. It's a challenge for them to know what they can rely on in this global trade environment. Our goal is to continue to show our customers and other stakeholders that the one thing they can rely on is Descartes. Thank you to everyone for joining us on the call today. As always, we're available to talk to you about our business in whatever manner is most convenient for you. And with that, operator, I'll now turn it over to you for the Q&A portion of the call. Operator: [Operator Instructions] Your first question is from Chris Quintero from Morgan Stanley. Christopher Quintero: Allan, congrats on a fantastic run here and best of luck in your next part here of your life journey. I wanted to double-click on the organic growth rate, specifically around the transaction volumes. Allan, I think you said reasonable strength. So what did you exactly see there? Was there an improvement in the volumes? Or was it kind of largely a stabilization? How would you describe the volume component here? Edward Ryan: Well, a lot of volume picked up was from our competitors. If you look at the trade sets, ocean and truck were fairly flat, but we were able to grow in those areas because we had solutions that were more attractive to customers than some of the one-hit wonder competitors that we've had in the past. And that enables us to pick up in areas like the Type 86 filing that we picked up quite a bit of business in the BIS 50 area where new government regulation came in and we were able to take our position in the market and go in and get a lot of new customers with bigger contracts that committed to us for a long period of time if we hadn't passed customs filing initiatives. Things like that added up to -- even in the face of transportation statistics that we probably would like them to be better. But we were able to grow substantially, I guess our position in the market and a bunch of AI things that I mentioned on the call are already helping. I don't think I said it in the prepared comments, but MacroPoint was at 87%, which is the highest truck rate in the industry by 20 points. And -- but still, the customers want to track all their shipments. And we're not using AI to get that number up, it's now 90%. And just in a couple of months, that shift occurred. And that's not only more money for us. It's happier customers, and they're paying us more money, but they want to track all their shipments and that put us in a situation where our customers are happy. We're making more money and we're beating our competitors handily because they haven't moved to market with these kind of solutions as fast as we have. Christopher Quintero: Got it. Okay. So stable-ish kind of industry volume trends, but you all just really took some market share here in the quarter. I would love to follow up on the AI commentary you gave at, totally makes sense from the macro point perspective, improving that tracking percentage rates. How do you think about the monetization angle of it? Are you charging higher prices? Is there a separate SKU to get some of this agentic capability? How are you thinking about that more broadly? Edward Ryan: Probably a bunch of different ways, but some of the more pertinent ones, and we said we had that challenge with the employees that identified new things. It's doing more for our customers with the data that we already have. So I'll give you an example, take a shipment is delayed and we know when it's supposed to be there and we see something happen with a plane or a truck or a ship that says, hey, there's going to be a problem with this shipment. We could identify that that's going to be a problem; we can figure out what to do about it and execute it for them. I can imagine a world in a couple of years where I'm charging a customer to do all of that, but that work used to take them hours and hours internally, and they wouldn't even come up with a very good solution for it. I could see a world in a couple of years where we may be telling the customer, hey, that shipment you have, it's going to be 8 hours late, and they go, oh, why? That's -- why is it going to be late? And we go because it was going to be late 5 days, and we figured out the problem and we booked you going somewhere else. And as a result, you're only going to be delayed a few hours. And to our customers, that's great news. It could cost them hundreds of dollars to deal with that and have an angry customer. And in the world I just described, we identified the problem faster than they ever would have done it themselves, came up with the best solution we could possibly come up with under the circumstances and rebooked them which they'll pay for and got them in a situation where they got bad news and it didn't work out that badly because we used AI tools and the data on our network to come up with a better solution for their customer. Operator: Your next question is from Dylan Becker from William Blair. Dylan Becker: Allan, congrats on the retirement, all the best. It's been a pleasure working together. Maybe sticking on the theme of AI with you, Ed, to start. I appreciate all the color on kind of the opportunity for value and monetization to come, but maybe if we think about the implications to kind of a moat and platform defensibility of the network here, maybe there's perception or at least the bottom threat in competition entering the space. It feels like the scaled network that you guys have is a massive differentiator. But wondering maybe how you think about the network as a leg up not only on compounding value but also maybe the complexity of trying to replicate this or something like this from scratch. Edward Ryan: I mean I've been in the network business my entire life. And I'd just give you 2 examples. You can't really compete with us as a network until you have all the connections. No one's going to switch from my network to yours if you only have half of the connections that I have. They needed people that come in and solve the entire problem. And that makes it very hard for someone new to come in and compete from scratch. Same with the data content business, you have to have all the data. You can't just get some of it and then start competing with us. It's not attractive to customers. And what that means is you have to spend a whole lot of time and effort upfront to recreate those businesses. If you even could and you can get any customers to do it, it's like by the time you start being able to monetize it, you could be 5, 10 years in. And I can tell you, just on the network side, the data all changes and the connections all change over that period of time. But we're -- we had the advantage of starting from the beginning when all of this started, and building all of this stuff. And there hasn't been a new network entrant in 20 years and data content the same thing, right, as people got to collecting the data content. But how do you get all of it because that's what you need to start. And the reason our data content businesses are so profitable is we don't charge any individual customer too much money. We have collected all the data over time, and now we just have to update it. And that has a certain cost to it. But once you get over that cost, it is a very profitable business because all the new customers are pure profit. If you wanted to try and start that from scratch, you're losing money for years and years and years to get to the point where you have your head above water. And it just made it unattractive for people to try and get back into it. So I look and go, hey, with all the stuff that we do for these people and the amounts that we charge them, it's not that attractive to get into it. You're going to lose a lot of money for a long period of time until you get into it and it's probably just not worth it to people. And that's why we haven't seen anyone try to do it. Dylan Becker: Great. That makes perfect sense. And then maybe switching over to Allan or Ed, if you have thoughts on this as well, too. But on the services, the organic services step up, how should we think about kind of the sustainability of subscription demand given we continue to highlight multiple moving parts and factors driving sustained complexity here. And then if you do think and you segment it out on kind of the volume recovery side, more of a market share story at this point, how we should think about kind of the volume normalization continuing to play out over time as maybe we get a sense of normalcy at some point here in the future. Edward Ryan: Well, I mean I'll take it, if Allan has anything else to add, he can jump in. I think our customers, they don't know exactly what's going to happen, and there's a lot of uncertainty out there. I called out a lot of it on the call. I think when that uncertainty goes away, you're going to have -- you're going to see increases in volumes and assuming the economy is in good shape when that happens. And frankly, we don't know the answer to that question. What we do know is that we've got to run our business to keep making 10% to 15% and really trying to beat 15% growth in EBITDA no matter what happens. It's why you saw us make the moves we did earlier in the year to cut costs. Not that we wanted to cut costs that we thought, hey, we make one promise to our shareholders, and that's what we're going to make 15% or attempt to be even better than that every year more than we did the last. And we are laser-focused on that. And there's some things we can't control in the business. Some things we can. The things we can, We want to try and control on the revenue side. And certainly, on the cost side, though, we have a lot of control. And it's not that we like making the moves that we did. No one likes firing people, cutting costs somewhat substantially. But we thought that's what we have to do to run our business properly and to keep people wanting to invest in our business so that we have the money to go out and buy more companies when other companies get themselves in a whole lot more trouble than we do because they're not willing to make those tough decisions. And we are. And I think that's what separates us from a lot of the other smaller players in this industry that it's easy to be a high flyer. So like what happens when one of the engines blows, you got to kind of keep running the business until you can get more power. Operator: The next question is from Paul Treiber from RBC Capital Markets. Paul Treiber: Congrats Allan, on the retirement. Just first question, the U.S. Department of Transportation announced a number of changes to U.S. trucking regulations. How do you see those impacting your domestic trucking business positively or negatively? Edward Ryan: I don't know that they're going to have a big impact on us. Most governments come in and put rules in place and we help customers comply with those rules. I'm not sure if that's going to happen with these particular rules. But when you have to track your trucks more accurately when you have to make sure your drivers are legal, and you have to make sure your drivers are not driving overtime or things like that, you need software solutions to track if you have a big fleet and guys like us come in and help people deal with that. And oftentimes help them act more efficiently in the process. So buy our software, comply with some government regulations, but we will also help you run your fleet more efficiently so we can save you money at the same time so that you have the money to kind of pay for this new rule the government put in. So I see it coming. There's going to be -- they'll always be coming. They're always going to have more rules for truckers and we just want to be there and prepared to help them with the ones that we think we can solve for them and have software that we give them that saves them money in 5 other places, too, so that they can continue to afford to pay for some of these things and operate more efficiently, even though the government just told them they had to do something. Paul Treiber: And then just a second question, just on capital allocation. You did mention valuations are down. You're putting in place the NCIB. It sounds like you see opportunistic opportunities. How do you look at the balance between repurchasing shares and capital deployment on acquisitions, like is there a priority for one versus the other? Does it depend on relative valuations of each? Edward Ryan: Well, we see a lot of stuff for sale right now. And we think the winner in this space is going to continue to bring businesses in and make them part of their own business. We think with our network, we're in a very good position to do that. There's lots of businesses that would be better if they operate on top of our network. And I see AI drive it a whole lot more business in that way as well. Almost every AI tool I've seen in the logistics and supply chain space looks like a feature to me. I'm sure there was some guy years ago working at WordPerfect and thinking, well, I've got the best word processor in the market. I've got the legal market all tied up and all of a sudden Microsoft comes in and goes, and I have Excel, and I have PowerPoint, and I have your e-mail and all the stuff and you go, they can't compete anymore. And I think we're in that kind of situation with the network that we have. A lot of these businesses are in desperate search of customers, and they will one day be a feature, just like a Word or WordPerfect is a feature as part of the Microsoft suite of tools. I could see these things getting layered onto our network and being a lot more valuable as a result. And so I think you're always going to see us gravitate in that direction. At the same time, we recognized that probably because of AI and maybe a couple of other things that are going on in the market, not much to do with us and other than maybe a misunderstanding a little bit of our business, if there's someone out there saying, "Hey, Descartes is an enterprise software company," I'm going like not really, we're a network, and we're different than those other guys. And if you're thinking you're going to take all the enterprise software guys down a little bit because AI might harm them, you shouldn't be putting us in that same category because we have a lot of things that are probably going to take advantage of AI. And we still have to deliver, we still have to make those things happen as we always do. But I like our chances. I like the cards that we have in our hands right now a lot better than I do many other people. And I think that's going to continue to result in more and more acquisitions for us. And as long as we see that, we're going to be trying to buy businesses up. That having been said, when our multiple drops to a level that we think is way lower than it should be, and we have some cash on hand, you might see us picking up some stock. Right now, it's out there as a placeholder to make it quicker to do if we wanted to do it. And otherwise, we're going to keep going about our business. And if we believe the market values us properly at some later point, we might not be as focused on it. But right now, we go, hey, it's gotten beat up a lot and maybe in our mind unfairly. Operator: Your next question is from Kevin Krishnaratne from Scotiabank. Kevin Krishnaratne: I've just got one. Allan, also congrats and thanks. It was a pleasure working with you. Hope to continue to do so going forward in new roles. E-commerce, you talked about that being a beneficiary to your organic growth. I know you touched on sort of the transactional piece with the filings and seeing a benefit there. Can you maybe talk about what you're seeing -- you've been beefing up that business to now inventory Sellercloud. You mentioned the holiday season, things are looking -- get to start off. So any kind of color there, maybe the size of this business, the growth and sort of what you're seeing there with the growing piece of this -- of your e-commerce business? Edward Ryan: I think it's like 12% now. Allan, correct me if I'm wrong, but it continues to grow, and we continue to pick up good assets there that we think provide solutions to the customers that will benefit them in our network in the long run. Finale is a great add-on to Sellercloud. Finale, if they had a customer that got you big at some point, they used to kind of -- that customer would graduate from there and leave and go to somebody else. Now all of a sudden, we have the ability to have them graduate and go to our next solution of Sellercloud. So that's attractive for us and maybe shows you how a lot of acquisitions go on the Global Logistics Network. A lot of times -- 20 years ago, we were buying stuff and thinking, I hope it grows, but I'm not going to count on that. I'm going to count on being able to cut costs and manage the business more efficiently than the people we bought it from. Now with 26,000 customers and growing, we start to look at these things and go, we can't help but grow these businesses. There's just too many people on our network that would like them. And the example I always use when I'm out talking to shareholders is I buy some company with 500 freight forwarders and they love it. And I look and go, wow, we have 5,000 freight forwarders. So if I buy this company, the first thing I'm going to do is walk it around to the other 4,500 and say, "Hey, what do you think of this?" Now they're not all going to buy it initially, but they're all going to take a look if we ask them to. I mean, we've got big relationships with all these people. And when we walk around a new solution to everyone that's -- they have to look at it. And a lot of times, the smaller companies that we're buying, they didn't feel like they have to look at it previously. They looked and went I don't have to meet them, whatever. All of a sudden Descartes buys the company and they kind of have to take a look at it. And sometimes, they take a look at it and buy it. And that's good news for us. That e-commerce space has been going great. We keep picking up more assets there and those assets, we've been able to grow them all. So that's exciting for us. And I think it's going to continue to be a good space for us that you'll see us continue to expand in over the years. Operator: Your next question is from Stephanie Price from CIBC. Sam Schmidt: It's Sam Schmidt on for Stephanie Price. I had a question around the year-to-date adjusted EBITDA growth that's tracking towards the higher end of that 10% to 15% target growth range. How should we think about growth there going forward? Edward Ryan: I think you're going to continue to hear us say, 10% to 15%. We've beaten 15% many times over the last 20 years unapologetically. I think we were up almost 30% in 1 quarter, if I remember correctly, 7 or 8 years ago. As our network gets more and more profitable as our revenue picks up at a higher growth rate. When Scott and I started running the business directly 15 years ago, we were growing like 1%, 2%, 3%. And all of a sudden, now we're growing at 4%, 5%, 6%, 7%, 8%, 9%, 10%, depending on what's going on and I go, it's a heck of a lot easier to get to 15% EBITDA growth with 7% organic services growth, because I can leverage that and get that up, get the EBITDA up to 10% or 11% or 12%. And then I add on a couple of acquisitions and all of a sudden, I'm well over 15%. I don't think you're going to hear us say a different number. We think that's a number that we'll always be in a good position to hit. And we think that if we can keep growing that EBITDA every year, our stock price has to kind of follow along. I was explaining that to one of my kids the other day who is an investment banker now, he is a private equity guy and I was going, look, I don't know what's going to happen to the stock price over time. Companies like ours are valued at different multiples, and we don't have a ton of control of that month-to-month, but we do make more money every year, and that has to end up showing up in the stock price. And we're pretty confident we can continue to do that. And if we do, it's tough for the stock to not keep going up. Operator: Your next question is from John Shao from TD Cowen. John Shao: Allan, congratulations on retirement. Good luck with the next chapter. I just want to ask your customer mentality at this point. I understand they're still waiting for some more clarity. But do you think a certain point, they're going to develop some kind of fatigue. And as a result, they're more willing to spend regardless of the environment? Edward Ryan: Yes, we'll see. I hope that's the case. I think as they get more certainty, they will be willing to spend. And we're seeing in the 60% of our business that's subscription sales. We really haven't seen any slowdown. It popped up significantly in the pandemic, and it's never really stopped. The transaction volumes are ebb and flow. They zoomed up in the middle of the pandemic and zoomed back down again and got back to kind of a steady pace and then they've been up and down for the last 2 years. But I'd call it like lackluster transaction performance. But our subscription sales have continued. I think most of the world realize that logistics and supply chain was a lot more important than they thought it was in the middle of that pandemic because the customers were telling them that. And the first place you put your money is into technology because that's where you get the biggest bang for your buck and that's where the customer notices the most. And so I think that's been great for us. It continues to today. And we hope when transaction lines pick up, that we're going to benefit from that. I'm pretty sure we will. And in the meantime, we're running our business as best as we can to try and keep it in 15% EBITDA growth every year and keeping a great solution for our customers so that they always want to use us, and they want to sign more contracts with us. And we spend a lot of time doing that, and I think it's going to pay off. John Shao: Got it. I also wanted to go back to the restructuring you did earlier in the year. Can I assume this quarter's OpEx and EBITDA include a full run rate of your cost savings? Allan Brett: Yes, that's correct, John. Absolutely. The full impact, we had partial impact in Q2 and now the full impact is in Q3. Operator: Your next question is from Lachlan Brown from Rothschild & Co. Lachlan Brown: Allan, congrats on an excellent tenure as our CFO. I'll keep it to the singular question. In terms of the strong organic delivery in the quarter, you mentioned you're taking share on market volumes. But how should we think about the contribution from other growth drivers like cross-selling, pricing and new logos? Was there an acceleration of any of those drivers quarter-on-quarter? Edward Ryan: Yes. I mean, I mentioned earlier, we're being very successful taking stuff away from our competitors. Cross-selling inches up every year. 15 years ago, it was minimal 20% or something. Now you look at it in 60 to 70 -- 65% to 70% and we continue to get better than that. Probably about 5 questions ago, I explained why, as we get a bigger and broader solution set, it's tough for the customers to not consider it and take it seriously. And then the thing I mentioned at the end of the last question is important, right? We spend a lot of time making sure that our customers get what they were promised. I mean I would joke people, but it's true, we will lose money to make sure that you've got what you wanted. And you know how serious we are about making money, but it's really important to us that our customers get what they were promised. There's only one FedEx in the world. And I could say it about any of our big customers. But I don't want them hating us. I want them to think Descartes would do anything I needed to do to make sure that I was successful in doing it. And you could look and say, hey, that's because you charge recurring revenue fees right? You want to get your money. And there's some truth to that. But maybe more broadly, we want them to think we're a good company to do business with. They were fair and that we try our hardest and that we try to make sure that the customer gets what they want. You've heard us say customers for life a lot of times on these calls. That's what we're talking about because I want them -- when they have their 32nd contract with us, I want them to be quite happy to sign the 33rd, 34th and 35th contract with us. It's really important to us. And from 20 years ago where maybe the company wasn't so focused on that kind of stuff and now it is. And I think we know that's the right way to behave. If I'm buying something from someone, if they stick with me, and make sure that they're trying their hardest to make sure they get what they want, I'll deal with some problems. I mean some of these things are complicated. I'll deal with problems as long as I know that they're going to keep trying to make sure that I'm successful. And we've gone to great lengths to do that. And I think that's a big part of the reason you see our cross-selling continue to tick up every year because the customers know we care about them. Allan Brett: Yes, I would just add, Lachlan, that price remains. Similar to other quarters, price is a very small part of that growth in Q3 similar to past quarters as well. So no big change there. We're using price increases responsibly to offset inflationary cost for us, but it's not the main driver of our growth. Lachlan Brown: Of course. Congrats on the strong results. Operator: Your next question is from Mark Schappel from Loop Capital. Timothy Greaves: This is Tim Greaves on for Mark. I guess my one will be on the TMS replacement cycle. Are you seeing evidence of that accelerating? And where is Descartes win in versus the legacy TMS competitors? Edward Ryan: I don't know that I see it accelerating, but it's a decent market for us right now, and we continue to pick up more transportation management solutions. We have 6 or 7 of them right now, depending on what kind of customer you are, Ford or broker 3PL, big retailer manufacturer these types of things. And we have a lot of good solutions to solve those problems. We continue to look at other TMSs when they come up or AI features that we think would be a good part of TMS and I think we're going to continue to remain in a leadership position there, especially with some of the companies that -- the midsize companies that they used to do it, get bought up in the as their focus and they lose their people, and we just keep sticking in there and buying more companies that can solve more types of problems for customers. And over time, I think that has helped us to win the day. We have a lot of different solutions and sell a lot of different problems, and people look at us and go, those guys are going to be around. They're not going to get bought up by a private equity firm and everything is going to go to hell in the handbasket. They are a public company that's neutral in the industry. They're a size and scale of [Audio Gap]. Allan Brett: I think we just lost Ed's voice there, but he's just emphasizing that we're well diversified and with the size and scale to manage properly. Ed, are you back yet? Sorry, we're just having a little audio problems for Ed, but hopefully, that answers it for you. Operator: [Operator Instructions] Your next question is from Scott Group from Wolfe Research. Cole Couzens: This is Cole on for Scott. Edward Ryan: Sorry, guys. This is Ed Ryan. I just got thrown off the call, but I'm back now. Cole Couzens: This is Cole on for Scott. We recently saw a competitor announce a change in their pricing philosophy to get away from per user fees. Maybe what percent of your revenue is based on per user pricing versus volume-based or fixed pricing? And how do you think about this evolving in a world where some of the brokers and forwarders are talking about structurally reducing headcount? Edward Ryan: Yes, I've heard this argument a bunch of times. There's a bunch of different ways we price. It's not just per user, we have all types of transaction processing charges even in some of our subscription services, per truck, per mobile handheld device. And yes, sometimes per user. I don't think that's going to be a big challenge for us. If they start to have less people using the system because they become more efficient, we're going to come up with a different way to extract value. I know the guy you're talking about, and I think they probably shot too high and there's a lot of problems with customers right now because of that. And I think if you see us start to do that, it's going to be a more reasonable approach too. Cole Couzens: Okay. Helpful. And we're seeing some of the forwarders seeing pretty big increases in customs revenue as a result of de minimis going away. Are you guys also seeing that benefit? And how does a big increase in customs filings and customs complexity impact you guys going forward? Edward Ryan: I mean you hear us say all the time on the call the complexity helps us, and I think that's correct. Look at the situation we're talking about here at the Type 86 filing, we've almost doubled our revenue in that space in just a couple of months. And honestly, 1.5 years ago, we were very concerned they were going to cancel de minimus and all of that business could go away. And what ended up happening was our sales team came up with the approach of we'll just keep charging you for all the shipments that you make per shipment and the same way we were doing it before. And instead of making a Type 86 filing, which is going away, we'll make a Type 1 filing. And so we were able to switch our customers over to that solution. And we were thinking we were doing pretty well. And then our competitors started really struggling to handle Type 1 filing with the massive amount of volume that some of the bigger players were producing, millions and millions of transactions a day and our network has the ability to deal with that because we've been doing in customs filings for FedEx and DHL and UPS and a lot of other big players for years and had already dealt with millions of transactions a day. So we had -- as a network operator versus a software company, which I think a lot of the other guys were just software companies, we had a network that was robust and able to process the transactions quickly. And we saw almost all of them switch over to us, and it really ends up being a gigantic benefit for us in the last several months. So happy about that. Operator: There are no further questions at this time. Please proceed with the closing remarks. Edward Ryan: Thanks, everyone. We look forward to reporting back to you on Q4 in March. And otherwise, if you're looking for one-on-one discussions with us, please reach out to us, and we'll find a way to talk to you. Have a great day, guys. Operator: Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may now disconnect your lines.
Operator: Good morning, ladies and gentlemen. Welcome to RBC's 2025 Fourth Quarter Results Conference Call. Please be advised that this call is being recorded. [Operator Instructions] I would now like to turn the meeting over to Asim Imran. Please go ahead. Asim Imran: Thank you, and good morning, everyone. Speaking today will be Dave McKay, President and Chief Executive Officer; Katherine Gibson, Chief Financial Officer; and Graeme Hepworth, Chief Risk Officer. Also joining us today for your questions, Erica Nielsen, Group Head, Personal Banking; Sean Amato-Gauci, Group Head Commercial Banking; Neil McLaughlin, Group Head Wealth Management; Derek Neldner, Group Head Capital Markets and Jennifer Publicover, Group Head Insurance. As noted on Slide 2 of the quarterly slides and the strategic update, our comments may contain forward-looking statements, which involve assumptions and have inherent risks and uncertainties. Actual results could differ materially. I would also remind listeners that the bank assesses its performance on a reported and adjusted basis, and considers both to be useful in assessing underlying business performance. And with that, I'll turn it over to Dave. David McKay: Thanks, Asim. Good morning, everyone, and thank you for joining us. Today, we reported record fourth quarter earnings of $5.4 billion and adjusted earnings of over $5.5 billion, closing out a record year in which we meaningfully drove our strategy forward. Our results speak to the strength of our diversified business model. This includes benefits from our leading deposit franchises in Personal Banking and Commercial Banking, Capital Markets reported record fourth quarter results. Our Wealth Management segment also reported record revenue, reflecting strong markets and client flows. These outstanding results underpinned a strong return on equity of 16.8% for the quarter supported by a CET1 ratio of 13.5%. This morning, we also increased our dividend by $0.10 or 6%. We further returned capital to shareholders through $1 billion of share buybacks of nearly 5 million common shares this quarter. Through an annual review of our medium-term objectives, we are increasing our return on equity, NCO from 16% plus to 17% plus. I will speak more to this after Graeme's remarks by providing an update on our Investor Day financial targets while sharing a strategic update on how we are driving long-term shareholder value. Before passing to Katherine for her views on the quarter and the outlook for fiscal 2026, I want to briefly address the operating environment in light of the heightened geopolitical and economic uncertainty. Fiscal and monetary policy has limited the impact of persistent sectoral and regional trade tensions, while other parts of the economy remain resilient. As Canada's effective tariff rate remains low and as Canadian exports to the U.S. remains solid, down 2% to 3% using the latest available data, the Canadian economy should maintain its demonstrated resilience as Canada negotiates a longer-term renewal of CUSMA. Furthermore, the ongoing shift towards a service-oriented economy should also offset some of the trade-related headwinds. North American consumers remain resilient, and we are confident in the overall resilience of our own retail portfolios. However, the impact of the K-shaped economy is increasingly polarizing with more affluent consumers investing disposable income in growing markets, while less affluent consumers struggle with affordability. Over the medium term, the federal government's infrastructure and defense spend should stimulate growth in jobs in Canada and attract foreign investment. Challenge is the country's ability to get these projects approved by all stakeholders in a timely and efficient way. While the operating environment remains fluid and complex, and there is a lot of hard work yet to be done by governments and the private sector, I am cautiously optimistic on the outlook for Canada. As Canada's largest financial services company by market capitalization, we recognize the important role we will continue to play in driving economic growth for Canada. In the U.S., our businesses are engaged in constructive dialogue with clients on lower -- as lower U.S. interest rates and pro-growth deregulation are providing more confidence in corporate boardrooms, leading to increasing market activity across sectors from banking and technology to manufacturing. With that, Katherine, over to you. Katherine Gibson: Thanks, Dave, and good morning, everyone. Starting with Slide 7. This quarter, we reported record results with diluted earnings per share of $3.76. Adjusted diluted earnings per share of $3.85 was up 25% from last year, reflecting continued momentum across most of our businesses and strong adjusted all bank operating leverage of 8.5%. Pre-provision pretax earnings were up $1.8 billion year-over-year, more than offsetting the increase in provisions for credit losses, which Graeme will speak to shortly. Turning to capital on Slide 8. CET1 ratio of 13.5% was up 30 basis points from last quarter, largely reflecting strong internal capital generation net of dividends. This is partly offset by higher risk-weighted assets as we continue to deploy capital to drive organic growth, and partly offset by a reclassification of certain RWA due to a methodology change. Returning capital to our shareholders through share buybacks and dividends remains a key part of our strategy. This quarter, we repurchased 4.8 million shares for approximately $1 billion, resulting in a total payout ratio of 59% for the quarter. Moving to Slide 9. All bank net interest income was up 13% from last year, or up 11% excluding trading revenue. Net interest income growth, excluding trading was up 17% for the year. All bank net interest margin, excluding trading revenue was up 3 basis points from last quarter, mainly reflecting higher margins in Personal Banking and Commercial Banking. Canadian Banking NIM was up 5 basis points from last quarter, largely benefiting from a favorable shift in product mix and the continued benefits of long-term interest rates. Moving to Slide 10. Reported noninterest expense was up 4% and core noninterest expense was up 5% from last year. Core expense growth was driven by higher variable compensation commensurate with higher revenues. Higher volume-driven costs and investments in technology also contributed to the growth. This was partly offset by continued expense discipline and cost synergies related to the acquisition of HSBC Bank Canada. On taxes, the adjusted non-TEB effective tax rate was 20.4% this quarter, down approximately 1 percentage point relative to last quarter, largely reflecting a favorable tax adjustment in the U.S. Turning to our Q4 segment results beginning on Slide 11. Personal Banking reported earnings of $1.9 billion this quarter. Focusing on Personal Banking Canada, net income was up 20% from last year. Strong operating leverage of 9% underpinned an improvement in efficiency ratio to 38.4%. This was partly offset by higher provisions for credit losses. Net interest income was up 13% from last year. Loans grew 3% year-over-year, reflecting growth in mortgages and cards. Deposits grew 1% from last year, driven by demand deposit growth of 8%, partly offset by a 4% decline in GIC. Noninterest income was up 7% from last year, largely reflecting the strength of our leading money in franchise with approximately $5 billion in mutual fund sales, half of which was in the fourth quarter. Turning to Slide 12. Commercial Banking net income of $810 million was up 5% from last year. Pre-provision pretax earnings were up 9% from last year, reflecting record revenue and well-managed expenses. Loans were up 5% and deposits were up 3% last year. Loan growth benefited from our diversified portfolio led by resilient sectors, including agriculture, health care and public sector, partly offset by slower growth in tariff-impacted sectors, including manufacturing and logistics. Commercial real estate continues to face cyclical headwinds. Turning to Wealth Management on Slide 13. Net income of $1.3 billion rose 33% from last year underpinned by record revenue. Noninterest income was up 14% from last year. Assets under management in RBC Global Asset Management increased by 17% to $794 billion year-over-year, reflecting market appreciation and net sales in long-term Canadian retail and institutional money market mandates. We continue to see momentum in Canadian retail mutual fund net sales as our clients move back into market across fixed income, balance and equity mandates. Assets under administration were up 17% in Canadian Wealth Management and 14% in U.S. Wealth Management versus last year. Our net interest income was up 13% from last year, including higher results in Canadian Wealth Management, driven by average volume growth in deposits and higher spreads. Higher revenue this quarter was partly offset by higher variable compensation in line with increased compensable revenues. City National Bank generated USD 163 million in adjusted earnings, including a release in performing provisions, up 79% from last year and 17% from last quarter. Turning to our Capital Markets results on Slide 14. Net income of $1.4 billion increased 45% from last year, underpinned by a record fourth quarter revenue of $3.6 billion. On a pre-provision pretax basis, results were up 62% from last year to $1.6 billion. Global Markets revenue was up 30% from last year, reflecting higher fixed income trading across all regions, particularly in rates, municipal bonds and higher volumes and spreads in repo products. Higher equity derivatives trading also contributed to the increase. Corporate and Investment Banking revenue was up 18% from last year. Investment banking revenue was up 26% year-over-year reflecting higher M&A activity. Lending and transaction banking revenue was up 12%, driven by higher volumes. These factors were partly offset by higher compensation on increased results and continued investments in technology. Lastly, turning to Slide 15. Insurance net income of $98 million was down 40% from last year, primarily reflecting the impact of unfavorable annual actuarial assumption updates, an adjustment related to a previously recognized reinsurance recapture gain. Effective Q1 2026, we are revising our methodology for allocating capital to insurance to more closely align with legal entity capital requirements. This increases attributed capital for insurance impacting the ROE effective fiscal 2026. This change though in the segment allocation has no impact at the all bank level. I'm now going to spend a few minutes on our outlook for 2026. We expect positive all-bank operating leverage for the year, including 1% to 2% positive operating leverage for Canadian Banking. We expect annual all bank net interest income growth, excluding trading to be in the mid-single-digit range. I'll spend some time unpacking the drivers given there are a few moving parts. As a reminder, in the past, we have highlighted that there are many variables that impact NIM, including changes in client and competitive behavior and the forward curve, which are difficult to predict in the current dynamic environment. Our guidance reflects improving product mix, including higher growth in demand deposits relative to GICs and benefits from our structural hedging tractor strategy. Furthermore, lower spread mortgages rolling into higher spread mortgages in the second half of 2026 are also expected to be a benefit, contingent on the competitive environment. Solid volume growth across our businesses is also expected to contribute. We expect mortgage growth in the low to mid-single-digit range, reflecting continued stabilization in the Canadian housing market. Commercial loan growth is expected to trend in the mid- to high single digit range, contingent on improving macro conditions and client sentiment. The $117 million in benefit this quarter related to the purchase price accounting accretion of fair value adjustments from the HSBC Canada acquisition will decrease to approximately $80 million next quarter, and largely run off by Q2 2026. This is expected to impact all bank net interest income growth by approximately 1%. Also, as a reminder, the second quarter has fewer days than the other quarters, which generally results in a decrease in net interest income. Turning to noninterest income. Noninterest income is expected to benefit from a continued shift in client flows towards investments, partly offset by reduced fees in the second half of the year, in line with regulations set out in last year's federal budget. In Capital Markets, we continue to maintain a high-level engagement with our clients in what we deem a constructive environment as deal pipelines continue to remain robust. We expect all bank expense growth to be in the mid-single-digit range, reflecting higher variable compensation. For Q1 2026, we expect to incur seasonally higher costs related to pension and eligible to retire benefits. We will continue upholding a disciplined approach to cost management, while investing in our strategic growth initiatives, as well as continued investments in our broader safety and soundness framework. As noted at our Investor Day, we expect the adjusted non-TEB effective tax rate to be in the 21% to 23% range, reflecting changes in earnings mix. As we look to 2026, we'll continue to prioritize client-driven organic growth, dividend increases and be more active in our use of buybacks, while maintaining strong capital levels. Dave will speak to this further in the strategic update. To conclude, we generated record results this quarter, underpinning an adjusted ROE of 17.2%. Our results highlight our efficient use of resources, including our robust capital, diversified sources of funding and liquidity and prudent cost management. And with that, I will turn it over to Graeme. Graeme Hepworth: Thank you, Katherine, and good morning, everyone. I'll now discuss our allowances in the context of the current macroeconomic environment and ongoing trade uncertainty. Despite persistent economic headwinds, the Canadian economy has demonstrated resilience over the past year with household spending remaining strong. As we head into 2026, we expect to see continued stabilization in the Canadian economy, supported by recent rate cuts, government fiscal support and federal budget actions. However, U.S. and Canada trade issues remain largely unresolved. Consequently, we have maintained a prudent approach with our allowances, retaining elevated weightings to our downside scenarios consistent with the last 2 quarters. Turning to Slide 17. We took a total of $14 million or 1 basis point of provisions on performing loans this quarter. This mainly reflects changes in credit quality and portfolio growth, partially offset by favorable changes in our macroeconomic forecast. As a result, we observed a small increase in allowances on our performing loans in Personal Banking and Commercial Banking, offset by releases in Wealth Management from the City National portfolio. It's important to note that economic impacts have not been felt uniformly across our portfolio. Rising unemployment in Ontario and the Greater Toronto area, coupled with higher payments at mortgage renewal have contributed to rising consumer impairments in these regions. Additionally, softness in these regions and uncertainty from U.S. sectoral tariffs have had a greater relative impact on economically sensitive sectors in the commercial banking portfolio. In response, we have continued to build reserves against our Canadian portfolios. Overall, we continue to maintain strong reserves, and we will continue to prudently manage our allowances given the backdrop of ongoing uncertainty as we move into 2026. Moving to Slide 18. Gross impaired loans of $8.7 billion were down by $69 million or 2 basis points from last quarter, primarily driven by accounts returning to performing status and higher write-offs as total new formations were flat quarter-over-quarter. Our overall gross impaired loans remain elevated, we are seeing a more stable trend in the pace of new wholesale formations and watch list exposures since the beginning of the year. In Capital Markets, new formations increased by $160 million over Q3. This was offset by an increase in borrowers returning to performing status and higher write-offs. Impairments this quarter were mainly driven by accounts in the consumer discretionary, real estate related and financial services sectors. In Commercial Banking, new formations decreased $215 million quarter-over-quarter. New formations were driven -- primarily driven by accounts in the real estate and related, consumer discretionary and transportation sectors. Turning to Slide 19. PCL on impaired loans of 38 basis points was up 2 basis points or $71 million quarter-over-quarter, in line with our expectations, with higher provisions across most segments. For the full year, PCL on impaired loans of 37 basis points was consistent with our full year guidance despite the impairment from one large Capital Markets borrower in the other services sector. This reflects the diversification and scale benefits of our loan portfolio and overall business model. Losses in the retail portfolios were $74 million higher this quarter, in line with our expectations. Our unsecured portfolios continue to be the main driver of losses for the quarter. Mortgage provisions are increasing as expected due to the regional factors previously highlighted. We expect retail losses to remain elevated in 2026, as we work through the lag effect of higher unemployment, consumer insolvencies and ongoing payment shocks for mortgage renewals in Canada. We continue to monitor the performance of the condo segments. However, the condo portfolio continues to perform better than the overall mortgage portfolio, pointing to our strong underwriting standards and portfolio quality. In the commercial portfolio, provisions were up $50 million this quarter. We took additional provisions on a previously impaired commercial real estate exposure tied to the insolvency of a large Canadian retailer and a new provision in the consumer discretionary sector. Further, our annual update of our coverage ratio has resulted in a small additional provision for the quarter. The cyclical supply chain and consumer discretionary sectors accounted for a majority of our commercial losses over the last 12 months, given softer economic conditions and the impact from the higher rate environment earlier in the year. In Capital Markets, provisions were down $73 million quarter-over-quarter as provisions were taken on two large accounts in the previous quarter. To conclude, we remain confident in the overall quality, diversification and resilience of our portfolios. We are pleased with our performance through a year marked with prolonged and heightened uncertainty. This year, we added a total of $622 million in provisions on performing loans, positioning us favorably to navigate the risk landscape, whether it be uncertain outcomes from U.S. trade policy, geopolitical risk or surprises to our economic forecasts. Looking ahead to 2026 with early signs of stabilization in sector-specific export and employment numbers, we expect Canadian GDP to gradually strengthen and unemployment rates to gradually fall from an earlier peak of 7.1%. However, economic growth will remain relatively modest and lagged impacts from fiscal stimulus could leave certain sectors and regions under pressure. Based on this backdrop, we are forecasting PCL and impaired loans in 2026 to continue in a similar range as what we have experienced in 2025. While the timing and outcome of CUSMA negotiations creates ongoing uncertainty, we feel the potential downside risk has been appropriately captured in our allowances, supporting our financial resilience through the cycle. Credit outcomes will continue to depend on the extent and duration of tariffs, the effectiveness of announced fiscal support and stimulus measures and the performance of labor markets, interest rates and real estate prices. And as always, we continue to proactively manage risk through the cycle, and we remain well capitalized to withstand a broad range of macroeconomic and geopolitical outcomes. And now back to Dave. David McKay: Thank you, Graeme. Before speaking to the progress made against the strategies we articulated at our Investor Day in March, I will share some highlights of our annual performance, starting with Slide 3 of the strategic update deck. In fiscal 2025, we delivered an ROE of 16.3%, underpinned by over $66 billion in revenue and $20.4 billion in net income with record results in Wealth Management, Personal Banking, Capital Markets and Commercial Banking. Revenues were driven by strong volume growth, constructive markets and margin expansion across key products. Our earnings supported the increased return of capital to shareholders and a $58 billion increase in risk-weighted assets from last year, as we continue to support our clients' financial needs and growth aspirations. At the same time, we prudently built our allowance for credit loss ratio to 71 basis points and saw common equity Tier 1 growth of $9.8 billion with our CET1 ratio increasing to a robust 13.5%. Our funding strength is further underpinned by 127% LCR, 100% loan-to-deposit ratio across Canadian Banking growing U.S. deposits across City National and Transaction Banking and relatively narrow wholesale funding spreads. We grew book value per share by 9% this year, in line with our historical 10-year average, while returning over $11 billion of capital to our common shareholders through dividends and share buybacks. Slides 4 through 6 are a good reminder of the foundational strength of our business model, which is underpinned by being the leading financial service provider in Canada across most businesses and client categories. In addition, we have a strong presence in the United States and Europe and attractive client verticals in some of the world's largest fee pools. The success of our diversified business model is further strengthened by how our segments are working together as One RBC to deepen client relationships and bring them the full strength of our bank. We're delivering more comprehensive FX, payments and transaction banking solutions to our wholesale clients across platforms and geographies, while looking to leverage the North South connectivity of RBC Clear and RBC Edge. We're also providing complex solutions for our high-net-worth and ultra-high-net-worth clients, leveraging the collective expertise of our Capital Markets and Wealth Management businesses, as we look to capitalize on our combined origination and distribution strengths. In short, our clients are at the center of everything we do. Turning to the ambitions we setout at Investor Day, we are already seeing outcomes unfolding from the significant growth opportunities we articulated in March. Starting with the integration of HSBC Bank Canada on Slide 7, we expect to exceed our initial target of $740 million in annualized cost synergies. With $115 million of cross-sold revenue in 2025, we are well on our way to achieving the $300 million annual revenue synergies target by 2027. Going forward, we expect to drive further synergies with both our commercial and retail client franchises, including cross-selling Personal Banking and Wealth Management products, as well as higher payment volumes and fees from enhanced treasury management solutions, international trading capabilities, along with strength with internationally connected clients. Moving to our ambition of leveraging our market-leading artificial intelligence capabilities, where we continue to see the benefits of our long-term organic investments in data platforms and foundational models. In the past, you have heard us speak about Aiden, NOME, PVC.AI and our leading ability to build and implement machine and reinforcement learning models. We believe these capabilities have accelerated our ability to build and deploy generative AI models. We are partnering with leading firms like NVIDIA to accelerate our Agentic AI strategy, enhancing our Aiden platforms across Capital Markets. We're also implementing key initiatives across our businesses, including reimagining mortgages and workflow for our commercial, corporate and investment banking teams. We're also leveraging AI to build the technology platform of the future, showing early results in enhanced security to protect the bank, and clients' technology operations and AI-enabled developer productivity. This includes the development of over 5 million lines of code over 55,000 code reviews and over 3,000 test suites. RBC Assist, our internal AI tool has been launched to over 30,000 employees across front office and functional roles, enabling employees to be more productive in their day-to-day work. We are on track to meet our target of $700 million to $1 billion of enterprise value from artificial intelligence. Importantly, our target is net of investments, including building on investments already made in data storage, GPU clusters, proprietary LLMs, risk governance and in people. We are also performing well against our enterprise-wide targets as seen on Slide 8. As Katherine noted earlier, we reported strong growth in net interest income this year, as we leverage the strength of our Canadian deposit franchises. In addition, strong fee-based growth in Wealth Management and Capital Markets revenue streams, combined with an uptick in transaction banking revenue increased our revenue productivity with a revenue to RWA ratio up over 40 basis points this year. At the same time, we are driving our efficiency ratio towards our 53% target while continuing to invest for future growth. Moving to Slide 9. Our goal continues to be to drive long-term shareholder value, which is reflected in our 4 medium-term objectives. As I noted earlier, we are increasing our through-the-cycle medium-term ROE objective to 17% plus due to the improved cost efficiencies and increased revenue productivity, including strong client flows and funding synergies from deposit growth. We are constantly evaluating growth opportunities to drive shareholder value with the goal of optimizing growth, returns and capital efficiency. We believe a 17% plus target allows us to do it all through a market cycle. We are always focused on achieving better outcomes for our shareholders than simply meeting our objectives and targets. Our premium ROE, robust capital generation and current CET1 ratio give us significant strategic optionality. Even after deploying capital to grow our franchises and pay dividends, we expect to build significant excess capital over the coming years. Net income, net of dividends and core of RWA growth is estimated to add approximately 80 basis points to our CET1 ratio annually. We'll continue to consider all dimensions of capital allocation, focusing on client-driven organic growth within our risk appetite and maintaining higher capital buffers during more volatile times. You've heard me say before that there is no half-life to capital. Returning capital to shareholders is an important part of our plan. This year, we bought back 15 million or 1% of our common shares outstanding. Our total payout ratio was 57% this year. Unless we see changes in the domestic stability buffer, we continue to view that we have surplus capital in excess of 12.5%. At this point, our strategy is to operate within a 12.5% to 13.5% range in the current environment. If there is a sustainable -- if there is sustainable excess capital above 13.5% CET1 ratio, Beyond what is needed to support longer-term organic growth opportunities within our risk appetite, we would look to deploy it towards accelerated buybacks above our recent cadence. We will also continue to strive to consistently grow our dividends, which have increased at a 7% CAGR over the last 10 years. Given the strength of our performance, our fiscal 2025 dividend payout ratio was at the lower end of our 40% to 50% medium-term objective. Going forward, we will look to sustainably operate at the midpoint of this range. Today's outsized dividend increase reflects this intention. I will provide an update on how we're progressing on some of the key segment-specific strategies we highlighted at our Investor Day. On Slides 10 and 11, Capital Markets generated record revenue of $14.4 billion and earnings of $5.4 billion this year, as our major businesses, we're well positioned to take advantage of constructive markets. Importantly, we are on track to meet our Investor Day targets of pretax pre-provision earnings growth and increased revenue profitability from our financial resources. We are -- we successfully grew our client franchises this year, leveraging the full breadth of our capabilities through our holistic global coverage model. Business growth was enabled by continued investments in talent with accelerated hiring of senior coverage and relationship managers in global markets and investment banking across the United States and Europe. Additionally, the cross-platform investments we made in artificial intelligence and technology are amplifying the execution of our strategic priorities. In Global Markets, we delivered broad-based market share gains with notable growth in focus areas, including equity derivatives and financing, commodities and G10 FX, where we're capturing benefits from enhanced One RBC approach. With the increased scale of this business, we believe we can sustainably deliver strong results over the cycle, and we are focused on increasing market share guided by our prudent risk appetite. In Global Investment Banking, we are seeing the results of our strategic shift towards winning larger mandates, resulting in increased revenue and productivity of senior bankers. Given the strength of our technology, data center, energy, power, utility and infrastructure teams across both investment banking and corporate banking, we are well positioned to benefit from the structural growth in artificial intelligence infrastructure and energy systems globally. And lastly, we are pleased with the progress of RBC Clear, our U.S. transaction banking platform. We've onboarded over 180 clients and USD 23 billion in deposits this year and are well on our way to reaching our USD 50 billion medium-term target. The funding benefits from this strategy will not only reduce our reliance on wholesale funding, it will also enable our growth strategies. Moving to Wealth Management on Slides 12 and 13. We improved the pretax margin to 24.5%, as we drove -- as we drive towards our Investor Day target of 29% by 2027. We are well positioned to benefit from secular trends across our key client segments, with annual net new assets increasing $33 billion or 4.9% in Canadian Wealth Management, excluding direct investing. U.S. Wealth Management net new assets increased by USD 28 billion or 4.3%, excluding CNB. And our total AUA across our Wealth Management advisory businesses has now reached $2.3 trillion. We are looking to further extend our industry-leading position in our Canadian full-service private wealth businesses by enhancing product capabilities that are becoming increasingly important to our client base. We've doubled sales of private alts while having a record year for insurance sales to our Canadian clients. We are also increasing our investments in RBC Direct Investing, the second-largest self-directed platform in Canada, to enhance the client value proposition for the next leg of growth. We introduced commission-free ETF trading to create more value and win with early-stage investors. We launched our role distinction program that provides dedicated support and exclusive benefits to high-net-worth clients as they transition into full-service relationships. This year, we attracted over 90 experienced financial advisers to U.S. Wealth Management, with approximately 80% of these hires delivering over $2 million of historical revenue production. We will continue hiring over the medium term to meet our Investor Day commitments. An important part of our U.S. strategy is to expand our product shelf with proprietary banking offerings to our U.S. Wealth Management and private banking clients. By the end of fiscal 2026, we will be launching enhanced credit card and mortgage capabilities, as we continue to grow security-based and tailored lending. We continue to believe in the secular opportunity in U.K. Wealth Management, given the country's structural retirement funding challenges. While foundational technology integration efforts related to the Brewin Dolphin acquisition are taking longer than anticipated, we believe this will be largely complete by the end of 2026. We remain steadfast in achieving our profitability targets over the medium term. RBC Global Asset Management maintained its leadership position in Canada, as we leveraged our leading affiliated retail distribution network, while enhancing our global distribution capabilities. We are expanding our investment capabilities with production innovation, adding to our growing expertise across traditional active mandates. This is in addition to a growing platform of alternative asset classes. These factors contributed to strong net sales of over $38 billion or 5.6% at RBC GAM and growing AUM to $794 billion. Turning to Slides 14 and 15, and looking at the U.S. as a region, we have made solid progress in enhancing profitability across our U.S. businesses. Net income was up 28% from last year, driven by more active clients, strong markets and improved operational efficiency. City National's net income increased to USD 350 million or USD 450 million on an adjusted basis as it continues to execute well at the client level, while growing deposits. The U.S. regions ROE increased by 1.4% to 10.7%, with the efficiency ratio improving by 4% to 79%. This success has been underpinned by several factors, including leveraging enterprise-wide capabilities, centralizing shared services and eliminating duplicative processes, operations and functions. We've seen improvement in both capital and funding efficiency through various financial resource optimization programs. Moving to Slides 16 and 17. This was a great year for Personal Banking. In addition to record revenue, we are on track to meet our Investor Day target of a sub-40% efficiency ratio by 2027. We're proud that RBC was ranked highest in customer satisfaction among the big five retail banks in the J.D. Power Canada Retail Banking Satisfaction Study for the second consecutive year. We added 400,000 net new clients to our premium client base this year. In addition, 40% of new clients acquired in year are now multiproduct clients. We remain focused on capturing the shifting money in motion, benefiting from the combination of our award-winning client value proposition, interconnected distribution channels and leading deposit and investments franchises. Reciprocity is also a core part of our client value proposition. We added strategic relationships with iconic Canadian partners such as Canadian Tire and the Pattison Food Group. This helped us grow our Avion member base by 700,000 in 2025. Looking forward, we are excited about our partnership with Visa for the 2026 FIFA World Cup. With respect to channel optimization, our strategy to automate low complexity work, leverage artificial intelligence and increase the number of specialists in our sales force is helping meet our clients' evolving needs while also driving higher adviser productivity and workload digitization. Turning to Slides 18 and 19. Commercial Banking expanded on our largest business deposit and lending franchise in Canada. We exceeded our growth goals in 2025 with double-digit volume growth on both sides of the balance sheet, driving record revenue. Ultimately, we did not meet our profitability expectations. Our ROE declined from fiscal 2024 largely due to higher PCL amidst an uncertain macro backdrop. Despite unfavorable business sentiment and heightened competition, average commercial banking deposits and loans were up 10% and 16%, respectively. Our diversification and leading product shelf, including our market-leading transaction banking solutions helped offset the impact from the more challenged sectors while consolidating business with existing clients and attracting new clients. Increased investments in dedicated service and integrated distribution teams, along with realigned coverage positions us well to unlock further growth as business sentiment recovers. We are seeing strong momentum with transaction banking revenue up approximately $80 million from last year, as we saw increased client activity in both flows and account management activities. In addition, we are increasing our collaboration with Capital Markets and City National to support the North South banking needs of our clients. Our investments are increasing scale, and increasing scale give us confidence in our ability to continue driving down the efficiency ratio towards 32% target while supporting our medium-term growth ambitions. Moving to Slide 20. RBC Insurance is an integral part of the One RBC model, working with both our Canadian Wealth Management and Personal Banking businesses to provide both wealth and insurance solutions while growing our leading creditor insurance business. As Katherine noted earlier, effective Q1 2026, we are revising our methodology for allocating capital to insurance. Going forward, the ROE target for insurance will now be in the mid- to high 20s, underpinned by mid-single-digit earnings growth and execution against key strategies. We'll continue enhancing our product suite to gain market share in key areas of focus, including in our group businesses. You'll hear more about this over the coming quarters. We are leveraging the power of AI to improve our underwriting, claims management and adviser effectiveness. Investment management will also play a part, as we increase our allocation towards higher-yielding alternative assets, including infrastructure. So to close, we are well positioned to succeed across economic cycles given our unwavering commitment to our clients and diversified revenue streams at scale leading franchises and a strong balance sheet underpinned by robust capital ratios, broad sources of funding and a prudent risk appetite. We remain focused on delivering a premium through the cycle ROE and strong EPS growth underpinned by client-driven market share gains, increasing revenue productivity and improving cost efficiencies. Finally, we are committed to using our strong internal capital generation to return capital to shareholders through increasing dividends and the strategic cadence of buybacks. With that, operator, let's open the lines for Q&A. Operator: [Operator Instructions] And your first question comes from the line of Ebrahim Poonawala with Bank of America. Ebrahim Poonawala: I guess, Dave, thanks for running through all of that. I guess a question around ROE, and as we think about the capital deployment Royal earned what, 17.2% ROE with a 13.5% CET1 this quarter. As we look forward and you look segment by segment, do you consider that the bank is overearning on ROE in any part of the business? Because I guess the follow-up to that is, is the ROE potential even with a 13% plus CET1 exceeding 18%, not 17%. And I asked this in the context of whether or not your scale, your diversity is actually creating a competitive advantage versus your peers in terms of the ROE differential. So would love any color on that. David McKay: Well, I think, first, I'd say our ROE has already differentiated itself significantly from our peers, given that many aspire to get to 15% versus us being already at 17% in the last 2 quarters, as you mentioned. So I think it is already differentiated quite significantly. And we're very clear about the plus, right? So we're trying to balance a number of things. One, we do want to see accelerated growth, and we want to outperform on growth as well. And therefore, as we look at the opportunities. Now we could easily run this bank at 18-plus percent, but we would trade off a bit of growth for that. So we think targeting 17-plus percent for now, and that's a target that we review within the year and then annually at a minimum. So it's not a static target. It can be a dynamic target for us, and we will continue to review that. We believe that we can achieve accelerated loan growth, return capital to shareholders and drive a premium ROE of 17%. Like we're -- as you said there in the last 2 quarters, other aspires -- aspire to it. And that's, for us, plus doesn't mean we can't do both. I would think you can also detect a little bit of conservatism from us in that we still haven't resolved CUSMA. We still haven't seen the economy normalize yet. We are running fairly elevated markets right now. And, therefore, I think it's just a prudent approach given there are some significant uncertainties that could affect the economy going forward that we just want to see play out a little bit longer. And, therefore, I think, as we sit here, we thought that 70% kind of clears the board for us. As I said in my comments that we can provide accelerated growth, a very strong ROE at 17-plus when we fully develop our AI, and we start to see the benefits that we might see as 30,000 employees are using generative AI right now in their jobs, as we start to see those benefits roll in. And I'm hopeful that we'll be able to look at that again and increase that in the near term. But for now, I think it is differentiated. It's a growth story. It's a capital return story through dividends and buybacks. And it's a really, really strong performance and consistent performance within our risk appetite. Ebrahim Poonawala: Got it. That's clear. And just following up on that, Dave, I'm having a hard time understanding whether the economy is getting better or worse as we look into the first half of '26 and how significant or important is some clarity on CUSMA or the U.S. trade negotiations to really get business investment going, CapEx going? Or are actions that the government has announced enough to actually start seeing a pickup in activity based on what you're seeing? David McKay: No, I still think there's significant uncertainty exists. So you saw a lot through 2025, and you heard the commentary from both Derek and Sean that investors and businesses have held back on CapEx. You're starting to see a little bit of growth there because some businesses just need to replace machinery that's wearing out or at a necessity, they have to move forward. But there still is a hesitancy, as we have not resolved the issues around CUSMA. You're seeing pretty severe sectoral impacts that are leading to job losses and Ontario is most acutely impacted by that. So you're seeing challenges there. So I would say we have not resolved CUSMA. And, therefore, a lot of the elements of the budget were more medium-term oriented and not short-term oriented. So just for that reason, you just heard Graeme's commentary on largely flattish outlook for credit quality, and we're just being a little more conservative in our outlook for the next year, not a deterioration, but we're struggling to see a significant acceleration yet in either mortgages or commercial activity. Operator: Your next question comes from the line of Gabriel Dechaine with National Bank. Gabriel Dechaine: Sort of related to that question, and I guess, Graeme touched upon a little bit in his comment. I'm just kind of trying to get a sense for your credit outlook there. You said the downside scenarios are reflected in your reserves. So if the USMCA or CUSMA is not extended than you've already reflected that. What's the -- what happens if that scenario plays out? Graeme Hepworth: It's Graeme. I mean, always, I'm a bit reluctant to project what we're going to do on performing allowances, but I think you're focused on the right point that could really kind of be a toggle for us one way or another in 2026. As you recall, we built up fairly significant provisions in Q2 last year kind of following operation date. And while that's abated, I think we haven't really released any of those allowances, just reflecting the CUSMA uncertainty. And so as that plays out this year, I mean, you could certainly see, I'd say, three different paths there. If CUSMA concludes satisfactorily or favorably, then that certainly would leave us in a spot that we've got some reserves that could be released. I think if it plays out unsatisfactorily, then I would say we have prefunded in part what could be an increase in Stage 3 losses going forward. And quite frankly, if the uncertainty doesn't sort itself out in '26 and drags on, I would say we'd probably continue with those reserves in place. So right now, we don't know how that's going to play out, and that's the uncertainty that Dave is referencing. And I think we'd like to get deeper into that and understand that before we kind of provide direction on which way performing allowances would go. Gabriel Dechaine: Yes. Okay. So yes, that does provide some clarity of uncertainty. And Dave, there's been this trend across the sector of pulling forward ROE targets and stuff like that, your bank obviously is doing that. Something that you included in your 2027 ROE target, the upside scenario was 17% plus at the time and that -- maybe about half of that included some AI benefits. I'm wondering if there's a potential scenario, it sounds like it based on your commentary that we're also going to be pulling forward and maybe upsizing those payoffs from the investments in your various AI strategies. And yes, let's go with that. David McKay: Well, I think you heard in my comments, certainly, as we work through the year since Investor Day and building the models and testing the models and deploying a new model, greater confidence in our ability to execute within that range. We are confident, obviously, in making those commitments at Investor Day, but we progressed and had a very strong year. We've rolled it out to 30,000 employees, and we haven't seen the benefit of that yet. So we are quite excited about the impact of generative AI. It was kind of one of the factors that's featured into our 17-plus percent target for ROE. And I think it would be the #1 driver that would factor into us outperforming against that 17-plus percent target. Gabriel Dechaine: Got it. So we're still 2025 investment year, 2026 investment year payoff, you start to accelerate in 2027? Or is that.. David McKay: Yes, that's exactly it. Exactly. We're excited about it. We're doing well with it. As I said, we have all these strategic capabilities that have allowed us to accelerate the deployment. Operator: Your next question comes from the line of Mario Mendonca with TD Securities. Mario Mendonca: I observed this morning that the growth in CNB, the loan growth, clearly has improved. So that bank has turned the corner. But one thing I want to follow up on this I've noticed the difference between Royal's growth in commercial in the U.S. and frankly, all the Canadian banks relative to the U.S. banks, and those banks that are located in the U.S., solely in the U.S. And my question is, is there a difference in how capital -- or the capital requirements for the U.S. banks when they lend commercially and the Canadian banks, and I'm making this observation because OSFI has implemented the final rules on Basel III. It appears that in the U.S., a lot of that is on pause. So the first question is, is Royal at some kind of disadvantage in lending in the commercial space in the U.S. relative to the U.S. peers? Graeme Hepworth: Mario, it's Graeme. I might start with that and if others want to add in. For CNB, in our capital allocation rule, it is -- it starts with the OSFI rules ultimately. And for CNB, we are still on a standardized approach with that bank AIRB is something we're working towards and would hopefully expect to get there, but it really is OSFI's rules that we adhere to in our capital allocation methodology there. I mean, the U.S. rules would be kind of a combination of standardized approach as well as their CCAR methodology that falls into that. And what we have to hold capital at our subsidiary level based on those rules, ultimately, from a parent level, we really would focus on the OSFI capital rules, first and foremost. Mario Mendonca: But has Royal received any like exemptions from OSFI on how those loans are treated in the U.S.? Graeme Hepworth: No. David McKay: So I would just add some color, Mario, that I think, I've mentioned on previous calls, we've been rolling off lower ROE single-product relationship loans on the balance sheet and putting on kind of multiproduct relationship assets. And I think that is probably a bigger driver towards an improved ROE story and accelerated growth. It took us a while. So there's a lot of roll-on, roll-off. And now we're starting to see, kind of more roll-on, both on -- not only on the lending side, but also on the deposit side. And that's just good evidence of the strategy execution I talked about. That's going to have a much bigger ramp-up, I think, on ROEs going forward, and we're pretty excited about the progress at City National. Mario Mendonca: My second question relates to Capital Markets. And I'm not so much talking about earnings now. I'm just talking about the revenue actually like trading, underwriting revenue, securities and brokerage commissions. Those are those big three items that make up your Capital Markets revenue. I mean, obviously, an enormous year up 21% year-over-year with trading something like 33, can you put a finer point on your outlook for Capital Markets related revenue, the big three, like trading, underwriting and then securities and brokerage commissions, what you would expect in '26? Derek Neldner: Sure. I mean just a couple of high-level questions to frame that before I touch on '26. I would just emphasize -- the strategy we're taking in Capital Markets is really building sort of long-term franchises, long-term relationships with our clients. And we've obviously benefited from the very robust activity we've seen this year, but we're not sort of just pursuing where the trading revenue might be in the next quarter or two, like it is really about building long-term client franchises. A key part of that is the diversification of the business, which has, I think, really been a key to our ability to successfully deliver lower volatility results than our global peers. And so when you look at the diversification across all our businesses, obviously, corporate banking, investment banking, the various sectors and products within that. And then within Global Markets, a very balanced asset class portfolio across both FICC and equities, that diversification, while you may get volatility in certain areas has really allowed us to deliver greater stability over a cycle. So if you take those two foundational elements to the strategy, and you then look at 2026, we're very constructive on the outlook overall. As Dave highlighted, there are some uncertainties and risks, and we can see cyclicality in the fee pools. But right now, we continue to see very high levels of activity across all three of our major businesses. So across trading, we're seeing a healthy level of volatility. Obviously, there's uncertainty around the economy, the direction of rates, inflation, tariffs, et cetera, that is driving a fair bit of trading activity, and we expect that will continue. Within investment banking, there is a lot of secular trends. Dave alluded to a few of those that are driving strategic activity among our clients. That strategic activity combined with a strong market backdrop is driving good underwriting activity, both across debt and equity. Our pipelines remain very strong there. So we expect that, that will continue. And then we are seeing a lot of clients, particularly outside of Canada, making strategic investments in their business, which is driving very good opportunities in our loan book. So right across all three businesses, we continue to have a very constructive outlook. Even if we were to see a slowdown or a correction in fee pools, as you saw through our Investor Day strategy, we do believe -- we've got a number of key initiatives and investments underway that will allow us to continue to gain share that will offset any slowdown in fee activity, but at this point, our outlook is positive, we don't anticipate a slowdown. Operator: Your next question comes from the line of Sohrab Movahedi with BMO. Sohrab Movahedi: Dave, not to take anything away from the excellent detail that you kind of shared with us. Is the ROE improvement simply reducing the targeted CET1, which at Investor Day was 14%, now down to around 13%? Therefore, 16% plus goes up to 17% plus? David McKay: I don't think that math is sufficient to get us there alone, right? It's also an improvement on return on assets. I don't know, Katherine, do you want to jump in? Katherine Gibson: Yes. Why don't I jump in? So that change in the MTO is not dependent at all on us changing our CET1 outlook. At Investor Day, we gave you a path to 16% plus without having to pull down our CET1. And then we also showed you a path to 17% plus. And so what you're seeing today with us announcing that change in MTO is basically just confidence, ongoing confidence in our progress going forward, and that underpins it. As you would have seen in our remarks, we have guided to operating in a range going forward of 12.5% to 13.5% and that provides prudence, gives us opportunity on a variety of fronts and with the unknown environment ahead of us, it also gives us a bit of a buffer there. But as we go forward, if we see the right opportunities, the right actions to move lower in that range, that will result in a higher ROE, but we're not driving down to equate to a higher ROE. David McKay: I mean, at the end of the day -- just at the end of the day, we're trying to drive shareholder value here, right, and total shareholder return. And therefore, it's not just optimizing the ROE, but it's driving growth and EPS growth at the same time. And we've obviously simulated all of the outcomes running the organization at 18-plus percent, which we can do, and we find a 17-plus percent at this point in time, allows us to drive more shareholder value through all the elements of having dividend growth and returning capital to shareholders and being the most efficient capital user. So I think when you get all of that together, it creates more shareholder value at this point in time with the variables that we're working with. If things change, we can certainly revisit it. Sohrab Movahedi: No, no, that's -- I just wanted to -- I just kind of wanted to understand how much of it was the numerator, how much of it was the denominator, if you will. But you mentioned it just right now, Dave, and I think you answered -- you mentioned in an answer to another question that if I want -- if we -- if the bank wanted to solve for something higher, there's a bit of a toggle basically with the growth end of the spectrum. But like you're not adjusting your risk appetite here in any way, are you -- like are you saying that within my risk appetite, I can have accelerated growth that can drive 17% ROE, but within my risk appetite, I can still slow down my growth and get 18% ROE. I'm just trying to understand how I should be thinking about your risk appetite and the comment around the growth and the 17%, 18% type ROEs you're talking about? David McKay: We're absolutely not changing our risk appetite target. It's return on risk. That focus us and then causes us to make marginal decisions on whether we do a deal or don't do a deal. So no, we're not changing our risk appetite because what's an important part of our medium-term objective is that the volatility of our earnings, right? So it's a big part of how we overall think about the organization and our investor base. So consistent risk appetite and risk strategy is critical through the cycle. It doesn't change, but as you look at the trade-offs between doing above cost of equity deals, but below hurdle and what balance of that to -- you're above, you look at how you're growing and where the opportunities are, and you're trying to balance towards one of those targets and optimize all of your variables that I talked about. So it's more of the return on risk, the balance of that than it is anything around the quantum of risk. Sohrab Movahedi: And is that toggle mostly in Derek's business then? David McKay: Yes, absolutely, that's one of the Derek's, but also within Commercial Banking within the United States, so it's in every business where we take risk, we're looking at the return on that risk. And how it's being priced and how we balance that to an overall 17% plus target with the premium growth objectives that we set. Operator: Your next question comes from the line of Paul Holden with CIBC. Paul Holden: I thought dropping the extra 30 page slide deck on the day of earnings, it was a test to see how we're using AI, but Dave, your summary is more useful for me. So I guess, I just want to drive like a little bit of a finer point on the ROE versus growth target. So obviously, you increased the ROE target. I would argue, if you're generating a higher ROE and as you also highlighted, are generating a lot of organic capital generation, like, why not increase the EPS growth target? Or is that something you kind of leave in your back pocket for when you find the right opportunities to deploy that excess capital? Katherine Gibson: Paul, it's Katherine. So to your question, why not changing the earnings per share target, it kind of goes back to when you looked at the variables and how they come together. We felt confident about moving at this time the ROE to 17%. We felt though the EPS keeping it at 7% plus is the right complement as we think about maximizing that shareholder value return. And I would also emphasize that they're not capped. There's pluses on both of those, and so we will continue to drive forward and drive those results that hit those medium-term objectives and deliver against those. Paul Holden: Okay. So maybe the way I'm going to look at it, I think it was 7% probably organically and then maybe the pluses from capital deployment. Second question then -- and I guess, to Graeme. So as I think about the outlook you laid out for '26, I think you mentioned sort of expectation for improving GDP and unemployment rate through the year. Does that suggest then based on your 2026 PCL guidance that maybe we can expect the first half of the year to start higher and then moderate through the back half of the year. I think that's probably how it lines up, and maybe you can talk us through that. Graeme Hepworth: Yes, Paul, it's a good question. I mean I think right now, as we look at it, I think I would focus, first and foremost, on the guidance we laid out for the year. We're kind of at these levels now, we would expect these kind of -- this kind of 35 to 39 basis point range to persist through next year. Well, yes, the macro, we do expect that it will trend positively through the year. I would say a lot of that though then won't really manifest itself -- in kind of credit outcomes until probably 2027. I would say it's hard to really predict a trend broadly, wholesale will be more volatile quarter-to-quarter I would say retail, there's probably some -- a bit more mix in the trends, I would say, as we progress through the year. The unsecured products could improve. They will react quicker to some of the macroeconomic indicators, but on something like mortgages where 2026 is the kind of big year of refinancing and the payment impacts, that will probably see a bit more pressure the other way, not maybe significantly from where we are, but we will see some upward pressure through the year, right? So there's different portfolios that are going to react differently through the year. And that's kind of why we're looking at it. It's probably a bit of a plateau through the year before we start to see improvements going into 2027. Operator: Your next question comes from the line of Jill Shea with UBS Financial. Jill Glaser Shea: I just wanted to touch on efficiency. You've made really good progress on the adjusted efficiency ratio of 54% relative to the medium-term target of the 53%. So I just wanted you to maybe touch on that efficiency level. Could we get to a point where it's even lower than that 53% just given the scale of your business? Or is there like a philosophical, like reasoning behind like the 53% that you want to reinvest in the business? So maybe just help us think through that efficiency level over time. Katherine Gibson: Jill, it's Katherine. Thank you for the question. It's a great question. So as we think about the efficiency, we're obviously always striving to improve. And as you've noted, we've had significant improvement over -- when you compare where we are now to the last couple of years, a couple like significant improvement. And even throughout this year, we continue to improve. To your question about do we see a cap? No, I would say that we continue to see opportunity as we go forward. Our first target, though, is what we've put out there for Investor Day is to hit the 53% for 2027. But as we think about our business, as we think about the opportunities going forward, there are the mechanisms. We've talked about artificial intelligence. We've got use cases underway. We've put a benefit target out there against that. And so that's all going to play into it as we continue to progress, but back to kind of that 53% is our target as we sit now, but we're always looking for opportunity to go further. Operator: Your next question comes from the line of Mike Rizvanovic with Scotiabank. Mehmed Rizvanovic: A quick one for Katherine. I wanted to just ask about your deposit mix in Canada. So you had a nice uptick quarter-quarter on the noninterest-bearing. And when I look at the split between noninterest-bearing to total, it's still hovering in that sort of 14%, 15% range. I think you peaked out at about 20% a few years ago. And I'm wondering in the rate environment that we're in, where we maybe get a bit of down drift in rates going forward. Can you see that number reflate, like is there a margin benefit to that? Is there anything to be said on maybe the NIM pickup that you might get in the Canadian lending business, if you do get a greater portion in noninterest-bearing going forward? Erica Nielsen: Thanks, Mike, for the question. It's actually Erica. So when we look at our deposit business in the Canadian bank, A couple of things are happening. We are seeing rotations out of some of those interest-bearings on the GIC portfolio. We are aligned as this movement occurs to the needs of the client. So as we build that portfolio, if you go -- sort of end of the pandemic through the last number of years and the attractiveness of the interest rates in the GIC portfolio at that time. We saw a lot of consumer deposits flowing into that category. Now as we see the markets pick up, we see more of a long-term home for some of those deposits into the markets business. So you see a lot of demand, Katherine alluded to in her speech, the pickup that we've had in mutual fund sales in direct investing into our DS businesses as clients sort of seek access to market space. At the same time, we've built strength in our demand deposits in our account, checking and savings accounts built on the back of the strong client acquisition that we have on the back of the depth of relationship that we have. So I continue to see strength in those deposits, while I think we will see some -- we'll see continued movement from our GIC portfolio into the markets businesses. Katherine Gibson: Mike, I was just going to build on it because you had a comment there also around NIM. And I'm going to say too to what Erica has just outlined, as we continue to see the shift, our expectations as we go into 2026 is that we will have that as a positive momentum into NIM as we go forward. Just given the differences in the margin between term deposits and on term. Mehmed Rizvanovic: Okay. Got it. And just a quick one for Dave. Just in terms of M&A appetite, and I apologize if I missed this in your earlier remarks, but this whole CUSMA dynamic not being resolved just quite yet, it sounds like it might make you a little bit hesitant to sort of pull the trigger on M&A in the U.S. If you do intend to build out the City National franchise. Is that a fair way of looking at your appetite right now? It's a little bit hindered by the fact that there's still some uncertainty and you might -- it might preclude you from doing a deal in the near term. Is that fair? David McKay: No, I don't think CUSMA would impact given the strategy to grow Wealth Management and secondarily commercial activity in the U.S. in a very strong economy, I don't think CUSMA would be the main driver. I honestly think that for the partners who we would execute that strategy with targets they may come to market at any time. And therefore, you have to be ready and understand your playbook and understand your synergy levels and where you can play from a price point, given there's so much capital attracting quality so much capital and free capital available in the U.S. to go after some of these high-performing businesses, you expect a lot of competition. Therefore, I think it's honestly -- it's more the timing than it is -- you might have to react to someone who goes into play or you get a bilateral opportunity to do something in a relationship you've cultivated over years. That's probably the bigger consideration. And that's why having the strategic optionality of all the capital and our organic capital, and I talked a lot about organic deployment of capital, but we didn't -- I didn't actually talk about inorganic deployment. So you didn't miss it. That obviously remains an option, but buying back shares right now and returning capital to shareholders and accelerating organic growth remains a priority. So I hope that helps. It's really, I think, timing. Operator: Your next question comes from the line of Doug Young with Desjardins. Doug Young: And I'll try to keep this maybe high level, Dave. I mean lots of information. Thanks for that. Maybe if I can ask you to distill the message down to like what are three items that you're particularly excited by and that you think could surprise investors that maybe isn't well known or thought of in your story? David McKay: I came -- I mentioned this last quarter. I think when you have the management team focused on operating the business the way we are today, and you're seeing the results of that and all our businesses are performing well. All our businesses are outperforming from capital markets, investment banking and global markets right through to consumer banking, commercial banking, wealth management. I think you're seeing the results of a very focused management team focused on organic execution with the client at the center. And we've got so much we've shown you that we're investing in new products and the success of RBC Clear being one of them. So we're bringing new services and capabilities to market even without the artificial intelligence input. So I'm very excited about the focus of the business, the performance of all our businesses outperforming. You saw that in the results in the last 2 quarters. And we're very excited about '26 in the future. So I would say that's kind of one. Two, I'm really excited about artificial intelligence. So as you look at the impact and the journey that we're on and how it's going to make us more productive, more effective, it's going to allow us to serve more clients with the same or lower cost base to create new products I think I'm very excited about the artificial intelligence journey. I'm also excited about the improvement in our U.S. operations and in our European operations. So notwithstanding that we're doing well and we're leading in most of the things we do, we still have areas where we're not doing well. And we can continue to improve those that make a meaningful difference to the shareholder and the investment in particularly City National, our aspirations around RBC Clear and mid-corporate cash management and transaction banking and just as we deploy a full transaction banking solution into our treasury management solutions in the United States next year then connect kind of north, south from there and then globally, very excited about building out a global business that can compete. I'm excited about deploying capital into new markets like potentially in the Middle East. As we go through a plan there and the accelerated growth in the Middle East and our ability to open up in new markets and use our strengths and wealth management and in capital markets to compete in new areas. The improvement in Asia has been incredibly significant for us, and we're excited there. So as I go through focus on the business, organic growth, AI deployment is transformational and improving underperforming businesses, all of it gives us very significant momentum forward. And one of the reasons we increased our MTOs and we certainly -- I certainly appreciate the ambition you have for us and pushing that ambition, I think that's great. We also have that ambition for ourselves. Doug Young: That's helpful. And then just secondly, on capital markets. I think the guidance was pretax pre-provision earnings around $1.1 billion per quarter. Clearly, you've kind of moved past that. It sounds like the pipeline is fairly full. And potentially maybe the earnings power of this business is higher than when you put that out there. So is there a new number that you would kind of point to you for that capital market franchise? Derek Neldner: Yes. Thanks, Doug, for the question. Obviously, the $1.1 billion guidance on PPPT that we provided was a number of years ago. And I think as you've seen, we've continued to invest in and grow the franchise. We really sought to refresh that in our Investor Day target where we signaled it from 2024, which is a reminder. In 2024, we delivered full year PPPT of $5 billion. So call that $1.25 billion a quarter. From there, we signaled medium-term target of high single-digit annual growth in that PPPT number starting from that 2024 base. Obviously, given the activity in the market this year and the success executing on our strategy, we significantly exceeded that. We're not changing that at this point, but we continue to be very comfortable on how we can continue to deliver against that high single-digit target. And if fee pools remain constructive, we certainly believe we can outperform that. Operator: Your next question comes from the line of Matthew Lee with Canaccord Genuity. Matthew Lee: Maybe just one for Erica on the mortgage front. Most borrowers seem to be entering renewals in pretty healthy equity positions. Rates are stabilizing a bit. So is that changing how clients are shopping for products more towards fixed rate stability or variable rate optionality? And then how does that inform your product mix outlook for NIM and strategy for mortgage retention over the next couple of years? Erica Nielsen: Yes. Thanks for the question. Certainly, as the business goes onto the books, we see different dynamics in the fixed and variable rate businesses. So if you look at -- if you look at the acquisition pool, we see more variable rate acquisition than fixed rate acquisition at this moment in time. But if you wind the clock back a few months that was -- that actually had shifted and was the inverse of that. I think it has more to do on clients' expectations of where rates are going to be and where Bank of Canada is relative to the value of the variable rate mortgage at this time. And so I think Canadians now, if you are looking, you're thinking the Bank of Canada has been suggesting that it's in a hold guidance at this point in time. And so variable rates in that time can become more attractive to a client than they were when we were in the up cycle of interest rates. And so as we look towards this next year, I don't think that it's necessarily -- we don't really think about it as factoring into how we impacting the revenue generation of that business or the potential because the oscillation gets guided by the client and their expectations for what either fixed or variable rates are going to do over the year. So I think we remain confident that the products are priced properly to hit the demand of the client over the next year and so that's the expectation as we think about the guidance for mortgages in the next year. Operator: Your next question comes from the line of Mario Mendonca with TD Securities. Mario Mendonca: In your early comments, I think you referred -- someone referred to the second half of the year 2026 that fee income could be affected by the changes in the budget. Now I'm familiar with what was said in the budget, but I'm not really clear on what fees you'd be referring to here? Is it card fees, deposit fees, FX fees? Could you help me think through what you're referring to there? Erica Nielsen: Yes. Certainly -- it's Erica. Just following up on a question on the bank fees. So certainly, as we go through the back half of this year, we do have the NSF fee reduction that occurs at late in the second quarter of the year that will come to full run rate as we go through the back half of the year and then into 2027. As we commented before, that's largely immaterial. As you think about the guidance, the ability for us to earn through that is there. I will say that bank fees were also a key item related to the most recent budget that came out from the government, and we are working with the government to better understand their expectation on some of the fees that they specifically called out in that budget, but we don't have yet enough guidance on those -- their expectation for changes in those fees to be able to give you any sense of when we would expect that to go into play and whether that you should consider that material. Most of the fee reductions that we've had in the portfolio over the last number of years as a bank we've been able to earn through and so we would look to do the same as we consider some of those new potential fee changes. Mario Mendonca: Just for clarity, the line item I would focus on there would be the deposit and payment services fees, but not the other, not cards or others. Is that right? Erica Nielsen: That's correct. Mario Mendonca: Okay. One other quick question on expenses. I think anybody who's been around the banks would acknowledge that this was an unusual year. It is not normal for any bank to have operating leverage of over 5%, nearly 6% in a given year and especially not a quarter like this month over 8%. So what I'm trying to get at is why? What was so different about 2025? Was it the mix of business? I mean, is AI starting to have an effect on expense growth? Why was this such an unusual year from an operating leverage perspective? Katherine Gibson: Hi, Mario, it's a great question. A couple of things that have really underpinned that high operating leverage. As you've called out, it has been quite a year where every business has performed very well. We've seen the market appreciation we've seen constructive markets for capital markets. And so part of it is that mix that's coming through. Another part of it is the HSBC synergies that's coming through, and we're seeing that predominantly in Commercial and Personal Banking, but also in capital markets, as well as in wealth management as well. And then the other -- I guess, maybe another element to the mix, just to call out, is what we've seen on the NIM front. So from a deposit perspective, we've been seeing throughout that year, shift of GICs into non-term. So that's also been definitely positive to our top line and then positive to operating leverage as well. Mario Mendonca: But is the paradigm still 1% to 2% is normal for a bank. Is that still an appropriate benchmark I should use going forward? Katherine Gibson: I was just going to say that, that is our guidance for next year. It's a positive uplift for the organization going forward. And then for -- in particular, commercial and personal banking, guiding to still remain in that 1% to 2% going forward. Operator: Your next question comes from the line of Sohrab Movahedi with BMO. Sohrab Movahedi: Really appreciate you squeezing me one more time. Katherine, lots of good outlook commentary. Can I get a sense of what you think would be a reasonable RWA growth for the Bank in totality next year? Katherine Gibson: I would guide you for RWA to be in line with the guidance that I had noted on loans. And so just quickly going back over that, like mortgages was low to mid. On the commercial side, it was mix high volume growth. And then capital markets or wholesale say moderate growth going forward. So you can look to that guidance to underpin what you can expense -- expect us for RWA growth going forward. Sohrab Movahedi: So no reason why RWA growth may be higher than loan growth? Katherine Gibson: No. David McKay: Okay. I think that's the end of our questions in the queue. This is Dave, so I'll just quickly close here and really appreciate all the time you spent with us and the questions this morning. I take the lack of questions on the quarter to mean that as we feel it was an outstanding quarter, and we performed well across our businesses. We provided a lot of guidance going forward more than we normally provide. I think we appreciate all the questions around trying to see where the ambition for that guidance was you have a team that has outperformed and wants to continue to outperform. And I think you can face that in the philosophy that we set targets that we want to beat and want to outperform on. And we have confidence in the future that this is a growth story. This is a capital efficiency story. This is an outstanding franchise with great client segments that will continue to perform. So I really appreciate your time, your extended time this morning. Thank you for your questions. Have a great holiday season, and we'll see you in the New Year. Thank you. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.