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Operator: Good day, and thank you for standing by. Welcome to the NeurAxis, Inc. Third Quarter 2025 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press 11 again. Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today, Ben Shamsian, Investor Relations. Please go ahead. Ben Shamsian: Thank you. Good morning, everyone. And thank you for joining us for NeurAxis, Inc.'s Third Quarter 2025 Financial Results and corporate update conference call. Joining us on today's call is Brian Carrico, CEO of NeurAxis, Inc., and Timothy Robert Henrichs, CFO. At the conclusion of today's prepared remarks, we'll open the call to questions. If you are listening through the webcast, you can follow the operator's instructions to ask questions. If you are dialed into the call live, you can press star 11 button. Finally, I'd like to call your attention to customary safe harbor disclosures regarding forward-looking information. The conference call today will contain certain forward-looking statements, including statements regarding the goals, strategies, beliefs, expectations, and future potential operating results of NeurAxis, Inc. Although management believes these statements are reasonable based on estimates, assumptions, and projections as of today, these statements are not guarantees of future performance. Time-sensitive information may no longer be accurate at the time of any telephonic or webcast replay. Actual results may differ materially as a result of risks, uncertainties, and other factors including, but not limited to, the factors set forth in the company's filings with the SEC. NeurAxis, Inc. undertakes no obligation to update or revise any of these forward-looking statements. With that said, I would like to now turn the event over to Brian Carrico, Chief Executive Officer of NeurAxis, Inc. Brian, please proceed. Brian Carrico: Thank you, Ben. Good morning, and thank you for attending the third quarter 2025 Earnings Call. During today's call, I will highlight the continued execution of our commercialization strategy for IV Stem, our neuromodulation technology for both the pediatric and adult patient populations, and RED, our product for patients with evacuation disorders. The continued execution has set the stage for continued growth in the recent quarters and stronger growth expected in 2026 and beyond. We will recap Q3 and discuss the milestones and growth plans for 2026. Following my remarks, Timothy Robert Henrichs, our CFO, will review our financial results for 2025. We'll start with commercial execution and reimbursement progress. Our strategy remains laser-focused on expanding access through medical policy coverage and accelerating utilization of IV Stem as we approach the effective date of category one CPT code on 01/01/2026. While revenue growth has strengthened in recent quarters, providers are still treating only a fraction of the addressable market because national policy coverage and a permanent CPT code are not yet in place. Our top priority remains securing coverage under medical policy. Our internal prior authorization team continues to expand, helping hospitals reduce administrative burden and improve patient access. A critical step toward broader adoption. We believe we are making progress with payers. Many of the nation's largest insurers are now in active dialogue as they approach policy review dates at many points between now and through 2026. Our advocacy emphasized the urgent need for pediatric coverage in the clinical risks of the off-label drugs with FDA black box warnings. To strengthen our message, we've mobilized a coalition that includes formal letters of support from the academic society, direct correspondence from leading children's hospitals, and national key opinion leaders, detailed updates from NeurAxis, Inc. to the payers, including the guidelines, the favorable ECRI clinical evidence assessment, the favorable up-to-date recommendations, and several additional strategies, which we will not be disclosing. Based on expert opinion, we have the most comprehensive payer engagement effort in our industry. The tone has been constructive, and we're confident this multichannel approach will drive favorable policy considerations. That said, we expect policy changes and prior authorization improvements to unfold gradually, not overnight. I want to now focus on and highlight the catalyst for what we expect to be continued revenue growth in the coming quarters. Two elements remain key to IV Stem's success. Number one, insurance coverage for access. And number two, physician RVU compensation for adoption. We now have roughly 55 million covered lives and continue to see positive payer momentum supported by the clinical practice guidelines published earlier this year. Regarding commercial readiness for 2026, in addition to the two key elements just mentioned, the commercial execution team utilizing these two elements is equally important and the primary focus of our commercial strategy. As the new CPT code takes effect and coverage becomes more available, it is paramount for children's hospitals to have enough dedicated time slots each week to treat the patients in need. Our commercial organization is fully aligned for the 2026 transition. We've prioritized target children's hospitals based on their utilization potential and launched comprehensive education and outreach, including direct engagement with the 75 children's hospitals who previously ordered IV Stem, division chief meetings with detailed RVU and financial modeling, comprehensive partnership with NASA beginning with a CME accredited presentation on November 12, integrated marketing, highlights the positive reimbursement shift, field programs focused on the clinical and economic value of the new CPT code, and we are working closely with all stakeholders to ensure there are dedicated weekly time slots available for patient treatment with IV Stem. These coordinated efforts are cultivating awareness and positioning IV Stem for broad adoption once the new CPT code takes effect. Our forecast remains conservative, recognizing that initial revenue conversion may lag as hospitals refine workflows and navigate early payer hurdles. As I just mentioned, coming off another quarter of growth year over year with Q3 coming in at a 22% increase marking the fifth consecutive quarter of double-digit growth. As this is our fifth quarter of double-digit growth, we are pleased that this amount of growth is coming considering the organic growth from the small number of hospitals comfortable with the current category three CPT code. More importantly, we hit another milestone as the big picture comes into more focus. This milestone is the indication expansion to functional abdominal pain associated with IBS and functional dyspepsia with associated nausea symptoms in the adult population, significantly increasing our market opportunity. Regarding the category one CPT code, the new category one CPT code represents a true inflection point. Effective 01/01/2026, this will streamline coding and reimbursement, introduce work RVUs for providers, and should substantially lessen the no authorization required response barrier that currently limits access with the category three CPT code. The reason this new CPT code is so critical is that it brings a permanent code with RVUs, making it much easier for providers to bill a procedure. It will allow reimbursement amounts for transparency and consistency, and it will provide work RVUs which is how physician productivity is measured. One could easily argue, as I've mentioned before, that physicians in a children's hospital setting are treating patients for free because there is no current work RVU associated with the category three CPT code. This will no longer be the case come January 1. As mentioned earlier, the new category one CPT code was assigned by the American Medical Association CPT panel and will be effective for utilization on January 1. Furthermore, the RVUs and payment values are now finalized for 2026, and we are very pleased with these numbers. This brings me to our commercial plan for IV Stem in adults. The FDA indication that was just awarded. As we all know, the category one CPT code for IV Stem will translate to adults because it's the same physician work for the same device technology. What everyone may not know is that although we have FDA clearance for adults with IV Stem, it was based on extrapolation of adolescent data to adults. Thus, there is not a large study conducted in adult patients alone. So medical policy coverage is not immediately likely. This means there could be 2026 coverage and reimbursement issues for IV Stem in adults. None of this is a big surprise to us, and is why we have been and will be spending our focus on the pediatric side of the business. Having said all that, we are approaching the adult IV Stem market from three angles. First, we are in the final stages of signing a contract with a prestigious institution to do a randomized controlled trial in adults. Second, we have submitted for a federal supply schedule contract, also known as an SSS contract, for access into the Veterans Administration. We are cautiously optimistic we will have an SSS contract by early 2026 with IV Stem on that contract. This will enable a commercial path into the VA, which is responsible for nearly seven million active patients per year with a functional dyspepsia prevalence rate of 3%. We are dedicating sales resources to this endeavor and will expand as we get feedback and see results. Third, we are doing a limited market release on the private and commercial side for IV Stem to gauge the insurance acceptance of IV Stem in adults using the cat one code and ultimately gauge whether there is a cash pay market if insurance is not favorable. Turning to RED, our rectal expulsion device. RED allows for earlier, more targeted treatment decisions for patients with chronic constipation, a meaningful improvement for patients and providers. We are selling the device and continue to see good physician interest. But being a new technology means practice flow changes and physician habit changes. Furthermore, there is an existing category one CPT code and strong reimbursement, but we have learned that there will be a new CPT code effective January 1, which may or may not be positive for RED. So we expect to learn in detail what this means before January 1. To this point, RED in the private market is to be determined but we will be exploring RED in the VA due to the synergy of a sales force calling on adult gastroenterologists in that location. In summary, we're executing against the milestones that matter most. Payer coverage expansion, CPT code implementation, commercial readiness, and execution. As we move into 2026, the focus is clear: drive national medical policy coverage, maintain disciplined commercial execution, and achieve cash flow breakeven as adoption accelerates. Although we are far from satisfied, we're proud of the progress made this year to date and energized by the opportunities ahead. For our shareholders, our team, and the 1,000,000 patients who stand to benefit from our therapies. I will now turn the call over to our CFO, Timothy Robert Henrichs, to discuss the financials. Timothy Robert Henrichs: Thank you, Brian, and let me add my welcome to everyone joining us on this call. These financial results were included within our press release, which was issued earlier this morning and were also provided in more detail within our 10-Q that was filed yesterday. I will provide some additional detail in key areas such as our financial results and liquidity position as well as an outlook on certain areas. The 2025 marked the fifth straight quarter of double-digit revenue growth year over year, as Brian mentioned previously. We are proud of our achievements and market penetration in 2025. Especially since that double-digit revenue growth is not even reflective of the milestones we achieved this year. Namely the FDA indication expansion to functional abdominal pain and functional dyspepsia with associated nausea symptoms in both children and adults, IV Stem label expansion from 11 to 18 years of age to 18 to 21 years old, including an increase of devices per patient to four. The published Naspigan Academic Society guidelines, the new category one CPT code, work RVUs, and reimbursement values as well as the RED device. Our operational, regulatory, and clinical accomplishments coupled with our revenue growth, strong gross margins, and operating expense leverage are setting us up well for strong growth in 2026 when a category one CPT code becomes effective. With that, I'll go through the financial highlights in detail. Revenues in 2025 were $811,000, up 22% compared to $677,000 in 2024. Unit deliveries increased approximately 38% compared to the prior year due to volume growth from patients in the company's financial assistance program that provides discounts to those without insurance coverage. In fact, 2025 marked the sixth straight quarter of double-digit unit growth. And although our average selling price to these patients was lower, we are encouraged by the increase in the volume for the quarter because these transactions are expected to convert to full reimbursement at a higher gross margin once insurance coverage is obtained in the future. In fact, this growth does not come as a surprise to us, as we assembled a dedicated internal team to deliver for these specific patients as our mission is to treat everyone regardless of their income level or insurance coverage. Additionally, a smaller portion of the revenue growth in the quarter is due to the soft launch of the RED product line in 2025. Given the achievement of the recent milestones, we expect revenue growth to continue in the fourth quarter prior to the effective date of the new category one CPT code given the strong demand and acceptance on the part of healthcare providers and patients for our products. Gross margin in 2025 was 83.3% compared to 85.4% in 2024. Despite the double-digit growth in sales, the decline in our gross margin year over year was due to one, higher discounting on devices sold through the financial assistance program to patients with lower income levels, two, stronger unit growth in the lower margin financial assistance program compared to the full reimbursement program, and three, expired RED inventory charges as the soft launch ramped slower than expected. Despite the decline in our gross margin in the third quarter, we expect our gross margin to recover into 2026 when a new category one CPT code becomes effective on 01/01/2026, which we expect will transition currently discounted device sales to full reimbursement revenue with insurance coverage. Total operating expenses in the third quarter of 2025 were $2,800,000, an increase of 25% compared to $2,200,000 in 2024. We measure and manage our operating expenses in three distinct buckets: sales and marketing, research and development, and general and administrative. As we continue to grow at a double-digit pace, we realized that investors would benefit from a more transparent presentation of our sales and marketing and research and development costs as those are indicators of our future success. As a result, we reclassified $243,000 and $54,000 from general and administrative expenses into sales and marketing and research and development costs respectively, in 2024 to conform to current period presentation. Selling expenses in 2025 were $762,000, a 125% increase compared to $339,000 in 2024. The increase is due to sales commissions that are directly proportional to our higher sales volume, a temporary commission structure to facilitate growth and adoption in new states, and higher targeted advertising and marketing costs as we prepare for IV Stem's CPT category one code effective date on 01/01/2026. Research and development expenses in 2025 were $131,000, an increase of 4% compared to $126,000 in 2024. The increase is reflective of higher year-over-year spending on a medical research project. It is worth noting that our research and development expenditures are up 18% year to date in 2025 compared to 2024 due to our successful efforts in achieving FDA approvals for multiple indications including the first-ever clearances for functional abdominal pain and functional dyspepsia with associated nausea symptoms in both children and adults. The expansion of the IV Stem label to allow for a larger patient population beyond eleven to eighteen years of age to eighteen to twenty-one years of age, including an increase of devices per patient to four, and the RED device. We expect our research and development activities will continue to grow into 2026 and beyond as we identify incremental patients and markets that will benefit from our technologies. General and administrative expenses of $1,900,000 in 2025 were 7% higher than the $1,800,000 in 2024. This increase was due to the introduction of a long-term incentive plan in 2025 that did not exist in 2024, and third-party costs incurred to enhance the company's systems and its internal control environment, partially offset by the absence of certain one-time nonrecurring consulting and advisory costs incurred in 2024. Our operating loss in 2025 was $2,100,000, 27% higher compared to a $1,700,000 loss in 2024. And our net loss in 2025 was $2,100,000, 21% higher compared to $1,800,000 in 2024. Our higher gross profit from increased quarterly sales year over year was offset by the higher operating expenses that I just walked through. As it relates to liquidity, cash on hand as of 09/30/2025 was $4,400,000. And we improved our liquidity position in October 2025 by raising an incremental $2,800,000 through an at-the-market equity offering and the exercise of warrants. Lastly, our free cash flow in 2025 remained at our expected burn rate of $1,500,000. Increased cash collections from our growth were offset by our higher inventory purchases to prepare for the IV Stem CPT category one code effective date on 01/01/2026 and higher advertising spend that I previously mentioned. And with that, let me turn the call back over to Brian. Brian Carrico: Thank you, Tim. To summarize, while we have recently achieved several critical milestones, we are still in the very early stages of what we expect to be substantial top and bottom line growth over the coming quarters. Our continued execution of the commercial strategy highlighted by the assignment of a category one CPT code for PE and FS and the broadened 510(k) clearances is expected to drive the scale and growth. With that, operator, we'd be happy to take any questions. Operator: Thank you. As a reminder, to ask a question, please press 11 on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. You can also ask a question on the webcast by typing into the ask a question box. Please stand by while we compile the Q and A roster. And our first question comes from Chase Richard Knickerbocker at Craig Hallum. Your line is open. Chase Richard Knickerbocker: Good morning. Thanks for taking the questions. Congrats on the progress. Brian, I just wanted to start maybe on how you're tracking success and, you know, incentivizing your team ahead of kind of that expected volume inflection next year? Obviously, there's a lot of kind of prep work to prep the ground for that potential volume inflection with the CAT one code and hopefully national coverage at some point in the future here. Can you speak to kind of how you're incentivizing your commercial team to make sure those, you know, IV Stem days are getting set up and kind of prepping those accounts to handle more patients? Brian Carrico: Well, two answers for you. One, we have a strong commercial sales force. We have a sales force that has been here for five, six, eight, ten years. They know the technology extremely well. I will tell you that from an internal forecast, this team forecasted what appears to be our 2025 revenue that they're going to come in within $50,000 on the year, which speaks to how well they know the account and the stage of the account. I would tell you they're highly incentivized from a commission structure standpoint. And I would tell you that they are being extremely diligent from a prioritization standpoint. When I say that, I mean areas and states that have good insurance policy coverage. That will now have a category one CPT code. That takes highest priority. And then even accounts that have ordered previously in those states become the top priority because it's always easier to grow legs on an account with champions than it is to open a new account, which takes time regardless. So I don't know if that answers your question, Chase, but I would tell you that there's not a lot of noise. No one's off in the weeds. They're highly motivated from a financial standpoint and from the fact that they've been here as long as they have, and they know the accounts as well as they do. The demand has always been there. So these relationships, this is all coming to fruition. And look, everyone's going to learn to some degree in the first quarter together on how this category one code responds in areas with insurance coverage and in areas that don't have written insurance policy coverage. And the good news is as we implement the category one CPT code, which, of course, affects every physician and patient nationally, it will give Tim and I an opportunity to be more predictive with how we see revenue rolling out, and we'll do that. We do that from a macro standpoint and from a micro standpoint. We go through the commercial sales team has gone through for the last several years account by account, state by state, and put together a forecast for the upcoming quarters and year. And that hasn't changed, and I believe with this category one code rolling out, we'll be able to look at again, how the revenues respond in areas with or without insurance policy coverage. That will give us an opportunity to predict, I believe, better than we have. What revenue looks like going forward. But I do think that will take thirty, sixty, ninety, at least a quarter, if not two quarters. I think by mid-2026, we've got a really good handle on what's working, what's not, and how we can materialize and drive revenues in all areas based on the success where we are. Chase Richard Knickerbocker: Is there any way you can help us think about kind of that volume inflection that would be seen, you know, just from the CAT one CPT code alone even kind of before national payer coverage? Have you kind of started that, any of that forecasting exercise with your commercial team as far as kind of how you're thinking about Q1 and Q2 year if we just kind of get the CAT one code, you know, in isolation? Brian Carrico: Yeah. We have in areas where we have insurance policy coverage, if you saw our internal forecast, you would see a better adoption rate and more confidence in the projection in areas where there is insurance policy coverage or some insurance policy coverage because we know those children's hospitals will have insurance policy coverage and a category one code, whereas areas without policy coverage, the trial by fire will be, you know, there is some confidence from children's hospitals without policy coverage that they will still do decent and get some approvals, more approvals than they are now with a category one CPT code for multiple reasons. But that's, you know, we're not going to step out on that limb yet. We want to wait and see what the response is right now. Our focus from a forecast standpoint is absolutely being in those areas where there is insurance policy coverage and there will be a cat one code, which in our world is a perfect world. Chase Richard Knickerbocker: Got it. And then just last couple for me. Any update, Brian, you'd be willing to give us on kind of engagement with payers? Any sort of new thoughts there as far as we kind of track towards, you know, hopefully, payer coverage at some point in the future here. And then just second for Tim on the SG&A, just as far as if you could help us quantify any additional commercial investment that we'll be making ahead of that CAT one code and how that flows through to incremental SG&A growth as we look into Q1 and Q2? Brian Carrico: Yeah. On the payer coverage, I would just say that payers traditionally don't engage heavily with industry, and that's the same with us. They're responsive. We believe that they're fully aware of this, you know, the category one code, which we believe brings strong credibility. They're fully aware of equity and up-to-date. And the society's feelings on the technology and the society's feelings on the concern for the antidepressants and the drugs that are being given to the children before IV Stem and the need for IV Stem policy coverage. But, you know, there are some things I'm just not going to get into publicly right now. But, you know, I would just say I like our position. And we feel good about the comprehensive approach we're taking with these payers. And they are responsive, and, you know, in most, if not all policies that we currently have, we didn't know until they were announced publicly that we had policy coverage. So I don't expect that to change and don't expect to get some big heads up that we were receiving another policy coverage. Timothy Robert Henrichs: And, Chase, to follow-up on your question regarding the SG&A expenses, so two areas as we head into 2026 and beyond where I think we're gonna focus special attention. And we saw it here in the third quarter, is that our sales and marketing efforts first. Historically, our marketing efforts have been, you know, kind of general across the patient population. In the third quarter, we moved the ball a little bit and decided to change our strategy and specifically target payers because of what's at stake here. And we think it's a matter of when, not if, which you can see in the third quarter, obviously, our marketing expenses, you know, more than doubled quarter over quarter. And I'm not necessarily committing to doubling that every single quarter, but I think that once we start to see that increased insurance coverage from the change in our marketing effort, I do think we're gonna continue to see higher marketing costs as we go into 2026. Because that is a direct, in my opinion, direct link to our sales. So as long as the sales are there, which we believe they will be, we will continue our new and improved marketing efforts targeting payers. Secondly, on the other area is R&D. Brian mentioned particular with, you know, the adult population and IV Stem because we got that indication from the FDA. When we head into 2026, we're gonna have, you know, an additional randomized controlled study or trial as well as other costs because our market is expanding with the device. The beauty of the IV Stem device is it has many purposes, but, obviously, we continue to work with the FDA to get those approvals and when we do get that approved, it expands our market share. So as long as that continues to happen, which it has and we expect it will, we will continue to invest in R&D in the device in order to expand our market share. So I expect our R&D cost to increase when we head into 2026. From a G&A perspective, you know, generally speaking, as our sales grow, we will hire more sales reps. And then there'll be commission associated with that. But I, you know, really look at that as variable. If you will. It'll be direct relation to sales. And the rest of the G&A, albeit not necessarily all fixed, I think we've been holding that pretty steady and taking some cost out just behind the scenes. Obviously, not doing anything to harm the business, but just to do, you know, good financial discipline and negotiate and continue good contracts for the company at cheaper rates and better services. So that's how I would sum up how we're thinking about 2026 G&A expenses. Brian Carrico: And, Chase, I would add to that that based on the results of the category one CPT code in areas with insurance policy coverage and in areas without insurance policy coverage, we have some plans teed up and that's in our internal budget for 2026. My point is we'll be ready to pull the trigger regardless of what works and where. We're ready to do some things whether, albeit, add additional salespeople on the pediatric side, whether, albeit, add additional salespeople on the adult side, whether it's private or VA, whether it's additional targeted marketing to healthcare providers to make sure this is top of mind and used early and often. There are multiple levers we have teed up to pull, enter in the budget, and we'll pull those accordingly. Doing that before January 1 or even in January, I think, would be equivalent to shooting before you aim. We want to make sure that we understand exactly what's happening before we utilize resources. Chase Richard Knickerbocker: Helpful. Thank you, guys. Operator: Okay. Brian, we have some questions that have come in. Question on RED. It's not a priority right now, but how do you see the revenue ramp here in the early innings in terms of what do you need to do to further educate the doctors on this? Brian Carrico: Well, first off, this to some degree, competes with ARM, and ARM is well entrenched in the market. ARM reimburses very well. RED has a nice reimbursement right now. But as I mentioned in the call, RED changes not only physician practice habits, but it changes physician practice flow. And when you combine those two, it takes longer to get this up to the scale that we expected as fast or, I should say, as we wanted. And going into 2026, this is pretty straightforward. We've got to understand the CPT code reimbursement and the work involved in that CPT code, and we're waiting on some answers from the AMA and from societies, and we won't have that information, I believe, until mid-December. I do expect we'll have it by January 1. Look, it's a nice-to-have product. It's in the bag with the reps who are at that call point. That should also be the case in the VA going into 2026. But our focus without question is on IV Stem in the children's hospitals. Operator: Okay. Thank you. A question for you, Tim. Can you speak about the current cash balance and sort of where do you see that taking you here? Timothy Robert Henrichs: As I previously mentioned, we ended the quarter with $4,400,000. Then in October, we utilized the aftermarket offering and some warrants were exercised for an incremental $2,800,000. When we head into and in the third quarter, we were still in our run rate at $1,500,000 a quarter. Now in the fourth quarter, then as we head into next year, we have two, what I would call, nonstandard payments going into 2026. If you recall back in July, we reacquired the license from Massimo for our NSS Bridge device. There's a payment due at the end of this calendar year and then another payment next year. And then we settled a lawsuit in the first quarter and that will be paid out in 2026 as well. And so those are incremental payments when we move into 2026. But having said all of that, excluding that, our $1,500,000 burn rate is still intact in 2026, and I expect the current cash balance to last us well into 2026. And then what that does is that gives us a chance. Everything that Brian talked about with the category one CPT code, depending on how that ramps with IV Stem, if it ramps faster than what we expect, our cash and liquidity will last us longer. If it's slower, I would tell you as we look into 2026, we generally try to be conservative with our internal forecast. We feel pretty confident about that $1,500,000 run rate. So it could go even longer into 2026. I mean, it ramps even faster if we get one big insurance payer that could obviously change the game for us and really limit any additional equity raises that we may need. But as it stands right now, my current expectation is that the current cash position and our liquidity lasts us into 2026. Operator: Thank you. And as a reminder, if you have an audio question, please press 11. And at this point, there are no more questions in the queue. Therefore, I'd like to turn the call back over to Brian Carrico for closing remarks. Brian Carrico: Thank you, everyone, for joining the call today. If anyone wants to follow-up in the coming weeks and months, I'm generally available. And we look forward to communicating any additional successes in the coming months. And everyone have a nice rest of the fall and winter. Thank you. Operator: This concludes today's conference call. Thank you for participating and you may now disconnect.
Operator: To all sites on hold, appreciate your patience, and please continue to stand by. To all sites on hold, we appreciate your patience and please continue to stand by. Please standby. Your program is about to begin. If you require assistance throughout the event today, press 0. Good day, everyone, and welcome to today's Bain Capital Specialty Finance Third Quarter Ended 09/30/2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question and answer session. Please note, today's call will be recorded, and I will be standing by should you need any assistance. It is now my pleasure to turn the conference over to Katherine Schneider with Investor Relations. Please go ahead. Katherine Schneider: Thanks, Chloe. Good morning, everyone, and welcome to the Bain Capital Specialty Finance Third Quarter Ended 09/30/2025 Conference Call. Yesterday, after market close, we issued our earnings press release and investor presentation of our quarterly results, a copy of which is available on Bain Capital Specialty Finance's Investor Relations website. Following our remarks today, we will hold a question and answer session for analysts and investors. This call is being webcast, and a replay will be available on our website. This call and the webcast are property of Bain Capital Specialty Finance, and any unauthorized broadcast in any form is strictly prohibited. Any forward-looking statements made today do not guarantee future performance, and actual results may differ materially. These statements are based on current management expectations, include risks and uncertainties, which are identified in the risk factors section of our Form 10-Q that could cause actual results to differ materially from those indicated. Bain Capital Specialty Finance assumes no obligation to update any forward-looking statements at this time unless required to do so by law. Lastly, past performance does not guarantee future results. So with that, I'd like to turn the call over to our CEO, Michael Ewald. Michael Ewald: Thanks, Katherine, and good morning. Thank you all for joining us on our earnings call here today. Continuing the regular programming, we do want to take a moment just to recognize anyone on the call who has served or is serving in our armed services. We genuinely appreciate your service and want to recognize you today on Veterans Day. Thanks. I'm joined today by Mike Boyle, our President, and our Chief Financial Officer, Amit Joshi. As usual, in terms of the agenda for the call, I'll start with an overview of our third quarter results and then provide some thoughts on our performance, the current market environment, and our positioning. Thereafter, Mike and Amit will discuss our investment portfolio and financial results in greater detail, and we'll leave some time for questions at the end. Yesterday, after market close, we delivered another quarter of solid results for the third quarter ended September 30. Q3 net investment income per share was $0.45, representing an annualized yield on book value of 10.3% and exceeding our regular quarterly dividend by 7%. Q3 earnings per share were $0.29, reflecting an annualized return on book value of 6.6%. Our net asset value per share was $17.40, a decline of $0.16 per share from the prior quarter end. This modest decline in our NAV this quarter was primarily due to a markdown on one of our loans that was idiosyncratic driven, not reflective of any broader credit issues apparent across our broader portfolio. Subsequent to quarter end, our board declared a fourth quarter dividend equal to $0.42 per share and payable to record date holders as of 12/16/2025. The Board also declared an additional dividend of $0.03 per share for shareholders of record as of 12/16/2025. As we previously announced in February, this brings total dividends for the fourth quarter to $0.45 per share or a 10.3% annualized rate on ending book value as of September 30. During the third quarter, we saw new deal activity pick up across the middle market, driven by new LBO and M&A activity following greater clarity on tariffs and stability regarding economic indicators such as inflation and unemployment, both of which have remained elevated in the US but have not continued to accelerate. Against this backdrop, our private credit group continues to curate a strong pipeline of lending opportunities in the core middle market. Our depth of industry expertise and collaboration across Bain Capital's global platform enables us to identify attractive investment opportunities in more specialized industries. Furthermore, our sponsors continue to view us as true business partners and value our ability to provide flexible capital solutions that support the financing and growth needs of their portfolio companies. During Q3, BCSS gross originations were $340 million. We remain disciplined on terms and structure in our segment of the market, with a weighted average spread on originations to new companies of approximately 550 basis points and weighted average leverage of 4.5 times. The vast majority of these commitments were to first lien borrowers. Now to quickly address the credit market headlines in recent weeks, we do not have exposure to First Brands nor Tricolor. While these credit events have been broadly linked to the overall private credit market, they've occurred outside of the traditional direct lending segment. First Brands and Tricolor are large cap companies versus Bain Capital's private credit group's focus within the core middle market. We favor this segment of the market due to its attractive characteristics, including greater loan tranche control, reduced lender consensus risk, and the prevalence of covenanted structures that provide for stronger lender downside management. We believe the bankruptcies of First Brands and Tricolor are idiosyncratic and do not believe that they reflect broader stress in the private credit market. However, these recent credit events reinforce the importance of our rigorous investment due diligence process, which incorporates scrutiny of off-balance sheet liabilities, collateral integrity, sources of liquidity, and corporate governance. Our processes also include deploying third-party legal advisers to perform legal due diligence and seeking to ensure that our borrowers have reputable auditors and quality of earnings providers. Finally, we also negotiate strict documentation for our loans, which includes not just financial covenants, but also broad reporting and inspection rights, all of which ensure we stay well informed about our portfolio company's performance, trends, and asset quality. While these are not new elements of our investment process, these recent credit events further support our emphasis on robust due diligence on every transaction we underwrite. In fact, credit quality and fundamentals continue to be healthy across our portfolio. Investments on non-accrual represented just 1.5% and 0.7% at amortized cost and fair value, respectively, as of September 30. Non-accruals were relatively stable from the prior quarter end. Turning to our outlook on earnings and dividend coverage in light of market expectations for a lower interest rate environment ahead. First, as a reminder, when we increased our regular dividend level throughout 2022 and 2023, we set our dividend policy at an attractive level for shareholders of between 9-10%, and to a level that we believed could be earned throughout multiple market environments. Since then, we've been operating with meaningful net investment income dividend coverage, which has provided excess income that has been distributed to our shareholders via supplemental dividends and also increased retained earnings driving healthy spillover income equal to $1.46 per share or three times our regular dividend level. Our Q3 net investment income has come down relative to peak levels in prior periods largely due to the decrease in base rates but notably still exceeds our regular dividend level. In the current environment, we believe we can maintain our regular $0.42 per share dividend. The company has several earnings levers to potentially offset headwinds next year from a lower rate environment and our fixed rate debt maturities in 2026 beginning in March. These future growth levers include: higher earnings from select joint venture and ABL investments through the senior loan program SLP, and legacy corporate lending as our current dividend payout from those has been lower relative to their run rate earnings potential. Second, higher levels of prepayment-related income and other income as new M&A deal volumes increase. And finally, leveraging our private credit group platform's focus on the core middle market to drive attractive spreads on new investments. Also selectively invest in junior debt investments as our flexible capital in today's market environment can be a valuable tool for middle market borrowers. Taking all of this together with the solid credit performance that we have demonstrated over the years, we believe the company is well positioned to continue driving attractive results for our shareholders. Furthermore, we believe our current stock price valuation offers a compelling relative to our credit fundamentals. At BCSF's current market price as of yesterday's close, our dividend yield, inclusive of our regular and special dividend for Q4, represents a 13% annualized yield. We believe this is an attractive level for investors on both an absolute and relative value basis across the BDC sector. I will now turn the call over to Mike Boyle, our President, to walk through our investment portfolio in greater detail. Mike? Mike Boyle: Thank you, Michael, and good morning, everyone. I'll start with our investment activity for the third quarter and then provide an update in more detail on our portfolio. New investment fundings during the third quarter were $340 million into 101 portfolio companies, including $124 million in 14 new companies, $210 million into 86 existing companies, and $6 million into our SLP. Sales and repayment activity totaled approximately $296 million, resulting in net investment fundings of $44 million quarter over quarter. Our new investment fundings were comprised of 36% to new companies and 64% to existing portfolio companies. First lien senior secured loans continue to comprise the vast majority of our new investments, representing 89% of our new investment fundings. The remaining 11% was comprised of 3% into second lien loans, 1% in subordinated debt, 5% in preferred and common equity, and 2% in our investment vehicles. We remain selective in our underwriting approach and continue to favor middle market-sized companies within the core middle market. While the market environment remains competitive with spread compression continuing in the broader market, we believe Bain Capital remains well positioned to source new opportunities given our platform's breadth, scale, and longevity in the core middle market. As Michael Ewald highlighted earlier, the weighted average spread of our Q3 originations to new companies was approximately 550 basis points. We were also particularly active this quarter with providing add-on capital to existing portfolio companies, which resulted in a weighted average spread across all of our originations in the quarter of 610 basis points over base rates. Our new investments during the quarter continued to favor defensive sectors such as healthcare, pharmaceuticals, aerospace and defense, and wholesale. Turning to the investment portfolio, at the end of the third quarter, the size of our portfolio at fair value was approximately $2.5 billion across a highly diversified set of 195 portfolio companies operating across 31 different industries. Our portfolio primarily consists of investments in first lien senior secured loans, given our focus on downside management and investing at the top of capital structures. As of September 30, 64% of the investment portfolio at fair value was invested in first lien debt, 1% in second lien debt, 4% in subordinated debt, 6% in preferred equity, 9% in equity and other interests, and 16% across our joint ventures, including 9% in the ISLP and 7% in the SLP, both of which have underlying investments primarily consisting of first lien loans. As of 09/30/2025, the weighted average yield on the investment portfolio at amortized cost and fair value was 11.1% and 11.2%, respectively, as compared to 11.4% and 11.4%, respectively, as of 06/30/2025. The decrease in yields was primarily driven by a decrease in reference rates across our portfolio, as 93% of our debt investments bear interest at a floating rate. Moving on to portfolio credit quality trends, credit fundamentals remain healthy. Median net leverage across our borrowers is 4.7 times as of quarter end, down from 4.9 times as of the prior quarter end. Median EBITDA was $46 million, which was relatively unchanged from the prior quarter end. Watchlist investments as a percentage of our overall portfolio have remained stable quarter over quarter as indicated by our internal risk rating scale. These investments include our risk rating three and four investments, which comprised 5% of fair value. Our underlying portfolio companies within this category have also remained stable. We have not seen a large migration of any new names down the credit risk rating scale. Investments on non-accrual represented 1.5% and 0.7% of the total investment portfolio at amortized cost and fair value, respectively, as of September 30. This is compared to 1.7% and 0.6%, respectively, as of June 30. Turning it now to Amit, who will provide a more detailed financial review. Amit Joshi: Thank you, Mike, and good morning, everyone. I'll start the review of our third quarter results with our income statement. Total investment income was $67.2 million for the three months ended 09/30/2025 as compared to $71 million for the three months ended 06/30/2025. The decrease in investment income was primarily driven by a decrease in other income from lower activity levels during the quarter. The quality of our investment income continues to be high as the vast majority of our investment income is driven by contractual cash income across our investments. Interest income and dividend income represented 98% of our total investment income in Q3. Notably, the vast majority of our PIK income, which represents 11% of our total investment income in Q3, is derived from investments that were underwritten with PIK. Only a small portion of our PIK income is related to amended or restructured investments. Total expenses before taxes for the third quarter were $37.2 million as compared to $39.3 million in the second quarter. The decrease in expenses was driven by a lower incentive fee resulting from our three-year look-back on our incentive fee hurdle as well as lower interest and debt fee expenses. Net investment income for the quarter was $29.2 million or $0.45 per share as compared to $30.6 million or $0.47 per share for the prior quarter. During the three months ended 09/30/2025, the company had net realized and unrealized losses of $10.5 million. As Mike highlighted earlier, our net losses this quarter were primarily driven by one of our portfolio company investments and not broad-based across our portfolio. Net income for the three months ended 09/30/2025 was $18.7 million or $0.29 per share. Moving over to our balance sheet, as of September 30, our investment portfolio at fair value totaled $2.5 billion and total assets of $2.7 billion. Total net assets were $1.1 billion as of 09/30/2025. NAV per share was $17.40, a decrease of $0.16 per share from $17.56 at the end of the second quarter. As of September 30, approximately 60% of our outstanding debt was floating rate debt, and 40% was in fixed rate debt. For the three months ended 09/30/2025, the weighted average interest rate on our debt outstanding was 4.8%, as compared to 4.9% as of the prior quarter end. The weighted average maturity across our debt investment was approximately 3.4 years at 09/30/2025. At the end of Q3, our debt to equity ratio was 1.33 times as compared to 1.37 times from the end of Q2. Our net leverage ratio, representing principal debt outstanding less cash and unsettled trade, was 1.23 times at the end of Q3 as compared to 1.2 times at the end of Q2. Liquidity at quarter end was strong, totaling $570 million, including $457 million of undrawn capacity on our revolving credit facility, $86.8 million in cash and cash equivalents, including $26.2 million of restricted cash, and $26.5 million of unsettled trade, net of receivables and payables of investment. With that, I'll turn the call back over to Michael Ewald for closing remarks. Michael Ewald: Thanks, Amit. In closing, we are pleased to deliver another quarter of attractive net investment income and credit fundamentals across our middle market borrower portfolio. Bain Capital Credit brings over twenty-five years of experience investing in the middle market and has demonstrated solid credit quality with low losses and non-accrual rates since our inception. We remain committed to delivering value for our shareholders by providing attractive returns on equity and prudently managing our shareholders' capital. Chloe, please open the line for questions. Operator: Certainly. You may withdraw yourself from the queue at any time by pressing star 2. Again, that is star and 1. And we'll take our first question from Finian O'Shea with Wells Fargo Securities. Your line is open. Finian O'Shea: Hey, everyone. Good morning. Michael, can you talk about to what extent the push for more spreads, leverage, off-balance sheet leverage, etcetera, to what extent that brings on more risk, and the sort of change in, say, expected loss rate on the go forward? Thanks. Michael Ewald: Sure. So I do think running in line with our on-balance sheet leverage ratio between one and one and a quarter is what we continue to focus on doing. And so we don't have a particularly heavy reliance on off-balance sheet leverage. Both of our joint ventures do use leverage. The ISLP is levered about 0.8 times to one, and the SLP is levered slightly more than that but is a smaller position. So I think prudently managing to that on-balance sheet leverage ratio target is one thing that we do focus on, and I think that is a key part of the risk-return equation that we're doing for BCSF. In terms of loss rates going forward, I do think, as we've noted on the call, there are idiosyncratic losses that come across any portfolio. But the fact that we have a very diversified set of companies, almost 200 companies in BCSF, puts us in a position where any individual loss won't drive a meaningful impact on the overall performance of the BDC. So I think that focus on on-balance sheet leverage and then pairing that with diversification is a key part of why we're able to drive the risk-return that we have been delivering in BCSF. Finian O'Shea: That I think is helpful. I just want to follow-up on the aircraft. Looks like a little bit of a mark there this quarter. Correct me if I'm wrong. I'm just seeing what sort of going on if it's airplane values or whatnot. And then the aircraft high level given that's a strength differentiator for Bain. Is this something you could expand, say, in a good asset or 30% bucket friendly way into more of the portfolio or say lever those vehicles more, safely a comment on that. Thanks. Michael Ewald: Sure. So we did have a small write down on some of our aircraft this quarter. But, really, that's just looking to potential exit valuation of some of the aircraft that we do own, and not reflecting a meaningful change in our underwriting thesis there. We do think underwriting hard assets is an important part of what we do and a big differentiator for BCSF. We've done that in aviation. We've also done that through legacy corporate lending, which is an asset-based financial company that we've supported and grown. And so I do think we are out there finding interesting opportunities across the asset-backed market, and we'll continue to have that be a substantial part of the portfolio. I wouldn't expect meaningful growth from here, but I think some stability from that segment adds good diversification, and it's something we'll continue to find new investments in. Finian O'Shea: Okay. Thanks so much. Operator: Thank you, Finian. And once again for your questions, that is. We'll move next to Paul Johnson with KBW. Your line is open. Paul Johnson: Yes, good morning. Thanks for taking my questions. So NII earnings just without the look back would obviously be a little bit lower. It was about 3¢ this quarter. I understand. I mean, it looks like fee and dividend income is also a little bit lighter this quarter just quarter over quarter. But if I kind of do the math on just the incentive fee or essentially the full incentive fee coming back in, that's roughly, like, 60-70 basis points on ROE plus you have roughly about half of your debt stack that's going to have to reprice pretty significantly higher next year. So that's probably, you know, another, you know, call it 50 basis points or so of an ROE hurdle that's just kind of coming in from the incentive fee and refinancing. So I guess the things that you guys kind of identified in terms of what makes you confident about the earnings coverage of the dividend. I mean, do you think that that should be kind of able, I guess, to exceed those items? Amit Joshi: Yes. We do expect that as both Mike highlighted. I think we have different levers to pull from our perspective. And we have baked into account some of the points which you've highlighted about our debt coming for refinancing next year. Of course, we did issue a debt earlier this year. But we totally appreciate that they will be done at a different level, which will put some pressure. But as Mike highlighted earlier, the levers which we have should be able to keep us above our regular dividend in terms of meeting those thresholds. Along with that, as we highlighted, we do have decent cushion from a spillover income perspective too, which is healthy as well. So among all of that, we feel comfortable. Paul Johnson: Got it. Okay. And then, I guess, like, the financing within the joint ventures and the CLO, at this point, do you think there's any potential room to extract any improvement there at this point? Most of those financing arrangements are pretty tapped out. Amit Joshi: We are continuously having discussions with our banking partners. So to your point, I would say yes. As spreads on the asset side have continued to tighten, we have been managing our liabilities as well appropriately. So my short answer would be yes. We are continuously looking at them. As you highlighted, some of them do have lock-in periods from that perspective, but again, as we have continued to grow, we have been having active dialogues. So in some cases, we have already done that. Like, in one of our joint ventures, ISLP, we did refinance the debt at a much tighter spread. So that's, again, something which we'll continue to do as we continue to look at those portfolios. Paul Johnson: Got it. Thanks for that. And then last one for me was just the junior capital opportunities that you mentioned. Is that something that you're seeing now, or is that just something I guess, you know, because you've been able to do that in the past that that's just, I guess, one of the levers that's available if opportunities come through the funnel. Michael Ewald: Yeah. Thanks, Paul. Look, you know, the junior capital bit is part of the private credit group's calling card. It has been for over twenty-five years as well. So, you know, we've got a much larger platform, which has about $20 billion or so of AUM, of which BCSF is $2.5 billion of that. Across that entire platform. Again, junior capital is something that we've done for over twenty-five years, and that's something that we can lean into when appropriate, when there's a need for flexible capital. You know, we're cautious about just taking more risk for the sake of taking more risk. It's more that, in today's market where base rates, though coming down, have stayed elevated, does seem to be an interesting air pocket in some companies' capital structures where you can charge a little bit more without taking some undue risk. Unfortunately, sometimes that does come with PIK income. But it is something that we can find where we can find some pretty interesting opportunities and have done so and continue to do so. Paul Johnson: Okay. Thank you very much. That's all for me. Operator: Thanks, Paul. We'll pause another moment. And it does appear that there are no further questions at this time. I would now like to hand the call back to Michael Ewald for any additional or closing remarks. Michael Ewald: Thanks, Chloe, and thanks again, everyone, for your time and attention today. We certainly appreciate your continued support of BCSF, and look forward to speaking with you again soon. Thanks. Operator: This does conclude today's program. Thank you for your participation. You may disconnect at any time, and have a wonderful afternoon.
Operator: Ladies and gentlemen, good morning, and thank you for your patience. This call will begin shortly. Thank you for your patience, and this call will begin shortly. Greetings. And welcome to the ACCESS Newswire third quarter 2025 earnings conference call. At this time, all participants will follow the formal presentation. If anyone should require operator assistance during the conference today, and please note this conference is being recorded. I will now turn the conference over to your host, Kristin Iacovelli, Vice President of Webcasting. Kristin, the floor is yours. Kristin Iacovelli: Welcome to ACCESS Newswire's third quarter 2025 earnings conference call. My name is Kristin Iacovelli, and I lead the company's Webcast and Events division as the Vice President of Webcasting. I've been with ACCESS for nearly twenty years, including my time with an organization that became part of ACCESS through an acquisition about six years ago. It's been an incredible journey watching the company grow and evolve into what it is today. I'm excited for what's ahead and proud to continue helping some of the world's leading brands and newly public companies share their stories each quarter. But before we begin, I'd like to remind everyone that statements made in this conference call concerning future revenues, results from operations, financial position, market, economic conditions, product releases, partnerships, and any other statements that may be construed as predictions of future performance or events are forward-looking statements. These statements involve known and unknown risks and uncertainties that may cause actual results to differ materially from those expressed or implied by such statements. We will also discuss certain non-GAAP financial measures, which are provided for informational purposes and should be considered in addition to, not as a substitute for, GAAP results. With that said, I'll turn the call over to our Founder and Chief Executive Officer, Brian Balbirnie, and our Chief Financial Officer, Steve Knerr. Brian? Brian Balbirnie: Thank you, Kristin. It's fair to say you, as well as many of us here at ACCESS, have a significant amount of industry experience, but all the credit to you for leading for over twenty years what is probably 50,000 webcasts, with you and your team. Truly amazing. You are a rare breed, and I'm so very grateful for your customer-first passion and how you lead and mentor your team, specifically working over this past weekend for us with one of our new IPO customers who was doing their first earnings call today. Congratulations from me, America, and thank you. With that, good morning, everyone, and thank you for joining us today to review ACCESS Newswire's third quarter 2025 results. As always, Steve and I appreciate you taking the time to be with us today, specifically on this 106th Veterans Day. Our 8-K and 10-Q will follow tomorrow as the SEC is closed on this holiday. Our third quarter results reflect continued progress in our core business and ongoing execution against our strategic priorities. We delivered both sequential and year-over-year revenue growth, meaningful improvement in profitability, and strong operating discipline, all while continuing to invest in our product and platform enhancements that will drive our future growth. Revenue for the quarter came in at $5.7 million, up 2% sequentially and year-over-year from $5.6 million. Adjusted EBITDA increased to $933,000, representing 16% of revenue, up from $546,000 or 10% in the same quarter of last year. Our gross margins held steadily at 75%, consistent with prior year levels, and operating loss improved significantly to $184,000 compared to a loss of $604,000 in 2024. These results reflect the positive impact of our operational realignment earlier this year, our continued focus on cost control, and our accelerating shift to subscription-based revenue. Before I hand the call to Steve, I want to highlight a few metrics that show the health of our business. Prior quarter and year, total active customers grew to 12,445, up slightly from the previous quarter. Subscription customers increased to 972, representing modest sequential growth and continued retention strength. Average recurring revenue per subscribing customer also rose to $11,601, up 14% year-over-year, evidence that our value proposition is resonating and our upselling strategy is working. We're encouraged by the progress but equally focused on the road ahead, continuing to scale efficiently while driving innovation and expanding our share in the market. With that, I'll turn the call over to Steve to walk you through some of the financial results in more detail. Steve? Steve Knerr: Thank you, Brian, and good morning, everyone. Happy Veterans Day to all of our former members of the armed forces. We are extremely grateful for your service and all you've done for our country. As Brian mentioned, Q3 is another quarter of generating increased EBITDA and non-GAAP net income while increasing revenue and lowering operating expenses. I will now discuss some of the details which led to these results. Total revenue for 2025 was $5.7 million, an increase of $84,000 or 1.5% compared to $5.6 million in the same period of 2024. For the first nine months of 2025, total revenue was $16.8 million, a $411,000 or 2% decrease from $17.2 million in the same period of the prior year. The increase in revenue for the quarter was due to an increase in our core press release revenue of 7% due to an increase in volume. For the nine months ended September 30, 2025, press release revenue increased 1%. However, this was more than offset by declines in revenue from our pro webcasting and IR website solutions. We anticipate increases in core press release revenue will lead to higher revenue growth rates in the quarters ahead. Gross margin percentages have remained relatively flat for both the three and nine months ended 09/30/2025, as compared to the prior year, at 75-76%, respectively. Although we have experienced increased distribution costs as we continue to expand our distribution footprint, we have been able to offset this with efficiencies in our operations teams in order to build scale. Gross margin increased $40,000 or 1% and decreased $233,000 or 2% for the three and nine months ended 09/30/2025, respectively, as compared to the same periods of the prior year. Moving to operating loss, we posted an operating loss from continuing operations of $184,000 for 2025 and $1.1 million for the first nine months of 2025, compared to operating losses of $604,000 and $2 million during the same periods of 2024. The decrease in operating loss is a result of lower operating expenses, which decreased $380,000 or 8% and $1.1 million or 7% for the three and nine months ended 09/30/2025, respectively, as we remain committed to developing efficiencies and optimizing our teams. General and administrative expenses decreased $409,000 or 22% for 2025 compared to 2024 due to a reduction in bad debt expense, employee-related expenses, as well as savings from indirect costs associated with the compliance business. For the first nine months of 2025, general and administrative expenses decreased $185,000 or 3% compared to the first nine months of 2024. This is due to the same reasons I just noted, however, it was partially offset by a one-time benefit recorded in 2024 of approximately $340,000 due to the reversal of stock compensation related to the resignation of an executive officer. We will continue to seek opportunities to reduce G&A expenses and are currently negotiating a sublease on our corporate offices, which we anticipate could save us over $300,000 annually. Sales and marketing expenses increased $34,000 or 2% and decreased $924,000 or 16% for the three and nine months ended 09/30/2025 as compared to the same periods of 2024. The decrease for the nine-month period is due to lower headcount throughout the first six months of the year. However, as of the third quarter, the team has been built back to where it was a year ago. Product development expenses have remained consistent for the three and nine months ended 09/30/2025, as compared to the same periods of the prior year. Decreases in costs related to consultants were partially offset by declines in capitalized software. Brian will talk further about some product enhancements coming this quarter and the early part of next year. And as such, we will expect to begin to capitalize more product development expenses related to such enhancements. On a GAAP basis, we reported a loss from continuing operations of $45,000 or $0.01 per diluted share during 2025, compared to a net loss of $870,000 or $0.23 per diluted share during 2024. For the first nine months of 2025, net loss from continuing operations was $1 million or $0.27 per diluted share compared to a net loss of $2.3 million or $0.61 per diluted share in the first nine months of 2024. There was no activity for discontinued operations during 2025 compared to net income of $404,000 or $0.11 per diluted share during 2024. For the first nine months of 2025, net income from discontinued operations was almost $6 million or $1.53 per diluted share compared to $1.7 million or $0.45 per diluted share for the same period of 2024. The increase is primarily a result of the gain on the sale of the compliance business. Looking to some non-GAAP metrics, 2025 EBITDA was $537,000 or 9% of revenue compared to a loss of $212,000 or 4% of revenue for the third quarter of 2024. For the first nine months of 2025, EBITDA was $1 million or 6% of revenue, compared to $70,000 for the first nine months of 2024. Adjusted EBITDA increased to $933,000 or 16% of revenue for 2025 compared to $546,000 or 10% of revenue in 2024. For the first nine months of 2025, adjusted EBITDA more than doubled to $2.3 million or 14% of revenue compared to $961,000 or 6% of revenue for the first nine months of 2024. Non-GAAP net income for 2025 increased $573,000 to $760,000 or $0.20 per diluted share compared to $187,000 or $0.05 per diluted share in 2024. The first nine months of 2025 non-GAAP net income increased to $1.5 million or $0.39 per diluted share compared to a non-GAAP loss of $78,000 or $0.02 per diluted share during the first nine months of 2024. We ended the quarter with $3.3 million of cash on hand. However, this was negatively impacted by cash outflow from operating activities of $582,000 during 2025. This was primarily due to the payment of over $1.1 million in taxes, primarily related to the gain on the sale of the compliance business. Cash generated by operating activities was $1.5 million during 2024, where this includes cash generated from the compliance business. The first nine months of 2025 cash flow generated by operating activities was $300,000 compared to $2.3 million during the first nine months of 2024. Again, the year-to-date amount for 2025 includes over $1.5 million paid in taxes primarily related to the sale of the compliance business. Adjusted free cash flow was negative $418,000 for 2025, compared to $1.4 million for 2024. For the first nine months of 2025, it amounted to $799,000 compared to $1.9 million for the first nine months of 2024. I will now turn it back over to Brian who will provide some updates on the business, customers, subscriptions, and volumes, along with everything else we have planned for the remainder of the year. Brian? Brian Balbirnie: Thank you, Steve. Let me start by saying that the third quarter showed solid execution across the board. Our focus remains on strengthening the core, scaling recurring revenue, and driving product-led growth. But before I speak on our outlook for the remaining part of the year and into next year, I wanted to reflect on the last nine months and what we've done to put the business in the best place for the future. We rebranded the business in January, sold our legacy compliance business in February, thus reducing the debt by 83%, also reducing then our OpEx by 7%. We retooled our entire back-office systems and processes, increased our focus on a subscription-first approach to sales, also increased subscription business to approximately 50% of our revenue, and we've continued to innovate our technology application by introducing AI agents that analyze content in real-time to further our commitments to both misinformation and disinformation. As most of you know, we're a lean business, and in reflection, this is an amazing amount of work to accomplish in nine months, as well as continue to grow minimally and improve operating results. All that said, we know that growth is key to our long-term business, and we are poised to do this in 2026. Customer counts and subscriptions at the beginning of the year were guided to achieve 1,500, and I want to talk about that for a minute. When you consider that when we disposed of the compliance business, we did actually lose 300 subscription customers from that sale. So that puts us in a corrected guided number of approximately 1,200 for our communications go-forward business. Today, we ended Q3 with 972, and we know that this number is aggressive to hit the target. But so long as we see continued ARR improvement and enhanced retention, with overall growth, we're setting ourselves up next year for an explosive year both in ARR and strong subscriber numbers. Here's how we're going to get there. Both in our internal initiatives of what we call trade-up and trade-in over the last couple of quarters we've spoken about. First, trade-up. We have significantly planned product upgrades that include advancements to our monitoring and delivery that will include real-time results from over 30 social media platforms, dimensions, the value and sentiment, and the impact of your brands, as well as connectivity to one of the world's largest social media management platforms that allows users to schedule, publish, and analyze content across multiple social networks from a single dashboard. Combining this at year-end, and into our ACCESS PR platform, we will see a lift in our ARR and provide further value to our customers. Second is the trade-in. As we expand our product offerings, we will benefit from being able to attract a larger total addressable market as enterprise customers and scale-up brands are craving an all-in-one platform that delivers all the tools needed to tell, manage, and monitor their brand. Also, with the advancements of our hashtag kill the report strategy, we are going to be addressing one of the biggest issues in the PR market, and that's the distribution report. The industry is full of implied metrics and results that leave many brands wondering where the actual value is. We think it is time to open this up even more and put the data in the hands of the users by simple prompts that will alert you in real-time. From there, you can build a point-in-time report that delivers that executable document to you. So very soon, we will let the old school distribution report rest in peace. We have also been busy this past quarter building a vertical we believe can be a contributor to the long-term future of our business. Adding this in the third quarter, we call it the EDU program. A class curriculum component of our ACCESS PR platform, where students and academics can use our PR writing platform, media database, monitoring, and pitching tool in a class real-life simulation at no cost. Our Get Back to the Next Generation enhances the skill development with leading applications that will prepare them for the workforce, understand the storytelling process, and improve what ACCESS can do for them in their careers. We look forward to these students graduating and taking the ACCESS PR platform with them in their first career job. We were awarded something that we feel very special about, and it's called the Bateman's study. And I want to read a quote from this press release. "As one of the most rewarding and challenging programs PRSSA offers, the Bateman allows students to gain hands-on experience with real clients while sharpening their research, strategy, and execution skills," said Janine Garcia, chief programs officer at PRSA. So what we'll see is 100 colleges and thousands of students that will be challenging their undergraduate public relations students across the country to create comprehensive campaigns for a real-world client. Operator: Us. Brian Balbirnie: This year's participating teams will develop strategic and creative solutions designed to build awareness and engagement for ACCESS Newswire, with a focus on showcasing how the company continues to support and elevate the communications industry. We look forward to judging the competition and early next year announcing the winners and results of that program. Back to the remaining part of this year and looking forward, revenue trends and ARR growth, sequential revenue growth, and improved profitability show that our strategy is working. ARR continues to rise, and we expand our subscription base and enhance the average value per customer. We expect to see continued improvement throughout the rest of the year, driving new product releases and deeper customer engagement. Our ARR per employee, one of our key internal performance metrics, continues to trend upwards. Operational efficiencies, automation, and the divestiture of our compliance business have allowed us to generate more recurring revenue per full-time employee. This metric demonstrates the scalability of our model and positions us well to meet our long-term profitability goals. Subscriptions and platform expansion, we're on track with our goals of transitioning the business to a majority subscription model. The number of subscription customers increased again this quarter, and the average ARR per subscriber now exceeds $11,650, a strong indicator of product adoption and retention. Focus remains on customer stickiness, ensuring that as we grow, our customers stay with us longer and adopt more of our platform capabilities. We are also advancing our AI-driven automation initiatives that began earlier this year. Our internal editorial validation system is now fully deployed, saving approximately 5% of the editorial time per release. By the end of this year, we'll roll out our customer-facing version, which is expected to further reduce our editorial efforts by an additional 5% and enhance content quality and consistency. Additionally, we remain on track to launch key social media integrations with leading management platforms before the end of this year, expanding how customers can distribute and measure their news across channels in real-time. And lastly, like I just mentioned earlier, the hashtag killed the report is on track to offer a robust agentic agent AI-based real-time prompting and alerting system to our customers. So to summarize, we are executing against the plan and achieving measurable improvement each quarter. Our ARR per employee and per subscriber continues to rise. Our operational expenses remain well managed, supporting long-term margin expansion. And our innovation, particularly around automation and integrated reporting, will drive our future growth and differentiation. Looking ahead for the remaining part of the quarter and into next year, our focus is very clear. Continue expanding subscription revenue and recurring ARR, drive gross margin efficiency while maintaining quality, deliver new product capabilities that enhance the customer experience, preserve cost discipline while supporting our growth initiatives. We expect continued sequential improvement in both revenue and adjusted EBITDA in the fourth quarter. ACCESS is becoming a stronger, more predictable, and more profitable business. We have said we would do this, and we are. Now it's time to grow the top line in 2026 and beyond. With that, I'll turn the call over to the operator for the question and answer session. Operator: Thank you. At this time, we will be conducting our question and answer session. A confirmation tone will indicate your line is in the question queue. And you may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up this before pressing the star key. One moment please while we poll for questions. Thank you. Our first question is coming from Jacob Stephan with Lake Street Capital. Your line is live. Jacob Stephan: Hey. Good morning, guys. Congrats on a nice quarter here. First, to start off, I just want to get some additional color on, you know, the nice sequential growth we saw in subscription ARR. I think, you know, you guys had said that, you know, previously, contracts were coming on at, you know, about $14,000. That still the case, or has that changed at all? Brian Balbirnie: No. Yeah. I think the end of Q3, we were about $13,000 and change. So we're just slightly off Q2's numbers. But we're still trending in the right direction overall when we look at total ARR. Jacob Stephan: Okay. And so just to kind of contrast your comments here, I you know, you kind of said that 1,200 for, you know, subscription customers was an aggressive goal for this year. But did I hear you correct? That's where you expect to be next year at this point? Is that 1,219? Brian Balbirnie: Yeah. No. That's a good point. Right? And what we were talking about in our prepared remarks last year when we guided to the 1,500 number, as I said earlier, we were not giving way for the number of compliance subscriptions. And so we do retract those to kind of restate the numbers, it would ultimately look like about approximately 1,200 is what the target would be. We feel like we're going to be slightly short of that 1,200 number. Although, we feel like our retention and our average ARR is going to continue to climb. And so long as we see those numbers, we're not concerned about the business seeing that 1,200 number by the end of the year. But I'd expect that in the next year, this time next year, you're going to be well north of 1,500 to 1,600 subscription customers on our focus communications platform. So not 1,200, but higher than those numbers. Jacob Stephan: Okay. That's helpful. Then maybe just touching on gross margin a little bit, you know, it did come in below, you know, 75%. A little softer in the quarter then. I guess, we had anticipated. There anything one-time in the quarter that, you know, impacted that? Or maybe how do you think about it going forward? Steve Knerr: Yeah. I think, Jacob, we did deliver gross margins at 75% for Q3. And I think we'll see some expansion there. I think what's important to point out, and I think, Steve, called it out in some of his prepared remarks, is that we've incurred additional distribution costs and other infrastructure costs to scale our operations. Even with that, we've still been able to maintain our gross margin. And so evidence of our commitment to do that is what we've talked about in the last couple quarters. About using some internal AI automations to help our editors be more efficient. And we're saving that time there with them, which is also helping us. So I feel confident that gross margins are kind of at a bottom-end level about the 75%. And are going to climb next year. Obviously, what's important to that is scale. Right? And we see the industry making a lot of changes in ownership, the industry making a lot of changes in volume. LLMs are now coming out saying that PR and blog content are one of the most important things that companies can have so that they're indexed and thought about from AEO and GEO. Kind of perspectives of queries on LLMs and searches. So we expect to see growth in the news industry next year by volume. And so that our top line grows, we'll see gross margins also grow. But, yes, Q3 did end up at seventy-five. Jacob Stephan: Okay. Yeah. And I'm certainly not suggesting that, you know, 75% gross margins is, you know, short or not good, but yeah. Maybe just one last one for me then. As you kind of look at 2026 and, you know, how you think about the overall market, what I guess, maybe if you can group it into, you know, like, IPO candidates, maybe, you know, existing public companies, and maybe even, like, existing customers for add-on sales. How do you expect kind of the three buckets? Where do you expect the majority of the growth to come from? Brian Balbirnie: Yeah. And we're using these words externally as well as internally in our trade-up, trade-in, trade-up strategy. Yeah. And when we think about the trade-up, we're doing really good at large enterprise brands coming in, subscribing to part of our platform, and expanding quickly. And if I just look back over the last, call it, year, almost every one of them has come to us to buy an investor relations platform or an earnings call platform subscription or a PR platform, and it has bought the other two over the period. In my opening remarks, we talked about a company called Fermi America. They bought everything. They're a fantastic organization. It's just a new IPO. So we get our share of that space. And we're doing well there. And so the example of Fermi really is probably a trade-in. Right? They were looking at other options. They had Nasdaq subsidy, to be honest with you. They could've gone but they chose the best of breed, and that was us to deliver on what they're looking for. So we'll get a small percentage of the IPO market as we always have. We're continuing to get a larger percentage of the enterprise business, which is great for us. To be honest, the rebrand of our business this year has made that a tremendous success for us in winning those customers. But by vast majority, because we've kind of looked at the market longer term, we need to be fueling growth underneath to be able to drive both kind of these scale-up new brands as well as the enterprise brands. And so kind of agnostic ourselves about public and private, we really want to look at where are the bigger opportunities for us to scale customer growth and scale subscription growth. And we've got a lot of plans in the works for next year that we'll talk about in our year-end call. Some of the things that we've got done and signed that will be released in January that we'll wait till then to talk about. That's going to give us a significant opportunity for growth coming into next year and beyond. But we still feel confident that we're a viable option and a strong leader in the enterprise space and a strong leader in the IPO space. I think we probably had more net wins in our PR, IR platforms than anyone else in the market in this last quarter. So we feel good about that. Jacob Stephan: Awesome. Very helpful, guys. Nice work. Operator: Thanks, Jacob. Thank you. Once again, ladies and gentlemen, if you have any questions or comments, please indicate so now by pressing star 1 on your telephone keypad. Okay. We currently have no further questions in the queue at this time. One moment. Apologies. We do have had a late question come in from Luke Horton with Northland Capital Markets. Your line is live. Luke Horton: Yeah. Hey, guys. Sorry about that. I thought I was in the queue earlier, but congrats on the quarter. Brian, could you just talk a little bit about industry volumes across the press release industry, kind of how that trended for the quarter and then what you've seen so far here in October and into November? Brian Balbirnie: Yeah. That's a great question. And so this may take me a few minutes to answer. And so as I begin, you know, kind of the response to you, Luke, I'm going to pull something up. Because I want to be sure that I'm being very articulate for our audience and our shareholders to understand. For the better part of the last eight years, we have as a business, have gone from no percentage of market to 20% of market in news volumes. And when we used to obtain research independently in the market that a firm no longer does, it indicated that the industry was growing at about a 4 to 6% CAGR over the last five years absent of this year. And so when we looked back at the last two years, and this goes to kind of the four main news wires in the market, us being one of them. We saw the largest, I'm going to leave their names out of this just to be fair to them. The largest news provider dropped market share from 34% to 27% in this, you know, mid-2023 to, you know, Q3 2025. Another one dropped from 32 to 26. And in the same time, volumes in the market went from 8% to almost 20% for us. So we're seeing the industry slow down in their contribution to market share. And we're continuing to grow. And by estimates, when we look at the year-to-date, we're continuing to see the same trend. We grew a couple percent. Everybody shrunk a couple of percent. And so that is the historical viewpoint. And so that's good for us. If you're outpacing the industry, that's great. But to be fair, we've got to get outside of the industry to drive growth. Whereas we feel that the rest of the folks in our industry are not doing, they're doing the same thing over and over again, and we've got a clear strategy for next year on what we're going to do. To address that. And that's adding some of the components we talked about. The social change in the reporting metrics and being very dynamic in real-time. There. But lastly, the other part of it is I think the hope for the industry as a whole and will benefit significantly from this is what AI is doing to content that needs to be run through LLMs. And they're using it for brand credibility, they're using it for industry knowledge and research. And the two fundamental points that every LLM is saying is press releases and blog content are the two driving factors. So we spent a good amount of time in what the new SEO, PPC world is calling GEO and AEO. To index releases that are being contributed, and we're one of the top newswires now contributing content to these platforms for all of our customers. And so we think that's going to lead to more volume in the industry, but it also gives us the competitive advantage to push ahead faster than everybody because folks are going to rely upon us for that AI query content. So hopefully, Luke, that helps with a lot of data. Happy to unpack some of it if you'd like. Luke Horton: No. For sure. I appreciate the perspective there and kind of the background on how that's trended over the last couple of years. You guys did mention some cost savings with the sublease of a corporate office. Potentially a $300,000 a year in cost savings. Are there any more kind of cost synergies throughout the business? Or any more costs that you're kind of looking to right-size here now that you've sold the compliance business and rebranded under the ACCESS Newswire brand? Just how are you thinking about the cost structure now versus maybe a year ago? Brian Balbirnie: Yeah. I think we've done a really good job in the last six to nine months of pulling down the OpEx. As we said, we would the lease was never modeled into our assumptions of future cost savings because you just don't know what you don't know on commercial real estate. I think we're really there now to enter into the sublet here beginning in January. So you'll see that as this mentioned, the $300,000 in annual savings that will come over the next two years and at least end, I think, at the 2027. Give or take a month at the end there. We may see some other small and consequential savings to be fair. A lot of it coming from our infrastructure as it relates to the delivery of our applications. Consolidating into different platforms and cloud-based systems that we may see some benefactor. Our webcast platforms went through significant upgrades over the past quarter or so. It's also yielding some savings that we'll see. You know, I don't want to give a percentage for guidance, but I'd say you're probably going to see another, you know, $30,000 to $50,000 a quarter in additional savings. But I think, again, to us, it's such a nominal amount. I'd rather reinvest that for growth than message that we're going to continue to drive down OpEx. We've got to deliver on our platform. We have to deliver on a customer-first approach and continue to be that marquee provider for our customers. And although generating cash is a beautiful thing, we need to grow. And I think that's the most important thing for us. Luke Horton: Got it. Awesome. And then could you also just kind of talk about how has the marketing strategy changed since the sale of compliance and the rebranding either between just kind of the sales-led growth or product-led growth here? As of late, I guess. Brian Balbirnie: Yeah. It's a consolidated mess. And we struggled for a couple of years prior to rebranding being the public company company. And that's an honorable thing. We started our business there, and we'll never forget what Issuer Direct was able to afford us. To get to where we are today. But as we look at our client numbers, the majority of our customers for the better part of the last five years have been private enterprise. And it is difficult to go into them underlying contracts with Issuer Direct, and ACCESS Wire and Newswire and Direct Transfer and all these other names that we had we needed to slim down the business or, I guess, the basketball term is, you know, go small to get big. Right? And so we had to do this. We wanted to do this for a couple of years. A lot of our shareholders knew that. So today, our teams go to market as a consolidated business unit that's focused on communications, brand building, and storytelling, and monitoring under the ACCESS name. And it's a cleaner story to tell. It's an easier product solution to sell. It has not disrupted our public company customers. We haven't lost public company customers as a result of doing this. Our brand is stronger than ever. When we did market research before rebrand and post rebrand, we generate more traffic to our platforms. We generate more traffic to our customers' news articles. We generate more engagement than we ever have, and eighteen years prior to doing this. So the rebrand has been a very good thing for our business. It has matured us significantly and the external view of who we are. And what we do. Strategically, ACCESS Newswire is the name, and probably over the next year, people will know us as ACCESS. And that is going to be a deliberate attempt to what we're trying to accomplish here from our public relations and investor relations platform. So to be fair, we couldn't be happier about it. And continue to push the theme that our marketing department has come up with of, you know, we love you more and we're going to service our customers regardless of how much AI is in the industry. It's always a human touch, we're going to do that. Luke Horton: Got it. Awesome. Well, really appreciate it, Brian. Thanks for all the color there, and congrats on a nice quarter, guys. Brian Balbirnie: Thanks, Luke. Operator: Thank you. As we have no further questions in queue at this time, I would like to turn the call back over to Mr. Balbirnie for any closing remarks. Brian Balbirnie: Ali, thank you. Smashing job as always, sir. Thank you again to our shareholders and everyone else who joined the call today to listen to us talk about the progress we're making here in 2025 and where we're headed into the end of the year and into next year. We appreciate our shareholders, our partners, our customers, and their continued trust and support, and we look forward to updating you again next quarter. Have a good Veterans Day. Thank you, everybody. Operator: Thank you. Ladies and gentlemen, this does conclude today's call. You may disconnect your lines at this time, and we thank you for your participation. Thanks, Alan. See you.
Operator: Good day, and thank you for standing by. Welcome to the Solesence, Inc. Common Stock third quarter 2025 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 participate, you will need to press star 11 on your telephone. You will then hear a message advising your hand is raised. To withdraw your question, simply press star 11 again. We ask that you please keep your questions to one and requeue if needed. Please note this conference is being recorded. During this call, management will make statements that include forward-looking statements within the meaning of the federal securities laws which are pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. This conference call may contain statements to reflect the company's current beliefs and a number of important factors could cause actual results for future periods to differ materially from those stated on this call. These important factors include, without limitation, a decision of the customer to cancel purchase order or supplies, agreement demand for any of the company's personal care ingredients, advanced materials, and formulated products, changes in development and distribution relationships, the impact of competitive products and technology, possible disruption in commercial activities occasioned by public health issues, terrorist activity, and armed conflict, and other risks indicated in the company's filings with the Securities and Exchange Commission. Except as required by federal securities laws, the company undertakes no obligation to update or revise these forward-looking statements to reflect new events, uncertainties, and other contingencies. I now hand the conference over to Kevin Carrington, President and Chief Executive Officer. Please go ahead, sir. Kevin Carrington: Thank you, operator. And thank you to all of our investors, teammates, and friends joining us today. We have a lot to cover, so we appreciate your time, patience, and attention. Today is a meaningful moment in the history of Solesence, Inc. Common Stock. This is my first opportunity to speak with you since stepping into the role of President and Chief Executive Officer. I am truly honored to take on this responsibility and energized by the incredible talent of our team, and the strong opportunities ahead to continue growing profitably with our brand partners. It is also a significant moment for another reason. Today marks Jess Jankowski's final earnings call as a member of the Solesence leadership team. Many of you know that Jess and I began this journey together in 2012 when he brought me in to help chart a new path forward. The conversations we had during that interview process about the business from a materials company into a product-focused organization became the foundation of what Solesence, Inc. Common Stock is today. Jess has been an exceptional partner to me and to all of us, working tirelessly to ensure we had the financial strength to grow, innovate, and establish ourselves as a leader in beauty innovation. With that, I'd like to turn it over to Jess for a few remarks. Jess? Jess Jankowski: Thanks, Kevin. Since this will be my final earnings call, I'd like to briefly touch on my time at Solesence, Inc. Common Stock and why now is the right time for Kevin to lead the company going forward. Over the past decade, Solesence, Inc. Common Stock has pioneered the skin health and mineral-based beauty industry, establishing more than 90 globally issued patents across four technology platforms. By collaborating with our brand partners, the use of mineral-based active ingredients in beauty products has become more widespread. Now we're seeing more and more brands infuse their products with SPF technology. We've grown at a CAGR of greater than 7x as compared to our addressable market in the skincare, color cosmetics, and sun care cosmetics areas. We have won eight awards for product and technology innovation so far and are sure to win more. Now we're the industry leader in this space. As I pass the torch to Kevin, we believe we can expand on this position for several reasons. First, the complexity and difficult logistics that go into creating these types of products mean that our industry has substantial barriers to entry that limit the number of potential competitors. Second, we possess a unique mix of expertise, best-in-class technology, and manufacturing capabilities that very few can match. Third, Solesence, Inc. Common Stock will maintain the same relentless commitment to scientific excellence and innovation that has always driven us. As I've reflected on my time here, I couldn't be more gratified by what we've accomplished. The transformation of Solesence, Inc. Common Stock is a testament to the hard work and dedication of our team. I'm grateful for having the opportunity to work alongside so many talented individuals. It has been no less than a privilege. This includes Kevin, with whom I've worked closely for over a decade. With his extensive industry experience, deep expertise, and vision, I'm confident that he is the right person to lead Solesence, Inc. Common Stock into this next exciting era of growth. I'll now pass the call to Kevin, who will provide a summary of the quarter as well as the vision and outlook for the company. Kevin? Kevin Carrington: Thank you, Jess, for your partnership. And, again, congratulations. Turning now to our work today. I've been honored to be in leadership positions with Solesence, Inc. Common Stock for over a decade, including leading the founding and development of our core consumer beauty, health, and wellness business, which has grown into the company we are today. While that journey and the accomplishments Jess covered have all been important achievements, and we should feel rewarded, our entire organization knows we have much work ahead of us. As evidenced by our third quarter results, 2025 represents the first quarter in almost two years where we did not have a year-over-year revenue increase. Admittedly, Q3 2024 was a record quarter for our company in both revenue and profitability and represented the level of profitability and performance we expect. So the comparison was going to be difficult. However, we remain confident in our ability both on a near-term and a longer-term basis to continue to grow at a multiple of the industry's growth rate and remain highly profitable while doing so. Our confidence is reinforced by the growth plans of our strategic brand partners. Without exception, each of them is expecting to outperform the market in the same manner as they have over the previous two years. Our products are important drivers for these companies' revenues, typically representing 30 to 60% of their business volume. So their success is our success. These brands are winning in the key retail segments where consumers want to buy beauty products, specifically at specialty beauty retailers and through TikTok and Amazon. Revenue growth combined with best-in-class profitability comes from the combination of the changes we've made in our leadership and our organization's structure. We believe three factors have hindered our ability to generate growth. These are, one, product design, two, labor efficiency, and three, inventory control. I'll now touch on each of these areas in greater detail and how we addressed them in our recent changes. First, product design is related to having exacting specifications, not just in terms of what the product is made from, but also how it will be manufactured and how it will perform. For the Solesence, Inc. Common Stock business, this is more complex because unlike many other beauty products, the products produced by Solesence, Inc. Common Stock are considered over-the-counter drug products. They must meet product performance criteria similar to what is required of prescription drug products while ensuring that the product delivers a joyful experience such that the consumer will buy it again and again. We must be able to make it consistently at a high volume at a cost that's 20% or less of the retail value. Our ability to deliver on these criteria gives us a sustainable competitive advantage, which protects our business position and is a critical factor in achieving profitability standards we expect. Every day, on millions of units annually, we meet this standard. However, when we have underperformed in this area, it was a significant factor in our results. We reorganized the team responsible for ensuring product integrity during the end of Q2 and all of Q3, creating a newly unified group accountable for product design, from the initiation of product concept all the way to product shipment. This unified group, the innovation and product integrity group, is a combination of the R&D and quality departments. Through the unification of this group under one leader, we have already seen improvements in both clarity of product requirements and control to ensure that products are made right the first time. The new leader, Yona Divorce Act, who is just appointed as Vice President of Innovation and Product Integrity, is also being recognized by the renowned Cosmetic Executive Women's Group, or CEW as they are more commonly known, as a 2025 Innovator Honoree. This honor reflects not just our confidence in Yoana's ability to help us drive more profitable growth, but also the industry's awareness of her exceptional capabilities. Moving on to the next area of improvement, labor efficiency. This issue has long impacted our direct profit performance. To be clear, this is not just direct labor, but also is impacted by our maintenance and engineering efforts that drive both uptime and throughput. As some of you know, we began investments in this area almost two years ago. These investments have included automating our processes and implementing overall equipment effectiveness, or OEE, which is a key metric for managing our manufacturing processes. While these investments initially enabled a significant improvement in capacity, it was only during Q3 that we started to see the positive impact on labor efficiency. Those improvements enabled our company to reorganize its operating schedule, virtually eliminating overtime expenses while maintaining improved operating capacity and flexibility. These improvements were reflected in a reduction of the average labor per unit by close to 25% on a year-over-year basis and an increase in our OEE performance by 10 percentage points. We further strengthened this area by reorganizing the reporting structure, which was partly enabled by consolidating our three facilities down to two. The consolidation alone will yield a mid-six-figure reduction in annual operating costs. We further expect that the labor efficiency savings will contribute to a similar high six-figure to low seven-figure reduction in direct labor expense on an annual basis as we move forward. Finally, and perhaps most impactful, is our inventory control. The change in scope and scale of our customer base has brought a change in the scope and scale of both the number of raw materials and components that we purchase and the number of products that we produce. To put it in perspective, just six years ago, we generated 80% of our revenue, $8 million, from 40 products built around a dozen raw materials. In fact, 60% of our revenue resulted from just five products built around three raw materials. Fast forward to today, 80% of our revenue, approximately $50 million, is generated by over 300 products and well over 1,500 different raw materials and components. It's easy to see how this change, when not effectively managed, can negatively impact our ability to realize the full profit potential of our company. I'll now briefly describe how some of the initial changes that have been put in place will help drive profitable growth. The change we made in manufacturing leadership now allows the most senior leaders in operations to be focused on addressing our supply chain challenges. Some of the first work that has occurred here is to increase material surveillance and control, resulting in almost daily tracking of variances that could occur through materials handling, consumption of materials and batch making, or spillage and waste. By increasing surveillance, we're now able to capture the significant issues that can contribute to negative income and put in more impactful corrective action. There is still much more to be done, but I'm confident in the ability of our team whose leadership is now comprised of people with direct experience in the beauty and personal care industry. They come from organizations that are some of the largest and best operated in the business. I'll now turn the call over to Laura, who will provide a recap of our financial performance. Laura? Laura: Thank you, Kevin. Good morning, everyone. I'm pleased to be joining you on today's call. Revenue for the third quarter was $14.5 million, a decrease of 14% year-over-year amidst a general softening in the industry reflecting the shift in consumer behaviors. As Kevin mentioned earlier, last year's third quarter was a record quarter, creating a challenging comparable as our customers adjusted their inventory levels as compared to the third quarter of 2024. In the third quarter, our shift in open orders, which represent the total value of customer orders that we've either already shipped or are still awaiting fulfillment in 2025, is currently $64 million compared to $34 million in the third quarter of last year and $60 million in 2025. Gross profit in the third quarter was $3.4 million compared to $6.1 million in 2024. Gross margin was 23% compared to 36% for the same period last year. The decrease was related to manufacturing operating inefficiencies and facilities improvements. Operating expenses in the third quarter totaled $4.2 million compared to $2.9 million in 2024. The increase is due to increased employee-related costs, legal costs, allowance for credit loss, severance costs, and costs related to our uplifting to Nasdaq in 2025. During the third quarter, other income included an adjusted payment of $1.2 million relating to funds received from the US Department of the Treasury under the employee retention credit program, along with approximately $300,000 in interest received related to the delayed payment. The ERC is a refundable payroll tax credit made available under the CARES Act and subsequent legislation. Interest income included interest paid relating to this amount of about $200,000 in the third quarter of 2025. The ERC payments and related interest did not apply to 2024. Solesence, Inc. Common Stock reported a net loss of $1.1 million compared to net income of $3 million in 2024. Adjusted EBITDA for the quarter was a loss of $435,000 compared to adjusted EBITDA of $3.6 million for the third quarter of last year. As Kevin noted, we made significant improvements to our business operations that will enable us to grow and deliver the highest quality products to our brand partners more efficiently and from a greater cost position. That concludes our opening remarks. Operator, you may open the call for questions. Operator: Thank you. And as a reminder, to ask a question, simply press 11 to get in the queue and wait for your name to be announced. To withdraw your question, press 11 again. One moment for our first question. And it comes from the line of Wayne Rohn. Please go ahead. Wayne Rohn: Congratulations, Jess. I hope your retirement goes well. I probably butt into you at Wrigley Field. But good luck, Kooga. Wayne. Oh, yeah. You won't butt into me at Wrigley Field. I'm very disappointed. This was supposed to be a better year. Are we making the same mistakes over and over and over again? And where do we get some optimism for the sales part bothers me a lot. What's the matter with that? And just mistakes we've made is not very comforting, and I'd like your response, Kevin. Kevin Carrington: Good morning, Wayne. You might bump into me at Wrigley Field, by the way. But thank you for your question. And we do take all of these very seriously. So let's start with the first question, which was are we making some of the mistakes? Same mistakes over and over? I can tell you, Wayne, that there are some areas that we have had a longer time to repair. Which is why we made some of the changes that we've made to the organization over the last quarter. So specifically around inventory management, that is an area that has taken us more time than we would like to repair. But with the changes that we've made, we're confident that we're on the right path to fixing that issue. Your other question was related to the revenue. And what's going on there. I think first, let's make sure we're clear, and we didn't talk about it. In our prepared remarks. But on a full-year basis, we're up $10 million over the prior year. So the trend for growth is strong. One of the things that has changed and is really related in part to consumer sentiment and our brand partners' desire to be conservative relative to their inventory levels is that they're not giving us the same lead time that they have in the past. And they're not stocking inventories at the same level that they had last year. So that had a material impact on a year-over-year basis between what we saw in 2024 in terms of revenue and what we saw in 2025. Rest assured again that we have and continue to expect to grow at the top line. So that is something that we're confident in. The final point is to make sure we're clear that, yes, we are taking the profit growth very seriously. It is an important part of the planning that we've done. And the adjustments that we've made in terms of structure, and the changes that we've made in terms of some of the other processes that we mentioned during our prepared remarks. Wayne Rohn: Thank you. And how come you waited so long to put out the third quarter? Because normally, you do first week. You know, get Kevin Carrington: Another good question, Wayne. You've got a new leadership team that wanted to make sure we did it right the first time. Wayne Rohn: Is the goal to me. Alright. Kevin Carrington: I'm sorry. Wayne Rohn: I said, there you go. That's a good idea. Thank you. So Kevin Carrington: that's it. That was the reason. Wayne Rohn: Thank you. And let's do look for do we have possibilities of greater sales reports? Kevin Carrington: For the fourth quarter this year. Our expectation on a full-year basis is that we will see an improvement over the prior year. So, yes, I think that in total, you'll see a positive revenue versus 2024. So we are staying on that trend, Wayne. So yes. Wayne Rohn: Thank you. Operator: Thank you. Our next question comes from the line of Ronald Richards. Please proceed. Ronald Richards: Can you hear me? Operator: Yes, sir. We can hear you. Please proceed. Hi, Ron. Hi. Ronald Richards: You know, I got a few questions. But I guess I'll start off with a really simple one. You know? It was a really simple mistake that led to your big lawsuit a couple of years ago. In a contract. Where there was one little sentence that somebody missed. Then this last quarter or two quarters ago, you had this $2 million error because of a screw-up on a new order. And this quarter, you know, it's really really simple. And you might think it isn't meaningful, but the announcement for this conference call referred to Central Daylight Time and Eastern Daylight Time. You know, all these things have a common point to them. Just the simple things, details are over. Is this gonna improve? Or are we gonna continue having a series of simple mistakes that cause the problems we're having? Kevin Carrington: Thanks, Ron, for the question. First, your first statement related to the lawsuit, I'm presuming you're referencing the BASF lawsuit. You know, we'll agree to disagree on that. That wasn't really driven by a contractual mistake or error. In fact, it was a decision. Let's just put it this way. The simplest way for us to put it is just commercial points of difference. And we did settle that in an amicable way with BASF and that has been an important part of quite honestly, our ability to continue to set scale the Solesence, Inc. Common Stock business. On the other two points, well taken. We certainly know that the details matter. It's an important part of our business. It's one of the things that we mentioned in our prepared remarks around product design. And making sure that we have the exacting specifications clearly understood and stated. So thank you for that comment. We are taking those things to heart, and it is an important part of what we're doing to improve the profit performance of the company. Operator: Our next question comes from the line of Stefano Bollis. Please proceed. Stefano Bollis: Hello. Good morning, and congratulations, Kevin, for your new role. And thanks to Jess for having sailed the vessel during all these years up to this point. And what is going? Gonna Okay. My question is, the gross margin for this quarter is this the fact that it's not around or slightly above the 30% Is this because of this reorganization work that you mentioned initially? Or was there something else? Kevin Carrington: Yeah. Your question related to gross margin is just to be clear, Stefano, and hopefully, you can respond to this. You're asking is the cause of the lower gross margin, is that what you're referring to? Stefano Bollis: Yeah. Kevin Carrington: Okay. Yes. Yeah. So in part, the lower gross margins were related to the expenses with the consolidation that weren't able to be capitalized. But they were also related to the transition that we mentioned. So we have good performance on a year-over-year basis at the direct labor level. Where we actually decrease direct labor pretty significantly on a per-unit basis. And in total. But we are, as that transition was occurring to the newer structures, still had higher indirect expenses. That we are addressing as we go forward. So that was one of the big drags on the indirect or, excuse me, on the gross margin. And I think, you know, Laura had mentioned some of the benefits of the changes that we're making. Laura, would you wanna comment at all on us? Laura: You know, in obviously, the short time I have been with the company, we have taken seriously the indirect cost and I feel very confident that we are making the changes and having the discussions that are necessary to improve our overall indirect costs. And I expect to see that improvement within the next few quarters. And actually sooner than that. Kevin Carrington: Thank you. Operator: Our next question comes from the line of Tony Rubin. Please proceed. Tony Rubin: Hi, good morning. This is a couple of questions. But following up on the first gentleman's question who asked about your sales and margin forecasting, you just said sales will be up in 2025. They're through the first three quarters already up $10 million, and as we're basically halfway through Q4, can you shed any light on what sales for the fourth quarter will look like? And what margins will look like as well as give us an outlook in some general sense as to 2026. Kevin Carrington: Good morning, Tony. So, yes, you're correct. The sales are up $10 million on a nine-month basis. As Laura indicated on a shift in open, and you remember that metric that we've been using, we're projecting around $64 million for the year, essentially. Which would put us up roughly $12 million on a full-year basis versus the prior year. We are working through the changes that we mentioned, and so we're very confident in improving the direct margin levels on a continuing basis. That work is well in hand and is yielding the results that we expected. The indirect margins or, excuse me, indirect costs, I should say, that are contributing to the gross profit level are going to be, as Laura mentioned, work over the next couple of quarters to improve that. So, as we improve that over the next couple of quarters, we'd expect the margins to normalize back to levels that we have seen say, a year ago. This quarter. So do anticipate doing that as we go through the next couple of quarters or so. In terms of a projection on 2026, we are because of the uncertainty that we're seeing from the marketplace and consumer sentiment, we're going to refrain from giving too much guidance there. Except to say that two things. One, we know that in general, most consumer markets are slowing down, and beauty is no exception to that. It is slowing. However, we're still confident that our growth rate will be a multiple of the industry's growth rate. So, we'll refrain from saying too much more than that at this point. Over the next coming weeks. We do plan on presenting our first investor presentation, Tony. And then that will give more guidance in terms of our expectations, not just for '26, but for the next few years beyond that. As well? Operator: Our next question comes from Stefano Bollis. Please proceed. Stefano Bollis: On indirect cost. So just for future modeling, the level the run rate of the SG&A expenses is it going to stay on this $3 million that we have seen in the last two quarters? Or this is due to those one-off impacts that you mentioned, the uplisting and some credit losses allowances and so on. Kevin Carrington: Yeah. Could you repeat your question? We had a hard time hearing you at the beginning of your question. Stefano Bollis: Okay. The question is on the expected run rate of the SG&A expenses that from historical levels were at $2 million or below $2 million. And right. Last and this quarter, they are $3 million. Is this the new level or there was a lot of components that are one-off? Kevin Carrington: Yeah. I would say for planning purposes, we're operating in that zone on a going forward basis. I think that some additions to our leadership team are part of that, obviously. To help strengthen the organization and to improve our overall performance. We've obviously added Laura. We've also added a VP of HR. There's been some other support functions added in there as well. And, you know, generally, for the business as we're operating right now, we have a little higher legal fees than we've had historically. But it is something that we've given the nature of our business, we've gotta at least plan for that over the next few quarters. Jess Jankowski: There was also, Stefano, though, a significant hit for me. There was a $400,000. You have to take the expenses for severance at one time. So that will not repeat going forward. So you know, right there, that's 15% of that total is not coming back. And we also think that generally speaking, we are gonna have all of our doubtful accounts run through SG&A, not COGS. So we believe we are gonna have better experience in that going forward. So that's gonna mitigate some of the investments we're making on the other side. To do that. Operator: Our next question comes from Tony Rubin. Please proceed. Tony Rubin: Yeah. Hello. I just wanted to follow-up to your quest or to your response, Kevin, on margins. You indicated that you thought margins would get back to a level of a year ago. What is your expected or target 2026 margins? And given all these spends on capital, efficiency, measures, etcetera, etcetera, you still I think, no matter what number you say, are gonna be short of your COVID-era margins where you were you know, in that 40% range. And is that something that we will ever see again? As you mentioned, the company is in your words, or to paraphrase, a leader in making these you know, complex formulations that the market does want. And just kind of as a side follow-up, I guess, I'm trying to cram a lot in here. You mentioned that you will grow at multiples of the industry, but that the industry is growing is softening. And if you could clarify what exactly that means because that's it's pretty difficult to parse. That. Yep. So Thank you. I'm gonna Kevin Carrington: Thank you. Thank you, Tony. There were three very important there. And we'll try and make sure we answer them all. And I will say, to the team that's managing this call, if we fall short please let Tony requeue so I can answer that third question. But let's start at the top. On the margins. So our guidance at this point Tony, we're gonna refrain from giving too much guidance on 2026. We will be prepared to provide further guidance soon. But we absolutely expect that our goal is 30% is really the floor for our guidance. Not the ceiling. And so just that's that's all we're gonna be prepared to say today. At least on 2026. In terms of COVID-era margins, you know, one of the things we talked a lot about as a leadership team was what is the margins that we anticipate achieving. We view ourselves as a technology leader as you mentioned, and quite honestly, the investments that we make in IT that has translated into our growth reinforce that. All of the different patents that are unique in terms of a company our size and operating in such a focused market as we do in part of the in terms of being able to represent us as a technology company. So we expect to achieve margins in that 40 plus percent range. That is an objective for our business. We know that that won't be something we can do overnight. But at the very top of that list, we are doing a much better job at driving direct margin performance and, ultimately, with some improvements at the indirect level, we'll be able to improve overall gross margins as well. And I think the third question I'm looking at Laura. Don't remember. So Laura: Don't remember the third week. Kevin Carrington: So, Tony, if you can read that for us? Yeah. Requeue and repeat, that would be helpful. Thank you. Operator: Tony, your line is open. Tony Rubin: I think you gave a flavor of what I was asking. Unfor I would hope for more specificity, and I would hope 30% would be considered a disaster, not even a floor. You know, with respect to that. I do applaud the company having an investor presentation presumably to get some institutional shareholdings and to articulate the story. As I'm sure you're aware, the stock has plunged in recent weeks, which, as I'm sure everybody on this call the management team especially is not happy with. So the ability to provide more clarity going forward certainly would be appreciated. And, frankly, the company has excelled at R&D has been good, degraded sales, but has continually failed in operation. So any measures that can really fix those issues and could instill confidence in the community I'm sure would be rewarded in spades and you know, to the benefit of all. So you know, good luck and godspeed, and thank you. Thank you, Tony. I think his last question that we all forgot was about the multiple of the market relative to how our growth was gonna be. Jess Jankowski: Yes. Thank you. Glad somebody's paying attention here. Kevin Carrington: Well, Jess, you could always have a job. It helped me not to answer so much. But thank you, Tony, for your comments. And you know, I do think that we will take that praise well that we've been excellent at R&D and good to great on the sales and marketing sides of the organization. We also accept the criticism that the company needs to improve in operations. And that's really a reflection of a lot of the changes that we've made and announced. It's also reflected in the type of recruiting that we've done over the last year and a half. In terms of bringing in really excellent people from top organizations that have been in the beauty and personal care industry. And understand what it takes to translate the products that we design into finished goods that are meeting or exceeding our profit expectations. In terms of the going forward and what's happening in the industry, so, generally, the industry is slowing down. I will say that one of the good parts of our focus is that the SPF-infused beauty areas where we operate are continuing to be strong. And they are growing faster generally than the industry. Our benefit has been over the past few years is that along with the growth of SPF-infused beauty, consumers' preference in that space has tended and trended toward mineral-based SPF-infused beauty. You combine that consumer preference with the growth in the industry, that means that generally, mineral-based SPF-infused beauty is gaining share against other types of approaches to providing SPF. That said, you then further, as you have already mentioned, Tony, our leadership around technology and enabling that technology, quite honestly, enables us to have preferential aesthetics in terms of transparency on skin, the lightness of the textures, the fullness of coverage when required or transfer skin-like appearance that our products can deliver all our preferences. And so that has helped us through having some great brand partners to really be able to grow at a multiple of the industry and we continue to expect through our investments in those brand partners to sustain that growth rate. Operator: Our next question is from Ronald Richards. Please proceed. Ronald Richards: I wanted to follow-up with my first question. I didn't really understand this ERC payment. Was that in this Q3, or was that in last year's Q3? I thought that you said it was in this year's Q3. Without that payment, would the financials have been $1.3 million worse? Laura: Hi, Ron. Thank you for your question. The ERC payment was in this quarter of 2025. You are correct. Ronald Richards: Man, that doesn't sound good. The total bottom line here. Laura: It would have impacted, obviously, our bottom line for the third quarter. And ladies and gentlemen, this concludes our Q&A session. I will pass back to Kevin Carrington for concluding remarks. Kevin Carrington: Thank you, Carmen. Back in 2019 when the consumer products business was less than $2 million, that was the first time that our company used the phrase the future of sun care is the future of beauty. Looking forward, we believe that remains true. Consider that Sun Care is expected to be one of the fastest-growing segments in beauty over the next five years. Further, Mirror, we observed that the ongoing transition of daytime products to incorporate UV protection as a key benefit enabling longevity. Health, and wellness. Because of these market dynamics, our technological and product leadership and commitment to driving improvements in operations that will yield significantly improved profitability. We remain confident and committed to delivering best-in-class performance not just to consumers, but also to our shareholders. In the coming weeks, we will release our first investor presentation. This will help each of you further understand our confidence in our future and the returns that our business can deliver to our investors. Like longevity and health, our process to deliver these results is a journey. We appreciate all of you who will remain on this journey with us. As we believe like the prior five years, the next five years will yield dynamic returns for all our investors. Thank you, and have a great day. And happy holiday season to all of you. Operator: And ladies and gentlemen, this concludes our conference. Thank you for participating. You may now disconnect.
Operator: Good evening, and welcome to the SenesTech Reports Third Quarter Fiscal Year 2025 Financial Results Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Robert Blum with Lytham Partners. Please go ahead. Robert Blum: All right. Thank you very much, operator. And as you just mentioned, thank you, everyone, for joining us to discuss SenesTech's third quarter 2025 financial results, and this is for the period ended September 30, 2025. With us on the call today is Mr. Joel Fruendt, the company's Chief Executive Officer; Mr. Tom Chesterman, the company's Chief Financial Officer. At the conclusion of today's prepared remarks, we will open the call for a question-and-answer session. [Operator Instructions] Before we begin with prepared remarks, we submit for the record the following statement. Statements made by the management team of SenesTech during the course of this conference call may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended, and such forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements describe future expectations, plans, results or strategies and are generally preceded by words such as may, future, plan or planned, will or should, expected, anticipates, draft, eventually or projected. Listeners are cautioned that such statements are subject to a multitude of risks and uncertainties that could cause future circumstances, events or results to differ materially from those projected in the forward-looking statements, including the risks that actual results may differ materially from those projected in the forward-looking statements as a result of various factors and other risks identified in the company's filings with the Securities and Exchange Commission. All forward-looking statements contained during this conference call speak only as of the date in which they were made and are based on management's assumptions and estimates as of such date. The company does not undertake any obligation to publicly update any forward-looking statements, whether as a result of the receipt of new information, the occurrence of future events or otherwise. With that said, let me turn the call over to Joel Fruendt, Chief Executive Officer of SenesTech. Joel, please proceed. Joel Fruendt: Thank you, Robert, and good afternoon, everyone. Thank you all for joining us today for our third quarter 2025 conference call. We once again had a very strong quarter with record quarterly revenues driven by the rapid adoption of our Evolve product line, which is showing growth across nearly every one of our key distribution channels and market verticals. E-commerce continues to be our largest channel, representing more than 50% of our revenue, and was up 55% year-over-year. And as many of you saw, we had a very exciting announcement as our products are now available at lowes.com. The intersection of our e-commerce and brick-and-mortar retail sales have the opportunity to be a significant growth driver for us moving forward, and Lowe's fits perfectly into that intersection. But as we have been communicating to you for the past year or so, our objective is clearly not to just grow at any cost. We need to reach profitability and believe we have the pathway to do so in the near term. Yes, high-margin revenue growth will be the easiest pathway there, but efficiently managing our expenses will be an equal part of the equation, and we are doing just that. During the quarter, we had a robust 43% increase in year-over-year sales. Gross margins continued in the 63% range and operating expenses were down 4% compared to last year and down 12% sequentially. And note that we had more than $100,000 of onetime legal expenses during the quarter that if removed, would have shown even further OpEx improvements. Overall, our adjusted EBITDA loss, which closely tracks our cash utilization, was the best in our company's history at $1.2 million. This compares favorably to $1.4 million last year and the most recent sequential quarter. With the continued focus on high-margin revenue growth, operational efficiency and cost discipline, we are poised to achieve our profitability objectives. Given the strong progress we continue to make, we feel very comfortable with the cash position we have, which at the end of September was more than $10 million. We will continue to execute and make incremental progress towards our profitability objectives, and we see a potential path to the future that may not require further equity offerings. So that's the high-level overview of the quarter. Record revenues, strong gross margins, reduction in our operating expenses, all of those resulting in the best adjusted EBITDA in the company's history. And finally, a strong balance sheet, which will bridge us to profitability. Okay. Let's transition to a few key activities that took place since we last spoke in August and some items we are working on, which we'll hopefully develop in the months to come. First off, as I mentioned a moment ago, our e-commerce business continues to show strong growth. Amazon continues to lead the way here with double-digit monthly growth. We continue to focus on being efficient with our advertising spend, ensuring that we don't spend during seasonally slower times for deployment. To that end, we slowed spend during late July and August, and we revamped our ad spend in early September. We had a highly successful Labor Day special that really boosted our sales in the month of September and should set the stage for a strong Q4 from Amazon as well. Beyond Amazon, which represents about 50% of our e-commerce revenue, we also are seeing growth from our existing senestech.com websites as well as walmart.com, homedepot.com and tractorsupply.com. And we had a big announcement about Lowes.com that has started carrying our Evolve Rat product. This expansion represents a major milestone in both consumer accessibility and retail distribution possibilities for the company. Launching on Lowes.com is a key component of our planned expansion through the broader retail channels. As we have talked about in the past, many retailers start new products on their e-commerce platform to assess overall potential and then transition to having them placed in their brick-and-mortar locations. We have a compelling case with Lowe's, Walmart, Home Depot and others that as the e-commerce side of the equation gains traction, we may then expand to in-store offerings in the future. We look forward to this being a large opportunity for us moving forward in the near future. During the quarter, our retail sales were up 254% compared to the year ago period, driven by expanded adoption that more than doubled its coverage with our ACE Hardware customer and follow-on orders from Bradley Caldwell, a wholesaler serving over 8,000 retail locations in the Northeast. Beyond e-commerce and retail, we continue to see adoption of our solutions within the municipal markets as well. During the third quarter, municipal revenue grew 139% year-over-year, driven by expanded deployments in New York City, Chicago and Baltimore, reflecting increased adoption in diverse urban settings. In September, we announced that Evolve Rat Birth Control would be deployed in another of Chicago's special service areas, this time, SSA #48 or the Old Town area. The new initiative led by the Old Town Merchants & Residents Association is focused on improving sanitation and public health in one of Chicago's most historic and vibrant neighborhoods. Planned deployments include strategic alleyways throughout the SSA, which spans key commercial and residential areas. SSA #33 or The Wicker Park Bucktown Special Service area of Chicago has expanded deployments in their area as well. We are working with the other 53 SSAs as they seek to implement an Evolve program. On a recent visit to Wicker Park Bucktown, a customer remarked, we've now seen in a week the rat activity we used to see in a day. It's good to have such simple articulation of Evolve's efficacy. These current programs continue to focus on controlled deployments in high-impact areas, laying the groundwork for potential large-scale expansion. And further, the overall awareness of these municipal deployments continue to have a positive impact on other channels such as retail, e-commerce and pest control distribution. In New York City, our rat contraceptive pilot program is showing exceptional results. Our team has been in New York supporting the deployment, where they continue to note 100% consumption of Evolve. We are working with New York City for reorders to advance the trial. In addition, we are working with local distributors to arrange for long-term supply to the city. While many of the headlines come from e-commerce channels such as Amazon, Home Depot, Walmart, Lowe's, et cetera, or our deployments in hardware retailers like ACE Hardware or municipal deployments in New York City or Chicago, the continued utilization of our solutions from pest management professionals or PMPs continue. Representing nearly 20% of our third quarter revenues, PMP revenue was up 72% sequentially from the second quarter as a wide variety of PMP partners are leveraging the unique attributes of fertility control across a wide range of customer applications, including theme parks. One of these theme parks is internationally known and is now in their third monthly order cycle. Our diverse distribution channel was clearly demonstrated during the quarter with near across-the-board growth from our various market verticals and distribution channels. With multiple shots on goal, each of which has shown stable growth and strong upside characteristics such as a large deployment of a major retailer or a large-scale deployment in municipal area, we feel very good about the future. Before I turn to Tom to review the financials in more detail, with the growth we expect, we have taken important steps to make sure we are structurally ready to meet this growth. Last quarter, we took the important step to increase our production capacity to meet future demand. We have officially completed our move into our new larger facility in the Phoenix area with new automotive capabilities designed to increase efficiency. So with that being said, let me turn the call over to Tom to review the financials in more detail and will then make a few closing comments before we turn it over to your questions. Tom? Thomas Chesterman: Thank you, Joel. Let me take a moment to expand on the numbers in the press release and a few points that Joel mentioned in his earlier remarks. On the revenue line, total revenue for the second (sic) [ third ] quarter was $690,000, which was an increase of 43% from Q3 of last year and up 10% sequentially. Breaking it down further, Evolve revenue increased 77% and accounted for 85% of our third quarter sales. ContraPest decreased approximately 31% and accounted for 15% of our Q3 sales. While down from a year ago period, ContraPest was basically flat from Q2 as there are still a number of loyal ContraPest customers. Looking at it from the vertical break in, e-commerce was clearly our largest contributor coming in at 54% of our overall Q3 sales. Overall, e-commerce was up 55% compared to our Q3 of last year and up 6% sequentially. As Joel mentioned, we dialed down unprofitable ad spend over the summer vacation period and re-ramped it up on Labor Day. We continue to see Amazon growth at double digits monthly. Our second largest vertical is pest management professionals or PMPs, which accounted for 19% of our Q3 sales and was up 29% year-over-year and up 72% sequentially. Municipal sales, while still a relatively small percentage of total sales, saw a 139% increase from the year ago quarter, driven by new deployments in Chicago and New York. Brick-and-mortar sales were up 254% year-over-year, driven by the expansion of ACE Hardware and Bradley Caldwell. Other contributors during Q3 were in the areas of agribusiness, commercial as well as zoos and sanctuaries. One item to point out is that we had very nominal revenue during the quarter from international sales. The groundwork has been set, and we simply need to wait for progress in terms of approvals, et cetera. We have communicated previously that this is a process, and we believe we are making good progress. Turning to gross margins and gross profits as a whole. For the third quarter, gross margins remained strong at 63%. The transition to the new facility will continue to show efficiencies and improvements in gross margins. Looking at it from a gross profit dollar perspective, gross profit was $433,000 compared to $315,000. More broadly speaking, the higher gross margins of Evolve continue to be a key driver to our improved financial performance. On the OpEx line, operating expenses were down 4% compared to last year and down 12% sequentially. As Joel mentioned, we had more than $100,000 of extraordinary expenses during the quarter that if removed, would have showed even further OpEx improvements. We continue to focus on being as efficient as possible within our expense structure, focusing on profitable ad spend and the overall cost structure. The revenue growth, improved gross profit dollars and decreased OpEx resulted in our lowest adjusted EBITDA loss in the company's history as we focus on achieving our goal of profitability. For the quarter, adjusted EBITDA loss was just $1.2 million and excluding the extraordinary items, would have been $1.1 million. Coinciding with the improved bottom line results is a balance sheet cash balance that has the ability to allow us to reach profitability without proactively raising any additional dilutive capital. Clearly, the ramp of revenues is the biggest unknown, but at the current sequential pace of growth in gross margin and OpEx structure, there is clearly a path where we do not need to proactively raise additional dilutive capital. I'll remind everyone that we do have additional capital potential if we need it, including 2.2 million short-term warrants outstanding at $5.25 per share, which, if exercised, would potentially bring in more than $11.4 million, and we have an ATM that is currently dormant. Let me now turn the call back to Joel. Joel? Joel Fruendt: Thanks, Tom. The adoption of our Evolve rodent birth control solution continues to be a game-changing solution, which has significantly opened up the addressable market opportunity for us. We have numerous shots on goal for continued steady sequential growth with outsized opportunities for what I would define as transformational growth that has the ability to quickly catapult us to profitability. We feel very good about our broad approach to expanding adoption of Evolve and the results to date are reaffirming our strategies. With a large addressable global market that has shown regulatory tailwinds in our favor, a first-mover advantage in rodent birth control, a diverse and scalable go-to-market strategy that is producing results and a lean focused growth strategy which balances revenue growth with operational efficiencies, I couldn't be more excited about the position SenesTech is in today. As always, I thank you all for your interest in SenesTech. With that, I'm happy to open up the call to questions. Robert, let me turn the call over to you to see if there are any questions in the webcast portal. Robert Blum: Great. Thank you very much, Joel, for your prepared remarks there. [Operator Instructions] All right. We have a few questions here, gentlemen. The first one is, will we see the company's products in Lowe's brick-and-mortar stores? Joel Fruendt: And I'd say the answer to that is we are in discussions with them. The first step was the e-commerce, and -- but we're also talking to them about doing a test deployment in about 100 stores. So stay tuned. I think the expectations of that would be sometime at the end of Q2. Robert Blum: Okay. Very good. Next question here is, do you have visibility on PMP-driven sales? What kind of growth are you expecting from this channel? Joel Fruendt: Well, PMP is certainly a key growth channel for us and one of our massive market verticals. We've had 20% -- account for 20% of our sales, which was up significantly over the last quarter and the year ago period. So we see that growing at significant levels as we go along, as more of the customers, the pest control operators become aware of that birth control is indeed another part of an integrated pest management program. And we're starting to see that by the reorders that we're getting. Robert Blum: All right. Very good. A couple of questions here on e-commerce. I think you addressed some of this in your prepared remarks, but how much of the revenue of the $690,000 was from e-commerce? Joel Fruendt: Well, it accounted for 54% of our quarterly revenue. That has been consistent with some of the other quarters that we've had in the past. Robert Blum: All right. Expanding on e-commerce here. A question here is Evolve is priced much higher than other rat control products on Amazon. With your big margins, you have lots of room to cut price. Is that part of your sales strategy going forward? Joel Fruendt: Well, what we did is we've positioned Evolve kind of in the middle of the pricing pack with different rodenticides that are out there. We monitor that closely. And we think that when there's -- the time is right, and we may have to discount a little bit in order to gain some large orders, we're willing to do that. But we're really comfortable where our price point is now. And I think our double-digit growth on Amazon monthly is proof of that. Robert Blum: All right. Very good. Next question here. There's actually a number of international questions. I'll try to summarize a few of these. First off here, could you give just sort of basic general details on your progress in the international markets? Joel Fruendt: Yes. Great news from New Zealand. We got the official approval for New Zealand. New Zealand has a program where they want to limit out pests by 2050, rodents and a couple of other pests. We got the approval there. We have our distribution set up there. So we're in the process of working on, okay, what does that order look like that we're shipping to New Zealand. And we have a number of those areas. We have now 18 exclusive distributors who are all working every day to get those country approvals. And it may take a little bit longer than what we would like. Sometimes in countries, it takes a little bit longer than others. But we know that once we get approvals in the countries that the container load orders are going to follow there. And so we're really excited about that. We're being very patient. And at the same time, we're pressing forward. So we expect many more country approvals over the course of the next 3 months. Robert Blum: All right. Very good. I hope that, that addressed most of the questions that were on here internationally. [Operator Instructions] Next question pertains to the legal expense. Any additional color that can be provided on that? Joel Fruendt: Tom, do you want to take that? Okay. It looks like Tom is not on. We have some legal expense. We have -- go ahead. Thomas Chesterman: I'm sorry, I had my mute on, sorry about that. Yes, as we've disclosed in our filings, we are being sued by Liphatech, a rodenticide manufacturer that we did some joint research with a while back. They claim we violated our nondisclosure agreement and infringed on their IP. We can't really comment specifically on the litigation, but I will say this. I mean, their assertions are baseless. It's bordering on ridiculous. And to some extent, I think the SenesTech and rodent birth control in general is beginning to scare the poison companies. They're now realizing that Evolve may hurt their business, and they're doing what they can to stop us. So I suppose that's a positive signal for our future in a strange way. Robert Blum: All right. Very good. Next question here is, could you give an estimate on how much revenue is expected from recent field trials that started in Somerville and Cambridge? Anything you can add on to that? Joel Fruendt: Well, I think it's too early to project revenues. All I can say is this is that those trials are going very well and that they're looking for a long-term solution. And we're very confident that as we have the positive results from these trials, that the orders will follow. It's very similar to the third monthly order in a row from one of the large theme parks. They try it out, they do their own internal work to make sure that it's something they want to use. And then once they realize that this is a way to end infestations, the orders will follow. And we think that there's going to be some really good things coming from both of those areas. Robert Blum: All right. Very good. Well, I am showing no additional questions here or topics. So I guess with that, Joel, I'll go ahead and turn it back over to you for any closing remarks. Joel Fruendt: Well, thanks, everyone, again for being on the SenesTech earnings call. We've been working hard. I think you can see by the results that a lot of our legwork is starting to pay off, and we're expecting even better things going forward. So thank you for your time and look forward to talking to you again after the post of the year. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Katariina Hietaranta: Good morning, and welcome to Kamux's Q3 results presentation. My name is Katariina Hietaranta, and I'm Head of Investor Relations at Kamux. We have our CFO, Enel Sintonen; and CEO, Juha Kalliokoski, presenting the results, after which we will have a Q&A session. Go ahead, Juha. Juha Kalliokoski: Thank you. Good morning. My name is Juha Kalliokoski, and I'm back as the CEO of Kamux since October 16. As Katariina said, Enel and I shall now guide you through Kamux's Q3 results. Here is agenda for the presentation. As usual, we shall first take a look at the quarter in brief, Kamux's market positions and what our showrooms network look like at the moment. I shall then lead you through our review by country, after which Enel will present in more details the financial development of the company. Towards the end of the presentation, we will take a look at where we are in terms of our long-term targets, a few words about our strategy. And at the end of, we will have a Q&A session. During Q3, we continued our focus on profitability and improving the financial health of the company. We have successfully reduced the average price of the cars we sell as planned. This contributed to revenue decrease, although the main component was the decrease in the number of cars sold. Our revenue decreased by 17%. Our focus on profitability has paid off and the gross margin has increased from 9.8% to 10.9%. The improvement gross margin was, however, not sufficient to compensate for the decrease in revenue. And subsequently, our gross profit decreased. Our adjusted operating profit decreased from EUR 5.5 million to EUR 4.3 million. Our cash flow has been extremely strong, EUR 31.5 million in January to September. And our inventory is at a healthy level as we enter the quieter period towards the end of the year. Revenue from the integrated services decreased from EUR 14.6 million to EUR 13.7 million as a result of decrease in revenue and number of cars sold. However, the share of integrated services in revenue increased by 5.2% to 5.9%. Consumer preference towards affordable cars continued in all our markets. Customer satisfaction was a good level and a targeted level and NPS was as high as 63% in Finland. Used car markets grew in Finland and Germany, while in Sweden the market was flat. In Finland, finally, it was the sales by dealers that grew during the quarter, while earlier in the year, market growth came mainly from consumer-to-consumer sales. Kamux continues to be the #1 player in the Finnish market measured in number of cars sold. In Sweden, we are #8. And in Germany, our market sale is still very small. A few words about the new car sales. On a year-to-date basis, the growth in new car registration in Europe has been very modest, less than 1%. In Kamux operating countries, registrations have grown only in Sweden, while in Finland and Germany, the new car market is either flat or negative. In the big picture, Kamux is Europe's fourth largest seller used car cars in Europe, and those figures are from last year. Here is an update on our showrooms network during 2025. As of today, we have 68 showrooms. In Finland, we have closed 2 showrooms, Klaukkala and Mantsala during the year. By the end of November, our showroom in Jyvaskyla, Central Finland will move to new premises that are owned by us and built to suit our needs. The total number of showrooms in Finland is now 42. We have made -- we have not made any changes in Sweden, where we continue to have 17 showrooms. I shall come back to our plans in Sweden later in presentation. The Schwerin showroom in Germany was opened in early July, and we currently have 9 showrooms in Germany. Moving to the comments per country. In Finland, we succeed in consumer purchase during Q3 very well. This is particularly important now as importing from abroad is not easy due to the low level of prices for used cars in Finland. Our strong focus has been on more profitable sales, which has led to decreased volumes. We are continuously working to find the right balance between volumes and margin. Gross margin per car sold increased both in Euros and in percentage, which we are very satisfied with. For the quarter, Finland gross margin grew from last year 10.3% to 11.6%. The adjusted operating profit margin increased slightly, although in Euros, we fell behind the comparison period. Adjusted EBIT margin is also above the 4% level. As of September 1, Joni Tuominen was appointed Managing Director of Kamux Finland, having acted as an interim MD since mid-April. Sweden. It has been a pleasure to see our Swedish team making a strong turnaround. Compared to Q3 in 2024, our operating results improved by EUR 1 million, which is really a great achievement. In Sweden too, the focus on profitability has had a downward impact on sales volume. But we have succeeded in increasing the margin per car as well as significantly strengthening the penetration rates for both financing from 48% to 53% and Kamux Plus from 16% to 25%. Customer satisfaction has also risen close to the group's target level and NPS was 58 in Q3. We have completed the assessment of our network in Sweden and decided not to make any major changes at the moment. The current network is sufficient for a profitable business in Sweden, and it also allows growth. We believe it's possible to have a profitable business in Sweden, and it's very much in our plans. Our team in Sweden has already made a clear positive turn by progressing according to plan for 2 quarters in a row. And the results are already visible both in the financial KPIs as well as operational efficiency and customer feedback. And then Germany, challenges on car selection and volumes continued during Q3. Sales volumes were weak, primarily due to the car selection that did not match the demand well enough. The revenue was impacted by the weak volumes, and the margins by the inventory management measures we took, selling out or getting right off low demand stock. Subsequently, the operating results was negative. Marcus Mezodi started as the Managing Director for Germany on the 1st of July. And together with him, we have started to turn the business around. As in Sweden, in Germany, we work in close cooperation with Marcus to build daily operating routines in line with the Kamux concept. Going forward, this will help us to achieve first reason car margins and thereby building the profitability of the business and supporting our ability to grow. As one of the first steps, we modified our purchasing process and ensure that our selection meets the demand better. And then here you are, Enel, you are going to the finance, more details about the financials. Enel Sintonen: Thank you, Juha. As noted by Juha already, our focus has been on financial health and what it means. First, our focus continued to be at car pricing and margins, and we continue to be selective on deals. And second, we continue to work with inventories with focus on capital efficiency, fit with volumes, car selection fit to consumer demand. And key achievements of the quarter were we achieved clear improvement in margin and profit per car. Both Finland and Sweden progressed as planned. In Germany, as noted by Juha already, we faced challenges, and we work intensively and with discipline to turn the profitability into the right direction there. We reached our targets on inventory levels and progressed well with inventory structure and selection fit. Decline inventory levels contributed well to liquidity. We have now EUR 20 million cash at the end of the period, and it enables growth as well as investments in the future. Focus on profitability had also some adverse impacts at the expense of being selective on deals and targeting higher margins, we lost some of the volumes. Volumes dropped exceeded our assumptions, and we needed to issue profit warning in October. Part of the volume drop, not significant, though, was due to smaller net showroom network. And here are the numbers and summarizing key financial ratios. Revenue declined 17%. Key drivers were underlined earlier. Gross margin to revenue improved 1.1 percentage points, which agrees with our targeted levels and was based on our plans. Operating result to revenue improved from 1.5% to 1.8%. Key contributors were improved gross margin and almost absence of items affecting comparability. Adjusted operating result declined slightly from 2% to 1.8%. Operating costs did scale, however, not at full scale. Inventory days improved slightly. However, this is the area we have clearly room for improvement and work intensifies on this measure. Return on equity calculated from rolling 12 months result is at clearly unsatisfactory level, especially due to 2 notably weak quarters of Q4 '24 and Q1 '25. In equity ratio, we have reached 50% level. As a summary, the financial performance of the quarter demonstrates that we are directing our focus and efforts in the right areas. A key area to improve is finding a right balance between profitability and volumes. And after 2 quarters of improving our daily routines on car profitability and inventory fit, as well as strengthened cash position, I think we are better equipped to go for volumes. We do it step-by-step with focus and also needed patience. Here, we can see revenue and adjusted operating result trends. And looking this year, you can see that Q1, we had a negative result. And this is the only quarter in this slide from '22 to '25 that is a negative. Going to Q2, we can see here going up, and also Q3 going further up. So, it's quite nice trend. However, as I said, we are not satisfied with the levels that we have right now. Going to Q4 last year was very weak on profitability-wise, and this is something now we are working to make a clearly better result there. Here, we can see the trend in volumes. So, volumes declined in the quarter, but less than in Q2. mostly due to profitability focus, and with slight impact from lower showroom network. In Q2, so previous quarter, we sold about 3,800 cars less compared to the previous year same quarter. And in Q2, we sold about 2,800 cars less than in previous year same quarter. So, we have seen some positive trend in here, but clearly, we work on the volumes going forward. At the end of the third quarter, our cash position was EUR 20 million. And as noted earlier, this gives us a good position going forward. We are satisfied with a combination of strong operating cash flows and positive car profitability development. Our integrated services revenue development was hit by lower volumes. We are not satisfied with this trend, even though the share of integrated services has slightly increased in total revenue. Here is a visual representation of how our net working capital developed. We can see EUR 24 million reduction in net working capital, driven by a decline in inventory. I can say that our inventory is in a better fit from both structural and also price point perspective. So, in October, as you know, we had to lower our profit guidance for the year. We have been successful in improving our profitability, but this work has had an impact on our volumes. And with the number of cars sold lower than our forecast, the adjusted operating profit in euros is also estimated now to be lower than expected earlier. We have also announced that our dividend distribution in October, we did it, and dividend EUR 0.07 was paid at the last day of October. And this morning, we have announced a share buyback program. Based on the Annual General Meeting mandate, Board of the Directors have decided to acquire at maximum 1 million shares corresponding to approximately 2.5% of the company's total number of shares. The maximum amount to be used for the repurchase of shares is EUR 2.5 million, and the program will commence earliest on November 17 this year. And Juha, back to you. Juha Kalliokoski: Thank you. So, a few words about our long-term targets and strategy. With regard to our long-term targets, we are currently behind in the financials but still believe that these targets are doable in the long-term. And as we have just heard, we have already made progress in improving our profitability, particularly in Finland. Sweden is also progressing in the right direction. In customer satisfaction, we have progressed it very well, and the group NPS for Q3 was 60. We hit our target. In October, the group NPS was as high as 66. Here is our current management team. I had the opportunity to work with the team in an operative role for 8 months before starting as CEO. And it gave me an opportunity to get to know them slightly differently than had I been the CEO. I was also involved in a number of the recent recruitments. Kamux has been an entrepreneur-led company. As the company grew, we needed a unified way of working, and this is what we began with Tapio in charge. We will continue to define and implement common ways of working, so this will not change. We will continue to work with optimizing volume and profitability, data-driven pricing and S&OP, processes as well as inventory management. We will focus on the net working capital, I mean -- and we mean no lazy capital. And at the center are naturally our passionate and capable employees. We have invested in training our employees and will continue to do so. One of the areas where we are proud is our customer satisfaction and demonstrated in our Q3 NPS, which was 60. Going forward, we also want to ensure that our personnel has the opportunity to succeed in the work. Our strategy remains unchanged. We have already made good progress on the customer side as is seen in our NPS figures. We have also made some progress in improving our operating efficiency, but here, we have still clearly more to do. The direction is right, and we still have a lot of to achieve. Our vision also remains unchanged to become the #1 used car retailer in Europe. Katariina Hietaranta: Thank you, Juha. Now it's time for questions, and we shall begin with taking questions from the telephone conference line, if there are any. [Operator Instructions] The next question comes from Maria Wikstrom from SEB. Maria Wikstrom: Yes. This is Maria from SEB. And for Juha, welcome back to a CEO role. I wanted to start with asking a question on the volume trends. Obviously, I mean, this is what has been the recent problems. I think everything starts with volume. So, if you could walk me through a bit of the actions what you are taking in order to resume volume growth in the future. Juha Kalliokoski: Thank you, Maria. If I start, you must choose your games where you want to win. And we choose in last spring the profitable business and we started there. And now we are a situation as we saw from our figures that in 2 quarters, we improved our gross margin in Sweden and in Finland. And now we are a situation we can push cars on the volumes. And of course, inside the company, we have many things what we are doing. And we believe that we can change our growth side also. Enel Sintonen: If I may continue a bit there, given that the NPS has been, I mean, very low in, I mean, the last 12 months. I'm wondering if this is a correlation with lower number of cars sold, which, I mean, then, of course, reduces the compensation for your salespeople and how you are able to turn this around in a very competitive used car market that we are seeing today? Maria Wikstrom: So low EPS. Juha Kalliokoski: Yes, it's one focus areas, what we showed to the people what we have. It's balanced between the demand for the employees and also the happiness of the people. But even we sell less cars and improved our margin, it means that the salary side, it not impacted so much when we compare the gross margin, what was the changes in the countries. And I don't see that this is the area why we -- the employee turnover was quite high. But this is totally the key area that we want to keep the people in the company and give more time for this and make a better job together all. Maria Wikstrom: And then my last question is towards your international operations, and I might even know the answer by now, but I mean, still asking if -- as it seems that your patient with turning around the Swedish and German operation is endless. So have I interpreted this right that even if you haven't returned positive numbers, I mean, from neither of the geographical areas until, I mean, today, you are still ready to -- patient enough to wait to get the turnaround in both of the regions. Juha Kalliokoski: Yes. We are focusing the turnaround case in the countries. And as we saw, the Sweden happened a huge change. And in Germany, we are doing daily routines at the better level and see also the possibilities, and we are continuing in both countries the business. Katariina Hietaranta: The next question comes from Calle Loikkanen from Danske Bank. Calle Loikkanen: This is Calle Loikkanen from Danske Bank. I have a few questions. If we start with Sweden, could you perhaps talk a bit more about your kind of upcoming plans in Sweden? I mean you have done now the network assessment. So, what are kind of the next steps to drive growth? And then also, where do you see that the EBIT margin could kind of realistically go with this setup, with this network that you now have within, let's say, a couple of years? Juha Kalliokoski: If I separate 2 parts to the question. The first part, we see -- of course, we know how many cars we can put in our stores, what we have or premises what we have, and it gives the possibilities for us to grow. with the stores what we have now. And the focus is make a bigger and better businesses in this setup what we have just now. And of course, we are looking into further what is the new way of working and make a business -- used car business. And the other part, we are not announced about or published the country by country EBIT levels, and we have the one target in long-term target, which is 4% in the group level. Calle Loikkanen: And then I was wondering about Germany. You mentioned inventory management during the quarter. So, I was wondering that is there more inventory actions that you need to do during Q4? Or was everything done now in Q3? Juha Kalliokoski: Of course, it's not a one-off when you are -- it's the daily basis work with the inventory, and you can't make it once. It takes a little bit more time, some months that you can turn the inventory right direction, and you are purchasing the right cars to the inventory. But the major change is we changed in Q3. Calle Loikkanen: And then on Finland, you said that the market growth was driven mostly by dealer volumes now in Q3. So, I was just wondering that what has changed in the market because it's been very consumer-driven market now for many, many quarters. So, has something changed in the market? And do you expect this dealer-driven market to continue in Q4 and onwards? Juha Kalliokoski: Of course, we wish and hope that the car dealers share of the deals are increasing. And it's maybe something about the customer -- what is the word of --- Enel Sintonen: Consumer confidence. Juha Kalliokoski: Consumer confidence is increasing. It means that consumers are purchasing or buy a little bit more expensive cars, and it means a bigger share from the dealers to the car dealers because typically, the consumer-to-consumer business, it's very low price point for the cars. It's only some EUR 1,000 the average price. But I don't actually know what was the reason in Q3, this changed, what happened. But of course, it's a good situation that it changed for the more car dealers driven growth. Calle Loikkanen: And then finally, on my side, you've been doing very well now in terms of profitability and kind of margin improvement. And of course, that's the cost side here has been then the volumes. But I was wondering that now you've made a good improvement on the margin, is it now time to push more for volumes going into Q4 and into 2026? Or do you -- how do you think about the profitability versus volumes now versus what you've done over the past, let's say, a couple of years -- sorry, a couple of quarters? Juha Kalliokoski: Yes. It's totally a good question, Calle. As I mentioned earlier, we have focused the profitability and turned the right direction. And now we are a situation that we can balance between the profitability and the volumes and push costs more about the volume side. And we believe that we can grow and of course, calculate together to integrate with the integrated services, what is the right balance between those. Enel Sintonen: Yes. And just to add, when looking back to Q4 last year, looking at the volumes and then profitability, you can see there that we were, how to say, focusing more on volumes compared to profitability. So, this gives us that our comparative numbers in Q4 volumes is, how to say, a challenge in that sense. And also -- but however, the profitability is, how to say, in a more moderate level. So, the last year Q4 volume focus is giving us some maybe challenge. Juha Kalliokoski: Yes. And maybe one point more. If you compare a year back, we have now EUR 30 million less inventory and a lower average price point. It means very much lower risk compared to a year ago because it was quite a big grasp what we had a year ago. Calle Loikkanen: That's a very good point. That's a good explanation. Is there any kind of -- you said lower price point in the inventory. Is there any number that you could give us that how many percent lower is the price point now or something that you would like to share? Enel Sintonen: Not at this moment to share. Katariina Hietaranta: There are no more questions at this time. So, I hand the conference back to the speakers. Enel Sintonen: Very good. Thank you. I think that we shall next take a couple of questions here from the audience, and then we'll go with the questions received in the chat. Okay. Rauli, please? Rauli Juva: Yes. Rauli from Inderes. A few maybe more detailed questions continuing on the inventory you mentioned. Typically, the seasonality on the inventories is that it goes down in Q4, so -- in Q3 to end Q4. So, are you expecting that also in this year, even if you are kind of starting point is quite a bit lower than typically? Juha Kalliokoski: Yes, it's -- we are quite a good level at the end of Q3. And we don't have a pressure to give a lower number at the end of -- value of the end of the year. Of course, it's the condition of the inventory, how fresh it is. And this is more about the things what we are just now doing. Rauli Juva: Then in Finland, you mentioned that you had discontinued the cooperation with Beely, whatever it's pronounced. So, can you open a bit about that? Why was that ended? And are you considering your own leasing offering? Juha Kalliokoski: Yes. We looked through about the contract and the business, how it went. And we didn't see it's so good business for the Kamux but we made decision that we ended that. And of course, it's a very small part of our business, and we will see is there coming some other products for this segment. Rauli Juva: And then finally, the Kamux Plus penetration in Finland, if I didn't look right, it was the lowest in a few years, even if not that much, but still below 30%. So, is there any particular explanation why that's down? Juha Kalliokoski: Maybe one part is the average price, what we sold, it was lower. And it typically goes so that the penetration is higher when you sell the more expensive -- little bit expensive car. And this is maybe one part. And the second part is, of course, where we are focusing, and it's also on the table to sell better penetration of the Kamux. Katariina Hietaranta: Further questions from the audience? Unknown Analyst: In history, Kamux had competitive advantages like selling services and management with data. How is it nowadays? If we are targeting towards 4% EBIT margin, do we have some new advantages in competition? Or is it about executing old advantages better? Juha Kalliokoski: As we see in Finland, we are over 4% level. And still, we are not satisfied that level where we are. We can improve that, and then when it comes to Sweden and Germany, in our side, it's possible to achieve those targets in this business, how we work just now. Of course, we are thinking all the time where the used car business are going and what we are taking from there. Unknown Analyst: Then, about profitability and volumes. Just wondering, are they really against each other? I mean, if you are selling more volumes, you have more turnover against those fixed costs. So, focusing instead of volumes to profitability? Are they really opposed to each other? Juha Kalliokoski: Yes, this asks because when we speak only about the cars, and if you give the very big discounts, you can make a deal. But you don't have any metal margin or very low-level metal margin. You have only the integrated services. And as we see what is the part of the integrated services from our gross margin, we can't make 4% in group level EBIT if you do that. Of course, it's balanced between, and maybe we went, in some cases, quite straightforward and very, very small discounts, what we gave, especially in Finland. And it came against us when we speak about the volume. Enel Sintonen: I just wanted to add here that when thinking about profitability, it's also purchase and sales. So, we are more careful what we purchase to ensure that what we sell is also profitable. So being at the lower level right now, 2 quarters, it has also given us opportunity to strengthen our daily routines on this and how we think about car business overall. And I think that your question, yes and no. So Juha answered already that. But the question also is how we consider what is the business we are at and what we want to achieve longer-term. Unknown Analyst: Then it's basically achieving more customer inflow to your shop so that you can pick most attractive ones. Final question about cost. There are 2 kind of costs, purchasing price of cars, but then operational costs. Do we have any opportunities with operational costs, how to operate car business more efficiently? Enel Sintonen: Thank you for the question. So yes, so when we look at the first showroom costs, the question is what is our showroom network, how much is -- what is the capacity? And we can see that we have still, how to say, capacity in place for higher volumes. So, we can do some changes there in the future when and if needed. Another thing is, of course, when we're looking at the customer journey and how we get more traffic, this is something that is changing quite intensively, the cost structure and there. So, this is something we are working also significantly. And also, salaries and pay for the stuff. We have fixed, but also a very big part of variable. So, fixing also salary models is something. So, a significant part is we can scale. So, room for improvement, I would say. Juha Kalliokoski: And just a year ago, we invested in new provinces, Helsinki Tunemi, Espoo Fila, and Vantaa Petikko, 3 big stores, quite high costs. And as we saw, our sales declined. And at the same time, you took in higher costs and lower sales. It's not a good combination, and now we are tackling that. Unknown Analyst: Did I remember right that in [USkula], we have built our own premises. What is the strategy with that in a way, instead of renting premises, having own one? Juha Kalliokoski: Yes, we looked at their premises quite a long time, and we didn't find that they're good for us. And that's why we made the decision that we can have some on-premises and in a good place and just made for us. And for example, Tampere Lakalaiva, which is not our own, but made clearly for us, and all of those works very well. Katariina Hietaranta: Thank you. We have a couple of questions online via chat. First, it's about the volumes. So, Mika from DNB Carnegie is asking that you've experienced sequential quarterly volume declines, while the overall used car markets in your operating countries were growing slightly. This suggests a significant market share loss. What specific leading indicators are you tracking to signal when volume declines will stabilize? And what is your realistic expectation for when unit sales will return to growth? Also, do you think the long-term target of 100,000 cars sold per annum need to be reassessed given the smaller store footprint and continued market share losses? Juha Kalliokoski: Quite a long question. Katariina Hietaranta: Yes. So maybe focusing in terms of what specific leading indicators are you tracking to signal when volume declines will stabilize? Juha Kalliokoski: As we see in all our markets, it's not the reason that the market declined. It's our own hands, how we think about the market and market share. And as we mentioned earlier, that we focused on the profitable side and financial health. And now we are looking more about the volume side. Katariina Hietaranta: And I believe that we have stated that the long-term target, 100,000 cars, is still valid, and there's been no change in that. Mika is also asking about Germany in terms of Germany has been described as undergoing a strategic restart, but shows deepening losses, management changes, and ongoing inventory and assortment issues. At what point do you consider a full exit from Germany to preserve capital? Juha Kalliokoski: As we mentioned earlier that we are focusing in both countries. We are not losing those. And I would say that our concept works in Germany it's more about how we handle it by daily routines and make the business in a daily basis. We are continuing in Germany. Katariina Hietaranta: We also have a question, a bit broader, on the European market. There are some strong players like Aramis or Ares, and yourself. Do you think there is some room for cross-border consolidation among these independent used car retailers? There are some interesting largely untapped markets such as Poland, Baltics, et cetera. Juha Kalliokoski: I remember earlier told about our strategy. And one part is possibilities to make acquisitions. Of course, it is. Katariina Hietaranta: Very good. I have no further questions via the chat. What about the audience? Everyone happy? Very good. Then I thank everyone and wish you all a good day. Thank you. Juha Kalliokoski: Thank you very much. Enel Sintonen: Thank you. Juha Kalliokoski: Bye-bye.
Fredrik Ruden: Welcome, everyone, to EG7's Third Quarter Earnings Release. My name is Fredrik Rüdén. I'm Deputy CEO and CFO. With me in this call, I have my colleague and the company's CEO, Ji Ham. We will start with the presentation and then end with a Q&A session. I hand it over to you, Ji. Ji Ham: Thanks, Fredrik. Thank you for all joining us. Let's go to the first slide. For Q3, net revenue came at SEK 355 million with adjusted EBITDA coming in at SEK 63 million, representing 18% margin. Year-over-year net revenue declined by 24%. Without the adverse FX effect, year-over-year decline was lower at 16%. Currency movement has been exaggerating the decline throughout this year, unfortunately, because of the significant volatility with the exchange rate over the last 12 months. Next slide, please. Some notable business unit updates here, starting with Big Blue Bubble. Our results came in below expectations, a tough quarter for them. Net revenue declined by 27% in local currency and 34% in SEK. Reasons for the decline was primarily driven by anniversary content for this year performing worse than last year. Active player base declined with lower user engagement and acquisition for the quarter with the anniversary content underperforming. Core in-game KPIs continue to remain steady and healthy. However, the underperformance appears to be limited to the user acquisition funnel. The team is actively working to improve user acquisition to return to prior higher levels. As for Daybreak, net revenue declined by 7% in local currency and 15% in SEK. For accounting and reporting, net revenue shows a decline, but sales actually demonstrated growth. We track another KPI called gross revenue in local currency, which actually increased year-over-year. Gross revenue is before platform fees and excluding revenue deferral accounting. So it is more of a cash basis number for sales, but that number at the top line demonstrated growth for the quarter. And the main growth drivers for the period for Daybreak included Palia, Lord of the Rings Online, Dungeons & Dragons Online and DC Universe Online, all of which are performing nicely with revenue increases and strong profitability. Titles that are performing softer than expected, include EverQuest and EverQuest II. Down from the big anniversary year in 2024, our EverQuest turned 25 and EverQuest II turned 20 years old. Also, EverQuest was negatively impacted by The Hero's Journey and unauthorized title that was out for a number of months, which for now has been successfully closed down. So that's no longer an issue, but nonetheless, it did impact EverQuest negatively throughout the year until it's closing down. Magic: The Gathering Online cardsets this year have been generally underperforming contributing to low results there. Overall, on a consolidated basis, Daybreak is demonstrating growth in the top line gross revenue level, which we are happy with. Piranha also delivered a solid quarter. Net revenue grew by 112% in local currency and 93% in SEK. MechWarrior 5: Mercenaries' DLC 7 performed better than we expected. It's on trend to be the best-performing DLC out of the 7, a nice outcome for a DLC for a 6-year-old title. Next up now is DLC 2 for Clans in December. Overall, Piranha is performing at a steady and profitable level, and we expect them to continue at that level for the foreseeable future. Next slide, please. Now on the product front, a couple of updates starting with Palia. Palia was one of the main highlights for Q3. Fall seasonal content release went out with a nice success. Animal Husbandry feature, which is a major system and feature for the title shipped with the update and reach peak engagement levels along with that update seen back in May along the console release, which was nice. Game is trending well with improvements across all the core KPIs. MAU increased by 77% when comparing September number to April, right before console release. Monthly average revenue per user also increased 141% and payer conversion rate increasing 99%. We're quite happy with the performance to date, excited for its long-term future. We believe it has a real shot at becoming one of the leading cozy life-sim games in the industry with the key differentiation being it's the only large multiplayer online game that's serviced as a live service title in the cozy life-sim games genre. We expect it to continue to be performing nicely going forward. Now for Cold Iron, we have decided to delay this title. New target release window now is Q3 2026. Our team has made good progress, but requires more time to finalize content as well as to achieve higher quality. Ultimately, decision here is to prioritize quality and invest the additional time and resources accordingly. Additional investment is expected to be approximately $7.7 million in total. Daybreak plans to invest $6.5 million of this, and Cold Iron shareholders co-investing $1.2 million. We continue to remain bullish in the project potential and expect returns in excess of our minimum target returns. Next slide, please. Fredrik, over to you. Fredrik Ruden: Thank you, Ji. Next slide, please. Third quarter was compared with last year relatively quiet and with a few smaller content releases, generating a net revenue of SEK 355 million, representing 16% FX-neutral decline. The lower net revenue is mainly explained by 35% negative FX movements. One successful title release in Q3 last year from Fireshine generating SEK 54 million. Big Blue Bubble turning down, as Ji mentioned. Strong anniversary campaign in EverQuest in Q3 last year, including a fairly strong revenue recognition rollover effect from Q2 2024. Adjusted EBITDA was SEK 63 million, which gave an 18% adjusted EBITDA margin. LTM net revenue was SEK 1.702 billion with the LTM adjusted EBITDA margin at 18%, which is in line with the historic average. Next slide, please. As earlier pointed out, we have a foundation of more predictable revenues and cash flows. More predictable revenue comes from the live service and back catalog titles. Net revenue from this portfolio was SEK 311 million in the quarter, corresponding to 88% of net revenue for the group in the quarter. Of the last 12 months, net revenue amounted to SEK 1.702 billion, of which SEK 1.258 billion derived from the more predictable revenue base. LTM more predictable net revenue has varied less than plus/minus 2% in the past 5 quarters. Following that stability, the portion of revenue -- that portion of revenue has been stable at 70% to 74%. Next slide, please. Daybreak is the largest contributor to the net revenue generating SEK 180 million. This corresponds to a decline from Q3 last year. The decline is attributable to challenging comparable figures following the successful anniversary campaign in EverQuest last year and SEK 18 million in unfavorable currency movements. And as Ji already pointed out, the underlying gross revenue or total bookings, what the customer actually bought from us has increased Q3 to Q3. But we do recognize net revenue over the period when the customer is using what is acquired from us, which means that we now and then have this rollover effects between quarters. The adjusted EBITDA came in at SEK 35 million corresponding to a 19% EBITDA margin. Big Blue Bubble delivered net revenue of SEK 55 million corresponding to a 34% decline. Currency fluctuations negatively impacted net revenue by SEK 6 million, and adjusted EBITDA amounted to SEK 25 million, representing a 45.6% margin. And Big Blue Bubble had lower-than-expected new customer intake. We are evaluating various mitigating actions to increase that KPI going forward. Next slide, please. Fireshine had, as expected, a fairly quiet third quarter, specifically compared to the third quarter last year when the company successfully published 1 digital title generating SEK 53 million. And net revenue in Fireshine was SEK 59 million in the quarter, and adjusted EBITDA was SEK 1 million. Petrol has been stable following the reach out to new business areas and cost optimization from the beginning of the year. Petrol generated SEK 30 million with a 5% adjusted EBITDA margin. Next slide, please. Piranha delivered a net revenue of SEK 30 million with an adjusted EBITDA of SEK 10 million, corresponds to 33% margin. The cost savings measures executed in the beginning of the year together with the successful launch of the seventh DLC for MechWarrior Mercenaries are the 2 major contributors to the strong performance. The seventh DLC, is, as Ji mentioned, one of the -- is becoming one of the best-selling DLCs for Mercenaries. Next slide, please. Our financial situation remained solid. We invested SEK 91 million, of which SEK 51 million in Palia and Cold Iron, and that is what we could define as new growth initiatives going forward. The level of investments in the more predictable revenue base remained low. Operational cash flow increased to SEK 51 million. This figure was negatively impacted by a nonrecurring payment of SEK 8 million. So if we would adjust for that operational cash would have been similar to SEK 60 million. And by end of the quarter, we had a net cash position and SEK 396 million in cash. We also successfully signed a new revolving credit facility of SEK 100 million, which is unutilized by end of the quarter. I hand it back to you, Ji. Ji Ham: Thanks, Fredrik. All right. Let's go to the summary slide. Next one, please. Okay. So in summary, Q3 was a down quarter with some hits and misses for us. Palia is performing well, and we're looking forward to its continued growth. Cold Iron game delay is a disappointment. It was not -- it's not going to be contributing to our 2025 performance, but we expect that it's going to provide a nice boost for 2026. We believe providing with additional time is the right decision to maximize returns for the project. On the industry front, the market still remains challenging for small to medium-sized publishers, and we intend to continue to operate cautiously because of that. We will be patient and highly selective in deploying capital to maintain solid balance sheet during this time. So that concludes our earnings presentation, and now we will transition to Q&A. Fredrik Ruden: Thank you, Ji. So the first question I have here is from [ Elia Ivano ]. What are the key reasons to delay the game to Q3 2026 and to increase the investment with another USD 6.5 million? To what extent is this driven by expanded scope, licensor requirements or earlier planning assumptions? Ji Ham: Yes. I think that's a great question. I would say it's a combination of several things. Ultimately, the content development for a video game, whether it's this game or many other games that are out there takes time. And in order to achieve quality initial estimate versus actual execution could differ, right? So in this case, some of that has happened where there's good progress being made throughout the development across the board. But at the same time, in order to finalize, get those features and content to finalization at the quality level that we see for commercial success is what's going to be requiring additional time for. So we estimate that, that requires us to be able to push this game out to third quarter 2026. And the investment that we're making is [Technical Difficulty] Fredrik Ruden: I think we lost Ji there. So I will go to next question. It's a question from [ Kara Dake and ] Hjalmar from Redeye. What is the total investment so far in Cold Iron? And how can the investment goes down in Q3? I'll try to answer this. So the first decision that we had was to invest USD 23.1 million. In first quarter this year, we decided to increase that with another USD 6.5 million. So in total, $29.6 million before the press release yesterday. And that was all settled in October. So from there and on, we will start to invest on this new decision. So adding another $6.5 million to that, the total investment is planned to be $36.1 million. And it's booked in U.S. dollar and it's revalued to SEK in the balance sheet in the group because our presentation currency is Swedish krona. And that's why it looks like it has gone down, but the U.S. dollar amount remains. So the question is, is Ji back in the call now? Ji Ham: Yes, I'm here. Fredrik Ruden: Yes. All right. I think we lost you there for a second. So here is another question also from Elia Ivano. Is Cold Iron USD 1.2 million co-investment new equity from its shareholders or reinvested profits from EG7? Ji Ham: Yes. That's investment from the shareholders. It's not from EG7. Fredrik Ruden: The commercial terms for which have been adopted in accordance, how have the commercial terms and recoup structure changed as a result of the increased budget? And how does this affect the allocation of risk and return between the parties? Ji Ham: Yes. I think from the beginning, the deal structure was meant to provide risk or lower risk and capital preservation priority for the publisher. So investment that Daybreak is making has priority over investment that Cold Iron shareholders have made. So this additional investment that's going in would be also recoupable at the top of the waterfall after the license fees. And then thereafter is when any profit split would happen. So from a risk allocation perspective, we're going to maintain the same structure that we've utilized to date, where Daybreak has protection over capital that's junior to it from the shareholders of Cold Iron. Fredrik Ruden: Here's a question from Hjalmar on Redeye. Big Blue Bubble, how should the soft player intake in My Singing Monsters be seen? Is there a risk of faster revenue decline going forward? Ji Ham: Yes. I would say it's too early to say. The lower user acquisition number was a surprise given that the game has been performing quite steadily over the last 18 months. So over the last quarter, there was a bigger drop than we expected. That doesn't seem normal in terms of what the trends look like. So we are investigating that as to what caused that lower vision at the top of the funnel with platforms like YouTube, TikTok and Instagram. So along with that investigation and evaluation, we are devising coming up with ideas and strategies of trying to show that back up to the prior levels. Subject to how those perform, we would be able to know more as to whether this means a new trend line versus a temporary blip where we could recover back to prior levels that we've seen over a prolonged period last year. Fredrik Ruden: Another question from Hjalmar. What was behind the strong profitability in Daybreak? Is it sustainable going forward? And I assume that this question came also from the lower profitability that we had in Q2 from Daybreak in conjunction to the release of Palia. Ji Ham: Yes. So there's a number of titles that are performing well. So Palia is at the top of the list, given that acquisition happened last summer and along with the console release and continuing addition of new compelling content. We expect that, that will continue to build in terms of population and revenues and, et cetera. So the third quarter was a good one, and we expect Q4 to be a nice quarter for the title. And 2026, we're very excited for Palia with additional content and big features that we're planning for. Additionally, some of our titles, including Lord of the Rings Online, Dungeons & Dragons Online and DC Universe Online are all performing quite well. Revenue engagement from players and the overall conversion for monetization, for those 3 titles, the teams have done an excellent job with great additional content this year with new server also improving customer experience with new server updates that help with the overall experience. That also was a nice contributor to their better performance. And DC Universe Online, metrics are up across the board in terms of all the core KPIs, and we expect that momentum to continue for the near term. So those 3 titles are doing really well. There are softer spots, as we mentioned. EverQuest, EverQuest II comparison not great compared to 2024 when it was big anniversary for both titles. And The Hero's Journey for EverQuest, was a distraction for the title, which resulted in a lower performance for EverQuest in particular this year, but we expect those titles to stabilize and turn the corner as we go into 2026. Magic: The Gathering Online, highly dependent on how magic, the gathering, the IP and their cardset content cadence, et cetera. This year, a little softer than what we expected. But nonetheless, a highly dedicated player base that continue to come and enjoy the title, highly profitable. So we're happy with that. And lastly, PlanetSide 2. We didn't mention it, but that title has continued to decline after we sold the IP a few years back. And we're continuing to support that. But the numbers have become less significant for the overall portfolio. But when you look at the overall Daybreak portfolio, we remain quite optimistic for 2026 with a number of titles that are doing well and that we expect that momentum to carry into 2026 and stability as well as potential growth there as well. Fredrik Ruden: A question on Palia. What will drive Palia's growth going forward, content and/or monetization? Ji Ham: I think it's both. So we have a pretty compelling content road map that we have communicated where we are doing monthly updates, smaller updates, but we have 3 larger quarterly seasonal updates and 1 big annual update. So those updates will bring new systems and features to continue to take the game towards 1.0. And along with that, we expect to improve core metrics that are really important for us to be able to grow a lot of the engagement and retention metrics and the monetization on top of that. So user acquisition, being able to bring in more players, this game has a great organic word of mouth user acquisition that's been very successful. On top of that, there's plans to be able to invest in user acquisition spend as well as we shore up the retention metrics even further from their level now, which has improved quite significantly from last year. But as we continue to make progress there, increasing user acquisition and being able to grow the player base, we have about 9 million registered users live to date. When you look at what we consider to be competitive titles or our aspirational titles, games like Stardew Valley and Animal Crossing and [ The Sims ] from [ EA. ] You're looking at population for each game in excess of like Stardew Valley over 30 million, Animal Crossing, which has sold over 47 million, and you have The Sims, which had over 70 million registered users as of a couple of years back. So we do think that genre and the market is quite deep and with only 9 million players so far that have come to play and enjoy Palia, we expect that there's significant more depth for us to continue to grow this game over the next number of years. Fredrik Ruden: I have a combination of a few different questions here. How confident are you in the Q3 release window? What is the risk of additional capital requirements for the Cold Iron game from here? And then is Q3 next year really an attractive release window, given that GTA will come out in November, and there is some discussions about Call of Duty to be moved to Q3 next year? Ji Ham: Yes. Based on everything that we know, with a lot of the detailed planning that went into arriving at the new schedule, we have a high confidence today. So that's the reason why we were able to provide a narrower window for the target rather than saying second half or 2026, we're able to guide towards that Q3. As for potential impact from GTA VI, the title has now been delayed a couple of times. Now, I guess, the spec or they've announced that November is when they would -- I expect to release the title. It's really hard to say and hard to plan or release around a GTA VI release date. Although I would say Q3, depending on what part of Q3, GTA VI is coming out in November, it does give us enough buffer to be able to get the game out initially successfully. And this is a premium title that meant to be a live service title. And as a premium title, we expect a significant portion of our revenues to come in the first 2, 3 months upon release. We do think Q3 still makes sense there. Now as to whether other big AAA titles would move out of the way with GTA VI being pushed into November, that may or may not happen. It's speculation at this point. But if it does happen and if there is a Call of Duty that's moving into Q3, then we would need to adjust accordingly at that time as we find out more. But for now, based on information that we know, we do believe that Q3 would be a great time for this game to come out. Fredrik Ruden: Then I think we'll take the last question from Hjalmar at Redeye. What is holding back M&A? Is it price of potential targets, a risk profile of the targets? Can you give some more details? Ji Ham: Yes. We are quite actively looking at opportunities. And I think at this point, we passed on a lot of opportunities. And as I think everyone knows, the market has seen quite a lot of distress over the last couple of years. And this year is less. But nonetheless, there's still a lot of headlines about studios shutting down, the last of which is NetEase just shut down 3 or 4 of their studios over the last 2 months. So there's more special situation opportunities that are out in the marketplace. We are looking at a lot of them. But at the end of the day, we're being very cautious. We are trying to find situations similar to Singularity 6, where there isn't a significant capital outlay upfront and that based on what we're able to contribute based on our expertise that we're able to create and underwrite and upside scenario that we have real confidence in. So along with the criteria that we're putting on, and then we're being quite strict about it, we passed on most of them. But at the same time, there's still some pipeline of transactions that we're evaluating now. And we're hoping over the next 12 months that we would be able to close on some additional transactions similar to Singularity 6. But at the same time, it is opportunistic. And based on whether we're able to ultimately find the right fit is what will dictate whether we're able to close on some of these transactions. We're not -- I would say pricing is probably not one of the things that are driving us away from transactions. I think pricing for transactions are quite reasonable in this marketplace. So we're active and we hope to be able to transact. But once again, we're being cautious and highly selective. Fredrik Ruden: And with that answer, we would like to conclude the Q&A session. And if you have any further questions, sorry if it's something that we haven't answered, just reach out to us, and we will reply to that in accordance. And with that, we would like to thank you for listening in today, and have a good day. Ji Ham: Great. Thank you, everyone.
Operator: Good morning. This is the Chorus Call conference operator. Welcome, and thank you for joining the Third Quarter 2025 INWIT Financial Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Fabio Ruffini, Strategy, M&A and Investor Relations Director of INWIT. Please go ahead, sir. Fabio Ruffini: Good morning, everyone, and thanks for joining us. With me today are Diego, INWIT General Manager; and Emilia, CFO. Before we begin, allow me to draw your attention to the safe harbor statement on Page 2. As usual, following a brief presentation, we will be happy to take your questions. Over to you, Diego. Diego Galli: Thank you, Fabio, and good morning, everyone. It's a difficult day for INWIT shares following the updated growth expectation in the '26-2030 period. It's important for us to answer the key questions you may have and lay out the priorities going forward. We expected to grow at the low end of the target range with revenues at about 4% compounded growth rate, more than 50% of which is contractually committed via inflation and Anchor MSAs alone. The update impacts noncommitted sources of revenues, densification outdoor and indoor, which are postponed. We are also factoring in slightly lower 2021 inflation, up 1.5%. We acknowledge the difficult market environment with protracted financial challenges of Italian telco sector, focused on maximizing efficiency, limiting investments to the bare minimum. In the previous outlook, we implicitly assumed that over the course of 2025, there would have been initial signs of an improved market structure following transformative transactions in 2024. This improvement has yet to materialize. Having said that, Q3 results confirm the resilience of the business, expanding all industrial and financial metrics while investing in critical infrastructure from NextGenerationEU in rural areas to Roma Smart City. Today, it's also important to affirm the structural outlook for digital infrastructure investments in Italy with a need to catch up since infrastructure investments cannot be postponed indefinitely. INWIT plays in a concentrated market with high barriers to entry, holding 2 competitive advantages, the best assets and locations in the market and a true industrial approach to deploying assets from the ground up. In this market context, we are conscious of our role as an enabler of investments and a driver of efficiency for operators, facilitating densification through sharing economics. This will be even more important in case of additional coverage obligations currently being discussed, linked to the extension of mobile frequency post '29. Moving to main trends of the quarter on Page 4. The key figures for the quarter, revenue growth by 4.1%, EBITDA after lease up by 4.4% with margin up 73%. Recurring cash flow up EUR 170 million with 69% cash conversion. In October, we completed the first tranche of EUR 300 million share buyback and successfully issued the company's first sustainability-linked bond. In summary, INWIT continues to be resilient in a challenging industry environment, acting in a proactive way on the levers under our control already to facilitate further network densification. Now I will turn it over to Emilia for a more detailed review of the results. Emilia Trudu: Thank you, Diego, and good morning, everyone. On Page 5, the focus is on new towers. Q3 displays a continued high volume of new sites, 180 across 2 programs, MSA commitment for TIM and Fastweb-Vodafone and the 5G NextGenerationEU program, where we are on track with the milestones. New towers are expected to continue to be the main network requirement of our clients due to data traffic growth, increasing capacity needs, the transition to 5G in suburban areas and the need to cover approximately 9,000 kilometers of roads and railways currently lacking adequate quality connectivity. Moving to total costs on Page 6. 670 new PoPs were added during the quarter, bringing the total 9 months figure to more than 2,000. This is consistent with full year target of approximately 2,500 new PoPs. Of the new additions, 260 PoPs were delivered to TIM and Fastweb-Vodafone and 410 to other clients, further diversifying INWIT's client base. Within other clients, we recorded steady pace with other MNOs, Iliad in particular, stable adds from FWA and solid demand from utility companies for IoT gateways for smart grid applications. Next, on Page 7, we review smart infrastructure. Revenues in the first quarter were up double-digit year-on-year to more than EUR 22 million. Growth was driven by the addition of 30 new DAS locations across multiple verticals and higher tenancy ratio across the more than 700 locations we serve. INWIT covers a growing portfolio of critical infrastructure assets. Latest additions include the Roma Smart City project, one of the largest in Europe, DAS and tunnels for the upcoming Winter Olympic Games between Milan and Cortina and international corridors connecting Italy to France and Austria and Germany. Looking ahead, demand for dedicated indoor connectivity is expected to remain structurally solid across verticals, including transportation, hospitality, healthcare and leisure. As you know, revenues come from 2 client categories: MNOs based on their ability to fund additional coverage projects via recurring fees and location owners where demand is solid, though primarily based on project-based revenues. Next, we review the P&L. Revenue growth stood at 4.1%, in line with the 2025 guidance midpoint. The drivers, as mentioned, were new PoP additions for Anchors and OLOs as well as double-digit growth in smart infrastructure and inflation at plus 0.8%. EBITDA margin remained stable at 91.3%, while the main efficiency lever continues to be lease costs. 360 real estate transactions in the quarter supported EBITDA after lease's growth of 4.4% and margin expansion from 72.8% to 73%. This partially offset the impact on cost of inflation and the higher asset base for which we pay lease costs. Lastly, net income increased by 5.9% to EUR 92 million, reflecting the expected trends in D&A, stable interest expenses and taxes. Moving to the cash flow on Page 9. Recurring free cash flow amounted to EUR 170 million in the quarter or 69% cash conversion. In the quarter, we recorded limited recurring CapEx, no cash taxes, which are due in Q2 and Q4, positive net working capital in line with full year '25 guidance. Lease payments were higher year-on-year, mainly due to the end of the VAT split payment mechanism. This is in line with full year expectations of about EUR 215 million lease cash out, including the effect of VAT split payment. Reported leverage stood at 5x net debt to EBITDA, reflecting the completion of the first tranche of EUR 300 million of share buyback plan with approximately EUR 180 million in the quarter. Additionally, we're pleased to report that in October, we completed 2 debt capital market transactions with the first sustainability-linked bond issuance and the partial buyback of the 2026 outstanding notes. This further strengthened INWIT's debt structure, extending its maturity profile and confirming solid market interest. With this, I hand it back to Diego. Thank you. Diego Galli: Thank you, Emilia. On Page 10, the updated expectations for 2026-2030. Growth sits at the low end of the range with an impact of about EUR 15 million to EUR 25 million progressively versus the midpoint revenues. This is driven by the lower expectations for non-committed revenues, mostly densification projects indoor and outdoor, which we expect to be postponed or reduced by our main clients. As you know, we invest on the basis of committed revenue streams, so a project postponement also means a delay or reduction in CapEx. This impact is partially factored in, in our updated leverage guidance. Together with a mix and phasing of industrial KPIs, there will be a more granular update with full year '25 results. Through 2030, we expect to deliver 4% revenue growth per annum, of which more than 50% is contractually committed, and progressive margin expansion and leverage reduction. Committed revenues come from inflation, more than 9% combined over the next 5 years, MSA contracts, particularly new PoPs on new sites and the solar energy projects and all this provides a contractually secured path to growth. Non-committed growth is less than 50% of total growth and comes from OLOs and additional densification revenues, both outdoor and indoor. Today, we are also confirming the dividend policy and capital allocation announced this past March. A few concluding remarks in the next slides. Today's presentation reflects an updated macro and industry view, stemming from current industry challenges. In this context, INWIT is expected to grow at 4% for revenues and 5% for margin. In any case, we continue to believe on the structural outlook for digital infrastructure in Italy, which is confirmed there is a need to catch up, which is an opportunity. INWIT continues to focus on all levers under our control, both on revenues and costs, affirming our role of an efficiency driver for operators, facilitating densification through sharing economics. With this, I thank you, and we are now ready for the Q&A session. Operator: [Operator Instructions] First question is from Roshan Ranjit, Deutsche Bank. Roshan Ranjit: I guess my question is around the evolving Italian landscape, which is something I think you've talked about now for the last few quarters. And if we think across Europe, what we've seen is where markets have evolved, there has been these behavioral remedies and the want for further densification of networks. So I guess my question is, how easy is that to apply to the Italian market given the already high tenancy ratios and also the kind of more restrictive EM limits, which whilst we have seen the rules change, we haven't actually seen any practical changes in the emission limits leading into kind of more PoPs in smaller areas. So anything you could say around how the evolving MNO landscape can benefit you even though that visibility is maybe a bit more limited than before? Diego Galli: Thank you, Roshan. Yes, I think that the key point is that in Italy, the digitalization and 5G rollout is behind all peers and European and international standards. There is a need to catch up. And this is recognized by all operators in the market. So there is a significant need for additional densification, both outdoor and indoor. This need currently goes -- can I say, is not materialized because there are financial constraints in terms of budget limitation and return on investments. We think that the market has evolved already in 2024 in the right direction. That's not been enough to continue to evolve towards a more sustainable market. And also, let me say, initiatives and the consensus around the new license renewals in 2029, which there is a scenario where the renewal is at no limited cost against commitment to invest, these kind of things do recognize the need to invest, do recognize the need for a more sustainable industry and go absolutely in the right direction. In case of densification, our role is clearly to do it in an efficient manner through the sharing economics and through the industrial capabilities. So in short, the market is behind the industry. There is a need of densification and INWIT is a key player to benefit from it building in an efficient manner, shared infrastructure, outdoor and indoor. Roshan Ranjit: Great. If I could just follow up, you -- I think you -- in terms of the densification, you've kind of given this target, I think it's 2.6x by 2030. So is that -- does that require an easing or further easing of any regulation? Or is that under the current regime? Diego Galli: Yes. No, there is no impact from regulation. This is consistent with current regulation. Operator: Next question is from Fabio Pavan, Mediobanca. Fabio Pavan: I would have first a follow-up on what you were saying, Diego, about the renewal of the license. So do you have any visibility on how long this discussion may take? Do you have already managed to discuss with regulators about this potential new scenario? And then the question is, clearly, you have managed to derisk the target and providing us a very solid equity story. What could be, if I may, upside from here in your view? So higher demand, which at some point, given 5G stand-alone coverage is very low rather than deciding to speed up in capturing opportunities in adjacent businesses. So it's open question, I leave that to you. Diego Galli: On the frequencies on the licenses, discussions are ongoing. I think there have been, let me call, public declaration from the regulator, which have been supporting the scenario. So I think there is a process on forming an overall consensus on this scenario that, again, from our perspective, makes a lot of sense to the benefit of operators and the entire value chain, the entire industry. In terms of upside, yes, I think that the updated guidance reflects timing in the development of the industry towards what we just call more densification. That means higher demand, higher number of new towers to densify -- to cope with the additional capacity needs and the additional data traffic in urban areas, additional towers to densify the suburban areas as soon as 5G stand-alone advances and new towers and dedicated coverage for the transport corridors, rail and roads where the quality of connectivity is clearly requires strong improvement. On top of that, indoor, there are thousands of locations where connectivity is not up to the use of data and digital needs. So that's, I would say, is the industrial key upside in terms of higher demand from the operators to deploy a digital ecosystem to advance on 5G and this again means more towers, more point of presence, more inter coverage. That's our core business that in these days, we do see under pressure because of the budget limitations. But going forward, we do see that investments cannot be postponed forever. Operator: Next question is from Rohit Modi, Citi. Rohit Modi: Some of them have been answered. So just one question, basically clarification on the committed revenues baked into the guidance. If I remember correctly, at start of the year, you mentioned more than 60% of the guidance is based on the committed revenues you have with the operators. Now slide shows that it's more than 50%. Just trying to understand if there's any change in terms of your committed revenue profile there. Diego Galli: Yes. No, thanks for the question. Yes, we -- the committed revenues made up of inflation and the MSA agreements continued as planned, and that's more than 50% of the overall growth. Where the -- we have updated our view is on the noncommitted bit that, again, is related to the to the densification, so the additional point of preference, both outdoor and indoor. In the business plan, in the guidance, we had about 1,000 additional towers, which were not committed. We think that, that is the bit that will take more time to materialize. And by 2030, we think there will be probably around 400 towers less, and this accounts for about EUR 10 million. On top of that, the outdoor -- the indoor densification, we have been developing this market growing very fast. But again, there are budget constraints from the operators at this stage, and we do expect the remaining bit to come from lower indoor location. We would expect that about 20% lower location compared to the March guidance. So these are the 2 main bits, towers and indoor cover solution projects. Operator: Next question is from Andrea Devita, Intesa Sanpaolo. Andrea Devita: So my question is basically on the change in FY '30 guidance because at the end, I clearly understand that on 2026, you have visibility of lower revenues. But I just want to understand whether you just applied, let's say, a mechanical new baseline for 2030, assuming that no catch-up eventually takes place. So 6 months ago, you had visibility on 2030 and now it is lower. Just whether it is structurally or you now do not assume that any catch-up, which should have taken place in 2025 will not take place ever in the next 4 years? Diego Galli: Yes. Yes, I think that as I shared before, what is -- we strongly believe in the need for investments in the sector, in the industry, which has been under-invested for a long time, and that's not only our view. This is the view overall in the market, in the industry as reflected in statistics. The industry has been under pressure and is under pressure in terms of financial return, and that has reduced the investments. In 2024, the industry has started changing with the telecom separation, the Fastweb-Vodafone transaction. We think that overall, the industry has gone into the right direction. And our assumption was that already starting from the end of 2025 with the impact in 2026, there would have been an acceleration of investments. Now talking with customers, in terms of commercial discussions, planning the next year activities, the rollout plan, securing locations that's clear that the emphasis on -- from the customers is on efficiency. So there is still a short-term focus on recovering efficiency on optimizing cost. And clearly, our growth is reflected in rental fees to customers, which means additional OpEx for customers. And this then faces the budget constraints of our customers. So the fundamentals are -- and the fundamental needs for additional investments are confirmed from our point of view. The timing is different. And this impacts for sure by 2026. But then we think that the -- I can say the phase, the timing for the development will take anyway a little bit longer. We don't see at this stage the view of an acceleration, which will compensate the initial shortfall. So in short, term impacted by budget limitation, medium, long-term growth with potential upside to what we have embedded in the current guidance update, growth coming from densification outdoor and indoor. Operator: Next question is from Oba Agboola from UBS. Obaloluwa Agboola: Can you hear me? Fabio Ruffini: Yes. Obaloluwa Agboola: Just on what you're hearing from customers, you mentioned customers are looking to be more efficient, so postponing investment. Are you hearing anything in terms of potential renegotiation of contracts? I know this is something Fastweb-Vodafone mentioned on the efficiency side. So just any update on how you see that? Diego Galli: Yes. We -- Clearly, we continue to talk with customers on recurring on an ongoing basis. We believe the MSA is a strong contract, creates value, has been creating and creates value for all parties involved. So we are very happy to continue to discuss with customers about potential development, additional investments to create value for all. And on the basis of additional investment cycle, we -- our mission is to create efficiency to make most -- the best effort, again, to be efficient and to share the benefits of efficiency with our customers. So that's our focus. The MSA is -- the MSA. Operator: Next question is from Fernando Cordero, Santander. Fernando Cordero: It's basically related on the guidance, and you have been updating to the low end of the previous revenue guidance. And this low end is falling to the rest of the main lines of the P&L. And what I'm a little bit or what I would want to understand is why you have maintained the EBITDA and EBITDAaL margins in your updated guidance despite the fact that, for example, in the third quarter, we have seen the operational leverage in your business slowing a bit, particularly on EBITDAaL side. So in that sense, are you reflecting in the updated guidance any increase -- any effort increase in buying land? Just to understand why the update on revenues is not impacting margins? Diego Galli: Thanks for the question. Overall, on the cost side, we continue our plans. And overall, the real estate programs and activities are on track. There is -- in the quarter, there is a specific topic in terms of comparison against last year same quarter. But overall, the ground lease cost is on track. Therefore, we are confirming our view on that. Operator: Next question is from Giorgio Tavolini, Intermonte SIM. Giorgio Tavolini: Two questions, please. The first one is on M&A. In particular, we recently heard about rumors on a potential tie-up between Iliad and Wind3. But more in general, we know your position regarding consolidation, which is a neutral to positive event. But I was wondering if you can add more color on Cellnex remarks regarding the fact that this kind of consolidation may temporarily weigh on tower growth cash flow due to the higher flexibility granted to the operators during the integration phase. So in the very short term, should be negative event then in -- over the long -- medium to long run should be pretty positive given the more investments and more network upgrades and better financial shape of the merged entity. The second question is on 5G stand-alone. Is it to assume to expect that the near-term investments from the MNOs will mainly prioritize active equipment upgrades on existing sites rather than, let's say, new passive infrastructure, new sites for the network densification? Diego Galli: Thanks, Giorgio. Yes, on potential consolidation, I think that the consolidation is a mean to get to a more sustainable industry structure and to enable and abilitate additional investments. So yes, I believe that the consolidation making the market more sustainable will drive additional investments. And so there is a positive impact on the overall value chain, including the tower companies in terms of additional infrastructure. When talking about consolidation, it's also important to highlight our MSA protections in terms of all or nothing and active sharing protection. With regards to the second point in terms of active versus passive, yes, what you say makes sense. But what is important to highlight is that the active upgrade then drives the need for additional point of presence. So the sequence is quite short between one and the other. And the key point is, again, is investment for network improvement on clearly both radio active and passive. That's what is needed in the market. And we think it will develop even if a little bit later than originally expected. Operator: Next question is from Milo Silvestre, Equita. Milo Silvestre: I have 2 questions. The first one concerning the recent, let's say, agreement between Cellnex and Vodafone on 1k hospitalities. So here, if you can elaborate on that point and if it may have, say, an impact on your expected discretionary investments? And the second one, considering the limited investment momentum on telco infrastructure, if we may expect an acceleration in net new verticals such as data center? Diego Galli: Yes. Maybe come back to the second part of the question, I'm not sure I fully understood. The -- yes, no, the announcement is related to a renewal agreement, and there is no impact on INWIT. Again, let me remind the MSA features, which include the all or nothing clauses and the preferred supplier clause as well. So no impact on us. The second part of the question, sorry, if you can kindly repeat. Milo Silvestre: Yes. And if, let's say, considering the weak momentum on new tower or densification investments, if you are, let's say, considering entering new verticals such as data center? Diego Galli: Okay. Yes, thanks. As part of our strategic plan, we have 2 potential areas of development where we think our companies can make a difference consistently with the current existing model. One of those is the edge data center, the far edge. So clearly different from the hyperscaler data center, which is a different business. But when the computing capacity is needed at the edge of the network, then clearly, we have the infrastructure, which is distributed in the country, which is connected with fiber and energy. So we have both the infrastructure and the business model, which may allow some investments on edge far data center. The second -- let me take the opportunity to mention also the second area, which is the involvement of INWIT tower companies in the active equipment as a player as a neutral host to own and run and manage the active equipment, again, to provide a more efficient operating model and to bring additional efficiency to the operators. These are 2 areas of potential developments, of potential upside for the company based on the strength of our financial position and the ability to invest and based on the industrial capabilities that we do have. So in short, yes, potential opportunities for the medium term. Operator: Next question is from Riccardo Romiati, Aurelia. Unknown Analyst: Just one. Given that the lower growth from noncommitted revenues probably also implies slightly lower CapEx, does this, together with the lower share price, provide an opportunity for further share buyback? And how do you think in general about shareholder remuneration going forward? Diego Galli: Yes. Thanks for the question. We have the EUR 400 million buyback program already approved, EUR 300 million just been finalized. We have EUR 100 million for the next month. And actually for Q1 and in a few days, in a couple of weeks, we will have the special dividends for EUR 200 million. So that's the current shareholder remuneration, and that shows the way we do think about shareholder remuneration, which is a mix of dividend increase and topped up by either buyback or special dividends, and that's the way we will continue to assess the shareholder remuneration. Unknown Analyst: And sorry, is the share price today, do you see that as an opportunity to further boost this? Diego Galli: Yes, absolutely. I think it's -- if I may, clearly, let me say that I strongly believe the current share price does not reflect the fundamental value of the company, the solidity of the business model, the cash generation and the ability to invest and to fuel further growth. So I -- for sure, the share price is below the fair value of the company. Operator: Next question is from Graham Hunt from Jefferies. Graham Hunt: Just on what could see the industrial backdrop improve. Is it just -- is it that we're just waiting for consolidation really? Or could you maybe expand on other situations which maybe could see your customers expand their budgets a little bit or we could see a pickup in growth? Just trying to explore different scenarios there. And on that, we've seen one consolidation, and we are still waiting for any improvement. So just wondering sort of if you could reflect on why that is? Why are we not seeing a pickup from Vodafone-Fastweb? Diego Galli: Yes. I think that the industry may improve across different levers. Starting from the top line, I think the pricing has been a little bit more rational in the last quarters, and that's clearly a key to support the industry a little bit of rationalization on consumer and there is the growth in enterprise, which is a significant opportunity for the telco industry to grow revenue. That's -- I think it's considering the overall digitalization environment, I think it's an opportunity which is at the beginning and operators will be in the condition to materialize in the next years. On cost and investments, let me mention that the energy cost is particularly high on the industry, and there are initiatives to support lower cost on the energy front. And the other element that I did mention before is about the frequency and the renewal of the frequency with no limited cost in exchange of investments together with additional investments and coverage commitments will be a way to support the industry to get better returns and to start the investment cycle and the positive cycles of investments, services and top line growth. Operator: Mr. Ruffini, gentlemen, there are no more questions registered at this time. Fabio Ruffini: In this case, thank you, everyone, for connecting. Have a good rest of the day. Diego Galli: Thank you. Operator: Ladies and gentlemen, thank you for joining. The conference is now over. You may now disconnect.
Operator: Welcome to the Gogoro Inc. 2025 Third Quarter Earnings Call. This conference call is now being recorded and broadcast live over the Internet. A webcast replay will be available within an hour after the conference is finished. I would like to turn the call over now to the Gogoro Inc. team for the third quarter 2025 earnings conference call. Henry Chiang: Hosted by our CEO, Henry Chiang, and CFO, Bruce Aitken. Hopefully, you have had a chance to review our earnings release. If not, you can find it along with today's presentation materials on the investor relations section of our website at investors.gogoro.com. We are hosting this call via live webcast, and the presentation materials will be displayed on your screen as we go. If you are joining us by phone, your lines are in listen-only mode. Henry Chiang will start with an overview of Gogoro Inc.'s progress and the key highlights for the quarter, followed by Bruce Aitken, who will take you through the financial results in more detail. After that, we will open the line for Q&A as time allows. Before we begin, please note that today's discussion may include forward-looking statements, which are subject to risks and uncertainties that could cause actual results to differ materially. Please refer to our press release and investor presentation for further information. We will also discuss certain non-IFRS financial measures today. Reconciliation to the comparable IFRS measure can be found in our earnings release. With that, let me turn the call over to Henry Chiang. Thanks, George. Henry Chiang: As we close the 2025, I am proud of how Gogoro Inc. continues to strengthen its foundation, one built on operational discipline, innovation, and long-term focus. The last few quarters have been about reinforcing the fundamentals that will power Gogoro Inc.'s next chapter. Our focus on operational efficiency continues to deliver results. Over the first nine months of the year, our focus has been on stabilization, efficiency, and cost optimization, and it shows. We generated over $25.7 million in operating cash flow, nearly doubling last year's level, and achieved approximately $21 million in operating expense savings compared with the same period in 2024. We grew our adjusted EBITDA to $47 million over the first nine months of the year, a 25% increase over last year, and delivered an adjusted gross margin of 19.3% for the nine months, an improvement of 4.3 percentage points from 2024. These gains did not happen by accident. They reflect a company-wide commitment to simplify, streamline, and strengthen. We have tightened all aspects of our operations, including a more efficient deployment of resources, lowering our inventory levels, improving our production planning, and increasing the efficiency of our selling channels and marketing efforts. These changes are translating into tangible outcomes, better cash conversion, and improved flexibility to respond to shifting market demand. Our product roadmap is also expanding to position us for future growth. The launch of our EZ and EZ500 models this year broadened Gogoro Inc.'s reach across price segments, strengthening our competitive positioning in the mass market segments while reinforcing our technology leadership. The EZ has been the best-selling electric two-wheeler in Taiwan for five consecutive months, and the EZ500, which has a larger motor in the same light chassis, increasing performance to the 125 cc level, became the best-selling 125 cc electric two-wheeler in Taiwan in October. We expect these products to continue to lead their categories for the rest of 2025 and contribute meaningful sales volume and margin throughout 2026. Our Powered by Gogoro Network Partners continue to scale and innovate. Yamaha's recent launch of the QC in August is a great example of how leading manufacturers are deepening their commitment to Gogoro Inc.'s ecosystem. Each new PBGN model not only validates the strength of our technology but also expands the value of our swapping network, creating a reinforcing loop of adoption, efficiency, and trust. It is clear that we have strengthened our operational foundation. We are more agile, more disciplined, and better prepared to navigate near-term headwinds while executing for long-term value. In 2025, we have proven that Gogoro Inc. can generate strong operating cash flow, expand margins, and execute with precision. Now, as we prepare for 2026, we are turning that foundation into momentum, leveraging a renewed product and technology portfolio to capture the next wave of electrification across Asia and beyond. This is where vision becomes action and where our leadership shapes the future of urban mobility. It is widely accepted that electrification of two-wheelers will continue and that battery swapping solutions will drive much of that growth. Policymakers and customers alike are seeing the benefits of the battery swapping model. To capitalize on this momentum, we are investing in vehicle, battery, and ecosystem developments. The core of an EV's performance is its powertrain, and the heart of the powertrain is a motor. Over Gogoro Inc.'s history, we have consistently developed the best electric two-wheel powertrain and motors, and we are currently developing another innovative motor, which will improve key metrics like vehicle energy efficiency. These improvements continue to deliver best-in-class performance for our vehicle customers, and we expect this motor to be ready for launch in late 2026. We are launching three vehicle models in 2026. These vehicles address multiple market segments. The specifications meet and exceed customer expectations, and initial feedback from both channel partners and directly from riders has been very positive. We look forward to sharing those vehicles with markets in 2026. At the heart of our network and our recurring revenue subscription model is our battery pack. It is the most dense battery of its kind in the industry, and our safety record is also industry-leading. To build on our historical success, we have kicked off development on a totally new generation of battery pack, one that will have greater density, improved manufacturability, and lower cost, but is 100% compatible with all of our existing battery packs. This battery will specifically benefit customers in cost-sensitive markets and will further demonstrate the total cost advantages of electric two-wheelers versus ICE vehicles. As a result of both our operational focus as well as our product and technology innovation, we are entering 2025 confident in our ability to deliver on our promise of Gogoro Network profitability in 2026, Gogoro Network generating positive free cash flow in 2027, and hardware sales profitability in 2028. With that, let me hand it over to Bruce Aitken, who will take you through the quarter's financial results and provide more details on our outlook. Bruce Aitken: Thanks, Henry Chiang. We delivered strong non-IFRS performance this quarter and demonstrated that the foundation we have built is ready for the next chapter. Let me take you through our third-quarter financial results in more detail. Our energy business continues to grow and is on track to generate income in 2026. Battery swapping service revenue grew 11.5% year over year to $38.9 million, marking another quarter of double-digit growth despite a contracting two-wheeler market in Taiwan. This growth was driven by a large subscriber base reaching 657,000 riders at quarter-end, up 5% year over year. The subscription-based nature of this business allows us to continue improving network utilization and profitability, even when vehicle sales fluctuate. Operationally, we made strong progress in efficiency and cost management. Our teams successfully reduced inventory by 34% year over year, a result of more effective procurement and production planning. These improvements reflect the significant work among multiple teams and demonstrate our commitment to cost management both now and in the future. Our energy business continues to be the financial backbone of Gogoro Inc., generating recurring cash flow, expanding margins, and demonstrating the stability of our platform. Turning to our hardware and other revenues, this segment, which includes vehicles and component sales, faced headwinds in the quarter as Taiwan's overall two-wheeler market contracted to 196,000 units, its lowest third-quarter level in a decade. Hardware and other revenue was $38.7 million, down 25.5% year over year, primarily due to a 43.7% decline in vehicle sales volume. This decline reflects a combination of macroeconomic headwinds, weaker consumer sentiment, and decreased discretionary spending, affecting both gasoline and electric motorcycles alike. While this environment remains challenging, we have taken proactive steps to rightsize our cost structure, streamline our vehicle portfolio, and focus our R&D investment on models and technologies that will yield the best long-term return. The launches of EZ and EZ500 are good examples of this focused approach, designed to expand our addressable market across different price segments while maintaining healthy margins. We view 2025 as a transitional year for our hardware business, one in which we are strengthening fundamentals and preparing for the renewed growth momentum in 2026, supported by new products, both our own and partners. From a macro perspective, Taiwan's market environment remains soft, with motorcycle retail sales, gasoline and electric combined, down roughly 9% year over year, and consumer confidence at its lowest point since early 2024. We do not expect a near-term rebound in consumer demand, and our planning assumptions reflect that view. However, the structural shift towards electrification continues, and our partnerships with major OEMs and city governments put us in a strong position to capture that transition once sentiment improves. Our financial discipline and operational improvements over the past year have made us more resilient to these cyclical fluctuations. Moving to profitability, our gross margin improved significantly to 12.2%, up from 5.4% in the same quarter last year. On a non-IFRS basis, gross margin reached 22.2%, up 5.9 percentage points year over year, representing our highest quarterly level since 2022. This margin expansion was primarily driven by improved inventory management, reduced service and repair costs, and fewer inventory write-downs. Our voluntary battery upgrade program continues, which does have a short-term impact on gross margin, but it strengthens our long-term economics by extending battery life and improving reliability. Our adjusted EBITDA rose to $20.2 million, up from $15.5 million last year, another record level since 2022. This improvement reflects higher non-IFRS gross profit, tighter cost control, and improved non-operating income. We generated $25.7 million in operating cash flow in the first nine months of 2025, almost double last year's level, supported by stronger working capital management and expense efficiency. Our net loss narrowed to $14.9 million compared with $18.2 million in the same quarter last year, reflecting a healthier operating structure and continued improvement in profitability metrics. Through these actions, we have strengthened our balance sheet and enhanced financial flexibility, giving us a strong foundation to pursue profitable growth in 2026 and beyond. Given the softer market conditions, we are adjusting our full-year 2025 revenue outlook to between $270 million and $285 million, reflecting the continued contraction in Taiwan's two-wheeler market. We expect gross margin in the fourth quarter to remain temporarily impacted by our accelerated battery upgrade program, which we expect to complete by year-end. These investments are deliberate and strategic, aimed at improving battery durability, customer satisfaction, and long-term profitability. We remain focused on finishing this year with strong operational execution, continued cost discipline, and healthy cash generation. With the structural improvements we have made, Gogoro Inc. enters 2026 with greater efficiency, agility, and confidence in delivering sustainable profitability. Operator: Thanks, Bruce Aitken. And now we will take some questions. Henry Chiang: Thank you, Henry Chiang and Bruce Aitken, for the updates. For webcast participants, you can submit your question using the drop-down box in the top right corner. We will address them as time permits. As attendees are formulating their questions, I will ask two questions that we have collected. Question number one, congratulations, Henry Chiang, on your appointment as an official CEO. Over the past year as interim CEO, you have overseen quite a few strategic and operational changes at Gogoro Inc. Can you share what this appointment means to you personally? And what your vision and priorities are for Gogoro Inc. over the next twelve months? Henry Chiang: Thank you, George, and I really appreciate the kind words. It has been a privilege to lead Gogoro Inc. over the past year and to now take on the role as a permanent CEO. Throughout the history, any transformation requires full dedication to fundamentals like products, technology, and execution. Gogoro Inc. has been investing in shaping and even creating an industry for the past decade. Over the past year, beyond the quarterly numbers, we have been diving deep to understand the true core and spirit of Gogoro Inc. The more I uncover, the more I see a company with enormous potential and untapped upside. Of course, challenges remain, and many more lie ahead. But at the heart of it all are solid fundamentals, a resilient team, and a clear mission. My vision for turning Gogoro Inc. around begins with streamlined operations and ensuring our financial results consistently meet expectations while building the operational resilience to thrive in dynamic markets. With this strong foundation in place, we can confidently focus on creating sustainable long-term value and unlocking the full potential of Gogoro Inc.'s innovation and impact. With our operations stabilized, we are now focusing on product and technology innovations. This is the season we are anticipating in 2026. We have seen policy tailwinds in Southeast Asia that indicate broad adoption of battery swapping and electrification. I am excited, active, and also cautious as I look into expansion opportunities. I look forward to sharing more with you in the coming quarters. My vision is clear and remains unchanged: to change the way people use and share energy and build cleaner and smarter cities for the future through battery swapping, which is the best solution for dense urban mobility. Thanks again for the question, and we will continue to push forward toward a better future. Henry Chiang: Thank you, Henry Chiang. Question number two. Your stock has declined following the 20-to-1 reverse stock split you executed in early October. Can you provide your view on this decline? Do you have any concerns? How do you view the long-term prospects for Gogoro Inc.? Bruce Aitken: Thanks, George. There are two ways to look at stock performance. One is the immediate reaction to the reverse stock split, which I will address first. But then also, there is a strategic perspective on the stock in general. So you are absolutely right. We have experienced a decline since the reverse stock split in early October. We think that is largely a near-term and largely a technical reaction. Many companies that do a reverse stock split do, in fact, experience a decline in the near term immediately after the split. So we have observed that pattern in other companies. We are not surprised by the stock price decline, but obviously, we will do everything we can to regain confidence among the investor group. But really, the short-term movement does not change the underlying fundamentals of the business. So with our operational discipline that Henry Chiang spoke about earlier, our cash flow generation capability, our cost control, and the growth opportunities that we have in front of us, we will continue to focus on executing. We will continue to focus on strengthening the balance sheet, and we will try to deliver long-term value for shareholders. And if you look at the stock price from that more strategic lens, then we do not believe that the stock price reflects the intrinsic value of our business. We think the most challenging period for Gogoro Inc. is behind us. We believe there are better days in the future. Whether you look at policy tailwinds, you look at the speed with which cities are accelerating their electrification, whether you look at customer and partner engagement, all of those point to a faster adoption of electric mobility in the future. As Henry Chiang pointed out, for dense urban cities, the battery swapping technology is the preferred option. It is probably the only option that will work in many locations and for many customers. So our message to investors is clear: focus on those long-term fundamentals, focus on the platform's growth, focus on our mission. We are committed to delivering sustainable value to our shareholders over the long haul. Operator: Thank you, Bruce Aitken. Now we open the line for further questions. Operator: There seem to be no further questions. I will turn the call over to Henry Chiang for some closing remarks. Henry Chiang: Okay. Thank you. As we close this quarter, I want to thank our teams, partners, and customers for their continued dedication and support. Over the past few quarters, we have strengthened our operations, improved efficiency, and laid a solid foundation for our sustainable growth. This is a strong and continuous commitment to our customers and shareholders. Looking ahead to 2026, we are laser-focused on delivering value through innovations. We strongly believe that battery swapping is taking off, and Gogoro Inc.'s product and technology will continue to lead the way. We remain committed to the milestones we have shared with the public: achieving energy network profitability in 2026, generating positive free cash flow from the energy network business in 2027, and delivering sustained company-wide profitability in 2028. Thank you for your trust and confidence in Gogoro Inc., and we look forward to keeping you updated on our progress in the quarters ahead.
Neil Doshi: Thank you, and welcome to Nebius Group's Third Quarter 2025 Earnings Conference Call. I'm Neil Doshi, Vice President of Investor Relations. Joining me today are Arkady Volozh, Founder and CEO, and our broader management team. Our remarks today will include forward-looking statements, which are based on assumptions as of today. Actual results may differ materially as a result of various factors, including those set forth in today's earnings press release and in our report on Form 20-F filed with the SEC. We undertake no obligation to update any forward-looking statements. During this call, we will present both GAAP and certain non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. The earnings press release, shareholder letter, and accompanying investor presentation are available on our website at nebius.com/investorhub. And now I'd like to turn the call over to Arkady. Arkady Volozh: Thanks, Neil, and thank you, everyone, for joining the call today. I'd like to share my thoughts about the demand environment, our capacity plans, and what we're doing in our product. First, about the demand. Q3 demand was very strong. We sold out all of our available capacity. We continue to see a consistent trend: we bring capacity online, we sell all of it. With the new generation of NVIDIA Blackwells coming online, more customers are interested in purchasing capacity in advance and securing it for a longer period of time. Today, we're very pleased to announce that we signed another major deal, this time with Meta, for approximately $3 billion over the next five years. In fact, demand for this capacity was overwhelming, and the size of the contract was limited to the amount of capacity that we had available. Which means that if we had more, we could have sold more. This deal comes on top of the Microsoft deal we announced early September, with a contract value between $17.4 billion and $19.4 billion. As we said before, we expect to sign more of these large long-term deals, and we're delivering on that promise. As busy as we are with these mega deals, our main focus is still to build our own core AI cloud business. We made great progress here with AI-native startups like Courser, Black Forest Labs, and others. The economics and the cash flow of mega deals are attractive in their own right, but they also enable us to build our core AI cloud business faster. This is our real future opportunity. Now on the capacity. In order to meet the growing demand, we have accelerated our plans to secure more capacity, and this is actually our main focus for now. Capacity today is the main bottleneck to revenue growth, and we are now working to remove this bottleneck. As we look to 2026, we expect our contracted capacity to grow to 2.5 gigawatts. This is up from the one gigawatt which we discussed in our previous earnings call in August. Furthermore, we plan to have power connected to our data centers, which means fully built, of approximately 800 megawatts to one gigawatt by the end of 2026. While we made significant investments in our capacity footprint, we're also investing in our main product, our AI cloud. To expand our addressable market opportunity to large enterprise customers, we released our new enterprise-ready cloud platform version 3.0 called Ether, and our new inference platform called Nebius Talking Factory. We believe Ether gives organizations the trust, control, and simplicity they need to run their most critical AI workloads. Nebius Talking Factory is an inference platform that enables organizations to run open-source models with reliability, visibility, and control. And we have a large pipeline of new software and services that we are continuing to build, which will differentiate us from other cloud companies. Based on the strength of demand that we see and our accelerated capacity growth plan, we believe we can achieve annualized run rate revenue (ARR) of $7 to $9 billion by the end of 2026. In summary, Nebius is positioned to win in this large and rapidly expanding AI cloud market. We're just beginning to realize the powerful potential of the AI evolution that is underway, and we are quickly becoming one of the primary cloud and infrastructure providers to support it. And with this, I would like to hand the call over to our CFO, Dado Alonso. Dado, please. Dado Alonso: Thank you, Arkady. While the details of our Q3 financial performance can be found in our shareholder letter, I'd like to provide some additional color to the quarter, discuss our financing options, and conclude with 2025 guidance. Q3 group revenue was $146 million, up nearly 355% year over year and 39% quarter over quarter. Annualized run rate revenue for the core business at the end of September was $551 million. The core infrastructure business, which accounted for nearly 90% of total revenue, grew 400% year over year and 40% sequentially. Once again, we sold out our capacity, and our revenue growth was limited only by the capacity that we were able to bring online. I'm also pleased to say that adjusted EBITDA margin for the core infrastructure business expanded quarter over quarter to nearly 19%. On financing, in order to support our aggressive growth plans in 2026 and to maintain this pace of growth in 2027, we will be utilizing at least three sources: corporate debt, asset-backed financing, and equity. We are in the process of raising asset-backed debt, which we'll be able to secure with attractive terms supported by the creditworthiness of our largest customers. Tomorrow, November 12, we will be putting in place an at-the-market equity program for up to 25 million Class A shares and plan to file a prospectus supplement. We will evaluate the program regularly based on our capital needs. The program enables us to access equity funding on an efficient ongoing basis. However, we will remain dilution sensitive as we prepare to finance future growth opportunities. Now I would like to turn to 2025 guidance. As we approach the end of the year, we are tightening our full-year group revenue guidance to a range of $500 million to $550 million, and we are currently pacing to the midpoint of that range. This compares to the $450 million to $630 million in our previous guidance. The reason we are in the middle and not at the top of that range simply relates to the exact timing of when capacity comes online. Our current momentum and long-term trajectory remain extremely strong. Our annual run rate revenue, which is a good reflection of our future growth opportunity, continues to expand, demonstrating the resilience and scalability of our business model. As such, we remain well on track to hit our ARR guidance of $900 million to $1.1 billion by the end of 2025 while also paving the way for substantial annualized run rate revenue growth in 2026 and beyond. In terms of the mega deals, we will begin serving Microsoft and Meta late in the quarter, and almost all of the revenue from these deals will start to be realized and ramp up during the course of 2026. We plan to give full-year revenue guidance for 2026 next quarter. Turning to adjusted EBITDA, as we have previously indicated, we expect to be slightly positive at the group level by year-end while remaining negative for the full year. Regarding CapEx, we are raising our 2025 guidance from approximately $2 billion to circa $5 billion. This acceleration reflects our strong conviction in the demand outlook and our decision to secure critical infrastructure, including hardware, power, land, and key sites. These investments are strategic enablers of future growth and will position us exceptionally well to capture the opportunities ahead. In summary, we have a large and rapidly growing opportunity in front of us, and we are executing with focus and discipline to capture it while delivering substantial sustainable growth and setting the stage for strong long-term profitability. Now let me turn the call over to Neil for Q&A. Neil Doshi: Great. Thank you, Dado. We'll give it a moment to collect questions from the online platform, and then we'll begin the Q&A. Alright. Let's start with the first question coming from Alex Platt of D.A. Davidson. Can you tell us more about the new Meta deal? Why did they choose you, and how should we model the deal? Arkady Volozh: Well, again, as we're happy to announce today, this new deal with Meta is approximately $3 billion. As I said, the size of the deal was limited only by the capacity that we had available, and if we had more capacity, we could have signed a bigger deal, probably. After we announced Microsoft in September, we said that we would have more deals of this kind, more large deals. And actually, we're delivering on that promise, and we're optimistic as these deals will arise more and more. However, these mega deals are important, but it's important to stress that we will remain focused on developing our own AI cloud, which currently serves not only these big deals but AI startups and enterprises. Ultimately, we believe that these large contracts provide us with great sourcing of financing for us to continue building our core AI cloud business. Neil Doshi: Great. Thank you, Arkady. We'll take the next question from Alex Duval, our analyst from Goldman Sachs. So we provided the updated 2026 ARR outlook of $7 to $9 billion. What exactly is in the $7 to $9 billion ARR target? And is this based on preexisting core business plus Microsoft and Meta? Is there anything else in terms of signing up for large deals? Mark, maybe you can take this one. Marc D. Boroditsky: Thank you, Alex, for your question. Let me walk you through the building blocks of how we get to this $7 to $9 billion in ARR. First of all, as we already shared, we had a bottleneck in capacity, and we worked extremely hard over the last several months to unblock this bottleneck. As we shared, we plan to have 800 megawatts to one gigawatt of connected power by 2026 and 2.5 gigawatts of contracted power. Second, we see the demand out there from AI startups to enterprises to the large strategics. And we see that client demand that we were unable to sell this past year due to a lack of capacity, and we strongly believe that the capacity we are putting in place in 2026 will help us to meet more of this demand. At the end of the day, we will allocate between the categories of customers based on the individual economics of the deals they represent. Thirdly, this new capacity that we are putting in place together with our current capacity that has already been sold, and the long-term contracts that we signed with Microsoft and Meta give us the confidence that we can achieve the $7 to $9 billion of ARR, of which more than half is already booked. Neil Doshi: Right. Thank you, Mark. We'll take another question from Alex at Goldman. Can you walk us through the timeline of your infrastructure build-outs for Q4 2025 and 2026? And what gives you confidence that you can reach your 2.5 gigawatts goal for contracted capacity? Andrey? Andrey Korolenko: Hello. Yeah. Thanks, Neil. So we are ramping up our capacity as fast as we can to accelerate our growth for the next year and beyond. We are happy to launch now already in Israel and the UK, and all the capacity in those regions was presold before the launch. And we are growing with the number of regions where we are present, and we are also bringing new capacity online in the current sites. We're also coming online in New Jersey. We are launching new phases of Finland in Q4, which are also presold, by the way. In 2026, we will continue scaling the existing data centers, including the UK, Israel, and New Jersey, and we have new data centers already in development, both in the US and Europe, and they start to come online in 2026. We are also in the process of securing several new large sites, which we believe will add hundreds of megawatts, and some of those will go online by 2026. So overall, at the moment, we are looking at more than or around 2.5 gigawatts of contracted power by 2026. And as we said, demand is growing massively, and we are very focused on rapidly building the capacity and the future pipeline to meet the demand in 2026 and beyond. Neil Doshi: Great. Thank you, Andrey. Alright. We'll take a question from the folks who've been submitting questions. We're getting a lot of questions on Microsoft and Meta revenue. How should we be thinking about revenue contribution from Microsoft and Meta deals for this year and going forward? Dado? Dado Alonso: Well, the Microsoft contract will not have a material effect on our revenue and ARR in 2025, as the first tranche was just delivered. All of our remaining tranches will be delivered in 2026, with more than half of them during the second half. So we actually expect revenue to ramp up over the course of the year. Starting in 2027, we will begin to recognize the full annual revenue run rate of this new Microsoft deal. With regards to Meta, we will be concluding the deployments within the next three months, so we expect to mostly be at a full revenue run rate in 2026. Neil Doshi: Great. Thank you, Dado. Maybe another question from our online audience. What does the overall demand environment look like in Q4 and into the next year? Mark, do you want to take this? Marc D. Boroditsky: Certainly. Certainly. I joined the company about five months ago, and I've had an extraordinary experience in these past five months. It's extraordinary from the standpoint that I've never seen the kind of demand profile that we're experiencing. It is literally accelerating for Nebius, and I believe as well for the broader market. As an example, in the recent quarter and quarters before, we saw pipeline generation. This is opportunities by customers that want to buy from us. Expand. As a matter of fact, in the past quarter, Q3, we saw pipeline generation expand 70% quarter on quarter, and we generated $4 billion in pipeline in that quarter. But we were only able to convert a portion of that given the constraints of our capacity. As a matter of fact, I've learned a new skill, one I don't think many go-to-market professionals have ever had to experience, and that's learning to say no to customers. As we routinely sell out and have to actually let them down lightly and try to convince them to purchase in the future. As I look out to 2026, and I think through the demand profile, the kind of pipeline that we're generating right now is giving us high confidence to continue to expand our results and drive towards the ARR growth that Arkady mentioned earlier on the call. Neil Doshi: Great. Thanks, Mark. We have a question now from one of our analysts, Nehal Chokshi from Northland. Incremental ARR in September was around $12 million, down from $180 million the prior quarter and $159 million in March. Why is incremental ARR down? Neil, it's a great question. You know, as we've stated, a lot of our revenue and our ARR is really dependent on us being able to bring on capacity. And because capacity really has been the bottleneck, that's why we've seen a little bit of that trend. However, as we're bringing on a lot of capacity in Q4, you should see that incremental ARR in Q4 will be significantly higher. Alright. Let's go to another question from online in terms of the CapEx. You have just announced your plan to achieve connected capacity of 800 megawatts to one gigawatt by 2026. How are you thinking about CapEx, and what is your philosophy on CapEx spending? Arkady Volozh: I think Arkady, can I take this? Probably, I should take it. Again and again, as we see, at least this year, our revenue growth was limited by our capacity, and everything we built was ultimately sold. So in theory, we should try to build as much as we can. In practice, we are limited by certain physical world limitations. The physical world cannot grow five or ten times a year. We have limitations in the supply chain and obtaining permits. The amount of capital that we can deploy. So when we plan for data center CapEx, there are actually three stages there. The first stage is securing the land and power. The second stage is building the data centers themselves, doing shell, electrical and cooling equipment, batteries, and so on. Physical installation, which we call connected power. And the third part is finally deploying the GPUs themselves. And if we look at it from the CapEx point of view, speaking, it breaks into three spending blocks. So first, stage, securing land and power. It's pretty cheap. It's around, again, it depends on the scale, but it's around 1% of total CapEx for securing those ports and electricity. The second stage, building with this set of building connected power, is something around, I don't know, 18, 20%. And the remaining 80%, the main part, is for deploying the actual GPUs. This is the main part of CapEx. So if we want to build as much as our capital will allow us, what should we do? First, we should secure as much capacity as we can because the cost, actually, it's not so it's an immaterial at this scale. Second, we should build as much as our capital allows. And third, we will fill GPUs in line with contracted or clearly visible demand. We will need this massive 80% spend will come only when we see real demand. That's why we say that in 2026, we will be securing 2.5 gigawatts total contract capacity, and we are planning to physically build 800 to one gigawatt of connected data centers. This will be done by the end of next year. Neil Doshi: Great. Thank you, Arkady. Let's see. Another question from Alex Duval from Goldman Sachs. You have announced your target is 2.5 gigawatts of contracted power, whereas before it was one gigawatt. Is it fair to assume that if you get 2.5 gigawatts, this will equate to over $20 billion of revenue? By when do you envisage you could do this and how? Maybe we'll give this to Andrey. Andrey Korolenko: Thank you, Neil. I guess it's fair to assume, but as Arkady just mentioned, we are securing the access to the power and the ability to build. But we will invest CapEx actually in building out and deploying the GPU in those. Keep in mind the constraints that we have with the capital and according to the demand in the future periods. Just important that we are able to accelerate when it will be needed, so we don't like being blocked by the capacity constraints all the time. Neil Doshi: Great. Alright. Take another question from online. Is it in a situation when you are sold out, is that the same issue? Or is that really an issue with your future growth and differentiation of servicing a broader range of customers? Mark, can you take this one? Marc D. Boroditsky: Certainly. Thank you, Neil. It's a great question. I mean, in theory, the situation of being sold out is a nice problem to have. But the person asking the question is right. For our business model, it's really important for us to be able to not only service large tech companies but also be able to support our AI cloud and in a very diverse set of customers. As a matter of fact, servicing startups and software vendors and enterprises is not only about delivering on their capacity needs today. We want to build partnerships with these customers and help them to meet their capacity requirements in the future, especially with enterprises. Because they don't want to actually have a multitude of vendors. They prefer to align with a strategic partner. That's why we are working very closely with Andrey. And as Andrey mentioned earlier, as we look forward and think about deploying capacity, it's going to be based on the demand that we're seeing out there. So utilizing the pipeline that we're building and the demand that we're experiencing to work with Andrey to identify the capacity that you should deploy. It's a very dynamic model that we're trying to put in place. Neil Doshi: Great. Thank you, Mark. Appreciate that. We have a question from Nehal Chokshi from Northland. Who's asking, you know, going, you know, so you've done equity deals. We've also done, you know, equity-linked deals as well. Dado, you know, how are we focusing on debt and asset-backed financing for large deals? Dado Alonso: Thank you, Nehal. Well, as you know, this is a capital-intensive business. And as we've said previously, funding our growth will require raising a significant amount of capital. In this context, we are actively evaluating a range of financing options today, including asset-backed financing, corporate-level debt, and equity financing. And we are working on all fronts in order to maintain a disciplined capital structure and maximize our shareholder value. With regards to asset-backed financing, we believe that we will be able to secure such a facility with attractive terms supported by the creditworthiness of our largest customers. I would like to reiterate that as we are growing our business, our focus and ultimate goal is to maximize our shareholder value. Neil Doshi: Great. Thanks, Dado. And maybe just sticking on the theme of financing, from the online portal. You know, why are you planning to pursue an ATM? You just completed a secondary, and this will result in additional dilution to shareholders. Dado Alonso: Any share of some perspective. We will be putting in place an at-the-market equity program for up to 25 million of Class A shares, and we plan to file the prospectus supplement tomorrow. We want to make sure that we have more tools at our disposal to access capital markets when needed. This is a long-lasting program, which will be used along with other capital raise options, including corporate debt, asset-backed financing, and others, as I mentioned in my opening remarks and just before this question. So the program enables us to equity funding on an efficient ongoing basis. However, we will remain dilution sensitive as we seek to finance future growth opportunities. Neil Doshi: Great. Thanks, Dado. Let's see. Another question from online. How are the early operations of your new UK facility progressing? Tom? Tom Blackwell: Yeah. No. Absolutely. So short answer is progressing very well. You may have seen just actually last week, Arkady and a few of us were there. We had our official launch as we presented the data center to the UK market. This is actually capacity that will be coming online really actually in the next week or so. So pretty very in the coming days. You might remember actually that in June was when we first announced our intention to launch in the UK, and actually even in the time since June and now, we've already come close to doubling the capacity that we're bringing on stream. You know? And that's just really a function of extremely strong demand that we're seeing in the UK. And actually, as is often the case with new that we bring on even before going live, we're pretty much sold out. So if not already fully sold out with our capacity. So that track, you know, that's a trend that just continues. I would just say overall, a few words about the UK, actually. I mean, we're very bullish actually about the opportunities in the UK. It's a vibrant AI market. You know, it's probably one of the most dynamic that we see outside of the US and China. The government's making a big push to support the growth of the industry and having a reasonable degree of success in this field. So there's a we see a lot of AI startups. The VC environment is strong. You also see some of the large tech companies establishing regional R&D and presence there. So really, there's a lot happening in the UK, and we think a lot still to come for Nebius in the UK. We're very happy to be there. And, actually, although this specific facility that we have, I think, with the capacity once by January will have reached the peak capacity there, we see a lot of other opportunities to expand capacity in the UK overall. Neil Doshi: Great. Let's see. In terms of we'll take another question on capacity. So, you know, you mentioned this quarter that you're fully sold out of available capacity. What are your constraints to growing in the near term and medium term to capture more of that demand? And could you also address some of the recent comments on the market around power equipment constraints? Andrey Korolenko: Yeah. I'll take it. Yeah. Thanks, Neil. As we discussed in most of the previous questions, capacity remains our main bottleneck. Everything we deploy, we sell. And we see the demand that continues to significantly outstrip our supply each time we add new clusters. So in the near term, the key challenges in increasing capacity are securing power and the supply chain. And we're addressing this. We have managed these situations in the past and have quite a bit of expertise in building on the data centers and the duration of those. So overall, we have mentioned. Generally speaking, we are doing quite well, actually, with the pipeline. And when we spoke last quarter, I believe that we announced that we have secured the roadmap of the one gigawatt of power. Now we are talking about the number 2.5 gigawatts. And we're still putting a lot of focus on growing this number and making this number reliable and effective and actually bigger. Neil Doshi: Great. Thank you, Andrey. Online, we're getting just a few questions about any updates on the New Jersey facility. Andrey, do you want to take that? Andrey Korolenko: Yeah. The New Jersey facility goes as planned. And the first tranche already was handed over to Microsoft, and we have continued the further expansion to the crane. Neil Doshi: Alright. Looks like a question from online. Maybe more of a market question. Are you concerned that we are in an AI bubble, Arkady? Arkady Volozh: Don't have anybody ask this question these days. Well, what we see today, the demand is here. Right? Yeah. We understand that we are in the center of a one-second generation AI evolution. Much no doubt that much more compute will be needed and much more will be built. This situation of unbalanced demand supply is temporary. Of course, eventually, demand supply will level up. And what we are doing in addition just to growing this raw capacity, we are building our AI cloud, which will real businesses, real industries, real enterprise market. Where AI will be making creating value. And we are big believers that the AI industry in general, you know, sector specifically. It's gonna be okay. Ultimately, we just need to be sure that a, we're diversified in terms of customers and workloads. And this is actually what our software is basically doing. That we invest conservatively and that we finance our growth responsibly, and we are very much focused on this. And also, while we're growing rapidly, five times more a year, we still remain laser-focused on maintaining healthy margins. And a sustainable business model as a whole. In old days, I would say. Healthy unit economics. So we are focused on that. And whatever comes will come. I would hope that we will be okay. Neil Doshi: Great. Thank you, Arkady. Next question is from Alex Platt from D.A. Davidson. How should we think about the lead time between when power is connected to and when it is hooked up to GPUs and generating revenue? Andrey Korolenko: Yeah. Thanks, Neil. So on the technical side, it also depends if it's a new site or if it's a special one of a current site. But, generally speaking, from the connected power and start of the GPU deployment until it can go in the platform engineering revenues anywhere from six to twelve weeks. If it's already an existing site, that can be even quicker. But generally, we also have flexibility. That's why we are building infrastructure. We have flexibility when we deploy and when we deploy how much we deploy. Neil Doshi: Great. Thanks, Andrey. Alright. Question from online. Can you update us on your progress with your primary customer segments? Mark, can you help us with this? Marc D. Boroditsky: Certainly. Certainly. We continue to see extremely strong demand from our customers in our core AI business, and we're continuing to expand business overall with our existing customers. As a matter of fact, we added a number of new customers in Q3. Most notably, some very disruptive startups like Cursor AI, Black Forest Labs, and World Labs. I'm sure everybody's heard of Cursor. We're very proud to be their partner. For those that haven't, they're an extraordinarily popular AI-powered code editor that is helping millions of developers to write and debug and optimize their code faster, and they're making great strides into the enterprise. Black Forest Labs is an interesting customer that is developing cutting-edge generative AI models specifically for image and video generation. Their popular Flex One model helps turn text and images into high-quality media-ready visuals. And World Labs is building something they call a large world model, which is able to simulate 3D worlds and it gives developers and AI engineers the necessary spatial awareness to build applications for things like media and gaming and architectural design and as well for physical AI and robotics. We've also, as I mentioned, seen expansion with existing customers. As a matter of fact, as an example, we've seen expansion with our software vendor customers like Shopify, and then also we've made great strides with our efforts around driving vertical market success, adding significant customers in our healthcare life sciences part of the business. And we're also making significant advancements in physical AI and media and entertainment customer segments. Neil Doshi: Right. Thank you, Mark. Maybe a question to looks like this is a question for Dado. Few people are asking, any puts and takes that you can provide on your revised 2025 year-end revenue guidance? Dado Alonso: Well, our business is actually scaling rapidly. There can always be fluctuations in the exact timing of deployments in such a fast-growing company like ours. And our focus remains on building a very large company. Obviously, much larger than today and significantly bigger than our plans for 2026. This was and continues to be our main focus. In any event, our annualized run rate revenue, which is a better reflection of our future growth opportunity, continues to expand, demonstrating the resilience and scalability of our business model. As such, we remain well on track to hit our ARR guidance range of $900 million to $1.1 billion by the end of 2025 while also paving the way for substantial revenue growth in 2026 and beyond. Neil Doshi: Great. Thank you, Dado. See, a question from the online community. How is your enterprise initiative ramping up? We seem to make some good improvements there over the past couple of quarters. Mark, do you want to help take this? Marc D. Boroditsky: Certainly. Certainly. We are making strides with regard to becoming enterprise-ready. As you saw with the launch of Nebius 3.0, what we call Aether, we've delivered a number of AI cloud improvements to support enterprise requirements. As an example, in the release, we are delivering really important compliance and security certifications. And we did this, as a matter of fact, in a matter of months when it would normally take other organizations a lot longer to deliver these types of capabilities. As a matter of fact, we delivered some important functionality that enables enterprise administrators to proactively manage their implementation. So tooling and controls like identity and access management and dashboards for evaluating the performance and security of their AI. I think as we all know, the sort of the critical foundation for enterprise readiness is to have these kinds of compliance and security certifications in place. And the enterprise functionality that enterprises are looking for. And the third is to have an enterprise-ready sales team. On that front, we are adding a number of key leaders to our organization. And we are expanding the overall sales organization for coverage in enterprise software vendors and key verticals. It'll take some time for the sales team to ramp, but we are building the foundation between the functionality that I mentioned and the overall team coverage. That I think will set us up for a strong 2026 with enterprises. Neil Doshi: Great. Thank you, Mark. Keeping with our online investor base, you know, you recently launched Token Factory. What is the opportunity around this? And does this expand your market or open up new segments? Maybe we'll ask Roman to take this one. Roman Chernin: Yeah. Thank you, Neil. Happy to talk about our new launch. So I will start a little bit from demand evolution. We fairly see now the next wave of AI demand growth, and it's mostly driven by the companies, by the people who apply AI to real-world applications across all industries, in B2C and B2B. It's not necessarily foundational model builders like it was, let's call it, in the first wave. And we as Nebius realized that we needed our inference as a service offering to make it serve a broader set of customers, including enterprises. So Token Factory gives vertical AI product builders, ISVs, and enterprises a platform to build what we call a flywheel of applying LLMs in vertical AI use cases at scale. Transforming, we help them to transform open-source models into optimized production-ready systems with guaranteed performance and transparent cost per token. We obviously leverage the underlying to bring the most efficient, scalable solution to our customers when they can be sure that they get the best total cost of ownership and can confidently grow with us. As a result, organizations can deploy and scale models such as OpenAI OSS, Quan, Deepsea, Glamour, Nematron, and many others on dedicated endpoints with guaranteed performance tuned for the super latency and 99.9% uptime. So in total, I mean, I must say we are excited about the opportunity of inference workloads. We believe that all companies will invest in inference to productize AI, and for us, it means it will require significantly more compute and will support this wave of growth. As well as we do for foundation model builders. Neil Doshi: Great. Thank you, Roman. Jumping back to online, looks like we have some additional questions here. What demand are you seeing for the new Blackwell generation, and how is this demand from the previous Hopper generation? Mark, do you want to take this one? Marc D. Boroditsky: Yes. Certainly. Thank you, Neil. Demand remains very strong across all types of GPUs. And as we said, we sold out our capacity in Q3, and that's across all types. And we're nearly sold out with respect to Q4. Talking about the Hoppers, we continue to see extremely positive demand for these chips. An interesting set of dynamics that we're experiencing is that as customers come to their renewal for Hoppers, or if they're looking to upgrade to say Blackwells, in both cases, we're typically selling them immediately. And often at better pricing than they were previously priced. As we're actually in tandem rolling out the Blackwell. So very strong demand profile for existing Hoppers. We're also seeing very strong demand for Blackwells. We're benefiting from the fact that we're one of the first companies to deliver them in the market. In our Israel data center, we launched with B200s, and in our UK data center, we launched with B300s. And we've essentially presold much of that capacity before these facilities even opened. We're very excited as well that we're launching GB300s. We're the first to do so in Europe, which will be coming online in our Finnish data center later this quarter in December. Thinking about in-production capacity, but we're also now pre-selling. We're right now, as I mentioned, selling the remnants of Q4. New capacity is being delivered in future quarters. So we're seeing a very strong demand across all types of GPUs. And as I mentioned earlier, and as Andrey mentioned earlier, we're working in close partnership with Andrey's team to make sure that our sales pipeline allows us to drive our model in order to be able to support GPU requirements in subsequent quarters. Neil Doshi: Perfect. Thank you, Mark. Another question from Alex Platt from D.A. Davidson. He's asking about our strategy regarding larger deals. Do we have a medium-term capacity target for these deals and customers? Arkady Volozh: Yes. We are very opportunistic here. The demand is there, not only for everyday deals but for large mega deals as well. And we'll enter into the deals which provide us with the best margins. We're very much focused on margins and profitability, not only on growth itself, and all our decisions actually direct from there. Neil Doshi: Great. Thank you, Arkady. Next question from Andrew Beal from Aarte. Can you provide more details regarding some of the greenfield sites? Do you have LOIs for further new US and EU DC locations, or are you further down the road with these? Andrey Korolenko: Yeah. Thanks, Neil. Generally, we are making great progress to bring our capacity. We have a robust pipeline both in Europe and the US. We mentioned that we are on the way of securing 2.5 gigawatts of, well, roadmap for the power through the next year. We are in the station also further down the road as well. But we are not in a position to say more at this stage. Neil Doshi: Great. Alright. Question from online. Can you provide an update on your facility in Israel? Tom? Tom Blackwell: Yeah. Sure. So as you can see, we're growing rapidly. So just last week, we were in the UK launching, and just a couple of weeks before that, we were in Israel. And, actually, the data center facility that we have there is already fully live. And as I think we've made various references to, Mark's mentioned it previously, again, that was capacity that was effectively even presold, and we definitely have opportunities to expand further in terms of capacity. We think Israel is a great market. You know, we again, we see a lot of demand. There's a lot happening in tech and in AI. And, actually, one of the things that's interesting about the market, I mean, our decision to go in there was purely based on our own commercial considerations. We think there's a great there's a lot of growth for that. But, actually, the government's also doing some interesting things. Really, to stimulate further demand. And so they're actually effectively putting money to subsidize sort of AI startups and institutions and helping them to access the compute as a way of getting of having the growth move faster. So we think it's anyway, we're doing great there. We have a we think that there's a great opportunity for us. And, actually, the model there might even be a model that we think either in other countries might look at that are thinking about building up the domestic demand in the AI industry. So overall, going great. Neil Doshi: Great. Thanks, Tom. Alright. From our online platform, let's see. How do you think about partnering with or buying potential companies that already have secured power or land? Consolidating or consolidating other neo clouds. Arkady? Arkady Volozh: Companies, we secure power and land. Again and again, it's all about margins. We are pretty much focused on the margins when we enter into a new contract, when we're raising capital, when we're developing new plots for data centers, when we design those data centers, when we build our RAC software, and so we vertically integrate and we are looking for efficiency at each stage. We have looked into potential acquisitions of power land market, but so far, our approach process proved to bring, I would say, much higher margins. So far. Yeah. So we're still moving further and further into building our own facilities. And we're actually decreasing the share of our own over-corrugated rented facilities. More and more will be our own facilities. Obviously, we will continue to consider different opportunities, but as you can see, we were able to secure a significant level of contract power organically. So we strongly believe that rather than later, the margins for the infrastructure business will play a significant role in the ability to, I mean, the business to grow and develop. And we basically remain very focused on that. Neil Doshi: Great. Thank you, Arkady. Alright. Let's take another question. Kind of market-related question. Maybe this one will go to you, Arkady. Is there any chance that GPUs are oversupplied in the coming year as new suppliers come to the market? Arkady Volozh: Two things here. First, we strongly believe that the market will still be supply constrained, at least in 2026. This means that data center capacity will be the chokepoint. Also, as we mentioned earlier, we plan our capital spend in those three stages: land power, building the facilities, and then the GPUs. And this conservative stage approach keeps us from overspending, actually, and allows us to maintain a healthy financial position. If there are any changes to the market, we'll be in good shape to weather a downturn, we hope. Neil Doshi: Great. Thank you, Arkady. Let's see. A couple of our analysts are asking, you know, in terms of, you know, any big challenges regarding the completion of the Vineland facility? You know, any, you know, challenges to meeting, you know, any performance obligations of your deal. Thanks, Neil. I think I already spoke about it. Andrey Korolenko: So yeah, as of today, it goes as planned, and we already handed over the first tranche to Microsoft. So yep, continue working according to the plan. Neil Doshi: Great. Thank you. Alright. I think we'll end the call there. Thank you, everyone, for joining, and we will speak to you again next quarter. Thank you.
Operator: Good morning and good evening to all and welcome to the Sea Limited Third Quarter 2025 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Please press 0. And finally, I would like to advise all participants that this call is being recorded. Thank you. I would now like to welcome Ms. Rebecca Lee to begin the conference. Please go ahead. Rebecca Lee: Thank you. Hello, everyone, and welcome to Sea Limited 2025 Third Quarter Earnings Conference Call. I am Rebecca from Sea's Investor Relations team. On this call, we may make forward-looking statements, which are inherently subject to risks and uncertainties and may not be realized in the future for various reasons as stated in our press release. Also, this call includes the discussion of certain non-GAAP financial measures such as adjusted EBITDA. We believe these measures can enhance our investors' understanding of the actual cash flows of our major businesses when used as a complement to our GAAP disclosures. For a discussion of the use of non-GAAP financial measures and with the closest GAAP measures, please refer to the section on non-GAAP financial measures in our press release. I have with me Sea's Chairman and Chief Executive Officer, Forrest Li, President, Chris Fung, and Chief Financial Officer, Tony Hou. Our management will share strategy and business updates, operating highlights, and financial performance for 2025. This will be followed by a Q&A session in which we welcome any questions you have. With that, let me turn the call over to Forrest. Forrest Li: Hello, everyone, and thank you for joining today's call. After a very strong first half of the year, our momentum has continued into the third quarter. We achieved a total revenue of $6 billion and adjusted EBITDA of $874 million, representing 38% and a 58% year-on-year growth respectively. Shopee's GMV grew by over 28% year on year. Money's loan book expanded 70% year on year while maintaining a stable risk profile. And Garena delivered its best quarter since 2021, with quarterly bookings up over 50% year on year. Our focus remains the same: continuing to deliver high and profitable growth across all three of our businesses. With ecommerce and digital finance penetration in our market still low but increasing, strong growth lays the best foundation to maximize our long-term profitability. I am very pleased with the profitable growth we have consistently delivered, and we will keep on this path. With that, let me take you through each business's performance. Starting with ecommerce, Shopee delivered another record-setting quarter, achieving new highs in quarterly GMV, cross-border volume, and revenue. We have now achieved five consecutive quarters of sequential GMV growth driven by more active buyers and a higher purchase frequency. And we have improved our year-on-year profitability across Asia and Brazil. Our monetization continued its upward trend into the third quarter. Take rate increased both year on year and quarter on quarter. As for a big contributor, our efforts to make ad services both simpler and smarter drove broader adoption and higher ad spend by our sellers. Ad revenue increased over 70% and ad take rate rose by more than 80 basis points year on year. The number of sellers using our ad product increased by more than 25% and their average ad spend increased by over 40% year on year. Our monetization gains, strong growth momentum, and a healthy balance sheet have positioned us well to capture even more growth opportunities. Our three operational priorities—enhancing price competitiveness, improving service quality, and strengthening our content ecosystem—have proven to be a winning formula, and they remain consistent. We think these priorities let me highlight some of the areas we have been investing into that we believe are critical for our long-term competitiveness and profitability. First, continue to improve our logistics capability, a highly strategic competitive mode that has differentiated us from our peers. We launched XPS Express in 2018 when we recognized that reliable and cost-effective delivery was the most urgent logistics demand in our market due to wide differences in geography and infrastructure. Over the years, we have learned how to deliver packages by truck, plane, boat, motorbike, and more. We deliver well in-depth, congested, and high-rise cities. We also deliver well in rural areas where we need to cross rivers, navigate rice fields, and locate homes without formal addresses or postal codes. This experience has given us a very deep understanding of every region in our market. Our delivery capability has now developed to the point where we can identify and deploy service quality improvements addressing specific user needs in different markets. This helps us to serve more users best while improving our operational efficiency even further. For example, in Indonesia, we saw growing demand from urban buyers for very fast delivery and the willingness to pay a premium for it. So we rolled out same-day and instant delivery with delivery times as fast as under two hours. The response was excellent. Orders using this faster option in the greater Jakarta area increased by more than 35% year on year in the third quarter. But for rural regions, we noticed a preference for economical delivery, so we came up with a delivery solution that reduced the cost per order by 20% compared to our standard delivery, allowing rural buyers to enjoy free shipping with much lower minimum spend. This boosted Shopee's popularity among rural buyers. Orders delivered outside Java increased by more than 45% year on year in the third quarter. In Taiwan, we noticed a very different customer demand. Many buyers preferred self-pickup options, so we expanded our automated long-term store network to over 2,500 locations in less than three years, making us the only ecommerce player in Taiwan with a locker network at such scale. Today, it is a key logistic channel accounting for more than 70% of all our deliveries in Taiwan. This move has paid off in more than one way. The lockers run at over 30% lower cost per order than traditional pickup locations. On top of that, the locker locations double up as last-mile hubs for home delivery at a lower cost compared to traditional last-mile models. In other words, we are making our buyers happier while reducing our costs. In the third quarter, our GMV in Taiwan showed double-digit growth year on year, and we still see a lot of room to deepen our penetration further in this highly attractive market. Today, we have built PX Express into a clear leader in scale, coverage, and cost in our Asian market. Our deep local insights have enabled us to customize ground strategies to create the most efficient and effective solution. With our delivery capability well scaled, our next goal to further deepen our logistics competitive mode is to enhance our fulfillment capability. This addresses a more upstream need for our sellers, ensuring fast, accurate order handling in addition to speedy and reliable delivery. We aim to make fulfillment a second core pillar of our overall logistic capability, another way for us to strengthen our reputation among buyers and sellers and ensure high levels of customer satisfaction just as we did with delivery. These efforts are already underway. In previous calls, I have shared updates on initiatives such as intelligent demand forecasting, where we pre-ship commonly ordered products closer to where we anticipate better demand will be. This helps us reduce buyer waiting time and fulfill orders more cost-efficiently. For instance, in Indonesia, if we wait until an order comes in from a remote island before shipping the item out from Java, we must rely on more expensive forms of transport such as airplanes to get it there quickly. But if we have already anticipated this demand, we can use cheaper forms of transport to pre-ship it to the area, letting us deliver it quickly and cost-effectively once the order is placed. We have made further headway in fulfillment by starting to offer warehouse solutions in some of our markets. Offering fulfillment services benefits everyone. It takes the burden of packaging and shipment off sellers, gives the buyers more consistent service, and allows Shopee to better optimize end-to-end logistics while serving more buyers and sellers. We are investing in this capability in a capital-efficient way, for instance, by mostly leasing rather than buying land and warehouses. The most intense investment comes not in the form of money, but in time and effort. It would be very difficult to build a fulfillment capability without a deep understanding of logistics needs in our market and a tightly integrated delivery network to pair it with. After seven years of experience with XPS Express, we have both. Second, continue to find new and exciting ways to deepen user engagement. Our subscription-based Shopee VIP membership program is a great example, and it continued to gain strong traction. By September, we had team members across Indonesia, Thailand, and Vietnam surpassing 3.5 million, up more than 75% from the previous quarter. Given the price sensitivity of many in our market, the success of our VIP program shows the high value we are delivering to our customers. VIP members are demonstrating higher engagement. In Indonesia, these members spend around 40% more after subscribing to the program. Shopee VIP members also bought three times more frequently and spent five times more than non-subscribers in the third quarter, accounting for about 10% of total GMV in Indonesia. We have also deepened user engagement by enhancing Shopee's content ecosystem. Our partnership with YouTube continues to gain strong traction. In the third quarter, shopping orders driven by YouTube content across our Southeast Asian market grew by more than 30% quarter on quarter. With these strong results, we are now extending this partnership to Brazil. Late last month, we also announced a collaboration with Meta to launch new tools allowing seamless product promotion and checkout between Facebook and the Shopee account. We are excited to see how this partnership will enrich our buyer community further. Third, we are committed to embracing AI, a powerful way to improve the whole consumer retail experience. Our AI efforts have already begun to bear fruit, contributing meaningfully to our monetization gains in the third quarter. Smarter search, better recommendations, and more personalized content have made Shopee easier and more enjoyable to shop on. We have also used AI to enhance product discovery beyond search, helping buyers find relevant and interesting items even when they arrive without a specific purchase in mind. We empowered sellers with AI tools, enabling them to generate images, video, text descriptions, and virtual showrooms to make their product listings more appealing. These initiatives have increased buyer engagement, improving our purchase conversion rates by 10% year on year in the third quarter. Taken together, all these efforts have resonated with our customers. Buyer purchase frequency across our markets continues to improve, going up a further 12% year on year in the third quarter. Average monthly active buyers also increased 15% year on year in the third quarter. And Shopee remains consistently regarded as the ecommerce platform offering the most price-competitive products in both our Asian market and Brazil. Based on Qualtrics survey, I would also like to highlight our progress in Brazil, where Shopee continued to deliver exceptional growth while maintaining positive adjusted EBITDA. Our GMV growth there has been outpacing the market, driven by sustained increases in monthly active buyer purchase frequency and average basket sizes over the past several quarters. Our wide product assortment, highly competitive pricing, and structural cost leadership have enabled us to scale rapidly and profitably. Our continuous improvement in delivery speed and reliability has enabled us to expand into more upmarket product categories. Delivery speed improved sequentially in the third quarter, with average delivery time improving by about two days compared to a year ago. In the Greater Sao Paulo area, one-third of parcels were delivered the next day, and nearly half within two days. With these improvements, we are seeing more merchants listing higher-value products and new buyer cohorts showing higher spending patterns. In the third quarter, GMV for Shopee Mall, our premium shopping section, more than doubled year on year in Brazil. In conclusion, Shopee has delivered another quarter of strong and profitable growth. With our strong performance year to date, we now expect Shopee's full-year 2025 GMV growth to be more than 25%. Next, moving to digital financial services. Money has delivered another very strong quarter, with revenue growing by 51% and adjusted EBITDA growing more than 35% year on year, while our ninety-day NPL ratio remains stable at 1.1%. The strong growth was broad-based, driven by both user growth and product expansion across multiple markets. Our loan book expanded by around a billion dollars during the quarter to reach $7.9 billion at the end of September, solidifying our position as one of the largest consumer lenders in Southeast Asia. Thailand has reached another major milestone, surpassing $2 billion in loans outstanding at the end of September. In Brazil, our loan book more than tripled year on year in the third quarter, with improving portfolio quality and stronger user performance. Our significant credit history with a very large base of users across many markets allows us to roll out products more widely while maintaining the health of our portfolio. We used to take a wide lead approach to onboarding new users. Now any Shopee user in most of our markets can apply for a pay later credit, and we can make credit approval decisions very quickly, in many cases, almost instantly. Moving to this all-can-apply approach enabled us to add more than five million first-time borrowers in the third quarter. New user cohorts scaled well with generally positive unit economics, a testament to our increasingly advanced risk underwriting capability. At the end of the quarter, active users across our consumer and SME loan products reached 34 million, up nearly 45% year on year. Meanwhile, loan disbursements to new users still accounted for less than 10% of total disbursements in the third quarter. As we continue to assess credit quality before cross-selling more products, we are also making our credit products on Shopee, at pay later, off Shopee, at pay later, and the personal cash loan easier to use in a wider set of use cases. In many of our markets where credit card penetration remains low, we are steadily establishing pay later as a trusted and convenient payment method of choice for all kinds of purchases, both online and offline. On Shopee, at pay later has grown steadily as penetration continues to deepen across all our markets. GMV penetration now ranges from single digits in early markets to over 30% in more mature ones, reflecting our discipline in scaling only when incremental disbursements are profitable. We see meaningful room to continue increasing at pay later on Shopee penetration across our markets. Off Shopee, at pay later showed strong traction this quarter, growing over 300% year on year and over 40% quarter on quarter. It still only accounts for less than 10% of our total loan book as of the end of September, so large upside remains for future growth. This product segment represents a significant opportunity to unlock access to offline spend, a very large part of consumer expenditure in many of our markets. The standalone Shopee Pay app, supporting both online and offline payments across a wide range of merchants, is a key pillar of our strategy to grow our money business off Shopee. In payments, it offers users a faster and more seamless experience, giving them direct access without having to go through the Shopee app. Beyond payment, it helps us unlock more use cases, positioning Shopee Pay as a one-stop platform for users' broader financial needs, off Shopee credit, insurance, wealth management, and more. The app has launched in Indonesia, Thailand, Vietnam, and Malaysia, and it's showing strong traction. More than 20% of our Shopee Pay monthly transacting users are using the standalone app. Personal cash loans also grew strongly this quarter. In Indonesia, we have been offering higher limits and longer tenures to attract more prime users who demonstrate strong repayment behavior. Loan sizes can typically range from a few hundred dollars to over a thousand dollars, allowing us to serve users with larger financial needs. Building on this step size, we have similarly expanded access to prime users in Thailand and Malaysia, where user adoption is going up quickly. In Brazil, personal cash loans grew close to 50% quarter on quarter, driven by the continued popularity of the combined credit limit we offer to as pay later users. In conclusion, Money has delivered another excellent quarter, building well while diversifying our credit portfolio across markets, users, and products. Our portfolio quality and our unit economics have remained healthy, and we are extending at pay later's reach beyond ecommerce and embedding it into users' everyday financial use cases. This will build a pathway for strong off Shopee growth for many years to come. Finally, moving to digital entertainment. Garena has delivered another stellar quarter. Bookings were up 51% and adjusted EBITDA grew 48% year on year, making it our best quarter since 2021. Free Fire encouraged a strong performance with the two high-impact campaigns, WeGain and the Naruto Shippuden chapter two. The campaigns received a huge positive response, accelerating our growth momentum from the previous quarter. Our speed game collaboration incorporated iconic challenges from the blockbuster Netflix TV series, such as the red light green light, and the glass bridge. The event drove strong participation, with the RhymeLife, GreenLife challenge being played more than 300 million times in the quarter. Our Naruto Shippuden chapter two event expanded on the resulting success of chapter one in the first quarter of this year. Based on gamer feedback and performance insights, we added five new fan-favorite ninja characters, new attack mechanics, highly sought-after collectible items, and a new one-on-one mode letting players use signature abilities from the series. Chapter two went down to surpass chapter one in both engagement and revenue. With an extremely high social media share rate for chapter two, doubled the already high bar set by our eighth anniversary event. Both Naruto chapters have achieved the highest satisfaction scores of any campaign launched over the past two years. Our Naruto content was very successful because it focused on what players value most: authenticity through attention to detail. This strong focus underpins how we take IP collaboration to the next level, and it is driven by Garena's core creative culture. First, we require every major IT partnership to be led by a team of genuine superfans of that IT within Garena to ensure authenticity and respect for the original work. Naruto fans love how closely the gameplay mirrors small but important details from the anime. For instance, one key storyline from the original anime was about rogue ninjas returning to eat the Choy, the ninja village they had been exiled from. In chapter one, we had to build this Ninja village into our map and introduce iconic attack deals from the main anime characters. In chapter two, we introduced attack skills that were specifically from the rogue ninja character, like fireballs, black fire, and exploding birds, and redesigned the map to feature a Detroit version of the Ninja Village. Continuing the narrative between the chapters in a way that was true to the original anime created a highly immersive experience and brought fan excitement to the next level. These are details only superfans would care about and understand how to incorporate into gameplay. Second, take a global yet local approach, bringing global IPs to our market in highly localized ways. For instance, we took advantage of the huge traction of our Naruto campaign to hold ninja-themed offline events in eight markets across Asia and The Americas, attracting tens of thousands of fans. The largest of these events was a two-day international all-star ninja clash esports tournament in Bangkok, with teams of Free Fire players flying in from across Asia and Latin America to compete. The Bangkok tournament was a huge success, becoming a top-trending event on YouTube gaming and on social media across key markets. In addition to such events, our teams stay closely connected to players through creator programs and fan groups, tapping into a constant stream of feedback and ideas that shape game design conditions. This effort builds very strong community connection and loyalty across our markets. Beyond Free Fire, we continue to expand our publishing portfolio with the launch of EA SPORTS SD mobile in Vina last month, strengthening our long-standing partnership with Electronic Arts. The game quickly became the country's most downloaded mobile game in October based on Sensor Tower. By combining EA's world-class football franchise with Garena's local know-how, we are deepening our expertise in sports games and reinforcing our position as a trusted publishing partner for global titles. With this very strong quarter, Garena remains on track to achieve more than 30% year-on-year growth in bookings for 2025. Our creative depth, disciplined execution, and close connection with players will continue to drive Garena's growth. In conclusion, all three businesses have built on the strong momentum from the first half of the year and delivered another quarter of exceptional growth. We will continue to make our digital ecosystem even more vibrant, trusting our leadership position, and delivering sustainable and profitable growth to our shareholders. With that, I invite Tony to discuss our financials. Tony Hou: Thank you, Forrest, and thanks to everyone for joining the call. For Sea overall, total GAAP revenue increased 38% year on year to $6 billion in 2025. This was primarily driven by GMV growth of our ecommerce business and the growth of our digital financial services business. Our total adjusted EBITDA was $874 million in 2025, compared to an adjusted EBITDA of $521 million in 2024. On ecommerce, Shopee's gross orders increased 28% year on year to 3.6 billion in 2025, and GMV increased by 28% year on year to $32.2 billion in 2025. Our third quarter GAAP revenue of $4.3 billion included GAAP Marketplace revenue of $3.8 billion, up 37% year on year, and GAAP product revenue of $500 million. Within GAAP marketplace revenue, core Marketplace revenue, mainly consisting of transaction-based fees and advertising revenues, was $3.1 billion, up 53% year on year. Value-added services revenue, mainly consisting of revenues related to logistic services, was $700 million, down 6% year on year due to increased shipping subsidies. Ecommerce adjusted EBITDA was $186 million in 2025, compared to an adjusted EBITDA of $34 million in 2024. Digital Financial Services GAAP revenue was up by 61% year on year to $990 million. Adjusted EBITDA was up by 37% year on year to $258 million. As of the end of September, our consumer and SME loans principal outstanding reached $7.9 billion, up 70% year on year. This consists of $6.9 billion on book and $900 million off book loan principal outstanding. Non-performing loans past due by more than ninety days as a percentage of total consumer and SME loans was 1.1% at the end of the quarter. Digital entertainment bookings grew 51% year on year to $841 million. GAAP revenue was up 31% year on year to $653 million. The growth was primarily due to the increase in our active user base as well as the deepened paying user penetration. Digital entertainment adjusted EBITDA was $466 million, up 48% year on year. Returning to our consolidated numbers, we recognized a net non-operating income of $61 million in 2025, compared to a net non-operating income of $50 million in 2024. We had a net income tax expense of $161 million in 2025, compared to a net income tax expense of $93 million in the third quarter of 2024. As a result, net income was $375 million in 2025, as compared to a net income of $153 million in 2024. Rebecca Lee: Thank you, Forrest and Tony. We are now ready to open the call to questions. Operator? Operator: We will now begin the question and answer session. We'll take a maximum of two questions at a time from each caller. If you wish to ask more questions, please request to join the question queue again. Your first question comes from Pang Vitt with Goldman Sachs. Pang Vitt: Hi, management. Thank you very much for the opportunity. Congrats on the great set of results. Two questions from me, both on the ecommerce side. Number one, on your growth guidance of more than 25% year on year for 2025, what do you bake in, in terms of the driver and competitive landscape? What will it mean for your margin trend? And how should we think about these trends carrying into 2026? That's question one. Question two, just to have a good understanding of the margins. So margin trend for ecommerce came down to 0.6% in the quarter despite higher take rate. Can you help us understand where is the investment area, whether this is in the fulfillment as you mentioned, or is there also something else that we should be aware of? Are these more fixed or variable? And how long and how much should we expect this investment cycle to be? Tony Hou: Yeah. But in terms of the gross assumption of more than 25%, I think we are kind of halfway into the quarter already. It's basically based on what we see so far in the market on the momentums and competitive landscapes. It's pretty much reflective of what we see so far as we come into the quarter. And regarding the margin questions, if you look at the previous year versus this year, we do see consistent improvement of margin if you look at a year-to-year basis. As we shared before, we obviously see quarter-to-quarter fluctuations sometimes for seasonality reasons or where some of the investment cycle of the initiatives and could also be a particular market status in terms of where we are pushing some of these initiatives. So I think if you look at a bit of a year-to-year trend, even going forward, I think we believe that we are able to deliver the 2% to 3% EBITDA margin as we shared before and also have improvement year to year if you look at the yearly basis. In terms of where we are investing, one thing is we mentioned in the opening, further investment into the logistic capabilities and fulfillment capabilities. And beyond that, we are also deepening our buyer engagement wallet shares through, for example, our Shopee VIP program that we shared in the opening as well. And all those efforts have been showing pretty good results. Our buyer frequency improved 12% year on year, and average monthly active buyers increased 15% year to year as well, which contribute to our great growth. This quarter, which is way above the guidance we gave earlier in the year, which is 20%. Most of this investment is less fixed per se. We take a relatively asset-light approach even coming to our logistics and fulfillment businesses. We don't own land. Most of our CapEx is just improvement of building the warehouses or sorting facilities, etcetera. It is also less fixed. For our buyer engagement and wallet share program as of VIP, obviously, you will see a little bit of investment in the early days to get everybody to understand the program and join the program. But as time goes, it should be a quite profitable program as you probably have seen in other ecommerce platforms across the globe. Operator: Your next question comes from Divya Kothiyal with Morgan Stanley. Divya Kothiyal: Thank you very much. My first question is on your new market entry strategy and framework. Could you explain the rationale behind closing some of the cross-border operations in LatAm and the reentry into Argentina? What milestones would you monitor for Argentina before making it a localized business? And is this one of your 2026 priorities? My second question is on market shares. If you can comment on the market shares in ASEAN, how have they moved in the third quarter? And also, if you could comment on Taiwan, do you foresee increasing marketing spend and investments in Taiwan next year? We're also seeing a bigger contribution from cross-border with Taobao getting more popular there. If you can comment on the market shares in ASEAN and Taiwan, that would be helpful. Thank you. Tony Hou: Yeah. I think regarding the new market, we take a very highly selective approach on any new geographic expansions. Many of the initiatives will be very early-stage testing the market in nature. The reason we look at Argentina is it's actually leveraging our capability that built in Brazil, leveraging on our existing cross-border infrastructure and the operational experiences we had already built in Brazil. The objective is more to capture the operational synergies across the adjacent regions and open additional channels for our sellers with minimal incremental investment. I think the year we will take some time to learn about the market without sort of having a heavy investment into the market at this point in time. For Chile and Colombia, we decided to wind down our cross-border operation in Chile and Colombia as part of our ongoing review of our global business priorities to ensure our resources are focused on the key business priorities in line with our long-term strategy in the region. Latin America is still an important market for us, and we will continue to explore the opportunities to serve the consumers and businesses well there. If you look at the absolute size in Latin America, obviously, Brazil is the largest one where we have a very large presence there. Argentina, as we mentioned, and Colombia are actually relatively smaller markets and also relatively more distant from Brazil. I guess that's the thinking around the first question. Regarding the market share in South Asia in quarter three, as we shared, our growth has been above kind of the expectations we shared before. And across the region, we actually do believe that we are gaining market shares in South Asia, growing faster than the market in South Asia. For Taiwan, in particular, the cross-border to Taiwan has been, in general, a smaller part of the businesses. And given the complexity for the buyer experience on the cross-border side, we are less concerned about the cross-border players selling from overseas to Taiwan as a potential impact on our businesses. Actually, if you look at the recent quarters, we grow very well in Taiwan. We grow double digits, which is faster than the overall market in Taiwan. So we are pretty confident that, meaning we are the largest ecommerce platform with the largest assortment, with the best pricing, and also we have the best delivery infrastructure, which is much lower shipping and fulfillment cost compared to anyone in the market. We are able to defend our market share well. We are able to grow even faster in Taiwan with our infrastructure much better built than previous years. Operator: Your next question comes from Alicia Yap with Citigroup. Alicia Yap: Hi. Good evening, management. Thanks for taking my questions. And congrats on the solid results. Two questions. One is, if you can, elaborate a little bit more on the overall landscape in Southeast Asia. So are there any countries that we are seeing more intense competition lately? And also, you know, any countries where you see peers are growing faster than Shopee? And do you anticipate the live streaming peers to start shifting more of the traffic and also the purchase frequency to the shelf space, the marketplace model? In addition to the live streaming, if that is happening, you know, what could be the potential threat to Shopee? And then the second question is should we assume the investment cycle this time around similar to, like, a couple of years ago where there could be some step-up investment that is more front-end loaded with GMV growth and market share growth to follow through later, especially for, for example, like, you need to ramp up your fulfillment, you know, capability in some of the markets, which will yield better results later on. So could you clarify if this time the investment cycle could be similar to what we saw last two, I mean, two years ago? Thank you. Tony Hou: On the competitive landscapes, what we see is relatively stable competitive landscapes. I think as you can probably observe as well from your own sources, we didn't see any particular market different from another. I think it has been a general trend across the South Asia market in terms of the intensity or the behavior of the competitors. Regarding whether the livestream peers focus more on the shelf space model, I think it's not something new. I think it's something we try to do for quite a long time. As you probably see from China as well, etcetera. But we do see that the nature of the platform is different. I think the percentage of share of commerce is relatively consistent, let's say, from what we observed. Also, if they are much more traffic pushing towards that, that is a potential of impacting how the overall app behavior and the user retention as well. But anyway, I think that's kind of similar behavior you will see in China and South Asia. But we wouldn't see that's a new thing impacting the competitive landscape in a meaningful way. On the investment cycles, I think the short answer is probably not. It's probably quite different from what you see two years ago in terms of the investment into their content ecosystem, if you remember that. I think what we are doing now is more as a continuous investment in our business to strengthen our competitive mode, pretty aligned with what we shared continuously every quarter. We would like to invest in our infrastructure to better logistics. And now we are extending logistics to the fulfillment network as well. It's actually, in a way, it's not completely new. It's a capability we have been trying to build for a period of time. And now we felt it's a good time to scale it even more. But as I shared just now, it's less CapEx intensive businesses as you probably imagine. And also as we grow the businesses, it will help our growth as well because this will help us to lower down the overall cost to serve as an ecosystem. And also reduce the delivery times to the user, so help us to penetrate the user more. And many of these contribute to our growth faster than we expected early in the year as well. If you take a look at the VIP programs, yes, it's a little bit of investment in the early days, but we also see that with the investment, the users are willing to spend more with the platform as well. I think Forrest shared that the users purchase 40% more than before they joined the VIP program. So in a way, it's less a big front-load investment than the return comes later. I think this time you will see it's more ongoing investment program to strengthen our competitive mode as I shared earlier. And this will impact on the general growth as we invest. Operator: Your next question comes from Piyush Choudhary with HSBC. Piyush Choudhary: Yeah. Hi. Thanks for the opportunity. Congratulations on a great set of numbers. Two questions. Firstly, for Shopee Logistics, what percentage of orders are now fulfilled by XPX within Asia and Brazil? How has it changed over the last one year or so? How much of an increase in your cost of services is driven by this logistics investment and the outlook for this cost item? That is first. Secondly, on Garena, can you share the outlook for Free Fire for 2026 after a successful 2025? Any planned IP collaborations? Any new game launches? Tony Hou: On the SPX, I do believe we shared before more than half of our orders are delivered through our SPX, and the percentage has been increasing, let's say, overall over the last year as we scale our network. On our cost per order, it has been continuously improving year to year. I think that's part of what contributes to our growth as well because this lowers down the cost buyers have to pay to receive the orders. But on top of that, I also want to highlight not only do we try to reduce the cost of our SPX delivery cost, but we also increase the speed for our SPX cost. Forrest mentioned that in Brazil, we reduced the buyer waiting time by two days if you look at the year to year. In Asia, we also reduced the delivery time quite meaningfully year to year and quarter to quarter as well by both introducing the fast shipping channel. If you look at many countries, we have instant delivery now. Also have same-day deliveries, but also reducing the normal delivery channels speed. I think this all helps to contribute to our growth as you see. For the Garena outlook, well, we are very, very excited to observe the momentum. I think this is extremely valuable, like, I think the turnaround, like, two years after the post-COVID headwind. And in 2024, we have a very, very high growth. That is the strong momentum continuing to 2025. Actually, the growth is even accelerated this year compared to last year. So the momentum is still very strong. So we remain very optimistic and positive, like, for 2026. We believe the user base will continue to grow. The content, the offerings will be more, like, the experience user experience is more immersive. And I think, like, especially this year, we were very successful with IP collaborations. And I think Garena as an organization, we unlocked a very important capability. So how to continually work with the global IPs and deliver the best content, very unique experience to our large user base. Right? Whatever we put on the platform, put into the game, like on a single day, more than 100 million gamers from all over the world will be able to experience that. Like, it's a very, very powerful distribution platform, distribution channels. We'll continue to work with more IPs, but of course, we'll be also very selective as well. And we are also quite excited to kind of see what AI can do. So in terms of boosting both the creative side, production side, and also the user experience side. We think that is a potential boost for future growth as well. At this moment, we are in the process of detailed planning for next year. I think probably we'll have a better sense. We're ready to share with the market what will be the specific outlook we receive for Garena in 2026 next quarter. We always have some new games in our pipeline. We have a very, very strong and dedicated experienced developers especially focused on the new games. And we have several games already in the pipeline or, like, in some markets already live in the trial period where learning experiences. And at this moment, I think it's a bit premature to project what is the impact. I think considering the size of the scale of Free Fire in terms of the user base and the revenue and profit, I don't think, like, at this moment, like, even if we have any new games, at an early stage, we'll make a significant impact in terms of the user numbers and the revenue and the financial side. But we're going to continue to put a lot of effort, and I think this through the new games development, we also learn about the different genres. We're also learning the differences about some new markets we haven't been to. I think it remains a very, very good opportunity for future growth. So when we have, like, the way to deal with it, it's the right time to share, so we'll also keep all our shareholders and investors informed. Operator: Your next question comes from Jiong Shao with Barclays. Jiong Shao: My first question is on the VIP membership. I'm trying to get a better understanding of that program. That's clearly a great thing to do longer term. I suspect in the near term, I was wondering what's the unit economics look like for the members and what do you think the eventual VIP member penetration should be in a region? So the reason I obviously asked that is because gross margins for ecommerce came down a bit quarter over quarter. I suspect it's kind of negative initially. And is that a time frame to kind of reach breakeven for the members? Second question is about AI. I think Forrest recently did some media interviews talking about AI may power the company to be one of the first trillion-dollar companies in the region. I was hoping you can talk about what are some of the things potentially you may do or you want to because some investors are worried about the massive AI CapEx that may be affiliated or associated with any kind of a new venture. Thank you. Tony Hou: On the VIP program, we are still in a very early stage of rolling out the program. As you probably can see, it's only a few months. But we see very good growth in the users signing up. If you look at sort of quarter to quarter, we see a 75% growth in the members. In terms of the GMV penetration, we're showing the early stage still in the teens, and we believe this can be a lot higher, probably similar to the percentage you observe in other parts of the world in terms of the penetrations. I think the important thing for us to look at the unit economics is that we would like to make sure that we have members not only receive better benefits from the platform because they are paid members and they are the important core users. We also want to make sure that we work with our partners to bring the benefit to them as well. If you look at Indonesia, it was videos. In Vietnam, we work with FTP plays. We also work with JGPT as well. Offer a free program to the VIP members. I think all those will help us to have good economics for this program. But you are right. In the early days, it does require some sort of investment to bring the user over. One thing that we monitor very closely is the retention rate. We would like to make sure that the user we bring to the program has good retentions. And in our early market, we see the retention improve almost doubled from the last quarter to this quarter period of time, which is a big breakthrough for us given that in our market, credit card is not a common payment method in many other markets. People use credit cards to make sure that it's a continuous payment. We are working on multiple ways to ensure that the retention goes well with the program well, especially together with our digital finance side through as well. Sure. Jiong, on the AI question, yeah, I mean, as I shared during the interview you mentioned, we're deeply excited about the new technology. I think it represents a fundamental technological revolution, which will create massive new opportunities and supercharge technology's ability to unlock values for people everywhere. I think it's extremely exciting for the market where, you know, which still, like, millions of hundreds of millions of people are underserved. Right? And we have been that uplift in the past ten years through the mobile Internet revolution. And we have observed how much the smartphone, the mobile Internet transformed people's lives, how much joy and convenience it brought to people's lives. And of course, we are part of this transformation, and that is what we are really as a company, what this is about our mission. We try to focus on the applications and how to connect those fantastic technologies to people's daily lives in every corner of the world. And we believe we'll see a similar pattern of AI revolution. Probably, we believe this impact and the value creation will be much, much bigger. At this moment, we're like, things you mentioned, okay, we're probably not going to do what the big tech is going to do. We're not going to, like, develop the trying to make some fundamental language model breakthrough. We're not going to build data centers. I think for that part, we are very much open to work with all the big tech that could, like, we're kind of, we have a lot of admiration and respect for how much effort and how much they can do to continually have the breakthrough of the technology and making technology more powerful and more useful. And what we are going to more focus on applications and how that technology built in Silicon Valley or anywhere in the world transformed to a consumer's daily life, small businesses like in Indonesia, in Vietnam, in Brazil. So that work is a factory what we are good at. And we have a lot of best practices that we learned in the past decade. And I think that is also kind of like make us really, really excited. We're going to have a very, very practical and bottom-up approach. So as I and we are very much focused on seeing the immediate return of results. As I shared in my opening, right, and we're very excited to actually see some of their critical use cases in Shopee. Right? And how much this can help on the advertising conversion, how to make product discovery easier, and it's, like, more discovery and beyond traditional search. Right, how to help sellers improve the product listing quality, and how to improve the best retention and conversion rate. And I think I probably shared in the previous order, like, a quarter. And also this is a see the improvement in terms of the customer service capability. And now the majority of our customer service is handled by AI, like a chatbot, and the satisfaction rate is very, very high. So that is all the things we have seen the result under the progress of bottom-up. And we believe with the continuing improvement capability built enabled by the more advanced and large language model and other parts of the AI development. And that there will be more and more things we can apply into the day-to-day business, which make a positive impact on people's daily lives. Rebecca Lee: This concludes our question and answer session. I would like to turn the conference back over to Ms. Rebecca Lee for any closing remarks. Thank you all for joining today's call. We look forward to speaking to all of you again next quarter. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and welcome to the Endava's First Quarter Fiscal Year 2026 Conference Call. Should you need assistance, please signal a conference specialist by pressing the star. To ask a question, please note this event is being recorded. I would now like to turn the conference over to Ms. Laurence Madsen, Head of Investor Relations and ESG at Endava. Please go ahead. Laurence Madsen: Thank you. Good afternoon, everyone, and welcome to Endava's first quarter of our fiscal year 2026 conference call. As a reminder, this conference call is being recorded. Joining me today are John Cotterell, Endava's Chief Executive Officer, and Mark Thurston, Endava's Chief Financial Officer. Before we begin, a quick reminder to our listeners. Our presentation and our accompanying remarks today include forward-looking statements, including, but not limited to, statements regarding our guidance for Q2 fiscal year 2026 and for the full fiscal year 2026, the impacts of headwinds facing our industry and business trends in our industry, including with respect to developments with AI enhancements to our technology and offerings, our pipeline of client opportunity and our ability to convert such opportunities into contracted orders. The benefits of our partnerships, our pricing models, demand from clients for our technology services, our ability to create long-term value for our clients, our people, and our shareholders, and our business strategies, plans, operations, and growth opportunities. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements. Actual results and the timing of events may differ materially from the results or timing predicted or implied by such forward-looking statements, and reported results should not be considered as an indication of future performance. Please note that these forward-looking statements made during this conference call speak only as of today's date, and we undertake no obligation to update them to reflect subsequent events or circumstances other than to the extent required by law. For more information, please refer to the Risk Factors section of our annual report filed with the Securities and Exchange Commission on 09/04/2025, and in other filings that Endava makes from time to time with the SEC. Laurence Madsen: Also during the call, we'll present both IFRS and non-IFRS financial measures. While we believe the non-IFRS financial measures provide useful information for investors, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with IFRS. Reconciliation of such non-IFRS measures to the most directly comparable IFRS measures are included in today's earnings press release, as well as the investor presentation, both of which you can find on our Investor Relations site or on the SEC website. A link to the replay of this call will also be available on our website. With that, I'll turn the call over to John. John Cotterell: Thank you, Laurence, and welcome everyone. We appreciate you joining us for our first quarter fiscal year 2026 earnings call. Endava continues to be deeply engaged by and with major companies across the world as they look for support in navigating the journey towards AI, whilst ensuring operational resilience in existing platforms and devices. We believe the partnerships with major technology giants and the decisions we took three years ago led to the development of our AI native change delivery life cycle, now branded Dava Flow, see us well placed for the coming years. However, we continue to navigate the challenges associated with this transition in business models, delivery approach, and acceleration of the new AI-driven digital wave. The first quarter results were lower than guided, primarily due to an unexpected credit made to a client that arose subsequent to our last earnings call, as well as certain non-large strategic pipeline opportunities that did not convert into revenue during the quarter as anticipated. While these factors weighed on our performance, our ability to secure a multiyear strategic relationship with a leading payments company of up to $100 million demonstrates the strength of our client relationships. This partnership will utilize the best of Endava's global delivery case capability as well as our AI and advanced engineering capabilities to streamline our clients' technology platforms and enhance existing capabilities. This represents a prime example of the type of deal and partnership we are targeting. Utilizing our capability as an AI native technology agnostic transformation partner, our broader partner ecosystem is already generating incremental potential pipeline opportunities, and client interest in Dava Flow is accelerating. I will return to each of these topics later in the call. Following the sales leadership realignment announced last quarter, we recently hired a Chief Growth Officer for Commercial Services, for Europe and North America. These changes are already sharpening our customer engagement model, which is evident in the composition of our potential opportunity pipeline, which we are tracking closely. We remain committed to disciplined cost management to protect margins while continuing to focus on growth. Starting with an update on our AI-related engagements. AI now anchors many clients' technology roadmaps, and we are partnering across a spectrum of projects, from early proof of concept to enterprise-wide rollouts and subsequent optimization efforts. Following the engagement for a leading U.S. healthcare services provider, where we deployed AI to automate the intake and summarization of medical bills and supporting documentation, we have now advanced integration into the clients' adjuster portal and enable both new real-time and scheduled processing support peak volumes. The architecture is built for compliance and auditability, U.S. data residency, and targets high accuracy to meet over 95% precision while holding unit costs below 0.5% per page. Early performance indicates faster, more consistent decisions and a clear path to materially lower per claim handling costs. Building on the enterprise ChatGPT program, our collaboration with a leading financial compliance technology provider has progressed. We partnered with OpenAI to drive a company-wide deployment of ChatGPT Enterprise anchored in governance and enablement. Within three months, more than 500 licenses were rolled out with a single sign-on, role-based access, and audit logging. Key team members across finance, legal, IT client services, and support received train-the-trainer enablement to develop high-value use cases and custom GPTs reinforced by structured communication, weekly show-and-tell sessions, and continuous measurements. Adoption has scaled, with growing catalogs of validated use cases, and measurable productivity gains are emerging in document workflows and client service operations. These first two client cases are examples we have previously discussed on earnings calls, and I'm covering them to show how these engagements are progressing, to show how engagements are building and deepening once production solutions are in place. For a leading U.S. retail pharmacy chain, we are modernizing a core handheld application by upgrading its code base using AI-assisted analysis, leveraging GitHub Copilot. We completed a comprehensive assessment and prepared a two-phase execution plan that targets the highest impact fixes and de-risks the upgrade. The resulting playbook is designed to be repeatable across other applications, strengthen security, reduce technical debt, and support a faster release cadence. Initial results indicate AI-enabled reviews and automated testing are lowering manual effort by between 25-30% and shortening migration time by between 20-25%, implying a projected productivity uplift between 30-35% once both phases are completed. For a global energy and utilities provider that runs large-scale power grid simulations, we migrated a 400,000-line Fortran system. We built AI-assisted passes and automation tools with agent coding tools to preserve program flow while refactoring syntax and improving memory management. We also identified code sections tied to domain concepts to speed future feature delivery. This approach reduced manual edit risk and enabled automated conversion at scale. Initial benchmarks indicate up to close to 30 times faster code changes with improved reliability. For an e-learning serving over 12,000 healthcare and human services organizations, we developed an AI-enabled content studio that streamlines the entire content life cycle: drafting, review, quality assurance, export, and accreditation for a catalog of 7,000 plus courses. Built on Windsurf and integrated with the client's enterprise AI infrastructure, the platform generates course outlines and transcripts, runs policy-based QA agents, automates SCORM imports, and compares accreditations standards. Automation rules and validation tests further enhance compliance and operational consistency. Results show end-to-end authoring efforts have fallen by approximately 30% and modeling shows projected time savings of 30% to 50% when scaling updates across the full course library. Turning to partnerships, our investment in our partnership with OpenAI is expanding. As we've enrolled a group of Endava engineers in OpenAI's newly launched partner-exclusive certification program. Our team is pursuing multiple opportunities across the OpenAI product suite through training created by OpenAI that is only available to service partners. This is another step to deepen our knowledge and advance our AI native to delivery capability. On the commercial side, the joint go-to-market framework we created in partnership with OpenAI is producing measurable results, with wins in the insurance sector. We continue to grow our dedicated Google Cloud business unit. In collaboration with Google Cloud, we continue to increase the number of Gemini enterprise projects that we are actively engaged in. Each engagement follows a production-grade reference architecture with explicit safety and audit controls, ensuring that pilot outcomes can be migrated into compliant enterprise environments. One of these projects involves a leading UK bank, where we are rolling out AI-enabled digital assistance that give employees fast, secure access to internal and market data. Early pilot results indicate shorter query resolution times and improved policy compliance, laying a foundation for institution-wide adoption of agentic workflows. We also continue to strengthen our partnership with Salesforce by investing in AgenTik AI and innovation, with a focus on applying agent force across Salesforce's core clouds to assist customer-facing teams, streamline operations, and unlock new levels of engagement and productivity. This reflects Endava's commitment to staying at the forefront of Salesforce innovation and helping clients turn emerging AI capabilities into real measurable impact. And now with an update on our large strategic deals, defined as multiyear large-scale engagements. In addition to the multiyear payments deal I mentioned earlier, we deepened our engagement with Convex, an international specialty reinsurer, by signing a new agreement. This builds on the success we have achieved together in recent years as Convex continues to invest in innovative technology deliver consistently high-quality service. This partnership enables us to deliver a range of capabilities enabling Convex to continue creating a business that has data at its heart and a strong emphasis on analytics to make better underwriting decisions. In mobility, we have extended and expanded our long-standing partnership with Toyota Racing Development, as their official IT consulting partner in 2026 and beyond. As part of the partnership, Endava will leverage its AI-enabled accelerators and frameworks to modernize core Toyota racing development production systems and enable digital transformation for the business. Next, let me outline how our delivery model is evolving and what that means to execution and client outcomes. The pace of AI innovation remains exceptionally fast, and the nature of our client discussions has evolved just as quickly. Where a few courses ago we were explaining foundational concepts such as intelligent agents, we are now examining how those agents can be deployed to deliver measurable efficiency across customer-facing and core operations. Clients are starting to move beyond the search for a single killer app application and are instead seeking opportunities to embed AI throughout their technology stacks and operating models. This marks the beginning of the transition from chasing incremental changes brought about by embracing AI to notable productivity changes. We're now spending time shaping larger-scale projects, can only be delivered through the strategic adoption of AI. Purpose-built for an environment in which autonomous software agents participate in delivery, Dava Flow treats flow as the next progression beyond agile. By embedding AI into every activity, the delivery life cycle is organized into four yet feedback-linked phases: Signal, Explore, Govern, and Evolve. Throughout all phases, human oversight, human in the loop guides AI contributions, and the system learns and improves with each cycle. In Signal, we deploy market and estate scanning agents to surface and qualify opportunities. The agent reacts to signals in the market or client environment and feeds qualified opportunities into the life cycle with confidence scores. In Explore, we use human-AI collaboration to convert these signals into evidence solution designs, producing prototypes, requirements, and models at pace. The aim is to reduce uncertainty and finalize what needs to be built supported by evidence. In Govern, we assemble and automate the build. Engineer oversight combines with agent-generated code to enforce best-in-class controls. Evolve is the post-deployment phase where the solution is in production with continuous improvement. Human in the loop checkpoints span every phase so that each iteration strengthens the next. AI agents watch the system's telemetry, user behavior, and performance data to detect anomalies or opportunities. Across the four phases, we take our lifetime experience of distributed agile at scale and optimize our approach to best organize agents at work, agentic checkpoints, and humans in the loop at the core of the new approach. We have equipped our teams with playbooks and training materials, and all delivery teams are expected to complete Endava flow training and immersion before the close of the current financial year. We ended the quarter with 11,636 Endavans, representing a 2% decrease from the same period last year. We are deepening our AI talent pool and embedding new capabilities across the business, positioning Endava to help clients turn emerging technology into near-term operational gains. We're expanding and upskilling our AI talent while trimming roles where market demand has declined. Our inaugural DARVAx Academy, created to train the next generation of AI-skilled professionals, drew 2,900 applicants and resulted in 470 hires across nine delivery locations. And our recent Tech Fest engineering event brought together those new hires working in 48 cross-functional teams to address 24 client-inspired challenges. Every team produced a working minimal viable product under mentor guidance. Before we conclude, I want to recognize every Endarvon for the perseverance and focus you continue to show as we steer through this period of rapid digital evolution and translate change into opportunity. Our priorities remain clear: sustain growth that endures, safeguard the distinctive culture that defines us, and deliver technology solutions that equip our clients to set the pace confidently in an ever-shifting market. I'll now hand over to Mark for a closer look at our quarterly financial results and guidance for the upcoming quarter and the remainder of the fiscal year. Mark Thurston: Thanks, John. Endava's revenue totaled £178.2 million for the three months ended 09/30/2025, compared to £195.1 million in the same period in the prior year, representing an 8.6% decrease. In constant currency, our revenue decreased 7.3% from the same period in the prior year. As John already mentioned, the first quarter results were lower than anticipated, primarily due to a matter in the United States, relating to an unexpected credit made to a client that arose subsequent to our last earnings call, as well as failure to convert certain non-large strategic pipeline opportunities into revenue as previously anticipated. Loss before tax for the three months ended 09/30/2025, was £8.5 million, compared to a profit of £4.2 million in the same period in the prior year. Our adjusted PBT for the three months ended 09/30/2025 was £9.9 million, compared to £19.2 million in the same period in the prior year. Our adjusted PBT margin was 5.5% for the three months ended 09/30/2025, compared to 9.9% for the same period in the prior year. Our adjusted diluted earnings per share was £0.05 for the three months ended 09/30/2025, calculated on 53.2 million diluted shares as compared to £0.25 in the same period in the prior year calculated on 59.4 million diluted shares. Revenue from our 10 largest clients accounted for 36% of revenue for the three months ended 09/30/2025, in line with the same period last fiscal year. The average spend per client from our 10 largest clients decreased from £7.1 million to £6.4 million for the three months ended 09/30/2025, as compared to the three months ended 09/30/2024, representing a 9.9% year-over-year decrease. Of this, FX movement contributed to a 2% year-over-year decrease, and the rest of the decline is in line with the rest of the business. In the three months ended 09/30/2025, North America accounted for 42% of revenue, Europe for 24%, UK for 28%, while the rest of the world accounted for 6%. Revenue from North America decreased by 1% for the three months ended 09/30/2025, over the same period last fiscal year. The decrease was driven by FX, with underlying constant currency growth. The unexpected client credit mentioned in my opening comments is more than offset by the reclassification of a large payments client from the UK to North America. The relationship with the client is now based there. Comparing the same periods, revenue from Europe declined 12.8% due mainly to weakness in the TMT and mobility verticals. The UK decreased 17.9% due mainly to the reclassification of the client referred to above to North America. And the rest of the world increased 9%. Our adjusted free cash flow was £9.2 million for the three months ended September 30, 2025, up from £3.5 million during the same period last fiscal year. Our cash and cash equivalents at the end of the period totaled £47.2 million at 09/30/2025, compared to £59.3 million at 06/30/2025, and £52.8 million at 09/30/2024. Our borrowings totaled £193.2 million at 09/30/2025, compared to £180.9 million at 06/30/2025, and £132.6 million at 09/30/2024. Capital expenditure for the three months ended 09/30/2025, as a percentage of revenue, was 1.7%, compared to 0.6% in the same period last fiscal year. We remain committed to our share repurchase program. As of 10/31/2025, Endava repurchased 7.1 million ADSs for $115.9 million under the program, and we had $34.1 million remaining for repurchase under its share repurchase authorization. Before moving on to the guide, I'd like to provide some context. As a reminder, since May 2025, we are utilizing a guidance methodology under which revenue for any unsigned large strategic opportunity in the pipeline is excluded until the related statement of work is executed and delivery has begun. By contrast, for our non-large strategic deal pipeline, we make an assessment of likelihood and timing of conversion and likely timing of revenue. Turning to the guide for the remainder of the fiscal year, we have reassessed our non-large deal pipeline and lowered our conversion into revenue assumptions. Additionally, the client-specific issue in the United States weighed on first-quarter results and will continue to affect the remainder of the fiscal year. While the three large signed engagements John highlighted are reflected in our guidance and partially underpin the expected revenue uplift in the second half. Mark Thurston: Now moving on to our outlook. Our guidance for Q2 fiscal 2026 is as follows: Endava expects revenue to be in a range of £179 million to £182 million, representing a constant currency revenue decrease of between 8-7% on a year-over-year basis. Endava expects adjusted diluted EPS to be in the range of £0.15 to £0.17 per share. Our guidance for the full fiscal year 2026 is as follows. Endava expects revenue to be in the range of £735 million to £752 million, representing a constant currency revenue decrease of between 4.5-2.5% on a year-over-year basis. Endava expects adjusted diluted EPS to be in the range of £0.80 to £0.88 per share. This above guidance for Q2 fiscal year 2026 and the full fiscal year 2026 assumes the exchange rates on 10/31/2025. The exchange rate was GBP 1 to USD 1.32 and EUR 1.14. This concludes our prepared comments. Operator, we are now ready to open the line for Q&A. Operator: We will now begin the question and answer session. Your tone phone. First question today comes from Bryan Bergin with TD Cowen. Please go ahead. Bryan Bergin: Hey, guys. Thanks for taking the question. I guess I'll start on the client credit. Can you share some more detail on this credit that was not foreseen and weighed on performance? Just any sizing of that in context, curious if it was due to company execution or maybe a choice by the client made to pull back on something. Is it isolated or could this reoccur elsewhere? Mark Thurston: So it was unexpected, Bryan. It arrived after we guided last quarter. It isn't related to remediating work. I'll qualify it as being a more procedural matter. In terms of the impact, if it hadn't happened, we would have been at around the bottom of the revenue guide. And certainly, in terms of EPS, we would have been right in the middle of the range that we set last quarter. I can't really go into any more detail than that at this stage. Bryan Bergin: Okay. Okay. And I guess on demand and the pipeline conversion then, is that a demand issue or would you say some friction in the changes in the commercial responsibilities? Just curious how whether you would say that demand has or client sentiment has changed much at all here in the last quarter. Maybe if you could just talk about how demand trends progress through the first quarter and to the early part of 2Q now? John Cotterell: Yes. Mark Thurston: I mean, in terms of the comment around pipeline conversion in the quarter, the significant impact on revenue was the credit note we just mentioned. Pipeline conversion, we did convert pipeline. So against the high end, it was about 50% of and against the low end, we were about 80%. So not as high as we would have anticipated. But in the light of that sort of performance and the ongoing sort of review of pipeline quality, we've looked at our assumptions for the rest of the year. And that's resulted in it's actually downgrading from top of the guide at £765 million to £752 million. It is actually offset though by some of the big wins that John highlighted on his script. So they add step change revenue basically in the second half. So they do underpin part of the ramp as we see going through into mainly Q3, Q4, but we've taken a more prudent line on the pipeline conversion in the non-strategic deal space. Bryan Bergin: Okay, understood. Thank you. Mark Thurston: Thanks, Bryan. Operator: The next question comes from Maggie Nolan with William Blair. Please go ahead. Maggie Nolan: Hi, thank you. I understand the commentary on how you're considering pace of conversions from here for the non-large accounts. But can you comment on whether there's been any client churn at unusual levels in this quarter versus recent past? John Cotterell: Hi, Maggie. There hasn't been a growth in client churn. And just to be clear, the client that Mark was referring to where we had the credit is an ongoing and not in decline. It's just a more conservative view based on the conversations that we've been having around that inflow of the non-large deal pipeline, which is what we guide against. Maggie Nolan: Okay. Thank you. And then can you talk a little bit about how you're quantifying any Brexit productivity gains from Endava flow? And just the ability to kind of drive this at scale across your model? John Cotterell: Yeah. So, we're seeing the AI shift essentially going through two steps. There's the sort of Gen AI with a bit of AgenTik coming in, where organizations are largely applying a bit of an accelerator from AI to an agile methodology. And getting in that sort of 20% to 30% range productivity improvement that people are talking about. What we're seeing with Dava Flow is taking that next step into using agents to do a far bigger element of the design and coding. All under human guidance and government. And through that getting significant step-ups in productivity. In the five to 10 times type range as I covered on the call last time. Now, for us, that gives us an opportunity alongside some of these bigger deals that we're working on to significantly accelerate transformation and change in client environment. And through doing that, to actually deliver a lot of benefit to the client, but also look at pulling through wider margins through that huge added value that we're delivering. Now, the big deal that I covered with the large payments client is very much based on those principles. Taking that Dava Flow capability to accelerate transformation for them, help with new product development, and some joint go-to-market together. So it's and it's very illustrative of the type of deal larger deal that we're working on. And, but we're not putting into our guidance as Mark is highlighted over the last couple of quarters. Maggie Nolan: Thank you. John Cotterell: Thanks, Maggie. Operator: The next question comes from Nate Svensson with Deutsche Bank. Please go ahead. Nate Svensson: Hey, thanks for the questions. John, wanted to go back to something you said at the beginning of the prepared remarks. I think you mentioned that you're navigating challenges associated with the transition in business model delivery approach and the acceleration of the AI wave. I guess just from my perspective, given the growth in the business, the lower guide, it seems like there's been some struggles with everything that's going on. So I'm just hoping you can take a step back and maybe talk at a higher on what your strategy is to successfully navigate these changes. I know there's macro considerations, but I guess beyond that, what do you think isn't going right? And what's the plan internally to try to turn things around and ultimately capitalize on some of the opportunities that are ahead of you? John Cotterell: Yes. Thanks, Nate. So, for us, we're pushing very, very hard on this shift to being AI native. Our vision is that over the next two to three years, AI becomes a much, much more significant player in our industry in the way in which people deliver to clients, deliver code, deliver requirements, and so on. And in pushing hard on that shift, we are moving much faster away from the old models than I believe many of our peers are. The result of which is that we are accelerating deliveries to clients in the current environment under the old T and M model largely. This quarter, we were 24% outcome-based, which is still rising. But it does mean that 76% of our revenue is coming in a T and M basis. As we're delivering a much higher productivity, that is having an erosion on the revenue that's coming through the business. That is being offset by the growth in demand for our new AI native approaches. Where every Endavan is using AI every day in the delivery of to our clients. And that shift is very, very fast. Last quarter, I reported that half of just over half of our services were AI related. Covering using AI to change and accelerate the SDLC, software development life cycle. Or identifying client workflows or indeed in deploying AI in the physical world. This quarter, that greater than half has moved to over 70% of our services. Are AI related on the same measure. So it is a strong shift and strong acceleration productivity. And that is having headline let's say, it's headwinds for us on revenue. On the old model. The strategy and the focus is all around driving the fastest shift we possibly can to the new model. Where we are writing more outcome-based deals with clients which locks in the opportunity to deliver greater benefit to the client using AI, but also to improve our margins. And we are seeing that come through in the rising proportion of outcome-based deals, and in the margins attached. To those deals. And so that's the strategic shift that we are going through. We are pushing through it very fast and we're probably carrying more pain in the short term. Because of that accelerated shift to the future state. That we're pushing through. Nate Svensson: Makes sense, and I appreciate the detailed response there. Did want to follow-up on this $100 million deal with a leading payments company. My guess is that would be a renewal with maybe one of your two large payments partners, but maybe you can correct me if that is indication, it was a new logo. But beyond that, maybe you could use that deal as kind of a launch point to expand more into general commentary on pricing and productivity commitments you're having to make in the current difficult macro sort of in order to get these larger deals across the finish line? John Cotterell: So the $100 million deal is not a renewal of one of our larger payments clients. It is an existing payment client, but really quite small. And well over 85-90% of that deal is net new revenue to us. And it is around helping that client transform their business. They are equally excited about us helping them do that as we are about helping them drive the transformation and bringing our engineering skills to bear on their estate. Mark, do you want to pick up on the pricing? Mark Thurston: Yes. I mean, pricing, I mean, as John said in terms of the revenues, we are still mainly time and materials. So we'd still look at the average rate per workday and it is very much stable quarter to quarter. Our issue is volume more than anything else certainly in the T and M space. Nate Svensson: Guys. Nice to hear about the payments win. John Cotterell: Thanks, Operator: The next question comes from James Faucette with Morgan Stanley. Please go ahead. Antonio Jaramillo: Hey, guys. Thanks for the question. It's Antonio on for James. Wanted to ask about your fiscal year 2026 guide. It looks like in the back half there's still a strong acceleration. And I know that you mentioned those three large deals are contemplated in that, but what gives you confidence that those large three deals will sort of come through in the back half? Any color there would be appreciated. Thanks. John Cotterell: So the three deals are signed. So they are committed spend that involves ramp up in the second half. I'll let Mark give you a little more color. They are. And it's not just those three deals, they're additive. Mark Thurston: So we've signed deals going back to Q1, sorry when we were guiding Q1 at the end of the year. So there was a further sort of layering on of, I'll call it step change revenue because that's typically the nature of it. And that layering on of these larger deals onto the run rate, which we'll refer to the non-strategic deal revenue stream, gives confidence in that back half. I mean, there is still a pipeline, you know, to convert. As we sort of highlighted when we were discussing the Q1 performance. So there is always sort of risk in the figure, but we have given a range of £752 million to £735 million which we think accommodates that risk in terms of the pipeline conversion on the non-strategic big deals. Antonio Jaramillo: Got it. That's helpful. Antonio Jaramillo: And then as a follow-up, I wanted to ask on your capital allocation priorities. Like how are you balancing investment within AI and also share buybacks? Just to get a sense of that as well. Mark Thurston: The share buyback continues. We still have $150 million approval from the board. We continue to invest. I mean, part of this year, we highlighted there was going to be margin impact through the investment in this shift mainly in terms of technology and onboarding people. And that still remains the case. As John said, we are pushing very fast on this. And sacrificing near-term profitability for the upswing in profitability that we think will come through in at the outer years. Antonio Jaramillo: Great. Thank you guys so much. Operator: The next question comes from Jonathan Lee with Guggenheim Partners. Please go ahead. Jonathan Lee: Great. Thanks for taking my questions. Can you help decompose what's contemplated in your outlook across the high and low end of the range as it relates to pipeline conversion required and the levels go get required and whether you've given any sort of allowance for macro uncertainty? Mark Thurston: Well, in terms of the range for the full year, if this is excluding obviously any strategic deal pipeline, which is growing strongly, 79% to 81%. In the current quarter, it is very high, it's about 95% to 93%. So we think the quarter for Q2 adequately is ranged. It does take into account that the quarter ending December, we have a lower number of working days, which is a headwind. Against the sort of revenue when you look at it sort of sequentially. But we have strong confidence in Q2. So Q3 and Q4 where we have the higher levels of pipeline, we have done a sanitization of the pipelines being proposed in the business, and we believe that those are achievable. And as I said, we have reduced the overall guide to take account of that. Jonathan Lee: Thanks for that color. And as you think about some of the margin challenges you're facing, how are you thinking about the potential for expansion levers and investments into the end of the calendar year and into the start of 2026? Mark Thurston: Well, I think as you've probably seen, Endava has high operational leverage, which is a sort of a negative and positive. So we're very much driven by top-line performance and reacting accordingly. You know, and visibility has to be good for us to react in sort of time. So if we have slow revenue progress, we have to take out costs, you know, as we respond to that. But similarly, with increasing revenue, we get a strong profitability, you know, recovery, which is what is implied in the full-year guide. That we get on that growth trajectory. And yes, there are some strong sequential growth quarter on quarter. Implied by those larger deals starting to deliver revenue. But it does give us high operational leverage, which moves up our gross margin quite significantly and delivers strong EBITA performance. John Cotterell: Anything that I'd add to that is if you look at that strategic pivot that we're talking about going through at the moment, that does have a margin impact. There's a friction element of that change, the change of skills making sure that you know, our people are moving to being AI native and having to take action where people are unable to make that shift. Or carrying skills that become less important. In an AI native world going forward. So that friction element is also hitting the short-term margin picture. Jonathan Lee: Thanks for that clarity. John Cotterell: Thanks, Jonathan. Operator: The next question comes from Phani Kanumuri with HSBC. Please go ahead. Phani Kanumuri: Thanks, John and Mark for taking my question. My question is on your headcount. There seems to be a bit of increase quarter on quarter. Is this an anticipation for demand in the second half of the year? And then how do you see the headcount strategy in terms of the AI productivity that you're seeing? And the macro headwinds that you're seeing for, let's say, the rest of the fiscal year? Thank you. John Cotterell: Yes. So a lot of the increase in the headcount seen is the DARVAX Academy that I talked about on the call. Where we're specifically targeting bringing in strong AI native leaders across the organization. As well as bringing in graduates who know, from their university background more AI native, but perhaps less experienced from a coding and governance point of view so that you can create that mix of teams who've got that natural affinity with AI, with prompt engineering and so on. Alongside the experience headcount. And so enabling that shift is part of the friction element. I was talking about for Jonathan. Where we're investing in the people who move into that space and then getting them placed into client environments. So that's part of that shift up in headcount. We still continue to see us training and bringing in AI native people and losing people who are not going to make that shift into the future. And so you're still seeing an attrition level that's running higher than it has been historically. Because of that churn that's going through the business. And we anticipate that that will carry on for another couple of quarters before we settle down into being much more completely in the new world. Phani Kanumuri: Thank you. John Cotterell: Thanks, Phani. Operator: The next question comes from Puneet Jain with JPMorgan. Please go ahead. Puneet Jain: Hi. Thanks for taking my question. I wanted to follow-up on like the $100 million deal, the one that has 85%, 90% of new work. Can you share like more details like the duration of that revenue or type of work you will do specifically around new development versus managed services? And then why that client and that deal led to like a very different outcome than others like are these type of deals replicable? John Cotterell: Yeah. So it's a very exciting deal for us. It's a headline of a number of other deals that we're working on that would fall into the same category. The duration is over five years and it's a commitment on the part of the client to spend that level of money with us in return for us driving accelerated transformation for them. It is almost all in the new development space rather than in the managed services space. And there are a number of pillars of transformation, of new product development, and of joint go-to-market exploration of capability. That is built into how we will deliver value back to the client for that spend that they have committed. It's a very close partnership mindset. Where together we're going to help transform that part of the market. And obviously, it's in the payment space. So we bring a lot of payments experience as well as the AI capabilities and so on that I've been talking about. Puneet Jain: Got it. And can you also talk about the timing given like the second half guidance for revenue implies give or take £10 million in incremental revenue of quarters in Q3 and Q4. So can ramp in this deal and the large two other large deals alone drive that incremental revenue? In the second half of this year? Mark Thurston: So incrementally, you know, your math is right around the ten a quarter. It's not quite phased that way, but your maths is roughly right. The deals that we've landed, I've contributing roughly about sort of 50% of that ramp. And the balance is coming from the pipeline conversion on the existing sort of run rate. That is after us look, and that is the non-strategic deals revenue sort of stream, if I can put it that way. So it's coming half and half from the big deals that we have landed but also some of the pipeline conversion in the existing run rate business, if I can call it that. Puneet Jain: Got it. Thank you. Mark Thurston: Thanks, Puneet. Operator: This concludes our question and answer session. I would like to turn the conference back over to John Cotterell for any closing remarks. John Cotterell: Thank you all for joining us today. In closing, we anticipate a gradual recovery over the balance of the year with being assisted by those large strategic deals that we recently signed or indeed signed back in the summer. Which kick in, in our H2. Our broader partner ecosystem is already generating incremental potential pipeline opportunities. And client interest in Dava Flow is accelerating. So I look forward to speaking with you all on our next earnings call in February. Thank you very much. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.