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Operator: Thank you for standing by and welcome to the United Natural Foods, Inc. First Quarter Fiscal 2026 Earnings 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. If you would like to withdraw your question, again, press 1. Thank you. I'd now like to turn the call over to Steve Bloomquist, Vice President of Investor Relations. You may begin. Good morning, everyone, and thank you for joining us on United Natural Foods, Inc.'s first quarter fiscal 2026 earnings conference call. By now, you should have received a copy of the earnings release from this morning. The press release and earnings presentation, which management will speak to, are available under the Investors section of the company's website at www.unfi.com. We've also included a supplemental disclosure file in Microsoft Excel with key financial information. Joining me for today's call are Sandy Douglas, our chief executive officer, and Matteo Tarditi, our president and chief financial officer. Sandy and Matteo will provide a business update, after which we'll take your questions. Before we begin, I'd like to remind everyone that comments made by management during today's call may contain forward-looking statements. These forward-looking statements include plans, expectations, estimates, and projections that might involve significant risks and uncertainties. These risks are discussed in the company's earnings release and SEC filings. Actual results may differ materially from the results discussed in these forward-looking statements. I'd like to point out that during today's call, management will refer to certain non-GAAP financial measures. Definitions and reconciliations to the most comparable GAAP financial measures are included in our press release and the end of our earnings presentation. I now ask you to turn to Slide six of our presentation as I turn the call over to Sandy. Sandy Douglas: Thanks, Steve, and thank you everyone for joining us this morning. In 2026, United Natural Foods, Inc. delivered solid results, including adjusted EBITDA and free cash flow, meaningfully above prior year levels. While net leverage declined approximately one turn compared to the prior year quarter. Importantly, we delivered these results amidst an operating environment that remains highly dynamic. Our first quarter net sales performance was driven by sustained natural and product growth, new business projects, and strong retail execution across our customer base. Positive sales in our natural products segment largely offset declines in our conventional product segment consistent with our expectations. As part of our accelerated network optimization efforts most notably at Allentown, which have proceeded ahead of schedule. As we improve our network, we're focused on continuing to improve service levels for our customers and suppliers in a growing $90 billion target market and on further increasing our long-term profitability. Our adjusted EBITDA growth in the first quarter continued to be driven by improving execution. Effectiveness, and efficiency across the business. This reflects actions taken within our value delivery office, to help support gross margins as well as continued progress managing shrink. Free cash flow results improved by over $100 million compared to last year's first quarter. Even as we took necessary steps to stock up on the inventory our customers need, in advance of the high volume holiday selling season that is now well underway. This performance enabled us to both improve fill rates and reduce net leverage, sequentially compared to the end of fiscal 2025 and from prior year levels. As a result of our solid Q1 performance, we're firmly on track to achieve our full year outlook, and we remain focused on executing our strategy adding value for our customers and suppliers, while becoming a more effective and efficient company. During the first quarter, we continued to make progress in both areas. I'll start with how we're adding value for our customers and suppliers. At United Natural Foods, Inc., we aim to do more than safely receive, store, and transport food. We're working to bring our customers the products, insights, programs, and services that will help them execute their strategies and successfully differentiate themselves in a highly competitive environment. We know this environment is increasingly challenging. Especially for traditional grocers. This is why we aren't stopping with what we can do for our customers and suppliers today. We're focused on what we can do to help them succeed for years to come. Our commercial organization is working to revamp and strengthen our merchandising capabilities. As a competitive advantage for our customers. Because we believe tailored merchandising and competitive pricing on key items is critical to helping retailers more effectively differentiate and compete. This focus also helps our suppliers successfully build their brands across the diversified 30,000 plus retail locations that we serve. A critical part of our broader merchandising capability is supported by our private brands portfolio. During the quarter, we appointed a new leader for this business with deep knowledge of how private brands can help retailers differentiate and drive value. For consumers. We also continued taking action to improve the experience for independent customers and emerging suppliers. Who are critical to the vitality of our industry. In fact, an early focus of our lean management kaizen workshops has been to troubleshoot some of the areas that suppliers have told us are important to them. Such as time to shelf, Following a recent Kaizen continuous improvement workshop, we took swift action to improve item setup forms and processes to streamline the new item setup process. This type of action not only directly helps our suppliers, our customers by ensuring that they get access to innovative products that their shoppers want. Turning to our focus on improving effectiveness and efficiency. In the first quarter, we took additional steps on our operational road map to pair advanced supply chain technologies with processes and capabilities that empower United Natural Foods, Inc. Associates to champion operational excellence. We recently deployed the supply chain technology, RELEX, across about half of our distribution network. With the second half expected to be completed by fiscal year end. This solution is helping us partner with our customers and suppliers to make smarter procurement decisions by using an AI based platform to predict demand, avoid waste, and reduce out of stocks. It is helping to deliver improved fill rates and inventory effectiveness as we expected and we anticipate further benefits as we complete the rollout this year. At the same time, we continue to scale lean daily management across our distribution network. With 34 DCs now onboarded, through first quarter's end. In these DCs, we continue to see encouraging improvements in our KPIs for safety, quality, delivery, and cost. All as a result of empowering our associates to see and solve problems faster more effectively. Together, Relax and Lean are driving effectiveness and efficiency across our network. Our customer fill rates have improved. And are now trending above fiscal 2024 and 2025 levels on average. We still have work to do. But we see even more opportunities to improve as we continue to scale these initiatives in the months ahead. During the first quarter, we also continued to optimize our network. Following the actions we took last fiscal year to streamline parts of our footprint. While also strategically investing to support future growth. These actions were completed at an accelerated pace relative to our initial expectations expectations. Our optimization efforts are enabling us to serve customers and suppliers through strategically located facilities. With broad assortments while removing redundant and wasteful costs. These actions have enabled us to continue to make network improvements and contributed meaningfully to our improved results. During the first quarter, we ramped operations at our new automated natural product distribution center in Sarasota, Florida. Which is expected to help address strong demand in that area. By combining the power of an optimized portfolio, with the right mix of technology, processes, and people, we are building a more responsive and resilient supply chain to support customer and supplier needs today and into the future. At next week's Investor Day, we'll provide a closer look at the key capabilities that we're building to add more value for customers and suppliers and continue to drive effectiveness and efficiency across our business. We also look forward to giving everyone a chance to hear directly from several of the talented United Natural Foods, Inc. leaders who are leading this important work. Together, all of us at United Natural Foods, Inc. remain focused on becoming the food retail industry's most valued partner. Our first quarter performance reinforces our confidence and our ability to continue to create sustainable long-term value for our customers, suppliers, associates, and shareholders. With that, let me turn it over to Matteo to provide more detail about our first quarter performance. Matteo Tarditi: Thank you, Sandy. And good morning, everyone. Our first quarter results reflect our focus on building capabilities to better support our customers while simultaneously improving profitability and free cash flow resulting in meaningful progress on our deleveraging efforts. We're also affirming our annual outlook for all key financial metrics. Today, will provide additional insight into our first quarter results, our financial position and capital structure, and our fiscal 2026 outlook. With that, let's review our Q1 results. Starting with slide eight, our first quarter sales came in at $7.8 billion roughly flat to last year. This includes natural segment growth of 11%, reflecting strong unit growth which outperformed the market. This growth, as Sandy mentioned, driven by the performance of our customers some new business projects for existing customers, as well as the continued secular strength in our natural organic, and specialty products. In conventional, as we anticipated and previously discussed, sales declined about 12%. Primarily driven by our accretive transition out of our Allentown distribution center. Which was completed ahead of our expectations. While this move pressured the top line, it supports improved profitability and free cash flow. Overall, wholesale inflation was about 3%. Unit volumes declined about 5% driven primarily by network optimization, mix was a positive during the quarter. In retail, total sales fell 5% in the quarter. Partly due to store closures over the past twelve months reflecting our strategic decision to strengthen the store network and improve future free cash flow. Same store sales declined 3%. But we are optimistic about the impact that David Best and his strength and leadership team will have on this business. Moving to slide nine, let's review profitability drivers in the quarter. Our gross margin rate in the first quarter was 13.4%, up 20 basis points versus the prior year quarter. This rate represent continued progress in to optimize our portfolio our event supplier programs, and higher levels of temporary procurement gains resulting from vendor price increases. Our operating expense rate was 12.7% of net sales compared to 12.9% last year. This improvement reflects the benefit of our effectiveness and efficiency initiatives driven by our value delivery office, network optimization, including continuous strategic automation investments, acceleration of lean daily management across United Natural Foods, Inc. In addition, throughput, a key indicator of supply chain product productivity measured by cases moving through the DCs over an hour, increased by over 2% compared to last year's first quarter. By nearly 10% from Q1 2024. Adjusted EBITDA for the first quarter was $107 million up nearly 25% year over year. On a rate basis, adjusted EBITDA was 2.1% of net sales, up 40 basis points year over year. All in adjusted EPS for Q1 was 56¢, compared to 16¢ last year. This was driven by higher profitability including the benefit of lower net interest and depreciation expense, partially offset by a higher tax rate. Turning to slide 10. Free cash flow in Q1 was a use of $54 million. Which was an improvement of about $105 million compared to last year's first quarter. This was the result of higher adjusted EBITDA more efficient working capital investment, and lower levels of year over year capital spending. We continue to expect capital investments to accelerate as we move further into the year, based on the expected project schedule. The free cash flow performance in Q1 coupled with the higher adjusted EBITDA, enabled us to lower our net leverage ratio sequentially to 3.2 times and by one full turn compared to this time last year. Historically, we have seen net leverage increase as we move from Q4 to Q1 and build inventory heading into the holiday season. However, our focus on customer service combined with improved procurement processes and early benefits ReLex, have led to higher average fee rates while we've continued to reduce net leverage. With a strong first quarter performance, we remain confident that we will further reduce net leverage to our target of below 2.5 times by the end of the fiscal year as we enter the seasonally higher free cash flow generation quarters. Flipping to slide 11, we continue to deepen lean practices to drive benefits across safety, quality, delivery, and cost. We have now implemented a lean daily management in 34 DCs as of the end of the first quarter. A sequential increase of six facilities in the quarter. We're actively working to eliminate waste and improve distribution center effectiveness and efficiency. All driven by our strategy of adding value to our customers and suppliers. As Sandy stated, we continue to focus on building enhanced capabilities including customer stewardship, merchandising, supply chain, and technology. These builds and work done over the past few years to better understand the needs of all customers and suppliers. And would be an important part of the content at the next week's Investor Day. Looking at slide 12, our performance in Q1 keeps us solidly on track deliver our full year outlook for fiscal 2026. To review, our guidance ranges and increases compared to fiscal 2025 include sales of $31.6 billion to $32 billion, This includes the year over year loss of sales from our transition out of Allentown, which will improve profitability and free cash flow but suppress the growth in consolidated net sales by about 3%. Adjusted EBITDA of $630 to $700 million, representing a year over year increase of about 20% and an average annual growth rate of close to 15% the midpoint relative to our reported fiscal 2024 results. This implies about 35 basis points of margin expansion at the midpoint of our outlook. And then adjusted EPS range of $1.50 to $2.30 per share increase of about $1.20 per share at the midpoint compared to last year. Our outlook for capital spending remains at $250 million. Reflecting our focus on safety, modernization, and continued prioritization of investment for growth. Finally, our free cash flow expectations remains at approximately $300 million. We will continue to prioritize reducing net debt improve our net leverage ratio to 2.5 times or less by year end. While it's still early in the year, we remain confident in delivering our plan as we move through the balance of fiscal 2026. As highlighted on slide 13, the strength of our customers, and a focus on continuing to improve execution across our operations including the benefits from lean our network optimization efforts, have led to a solid start to fiscal 2026. We are encouraged by our sustained progress on improving free cash flow deleveraging our balance sheet, our net leverage ratio decreasing by one turn versus this time last year. We remain committed to our strategy of adding value to our customers and suppliers while making you unified more effective and efficient as a business partner. As we suggested on our last call, our goal this fiscal year is to accelerate the momentum and we're on a path of doing just that. We look forward to sharing more with you at next week's Investor Day. With that, operator, please open the line for questions. Operator: Thank you. We will now begin the question and answer session. We ask that you please limit yourself to one question and one follow-up. Your first question today comes from the line of John Heinbockel from Guggenheim. Your line is open. John Heinbockel: Hey. Sandy, two related questions on natural growth. Right? So growing 10%, market's growing, right, maybe mid single digit. So can you talk to drop size? Right? Or know, new new account distribution versus existing growth? Is that sort of the fifty fifty split by drop size up mid single digit as well? And then you also mentioned fill rates. And I know the fill rates in natural are are not where they need to be. Some of that's structural, but how big of an opportunity is that? Sandy Douglas: Yeah. I think John, good morning. I I would say the general trend in our drop sizes have been positive largely because the a lot of growth has happened with some of our larger customers who are at the same time, and this is premise of your question, giving us more to do. I think as as that dynamic happens, obviously, that makes us more efficient down through the line. But at the heart of it, it's strong growth it drops to EBITDA. And and the you know, the the fill rate issue? Yeah. Fill rate fill rate's been solid in and we're very heartened by it, actually. We've taken a number of steps to improve fill rate. It's obviously a key metric to our customers. Between the reintroduction of technology and the new implementation of ReLex, on a bed of lean daily management. And then driven by a more localized management structure that was put in place couple years ago is giving us sequential improvement in fill rates 25 versus 24, and then this year, 26 versus 25. And we continue to see opportunity to improve in that area, and it's an area that's very important to us and to our customers. John Heinbockel: And then my quick follow-up is, if I look at EBITDA margin in the conventional business, right, so this quarter, is up over a 100 base or almost a 100 basis points, right, north of 2%. How do you look at the potential of that business? Right? It may not grow, but how much more profitable can it be? Matteo Tarditi: Yeah, John. Good morning. If think about it conventionally in Q1, the EBITDA reflected the benefit of the accretive network optimization. The supplier programs and then a little bit of temporary procurement gains that, again, we continue to view as secondary and and temporary to our strategy. The conventional outlook for adjusted EBITDA for the rest of the year largely reflects the network optimization the growth of the supplier's funds, the continuous work that we do on shrink, and then the initiatives that we have deployed between lean lean data management and indirect cost management all kind of helping on the on the operating expenses and the leverage. So Q1 may be a little bit heightened by some temporary procurement gains. But in general, our strategy remains consistent of creating new capabilities to keep our customers competitive merchandising professional services brands, while working the benefits of the network optimization and the lean daily management and indirect cost actions. Sandy Douglas: John, just one one sort of strategic overlay there. Around EBITDA margin as we look ahead our view is that the opportunities and, in fact, the mandate to create value for customers in this environment is a very long term opportunity for us to continue to get better. Whether that's execution, whether it's services, whether it's programs, whether it's merchandising, then if you look at our cost base, we have a huge amount of cost related to what we do, we see a very long runway of continuous improvement opportunity there. So we would expect EBITDA margins to continue to edge up the effectiveness and efficiency areas as well. Operator: Thank you. Your next question comes from the line of Ed Kelly from Wells Fargo. Your line is open. John Park: This is John Park on for Ed. For taking our question. I guess just kind of given the gross margin strength in the quarter, can you kind of talk about the sustainability of that and maybe parse out like how big of a benefit the network optimization efforts were? In Q1? Matteo Tarditi: Good morning, John. The gross margin rate ex Life from the quarter was at 13.6% versus last year of 13.3%. So we were up about 30 basis points. The key drivers, you know, within the gross profit growth, obviously, we had strong natural growth that brings, gross profit and operating leverage based on their efficient business model. We had suppliers' funds and shrink continuing to help and accrete within the the gross profit And then we had some level of procurement gains that, again, we continue to view as temporary and secondary. Both in our financial construction and in the strategic partnership with our suppliers. The EBITDA of $167 million if you consider the large driver of productivity, the growth in natural, is basically a fair representation of the quarter in our run rate. So you can think about the $167 million as a normalized kind of EBITDA for the quarter. Even if we had temporary procurement gains in a $32 billion business in a given quarter, you have a number of puts and takes So that that $1.67 is a good kind of recurring run rate that we plan to sustain. And then relative to incremental opportunities for gross profit, the capabilities that we're gonna discuss next week at the Investor Day between merchandising, professional digital services, brands, all help keeping our customers competitive, strengthening the relationship with our suppliers. But also helping on on mix, which is an important component of our gross profit. John Park: Got it. And then just kinda switching gears a little bit. You talk about the competitive environment at retail for both conventional and natural? I know you seeing any changes out there more recently? Sandy Douglas: You know, at at a at 200,000 feet, one of the one of the fun things about being in our seat in the industry is we get to see a lot of retailers work their magic and this is no exception at this time. I mean, clearly, given the stress that a significant percentage of the consumer base is feeling right now, discount is very competitive and compelling. But that has stimulated a lot of innovation in retail, and we see it across our customer base, whether it's in the play natural and organic folks or customers who are beginning to rethink what they do to continue to bring different, better, and special offers in their market community based retailers, multicultural focused retailers, and if you if you took the the part of the of the industry that's innovating and differentiating and winning, they're growing very strongly. And so it really is a market by market customer by customer strategic and operational battle, and there's lots of winners. There are people that are challenged as well, and I I think from our end, least, we're busy trying to figure out how to help them win. And, but it's very competitive out there. But that's creating a lot of innovation and we continue to view the broader industry as very healthy. John Park: Great. Best of luck, guys. Operator: Your next question comes from the line of Mark Carden from UBS. Your line is open. Mark Carden: Good morning. Thanks so much for taking the question. So you continue to generate quite strong growth in Natur Organic. How would conventional have shaken out ex the Allentown transition? It sounds like the impact there may have been more than expected just given you completely ahead of your expectations And then what are you seeing with respect to the health of the consumer in both your natural organic segments of the business? Sandy Douglas: Good morning, Mark. Yeah. What I would say is the lion's share of our weak weakness in conventional is because of network optimization. Obviously, the Allentown exit is the largest factor there. But there's been other tweaking across the country. Beyond that in conventional, there's it's been a bumpy quarter for the consumer with the shutdown creating general sentiment challenges with Snap delayed for a while, created some issues in those weeks. And and now retailers are coming back as that all comes back online. So very competitive and conventional and it sets up a mandate for us. It's the principal kind of north star of our merchandising reboot is to figure out how to get our customers in a place where they can be competitive in any scenario. And then in the natural, environment, obviously, been very strong growth in that segment across the different retailers, the largest of which all are our customers. And we're getting the opportunity to serve them. We continue to believe over the long term that the natural business is a as an industry, is a mid single digit grower, and we hope to be able to compete support the retailers that are competing in that environment. Mark Carden: That's great. And then as a follow-up, just at this stage, have you guys seen much incremental customer attrition following the cyber attack? You guys seem to be weathering it quite well last quarter. Just how was it compared to what you may have expected at the time of your last quarter call? Sandy Douglas: Yeah. Mark, I I don't think it's any different. My answer would be exactly the same as I answered it last quarter. We had one southern customer that joined us and we had one Upper Midwest customer leave us. But the I think the the core answer is that we and our entire network, our sales, our merchant our supply chain teams are busy serving customers as well as they possibly can. And we we continue to to to manage through a couple situations there, but as far as customer retention, we've been extremely fortunate and we're working very, very hard to earn that. And and hope to continue to be the best choice for customers going forward. Mark Carden: Thanks so much. Good luck, guys. Matteo Tarditi: Thanks. Operator: Your next question comes from the line of Kelly Bania from BMO Capital Markets. Your line is open. Kelly Bania: Thanks for taking our questions. Matteo, just wanted to follow-up first follow-up on the procurement gains. I guess that helped Q1 a little bit. But if I heard you right, that's there's nothing there in the plan going forward. So wondering if you could just confirm I heard that right. And then can you help us understand you know, did those procurement gains drive some upside to your plan, your internal plan for the quarter? And was that specific to any categories that you can help us just understand what was happening there? Matteo Tarditi: Yeah. Good morning, Kelly. So, answering the, the first part of your question, we have not, modeled any procurement gains in our 2026 or 2027 outlook. So we continue to describe those as temporary and and secondary. They they happen in the first quarter, but as I was saying before, in in a given quarter, we have puts and takes until some of the upside from the procurement gains were offset by by other dynamics. In relative to kind of how we are thinking about the the procurement gains, our strategy is always to work with the suppliers and build strong relationship with them, making sure that through that kind of strategic partnership, we keep our customers, you know, competitive keep our prices low, stable, and and predictable. So we we don't rely on procurement gains, you know, in order to achieve our financial targets. And, again, we continue to do them as temporary. Relative to, you know, specific specific categories, it's been a little bit of a combination of many as you can imagine. Partly related to tariffs, partly related to kind of the general inflation, that is still in the 2.5 to 3% range. So modestly up versus 2025. Kelly Bania: Okay. That's that's very helpful. Now I was also wondering if I could just ask a couple of questions about top line on the two sides of the wholesale business. So first, on conventional, I guess, excluding that optimization, it looks like those were down in the mid single digit range. You called out some of the factors, I guess, going on during the quarter, but I guess, can you continue to hit you know, your targets with that magnitude of of kind of core sales pressure in in conventional? And are you seeing or hearing suppliers in those categories? Becoming more promotional to to help maybe drive some volume? In that in those categories. Sandy Douglas: Yeah. Kelly, this is Sandy. I what I would say is the general environment in conventional get out of our optimization, which is the large majority of our decline. By the way. So more of the decline that I think you're your question framed. But be that as it may, there is pressure in conventional, and it seemed broadly And the major source of that pressure comes from the consumer situation, the bumpiness with Snap, and then the the efficacy of a discount positioning in that environment. And so retailers are responding to that in in, obviously, different ways. But if you were to draw broad themes, it's to respond by getting more competitive on key value items to start for sure, Secondly, it's to look at product assortments and and and seek to innovate in a way that fits the retailer's positioning and minimizes comparability. And then the third area is kind of the secret sauce of the retailer, whether it's food service or customer service or community or local sourcing or whatever it might be. And you can see evidence of that formula working in conventional across the country. You can just think of the of the retailers that might fit that. Many of whom are customers of ours in one way or another. So we see a great opportunity to try to continue to help retailers break that code and manage through the kind of consumer stress. Which as it abates will continue to favor them, particularly those who've executed that formula well in their businesses. Kelly Bania: You, Sandy. Can I just also ask about the natural side and obviously, very strong there? Just wondering if you could comment a little bit more about how widespread that growth is. You talked about getting kind of more business with large customers, but are you seeing kind of more broad based adoption of natural and organic? Because there has been some some signs of a slowdown. It seems like you have a different point of view there. So wondering if you could just elaborate. Sandy Douglas: Sure. I think the very much like the conventional business, it's a retailer by retailer story. Our business, as you know, is slightly different than just a pure mirror of retail. We we also do project work. We do market entry services as an example of project work. And so sometimes we have business in in a particular channel or with a given customer that might be temporary as they make a transition in their business. So if you look at our report, you'll see strong growth You'll see, a number of customers performing very well you see a component of it that is project related where we're helping customers execute against short term initiatives. Then you'll see the ongoing secular health of the natural organic and specialty categories. The way we think about it is that the category based on the same information you all have looks like it's a mid single digit grower. And we'd like to believe that we'll punch our weight strongly in that industry going forward. But, certainly, our performance in the last quarter and over the last year and a half or so because of the project work we've been doing has been very strong. Kelly and Cindy, let me maybe after two or three questions on sales, helicopter up and say a couple of words on how we're thinking about the the sales outlook So in in Q1, sales were roughly flat compared to the prior year. And the midpoint of our output, 31.6 to 32,000,000,000, is also flat. So Q1 has been consistent with the outlook. The the outlook reflects the expectation that the underlying natural growth for the year will be similar to the long term industry average, which is MSD. Now when we think about the rest of the year, into doing conventional, we'll have the full top line impact as well as the full adjusted EBITDA benefits of the Ellington Fort Wayne billings and Bismarck optimizations. Versus Q2 twenty five when we were just in the early innings of the network optimization. When we think about the the third quarter, will we be ramping down some of the critical customer project base that we started twelve months ago, but then we know that also can ramp up very quickly and that is part of the solution that we offer to our customers and how we create value. And then in the fourth quarter update, have a an easier comp we will have the the no repeat tailwind for the $400,000,000 of cyber related losses. So it it is a full year framework. We don't you know, guide by quarter, but wanted to offer a little bit of a helicopter view on how we're thinking about the next nine months, through that kind of framework of flat and midpoint. Kelly Bania: Very helpful. Thank you so much. Operator: Your next question comes from the line of Chuck Cerankosky from Northcoast Research. Your line is open. Chuck Cerankosky: Good morning, everyone. Great quarter. As we look at the margin improvement, going forward, that we anticipate. What what's left realistically left in the shrink area and where might that come from? Is it is it lower inventories leaning less spoilage, less breakage, but can you talk about that in some detail, please? Matteo Tarditi: Hey. Good morning, Chuck. So on on margins, the current outlook calls for 35 basis points of margin expansion. In 2026. And then if you think about 24 through '27, it's about 60 basis points of of margin expansion. And that is really rooted into large productivity programs the benefits of the network optimization, the supplier programs, and then there is still a contribution from from shrink. Now if you think about, 25 to 24 shrink was a very important contributor. In the end, our goal is to continue to improve and eliminate weight. I mean, it's a main principle of lean that is now at 34 of 49 distribution centers. So there will be a relentless effort on on reducing shrink. We closed pretty well at the end of the first quarter. We are pleased with the progress, so we'll probably see less of a large dollar contribution compared to other productivity programs and some of the capabilities that will help on mix. But our focus on eliminating waste and inventory related waste will continue for a very long time. Chuck Cerankosky: Alright. Thank you. Operator: Your next question comes from the line of Leah Jordan from Goldman Sachs. Your line is open. Leah Jordan: Thank you. Good morning. Sandy, you talked about new business projects in the prepared remarks, and it sounds like you're doing more with your largest customer. So just need to get an update on your new business pipeline. What are the opportunities between new versus existing at this point? And then I think, ultimately, more importantly, how do you view the competitive environment for winning new business across wholesale what are the differences really between conventional versus natural in the current landscape? Thank you. Sandy Douglas: Sure. Let me comment on projects and then just to make sure that I'm being precise in the way I'm defining them and distinguishing them from general pipeline type either expansion with an existing customer or a new customer. The way we talk about projects is imagine a retailer is moving into a new region. And they're building a DC. They might hire us to be their distribution for a couple of years. That's a project. We know it's a beginning, and we know it's an end. And we're happy to facilitate their strategy and happy to to earn that business assuming it's profitable. That we would call that a project. Whereas a customer might hire us to start to handle their culinary or a different category that we haven't carried before, that would be pipeline. And, obviously, a new banner would be a pipeline expansion. So just getting the definitions right. From our perspective, the pipeline is strong on both natural and conventional. What I would say to you that's enhanced is we have a very disciplined review process where we assess all of those programs and deals for profitability, for sustainability, for operational sense and for value for the customer, and we're very disciplined. We do not pursue business for business sake. That's what our network optimization is unwinding right now. So there's a a highly disciplined underwriting process that our presidents and Matteo very carefully review. But pipelines are are strong in both sides. Our basis of competition typically is when it's a product, a service, or a program that helps the customer differentiate. As opposed to price for price sake. We have to be very competitive. Make no mistake. Our customers expect that, but we try to bring a whole package and that it it allows for us to have a win win. And it fits the customer because the things some of the things that we can do, we do better. And, we're continuing to work as we'll explain next week at investor day. We see a significant opportunity to continue to improve the offer, and, we'll be talking about that next week. Leah Jordan: That's very helpful. Thank you. And then one thing that stood out in the deck, you really were highlighting a refocused effort, it seemed, on private label. There seems to be new leadership there. Just see if you can provide more detail on your updated strategy. You know, what are the opportunities in natural versus conventional for that category? What are the points of differentiation you're providing? And I don't think we've had an update. Where are percent of sales on on private label today as well? Thank you. Sandy Douglas: Okay. Thanks, Leah. Yeah. I mean, broadly speaking, you all see it. The natural brands are strong and strengthening relative to the whole store for consumer value reasons. But increasingly, there's opportunities to build them across good, better, and best. So all three tiers. We did strengthen our leadership there with a veteran of private brands from another wholesaler who, she's absolutely outstanding, and we're thrilled to have her join the team. We see a significant opportunity to increase penetration here. This is not our our penetration of private brands is not at industry levels. And we see it as an opportunity for growth and an opportunity to create more value for customers. And so we're very focused on achieving it, and it's a a long term opportunity. Again, I'll say this a few times today, but we'll talk more about it next week. So but that that's the long and short of it. It's a great opportunity across good, better, and best, and we're working on all three. The other thing that I would say for a little more color is the portfolio of private brands is segmented. It's not the same portfolio going into a traditional grocery store as it is to a store. So there's opportunities on both sides. Leah Jordan: Great. Thank you. Operator: Your next question comes from the line of Scott Mushkin from R5 Capital. Your line is open. Scott Mushkin: Thanks, guys. Appreciate the time to ask some questions. So I wanted to we've been spending a lot of time on sales, and I think the reason is is you guys especially on the organic, national organic side, surprise the heck out of a lot of people. So it seems like, you know, the incremental growth is organic growth with your you know, what the industry is doing, and I think we all have seen it slow across even your customers. More store openings, winning more business. I think you've talked about incremental projects. So taking the other side of the sales slowdown idea, if if the industry were to Sorry about that. If you Accelerate again, could we expect your business to accelerate? So, Scott, I'm gonna paraphrase the question because we lost you for a couple seconds there. You you were commenting that you'd seen the industry slow down and you're wondering if our our sales would accelerate if it accelerated? You wanna rephrase that one more time? Scott Mushkin: Yeah. I mean, I guess what I'd say is so we've seen some of your customers slow down, their organic growth, their comp. Your business you know, moved you know, I think, higher, surprised us, probably surprised the Street. So what I was wondering is, taking the other side of it, could we actually see your sales accelerate in natural organic if the growth rate returns to some of these customers? On a comp basis? Yeah. So let let's try to look at the pieces. We we don't give guidance by division. But what we said earlier is that our external analysis points to kind of mid single digit growth in the natural organic and specialty categories. Then how I might look at that if I was trying to think about United Natural Foods, Inc.'s growth is how would United Natural Foods, Inc.'s customers tend to perform against that average and how effective is United Natural Foods, Inc. at doing more to serve those customers or gaining more customers. But you know, from a a print of plus 10%, which has a significant amount of of project work that will annualize in the next couple months. You you you can develop your own forecast What we would say about our business is we continue to expect to compete and perform strongly in those categories. Alright. Perfect. And then the other question is turning now towards the conventional side. I think Sandy you mentioned that it's gotten tougher. We've seen that. We our research has seen that. But that also spurring more promos from manufacturers. So just walk us out, like, six to twelve months and say the industry continues, the conventional side continues to deteriorate from a competitive standpoint. Does that impact your business? I mean, obviously, it would slow the sales a little bit. But overall, how does that impact your business if we kinda take the line down and continue take it down in the competitive environment? Deteriorates further. Sandy Douglas: So Scott, first, let's let's talk about the pieces of the industry. Because I think this is really important. The it is a well well documented, well talked about fact that the biggest four have been taking share for decades in the so called conventional part of the industry. What what doesn't get talked about though is there aren't only two piles of customers in that segment. There there's many piles. And if you take a third pile and say, I'm gonna put the innovative retailers who've been aggressive in keeping their center store cost down that have been innovative relative to assortment and avoiding unnecessary comparability with the big four and then have their own secret sauce, whether it's food service, prepared food, great customer service, local associates, whatever it might be, and you put that group in a pile, they're outperforming everybody. And our strategic work is first and foremost to try to be the partner of choice for that pile. That's why we took our addressable market from $150 billion down to $90 billion. As we just said, we're probably not gonna be good at folks that are just trying to find a drayage partner to try to duke it out on price alone. We've gotta be sharp on price, but we've gotta be good in helping customers implement a more let's call it, differentiated strategy. So the I I would encourage everybody to look at the industry in a more segmented way. The the next comment I'd make relative to promotions, and this is our the commentary about merchandising. We're gonna talk about this a little bit. Next week. But we actually think that as I mentioned when I went through that set of things that we're seeing the winners do, that wholesale supported retailers need more help and need to work together with their wholesaler to negotiate better costs relative to EDLP. It's not just promotional dollars. That that game is not working very effectively for a lot of people. It does that's not say it doesn't work for anybody, but it so our merchandising effort now is going to work backwards from the shelf and say, what conditions have to be there so that our customers have a credible center of the store. And what programming is there for that suppliers might want to invest in because they do with the big four. How can we get them to invest through to help and continue to build a robust supermarket channel? So lots of work going on there. But macro trends are macro trends. But within them, there are winners, and it's a sizable chunk. And, that's a lot of what's on our work desk right now of some of which we'll be able to give updates on work in progress updates next week in New York. Scott Mushkin: Perfect. And just to just to clarify, it was a great answer, but so I guess your expectations that the industry continues to deteriorate, you guys should be okay. Is that a is that a good summation of what you just said to me? Sandy Douglas: Well, I I I don't wanna accept the premise. I I believe that in tough times, people that partner with an industry have to step up That that's as far as I'll go in my crystal ball. Scott Mushkin: Alright. See you guys next week. Sandy Douglas: Look forward to it. Operator: And your final question today comes from the line of Peter Saleh from BTIG. Great. Thanks for taking all the questions. I just had one question. On capital allocation. I know you're at 3.2 turns now on leverage, and that's down pretty substantially from last year. And while on your way to two and a half turns by the end of this year, so how should we be thinking about or modeling out your capital allocation strategy, capital returns going forward? You get to two and a half, will you continue to focus on you know, deleveraging, or should we consider more capital returns to shareholders? How do we think about that going forward? Thanks. Matteo Tarditi: Hey. Good morning, Peter. So 2026, our goal is to deleverage to 2.5 times or lower And in the last earning call, we also affirmed that in 2027, we want to deleverage to, two terms or, or less. So our capital allocation and our application of the free cash flow that we generate remains solely focused on deleveraging and and reducing debt. If you think about the cash performance in the quarter, we improved by about a $100 million year over year combination of better EBITDA and better working capital management. For the rest of the year, we continue to see the EBITDA at the midpoint, obviously, accreting more than a $100 million for the full year. And then that implied math would be at 2.5 times, would be basically free cash flow performance closer to a two twenty five, two fifty, and we have an outlook at 300. So there is clearly multiple ways to achieve the 2.5 turns and and less. And the same carries over into 2027 where again, we plan to print another $65 million of EBITDA at the current outlook. And generate another $300 million of, of free cash flow. The the only comment that I wanted to make today in the first quarter is CapEx was low by design. In the end, we focused on regular maintenance and some of the technology investments but we have a a very tight monthly steering committee with the business presidents that review both the new projects, but also the cadence of spending. So within the $250 million outlook, we still have all the projects and all the schedule lined up to consume that envelope. In the usual three partition of maintenance and modernization, safety, technology, and then automation and growth investments. Thank you very much. Operator: And that concludes our question and session. I will now turn the call back over to Sandy Douglas for closing remarks. Sandy Douglas: Thank you, operator. We remain focused on executing our strategy. To add value for our customers and suppliers while becoming a more effective and efficient company. As we continue to strengthen our operational execution, we're steadily improving our service levels, profitability, free cash flow, and capital structure. We have a long runway of opportunity to continue improving in these areas while building capabilities to help our customers and suppliers differentiate compete, and grow profitably in a dynamic marketplace. We look forward to providing more details on our journey to create long term shared value for all our stakeholders at our Investor Day next week. To our customers and suppliers, we thank you for your continued partnership. Collaboration, and support. We look forward to serving you during this busy holiday season. To the United Natural Foods, Inc. associates listening today, our thanks for all that you continue to do for our customers, our suppliers, our communities, and each other. And to our shareholders, we thank you for the trust you continue to place in us. Thanks again for joining us this morning, We look forward to updating everyone on our progress and I hope you'll join us at our Investor Day next week. Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Greetings, and welcome to the Citi Trends Third Quarter 2025 Earnings Conference Call. At this time, participants are in a listen-only mode. A question and answer session will follow the formal presentation. We ask you to please ask one question and one follow-up, then return to the queue. If anyone would require operator assistance, please press 0. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to your host, Nitza McKee, senior associate at ICR. Go ahead, Nitza. Nitza McKee: Thank you, and good morning, everyone. Thank you for joining us on Citi Trends third quarter 2025 earnings call. On our call today is Chief Executive Officer, Ken Seipel, and Chief Financial Officer, Heather Plutino. Our earnings release was sent out this morning at 06:45 AM Eastern Time. If you have not received a copy of the release, it's available on the company's website under the Investor Relations section at www.cititrends.com. You should be aware that prepared remarks today made during this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance. Therefore, you should not place undue reliance on these statements. Nitza McKee: We refer you to the company's most recent report on Form 10-K and other subsequent filings with the Securities and Exchange Commission for a more detailed discussion of the factors that can cause actual results to differ materially from those described in the forward-looking statements. I will now turn the call over to our Chief Executive Officer, Ken Seipel. Ken? Ken Seipel: Thank you, Nitza. Well, good morning, everyone, and thank you for joining us for our third quarter earnings call. I am pleased to report another quarter of consistent performance demonstrating disciplined execution and progress across every area of our business. Our transformation strategy is gaining significant momentum. Our operational capabilities are advancing, and our customer connection is strengthening. As I shared at a recent investor conference, we're in the early stages of what I believe to be a compelling transformation for Citi Trends. We've established a clear line of sight to achieve $45 million of EBITDA in 2027, which represents a $60 million increase from the 2024 levels. The substantial growth trajectory will be driven by our continued focus on consistent comparable store sales performance, gross margin expansion, operating expense leverage, and strategic new store expansion. Today, I'll walk you through the drivers of our third quarter results and provide additional details on how we're executing against this exciting long-range roadmap. Ken Seipel: Turning now to our results. In the third quarter, we delivered comparable store sales growth of 10.8%, which represents a 16.5% growth on a two-year basis. This marks our fifth consecutive quarter and fifteenth straight month of strong comp growth, with total sales up 10.1% as compared to last year in the quarter. Consistent with our year-to-date performance, the majority of our Q3 sales results were due to increased customer traffic. We began the quarter with a strong back-to-school season, and we finished the quarter with an equally strong late fall fashion and pre-holiday product performance, with particular strength in children's, men's, and basic apparel categories throughout the entire quarter. Our Q3 performance brings our year-to-date comp to 10% or plus 12.3% on a two-year basis. We're seeing positive sales increases across all store volume groups and geographies, as well as across all product categories, underscoring the breadth of the top-line improvement across the business. Plus, I am pleased to report that our holiday is off to a good start, and our strong two-year stack sales momentum has accelerated into the fourth quarter, where we are poised to generate our sixth consecutive quarter of year-over-year growth. Ken Seipel: Gross margin rate in Q3 was consistent with the operating plan expectations and year-to-date 2025 performance. Our merchants have done a nice job of managing product cost while delivering amazing prices in the ever-changing landscape of tariffs. Due to the macro disruptions, the off-price deal flow continues to be robust, which allows us to have confidence in continued margin performance in the foreseeable future. I should also note that we made a tactical decision to pull forward some of the product originally expected in early Q4 into late Q3, which created a purposeful shift of freight expense from Q4 to Q3 this year. And as noted in our press release, the prior year gross margin rate results in Q3 2024 were artificially high last year due to Q2 strategic inventory reset activity, actions that ultimately jump-started the company's top-line turnaround last year. SG&A leveraged 130 basis points compared to last year, which includes the incremental funding of performance bonus programs for our employees this year. We're making good strides in improving execution consistency in all areas of the business, which in turn is having a positive impact on expense control. Looking ahead, we're focused on efficient execution to enable us to continue to leverage expenses as we grow the top line. As a result, we achieved better than planned EBITDA in the quarter, giving us confidence in raising our EBITDA guidance for the year. Ken Seipel: Now turning to customer dynamics. Our turnaround is rooted in a clear, unwavering focus on the needs of our African American customer, who's at the center of everything we do. As I mentioned on prior calls, I believe the primary reason for the quick turnaround in our business is our laser focus on the needs of our African American customer and our highly differentiated competitive advantage of neighborhood-based locations. Our stores are embedded in communities that we've served for years. In proximity, combined with word-of-mouth service, powerful traffic drivers. Citi Trends has built a truly differentiated competitive position in this high-performing off-price retail sector. We're really the only off-price retailer specifically focused on the African American consumer, delivering styles, brands, and trends at compelling prices that resonate with this underserved demographic. Our cultural relevance is a significant competitive advantage. African American consumers are trendsetters and early adopters, and understanding this dynamic allows us to curate assortments with immediate appeal to our core customers. We also know that our customers are discerning. They understand that value is not just about price. They're willing to spend more when the style is for them, the fashion is on trend, and the quality is right. Our consistent strong traffic and basket performance in the third quarter provides clear evidence demonstrating the strength of our uniquely loyal high-frequency customer base. We continue to strengthen this connection by elevating the cultural relevance of our assortments and refreshing the shopping experience to better align with our brand voice. Our brand promise says it all: Styles that see you, prices that amaze you, and trends that tell your story. This holiday, we are launching and have launched the rebranded Citi Trends Joy Looks Good On You holiday campaign with an updated social media presence under the we are at Citi Trends tagline. We've also implemented city bus wraps and shelter marketing in key markets to strengthen our local presence. All of this reflects a more refined, culturally relevant, modern brand voice. Ken Seipel: Looking forward to further enhance our customer relationships and drive deeper engagement, we're making strategic investments in our technology infrastructure, including the design and implementation of a new CRM and loyalty platform. This work will deepen our interaction with our most frequent customers and enhance long-term customer value. While we're in the early stages of this initiative, we're excited about the opportunity to create a more meaningful brand interaction with our best and most loyal consumers. Before diving into this quarter's product performance, let me briefly remind you of our three-tiered product strategy. What's important to understand is that we're serving customers across all income levels, and we have a significant portion of average and higher-income customers, which creates tremendous opportunity for our assortment of recognizable brands at exceptional prices that align with their style and trend preferences. At the opening price point, we offer value-focused basics through our city score program for budget-conscious customers. The core of our business is our better tier, typically priced between $7 and $12, which offers a broad selection of on-trend styles that drive loyalty and consistent performance across women's, men's, kids, footwear, and home categories. At the top end, we're expanding our best tier through two distinct approaches. First, trend-relevant fashionable styles priced well below specialty retail. And second, extreme value opportunities featuring well-known brands at steep discounts, often up to 75% off MSRP. We're targeting this extreme value segment to represent an incremental 10% of total sales as these branded treasures drive both traffic and basket growth while delivering strong margins. Ken Seipel: With this strategic framework in mind, now let me walk you through our Q3 product performance, which was broad-based and balanced in all categories. Strong results were driven by both apparel and non-apparel categories, and all divisions posted increases. But first, I'd like to congratulate our children's team on their strong double-digit growth in back-to-school and throughout the quarter. As our children's team continues to improve style curation and product in stocks, our customers continue to respond positively. Children's is the cornerstone of our business and a model of consistent execution this year. Equally, basic product for kids, men's, and women's had a strong quarter driven by better styles and improved inventory position in store. Our men's division had another strong quarter of growth reflecting the team's work to increase trend for our younger male customer while also tending to the fashion sensibilities of our mature male consumer. We're excited about this more comprehensive approach to our male customer, and based on the positive initial customer reaction, we have significant growth ahead in this particular category. We also saw momentum in women's footwear, which is an area we've been working to regain lost market share. Still more work to be done in this category, but we're encouraged with Q3 results and customers' response to our branded product at extreme values. Looking ahead in product, we're focusing on strengthening product offering in all categories. Our creative director has significantly raised the bar and is focused on curating trends to ensure our product is always trend-right. From the opening price product to our best-branded fashion, our merchant team is finding ways to elevate trends and styles at amazing prices. In Q4, we're repositioning the men's store presentation to highlight increased emphasis on young men's trend apparel while maintaining our core and classic portions of the assortment. We're in the early stages of repositioning our women's area to better reflect the style, trend, and sizing opportunity that we see for the business and plan to introduce an improved assortment to our customers in Q1 of next year. As I've mentioned before, we're continuing our focus on growing our anticipation classifications, which includes big men's, plus sizes, and family footwear, all of which have significant upside potential in the future. Ken Seipel: Turning now to operations. As I've discussed in the past, our transformation is guided by a three-phase framework designed to deliver sustainable, profitable growth. The repair phase focused on restoring fundamental business practices to ensure a strong foundation for growth, including sharper clarity around our African American consumer, three-tiered product assortment, and implementation of AI-based allocation software to improve in stocks, reduce markdowns, and accelerate inventory turns. We are now firmly in the execute phase, focused on implementing best practices across all areas of the business to improve productivity and enable SG&A leverage. This includes increasing supply chain speed, reducing working capital cost, and aligning our teams around KPIs and performance-linked compensation to drive continuous improvement. From an operational standpoint, we made continued progress on these phase initiatives in the third quarter. I want to congratulate the entire team, specifically our senior leaders, for improved business execution in Q3. One of the keys to our success was consistent execution of a detailed plan that emphasized tactical excellence to win the quarter. We continue to improve our inventory efficiency, supporting a 10.8% comp with overall 3% less inventory than the prior year. Due to speed improvements in our supply chain, we were also able to execute a 4.5% higher average in-store inventory. In the supply chain, improved work processes, productivity standards, and day-to-day leadership enabled us to efficiently reduce in-process inventory. This improved efficiency drives working capital optimization and provides flexibility and speed to react to sales trends while protecting gross margin. In the quarter, we finalized implementation of our AI-based allocation system across all merchandise categories. We remain pleased with the results. Now turning our attention to an AI-based planning system to help streamline sales and inventory planning processes for our merchant teams. As I said before, retail is detail, and execution without measurement is just guesswork. Our use of KPIs and dashboards across all key functions provides the visibility that helps our team stay on track and drive continual operational improvement, which is the core element of our execute phase strategy. Looking ahead, while we've made good operational progress, as I said earlier, we recognize a significant opportunity remains to improve execution in many areas of our business. As we advance through our execute phase and improve consistency, we expect continued SG&A leverage to enhance flow-through of sales to profit. Ken Seipel: Now turning to our growth strategy. We remodeled 24 stores in the quarter, including 15 high-volume stores. Year-to-date, we've remodeled 62 locations and now have about 30% of our fleet in an updated format. These refreshed stores inspire our teams, elevate brand perception in the community, and send a strong signal that we're investing in local neighborhoods. In the third quarter, we opened three new stores in Jacksonville, Florida, Columbia, South Carolina, and Bainbridge, Georgia, bringing our store count to 593 locations across 33 states. In addition, we remodeled five stores in Columbia, South Carolina, and four stores in Jacksonville, Florida. And in support of these new stores and remodels, we added local marketing, which included wrapping city buses with a Citi Trends brand message. These openings are part of our pilot market backfill approach, where we are opening new stores in conjunction with remodeling existing locations to increase market share by strengthening our store presence and reinvigorating our brand. In the first few weeks of business, the new stores and markets have responded above expectations. I look forward to giving you a more thorough update on our next call after we have a full holiday season of results in these markets. These market investment tests will inform our approach as we accelerate growth in 2026, when we plan to open about 25 new stores, followed by at least 40 stores per year in 2027 and onward. This expansion strategy will take our store count to around 650 stores by 2027, focusing on backfilling existing markets where our brand awareness and performance are proven while selectively entering new markets with strong demographic alignment to our customer base. Our positioning of Citi Trends for strategic new store growth is guided by a disciplined data approach. Our new store expansion combines advanced AI-driven analytics, local market expertise, and strict financial criteria. Using AI tools, we have analyzed three years of actual transaction data from every store location, combined with comprehensive geolocation studies to understand the specific market characteristics that drive our success. This data-driven approach has demonstrated about 90% accuracy in predicting sales, helping us identify and replicate our most successful store profiles while minimizing risk. We're applying disciplined financial hurdles to every new store decision, targeting mature store averages of about $1.5 million and mid-teens four-wall contribution. Ken Seipel: Looking ahead, we continue remodeling about 50 stores per year as a part of our ongoing fleet maintenance and market investment strategies. This disciplined approach allows us to progressively upgrade our store base while achieving planned returns on invested capital and positioning us to expand intelligently while maximizing return on investment. Longer-term growth in early October, we had a chance to share our multiyear growth plan at an investor conference. The presentation we shared is available on our investor relations website. But I do want to take a minute just to review some of the key objectives of our long-range plan. The first objective is to grow sales to $900 million or more in fiscal 2027 with consistent comp store sales growth plus the addition of about 25 new stores in fiscal 2026 and 40 stores in 2027. We plan to achieve a gross profit rate of 42%, a 400 basis point expansion compared to fiscal 2024. And we plan to leverage expenses by 200 basis points to a rate of approximately 37% or less. Resulting EBITDA is expected to be $45 million or more in fiscal 2027, a $60 million improvement to 2024, and an EBITDA margin rate of approximately 5%. These are not distant goals. They're achievable outcomes driven by the actions we are actively executing to drive the turnaround of this important business, and with our fiscal 2025 results today, I think it's fair to say that we're off to a pretty good start. With that, I'd like to turn the call over to Heather to discuss our financial performance for the quarter in more detail and our outlook for the fourth quarter. I'll return after Heather for some closing remarks. Heather? Heather Plutino: Thank you, Ken, and good morning, everyone. I'm pleased to walk you through the details of our third quarter performance, which demonstrates once again the consistency and effectiveness of our transformation strategy. That clear strategy plus the foundational improvements made to date have created remarkable momentum across the business, and we are delivering measurable progress across key operational metrics. Starting with the top line, Q3 total sales were $197.1 million, up 10.1% compared to Q3 2024. Comparable store sales increased 10.8%, 16.5% on a two-year stack basis. Ken said this already, but it's so good it warrants repeating. Our Q3 performance marks our fifth consecutive quarter and fifteenth straight month of strong comp growth. A remarkable feat, particularly in the current retail environment. We delivered strong comps in each month of the quarter and saw consistent year-over-year growth in both traffic and basket as our revised merchandise assortment, including off-price deals and more branded extreme value products, continues to resonate strongly with our customers, enabling us to gain market share. We also saw positive results across all climate zones, across all store volume groups, and across all product categories, demonstrating the broad-based nature of our improving results. Heather Plutino: Third quarter gross margin was 38.9%, while 90 basis points lower than Q3 2024, these results were in line with our expectations. Recall that in the second quarter of last year, we incurred significant markdowns from our strategic inventory reset, allowing us to exit aged and slow-moving product while freeing up open-to-buy for our revised product strategy to fuel our top-line growth. As a result, markdowns and shrink in Q3 of last year were unnaturally low, creating an unfavorable comparison for the current year period. As Ken mentioned, early in the third quarter, we decided to shift inventory and the related freight expense from Q4 into Q3 to better manage freight flow for the distribution centers. Doing so drove additional freight expense in Q3, about a 40 basis point impact to margin rate while accomplishing the smoothing we wanted to achieve, protecting the holiday and delighting our customers with earlier access to holiday goods. Importantly, product margin was consistent with results from the first half of the year due to the hard work of our merchant teams, as Ken remarked on earlier. Heather Plutino: Third quarter adjusted SG&A expense totaled $79.5 million compared to $74.6 million in the prior year period. The increase to last year was driven by $3.2 million of higher incentive compensation accrual and store and DC expenses to process higher sales. As we've shared in previous calls, we reinstated an incentive compensation accrual at the beginning of this fiscal year after incurring very minimal related expense in fiscal 2024, causing the bonus to no bonus comparison again in the third quarter. In addition, due to improved expected financial results for the year, we set the bonus accrual to the max payout, driving a catch-up accrual in the third quarter. On a rate basis, Q3 adjusted SG&A was 40.4%, 130 basis points lower than last year. Adjusted EBITDA for the quarter was a loss of $2.9 million, in line with management expectations and better than a loss of $3.3 million a year ago. Heather Plutino: Before turning to the balance sheet, let me provide a few details on our performance through the first nine months of fiscal 2025. Comparable store sales for the first nine months increased 10% with a two-year comp stack of 12.3%. Comps were driven by a 6% increase in transactions. This is the metric we're most proud of as it is evidence that our loyal customers are responding positively to the changes we've made in our assortment strategy and to the in-store experience. Adjusted nine-month EBITDA was a loss of $100,000, an increase of more than $21 million to last year. EBITDA growth was driven by more than $47 million in incremental sales, 290 basis point margin rate expansion, and 100 basis points of SG&A leverage. So improvement across the board. Heather Plutino: Now turning to the balance sheet. Total inventory dollars at quarter-end decreased 3.1% compared to last year, with average in-store inventory up 4.5% as we strategically positioned ourselves for holiday sales, including the pull forward of inventory receipts from Q4 into Q3. As Ken mentioned, our success in driving double-digit sales increases with a modest increase in in-store inventory reflects our work to improve inventory efficiency through higher turns and improvements in supply chain speed. As we enter the important Q4 holiday selling season, we remain pleased with our inventory level, composition, and freshness. At the end of the third quarter, we remained in a healthy financial position with a strong balance sheet, including no debt, no drawings on our $75 million revolver, and $51 million in cash. This financial strength continues to give us the flexibility to invest in our growth initiatives while ensuring operational stability throughout our transformation. Heather Plutino: Now turning to our fiscal 2025 outlook. Based on our results through the third quarter and our confidence that the effectiveness of our turnaround plan will continue through the fourth quarter, we are pleased to update our outlook for 2025 as follows: With sales momentum of the first nine months of the year continuing into early Q4, we now expect full-year comp store sales growth of high single digits, at the high end of our previous outlook. We now expect full-year gross margin expansion of approximately 230 basis points versus 2024, also at the high end of previous outlook due to continued progress on inventory efficiency and planned supply chain improvement. 2025 SG&A is expected to leverage approximately 90 basis points versus last year, reflecting continued expense control. Once again, this is at the high end of our previous outlook of 60 to 90 basis points leverage versus 2024. With these updates, we now expect full-year EBITDA to be in the range of $10 million to $12 million, an increase to the $7 million to $11 million range in prior guidance. The revised guidance is $24 million to $26 million above fiscal 2024 results. There is no change to our effective tax rate of approximately 0% for the year. For the year, we will open three new stores and will remodel 62 locations. Both of these targets have been achieved as of the end of the third quarter. In addition, we are planning to close four stores in the fiscal year, just above our previous guidance of three closures. Heather Plutino: And finally, full-year capital expenditures are now expected to be approximately $23 million, at the lower end of our previous outlook of $22 million to $25 million. While we don't provide quarterly guidance, given where we are in the fiscal year, we want to offer thoughts on our expectations for the fourth quarter. Q4 comps are expected to be up high single digits with a two-year stack in the mid-teens. Q4 gross margin is expected to be in the range of 40% to 41%, up to prior year. SG&A is expected to be approximately $82 million, and Q4 EBITDA is expected to be in the range of $10 million to $12 million. Before I turn the call back to Ken, I want to emphasize that our third quarter results reflect more than just three months of strong execution. They demonstrate the durability of our business model, the effectiveness of our strategic initiatives, and most importantly, are a continuation of the improvement we've achieved across the last several quarters. As we look toward the fourth quarter into fiscal 2026, we remain committed to our disciplined approach while maintaining the flexibility that has served us well throughout transformation. The foundation we've built gives us confidence in our ability to deliver sustainable profitable growth while continuing to create shareholder value. I'm excited about the opportunities ahead as we continue to execute against our strategic plan. With that, I'll turn the call back to Ken. Ken? Ken Seipel: Thank you, Heather. Before I turn the call back to the operator to facilitate Q&A, I do want to emphasize that the transformation of Citi Trends is well underway. We remain guided by our three-phase framework designed to deliver sustainable profit growth. The first phase, repair, is about restoring fundamentals and establishing a strong foundation for growth. The second phase, execute, focuses on hardening consistent best practices to drive reliable, predictable performance. The final phase, optimize, leverages the work of the first two phases to accelerate our EBITDA growth. As a result of our efforts in the first two phases of this transformation, we've made meaningful improvements, including an improved product assortment strategy, a better in-store shopping experience for our customer, and improvements in many processes and systems. Our five consecutive quarters of comp store growth is a proof point that our strategy is working, our execution is getting better, and our customer connection is stronger than ever as we firmly establish ourselves as a leading off-price retailer for our customers. While we're proud of our results so far, we fully recognize there is significant opportunity ahead. I want to emphasize that we're in the early stages of this transformation. There's still work to do, processes to refine, categories to optimize, and systems to build. But the path forward is clear. We are confident in our ability to deliver continued transformation, drive shareholder value, and expand our role as the leading neighborhood retailer for African American families. I want to thank the entire Citi Trends team for executing with discipline, driving quickly toward our stated goals, and most of all, for delivering results. The team is doing the hard day-to-day work to unlock sustainable growth and shareholder value. And we are just getting started. Thank you, everyone. And now I'd like to turn it over to the operator for questions. Operator: Thank you. We'll now be conducting a question and answer session. If you'd like to be placed in the question queue, please press 1. You may press 2 if you'd like to remove your question from the queue. As a reminder, we ask you please ask one question and one follow-up, then return to the queue. Our first question is coming from Michael Baker from D.A. Davidson. Your line is now live. Michael Baker: Great. Thanks. Great quarter. So if I think about the two-year plan to get to about $900 million, you know, it probably implies another $85 million or so in sales growth in '26 and '27. You talked a lot about some merchandising opportunities and categories, but a little bit more detail on where the biggest holes are in your merchandising right now, either by product category or by good, better, best, or however you want to articulate, you know, where do those incremental sales come from? Ken Seipel: Yeah. For sure, Mike. Thanks. As I mentioned in the script, we are seeing broad-based growth throughout all the categories. And so at the top level for all categories, we've really sharpened our focus on better trend product, and we've seen good reaction to that this year and continued reaction. I mentioned briefly that we have just implemented a young men's category. That's actually just setting in the stores right now. We're seeing good reaction to that. And as we begin to understand a little bit more about that dynamic, there's significant opportunity there. Equally, across the aisle in our women's category, we've always had a pretty strong junior's business, but we recognize that there's a missing component of that as well as plus sizes that need to be fully matured. And then on top of that overlay, trend product in those categories as well. And so that's a little bit of a new business for us, relative to those two categories getting reset. And then, across the fleet, we're just getting going in shoes in our footwear category. The team, as I remarked, had a pretty good Q3 in women's. We're off to a good start there. But we have significant opportunity, multiple millions of dollars of opportunity to grow our shoe business back to even historical levels, let alone to catch up to where we are in the overall store. So there's significant opportunity there. And then I would highlight, and I don't mean to make this so broad-based, but really truly is how we're looking at it. In kids, for example, as we continue to build that business, it gets stronger and stronger and stronger. We've been executing quite well in kids. But as we continue to invest in inventory, we need to get growth. So there's areas throughout the store that we see that just offer us tremendous opportunities for growth. And then I guess I'll put at the punch line for all this, the other piece of it, don't forget that we have the extreme value opportunity, and we're doing a fairly small percentage of our business in extreme value right now. It's working quite well. And we see significant growth there. All of that actually totals up to, in my mind, a very obtainable $900 million. Michael Baker: Great. Thanks for the detail on that. If I could ask a follow-up, I suppose by virtue of the 10.8% comp, your trends were probably consistent throughout the month. You talked about consistency by product category and store cohort. Can you talk about the pace through the quarter? And if there was any impact from the government shutdown, SNAP, anything during those few weeks? Thanks. Ken Seipel: Yeah. I'll make some high-level comments, and then Heather can fill in any specifics here. But, you know, the good news about our consumer right now, they've shown remarkable resiliency with all of the macro changes around government SNAP and different programs like that. Candidly, we've really seen no major impact. The shopping patterns have remained consistent throughout the quarter. As I mentioned, we got off to a really good start in August. August was tremendous for us, led by our kids division. All divisions did well, but kids really had a tremendous back-to-school period. And then I was really pleased with how we finished the quarter. October, particularly the last three weeks of October, really accelerated quite well. We have mentioned in the script that we advanced some of our freight from Q4 into Q3. When that hit our stores, we actually saw a really strong consumer reaction. Heather Plutino: Yeah, Mike, the only thing I would add to that is that it was a pretty tight band. Looks a little bit like a barbell, stronger in the beginning, first month, third month, middle month was a little softer, but the range is, like, 9.5 to 12. So it's not like a severe dip in the middle or severe spike. So yeah, pretty consistent. Michael Baker: Great. Thanks. I'll pass it on to someone else. Heather Plutino: Thanks, Mike. Operator: Thank you. Next question today is coming from Jeremy Hamblin from Craig Hallum. Your line is now live. Jeremy Hamblin: Thanks, and congrats on the impressive results. I wanted to just come back to the point, Ken, that you were making on some of these extreme value deals, which, you know, we saw some of those drop towards the end of the quarter. Some notable deals with products like UGG, HOKA, Timberland brands, you know, Jordan brand, etcetera. And that did seem to be a big driver of your strong traffic. But where are you in terms of extreme value as kind of a portion of the product inventory and sales today? And I think you mentioned that you're expecting over the next couple of years to get that up to about 10%. You know, how do you expect that to progress over time? And, you know, what type of visibility do you have on continuing to drive deal flow, you know, across, you know, kind of major name brands? Ken Seipel: Yeah. Good. Thanks, Jeremy. A couple of things on our current status. Extreme value deal flows, as I mentioned, continue to be very robust for the team. And we're being pretty discerning about what's being brought into the business right now. I guess we probably passed on a three-to-one ratio of adoption of deals that come across the desk, maybe even more. And as a result of that, the current sales performance of extreme value deals is probably in the two to 3% of business range, and that'll just give you a broad range right now. It varies a little bit by category. And back to your point, we've seen a path to getting that closer to 10% as we continue to mature. So there's a significant opportunity there. We're learning a lot as we're bringing some of these deals in. Many of them have really responded much better than anticipated. A few have been a little bit slower than anticipated. A lot has to do with consumer acceptance and reaction to it. But as we're getting better and understanding how to do extreme value deals, particularly with our supply chain processing, we see that, and I believe that remains to be a competitive weapon for us going forward. Jeremy Hamblin: Thanks for the color. And then switching gears here to talking about the store fleet. And as you are rolling out stores for '26 and seeing a nice uptick in your unit growth, what do you expect the cadence of openings to be in '26? And then you mentioned 2027. You know, is that going to be, you know, kind of consistent in terms of, you know, store openings now that you've got visibility on the number of units that you're planning to open? Ken Seipel: Yes. I'll give you a little bit of color on the process going forward. Our real estate team right now is working on a number of deals in the pipeline. And our goal will be going forward to open up our stores really at three distinct times of the year. We'll be opening up stores in early spring, going into the spring period, the tax season. We'll be opening up stores in July, going into back-to-school, and we'll open up a group of stores in October going into holiday. And so I would expect of that fleet going forward, the 40 stores that I mentioned earlier, you can probably divide that equally by three into those time frames and probably have a really good view of how we're looking at the business from our side. In 2026, we'll have lighter openings in the spring. We're just getting caught up there. Most of those openings will be more in July and August, probably equally split there. Excuse me. July and October equally split between those two months. Again, give you an idea as we get caught up and get this engine moving forward and do store growth. Jeremy Hamblin: Great. And then just one more for me. I know that you've got a lot of initiatives that are going on, technology initiatives. But I wanted to ask about your shrink mitigation efforts. I know this is something that you've been working on very diligently, and I think you had a pretty decent gap to close of where you wanted to get that to. But any color you can share on the progress on those efforts, what the impact is to your gross margin, and what you expect to pick up from that kind of in 2026? Heather Plutino: Hey, Jeremy. I gotta grab that one. So we've rolled out new camera systems in about a third of our stores in 2025. And these new camera systems not only provide what you would expect, visibility into the store, but they're AI capable and allow for our loss prevention team to use facial recognition, which you can imagine is helpful not only to protect our stores but to engage with local law enforcement and to help the community, not just our Citi Trends stores. So we're excited about that. Those cameras also have, outside of loss prevention and shrink prevention, they have heat mapping capability, which will help us understand customer shopping patterns, and they have traffic counting capability, which obviously is an important component as well. So we're excited about that. We're going to roll out to more than two times that number of stores into 2026 so that we can leverage that very, very quickly. You and I talked about this before, but our shrink rate in 2025 still remains what I understand to be in line with averages for retail, but we're not satisfied yet. And that means that it's less than 1.5% of sales. Right? So still higher than we want it to be. Less worried about the rate than I am about the dollars. I think we still have a few million to give back to the company on shrink mitigation over time. Now as I look at 2026, our plan assumes a decrease in both dollars and rate in 2026. Based on technology, based on talent, we are upgrading and updating our talent in our loss prevention teams, and based on processes, we are training regularly our store management teams and our district managers on shrink mitigation. So all of that comes together to say that we expect a decrease in 2026 and a further decrease in 2027. Jeremy Hamblin: Fantastic. Last one for me. So you also noted the implementation of technology, improving CRM. Can you elaborate at all in terms of how you plan to use that, as the company continues to gravitate to using a bit more digital marketing efforts? You know, is there a thought around a loyalty program that you're leaning into? But any more color you might be able to share on the timing of when the CRM update is happening and what you expect the outcome to be from that? Ken Seipel: Yeah. For sure, Jeremy. We are in the process, as I mentioned, of really getting it out, testing, and developing the systems and the processes that go along with that. Our goal will be to launch a CRM in Q1 of this next year. And we don't have an exact date yet, so trying to pin down some stuff on the technology and its readiness and so forth. But think about a phase one implementation in Q1, and then there'll be a phase two implementation in the fall of 2026. The way I want you to think about CRM and loyalty for our business is we're actually going to be calling it, quote, unquote, the insiders club. We'll have a much better title, I'm sure, by the time we get to it. But it's effectively going to be a way for our customers to tap into emerging trends and deals. You think about the value of being a part of our loyalty club and being one of the first ones to know about some of these amazing extreme value deals that are coming down the pipeline. Well, we have the ability to notify our best customers. They can come in and shop first and best and be kind of in the know, if you will, around emerging deals that are coming to the store. We believe that there will be significant interest in that. And that actually has the ability then to drive incremental traffic with some of our best and most loyal consumers. So beyond that, we're also trying to build in additional tools to make the shopping experience easier for our best customers. As an example, one of the things that they'll gain is actually the ability to have electronic receipts. And so, quickly, they can have that stored and be on their phone, and eventually, we'll have an app on there that they can just simply access that. Also, layaway programs and things of that nature will have digital access. So the goal here is to make it an insider's club and then to find ways to make the shopping experience a little bit easier and more convenient for our consumer. And then, as you mentioned, the intangible value for us is we're going to have a pretty significant database of consumers that are highly engaged that we can speak to with regularity via these marketing ideas. Jeremy Hamblin: Great. Thanks for all the color, and best wishes. Ken Seipel: Thanks, Jeremy. Appreciate it. Operator: Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over for any further or closing comments. Ken Seipel: I'd like to thank everybody for attending today's call. We look forward to talking to you next quarter. Operator: Thank you. That does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.
Operator: Welcome to the American Eagle Outfitters, Inc. Third Quarter 2025 Earnings Conference Call. All participants will be in listen-only mode. Please signal a conference specialist by pressing the star key followed by zero. There will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Judy Meehan, Head of Investor Relations and Corporate Communications. Please go ahead. Judy Meehan: Good afternoon, everyone. Joining me today for our prepared remarks are Jay Schottenstein, Executive Chairman and Chief Executive Officer, Jen Foyle, President, Executive Creative Director for American Eagle and Aerie, and Mike Mathias, Chief Financial Officer. Before we begin today's call, I need to remind you that we will make certain forward-looking statements. These statements are based upon information that represents the company's current expectations or beliefs. The results actually realized may differ materially based on risk factors included in our SEC filings. The company undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events, or otherwise, except as required by law. Also, please note that during this call, and in the accompanying press release, certain financial metrics are presented on both a GAAP and non-GAAP adjusted basis. Reconciliations of adjusted results to the GAAP results are available in the tables attached to the earnings release which is posted on our corporate website at www.aeoinc.com in the Investor Relations section. Here, you can also find our third quarter investor presentation. And now I'll turn the call over to Jay. Jay Schottenstein: Thanks, Judy, and good afternoon. I hope everyone had an enjoyable Thanksgiving weekend. I'm extremely pleased with the trend change we've seen across brands, reflecting a number of decisive steps we've taken from merchandising to marketing to operations. These deliberate actions are having a positive impact on near-term results and also serve us well for the long run. We delivered record revenue in the third quarter and very strong momentum has carried into the fourth quarter. We're seeing an encouraging response to the newness the teams are delivering. With each new collection gaining steam, most notably, Aerie and Offline are generating exceptional growth across categories. As discussed last quarter, we have made incremental investments in advertising which is contributing to stronger demand while better positioning our business for enhanced long-term brand awareness and overall customer engagement. At the same time, we are focused on operational improvements and cost efficiencies to drive higher profitability in what continues to be a dynamic macro environment. Turning to the quarter, total revenue increased 6% to $1.4 billion, a third-quarter record. Operating income of $113 million exceeded our guidance of $95 to $100 million, fueled by higher-than-expected demand and well-controlled costs. As previously noted, our results also included about $20 million of net impact from tariffs. Diluted EPS for the quarter of $0.53 increased 10% compared to the adjusted EPS last year. The strong top line reflected a return to positive comps which increased 4%. This was a meaningful acceleration from the 1% decrease last quarter. Improvement was made across both brands and channels, all posting positive comps. Aerie's 11% comp in the third quarter was a real standout, where strong demand was broad-based across all categories. Growth accelerated throughout the period, which has continued into the fourth quarter, where we are seeing exceptional demand so far. As we look to the future, we continue to see untapped opportunities within Aerie and Offline, which are rapidly emerging as important customer destinations. At just under $2 billion in revenue, and less than 5% market share, this indicates a significant runway for future expansion, underscoring our ability to capture a much larger piece of the market as we execute our strategic initiatives. American Eagle's comp growth of 1% marked a sequential improvement from last quarter. Strength in jeans, coupled with better results in men's, were among the drivers. As Jen will review, AE's business strengthened with greater in-stocks and our strongest sellers and new product flows. Positive trends have continued so far in the fourth quarter, including a terrific Thanksgiving weekend. Beyond product, our results have benefited from the success of our recent marketing campaigns, which have driven engagement and attracted new customers. We are encouraged by the impact of the campaigns and collaborations with Cindy Sweeney and Travis Kelce, and now holiday gifting with Martha Stewart. We see measurable benefits especially across our digital channels. Looking forward, we will build on this momentum with more exciting campaigns ahead. All in all, I'm very pleased with the progress and meaningful turnaround from the first half of this year. Now the holiday season is upon us, and the fourth quarter is off to an excellent start. We are seeing a clear acceleration from the third quarter, including a record Thanksgiving weekend, with strong performance across brands and channels. As a result, we are raising our fourth-quarter outlook. We remain well-positioned with exciting new collections centered on gift-giving and events planned throughout the season to continue to delight our customers. Before I turn it over to Jen, I want to take a moment to acknowledge our incredible team for all their hard work and tremendous dedication. Their efforts have fueled a meaningful trend change across our leading brands. Great work continues, and I couldn't be more optimistic about the long-term outlook for our business. We look forward to driving more success as we head into 2026 and beyond, driving profitable growth and enhanced value for American Eagle Outfitters, Inc. Let me turn it over to Jen. Jennifer Foyle: Thank you, Jay, and good afternoon, everyone. I am very encouraged by the stronger performance across our brands, marking a significant turnaround from the first half of the year. This demonstrates the resilience and product leadership of our portfolio of iconic brands. The increasing customer demand, which has accelerated in the fourth quarter, is spanning new and existing customers, fueled by a well-coordinated effort across both merchandising and marketing. Compelling product collections combined with higher engagement and expanding brand awareness are driving our performance. And the teams are executing very well, leveraging our expertise in key categories and most importantly, by listening to our customers. Let me walk you through a few highlights in the third quarter, beginning with Aerie. The Aerie brand continues to exceed expectations. We achieved record revenue with the third-quarter comps up 11%, fueled by strength across all categories, including intimates, apparel, sleep, and Offline. Aerie and Offline's performance has been especially impressive with a meaningful acceleration in demand since the spring season. In fact, comps have strengthened with each new delivery. The resurgence in intimates has been very encouraging, with solid growth in both bras and undies. Greater depth and breadth of our signature fabrications, strength in new fashion across bralettes and bra tops, and fun prints with matchbacks to apparel are just a few highlights fueling the brand's double-digit growth. Aerie apparel remained consistently strong driven by bottoms, fleece, tees, and sleep, which has emerged as a powerful growth category. Offline by Aerie also continues to gain meaningful mindshare as we expand awareness and move into newer markets. We remain highly focused on growing the activewear segment. We are building on our signature fabrics and franchises such as our core leggings, while also launching newness with updated fashion silhouettes. Needless to say, we are very excited about our future for both Aerie and Offline. We are well-positioned for the remainder of the holiday season and continue to believe in the substantial long-term opportunities ahead. Moving to American Eagle, which posted a positive January comp, demonstrating a meaningful improvement from the spring season. Positive demand was fueled by trend-right new fall collection combined with bold marketing and exciting product collaborations. Underpinned by our dominance in denim, our strategies to reset the brand and firmly position American Eagle at the center of culture are beginning to yield results. The quarter marks an improvement in our men's business, where we saw nice wins across tops, sweaters, fleece, graphics, and knits. All areas we have been working to recapture. Bottoms provided a stable foundation with jeans and non-denim pants trending positive. And favorable trends have continued into the fourth quarter reflecting the positive reception of our new product. In women's, although we had a very good back-to-school season, the quarter in total was not as strong. Robust demand early in the period led to a number of out-of-stocks in some of our best-selling items. Non-denim bottoms, shirts, and dresses proved more challenging, while knit and fleece tops as well as jeans were positive highlights, where we continue to see strong demand. And importantly, better in-stocks late in the quarter drove positive results which has continued into the fourth quarter. AE is a true holiday destination with amazing gift-giving focus combined with fun fashion and party dressing. The response to date has been highly encouraging. Now shifting gears to marketing. This fall season, American Eagle launched its largest, most impactful advertising campaigns ever, which are delivering results. By collaborating with high-profile partners who are defining culture, we are attracting more customers and have more eyes on the brand than ever before. Combined, the Sydney Sweeney and Travis Kelce partnerships have garnered more than 44 billion impressions. Total customer counts are up across brands, and customer loyalty grew 4% in the quarter. AE is clearly building long-term awareness and desirability, and has captured the attention of both new and existing customers. Traffic has also increased consistently throughout the quarter, which is most evident within our digital selling channels that include both AE and Aerie. Although it's still early days of our renewed marketing strategy, we know that having the right talent amplifies our brand and product at key moments. We are very encouraged by our progress and expect to continue fueling brand excitement into 2026 and beyond. Our recent holiday campaign with Martha Stewart is yet another example of how we are creating fun moments to delight our customers while reinforcing our position as the go-to gifting destination. The holiday season's in full swing, and as Jay mentioned, we are encouraged with the results so far. We are heads down and focused on the rest of the year to deliver long-term sales and bottom-line growth. Thanks to our amazing teams, and thanks to all of you for your ongoing support. I wish everyone a happy and healthy holiday season. And with that, I'll turn the call over to Mike. Mike Mathias: Thanks, and good afternoon, everyone. I'm pleased to see the steady progress throughout our business, which led to strong revenue and profit above our expectations in the third quarter. In addition to generating a meaningful top-line improvement, we successfully controlled costs, created efficiencies, managed promotions, and navigated through a highly dynamic sourcing environment, minimizing the impact of tariffs. Consolidated revenue of $1.36 billion increased percent to last year fueled by comparable sales growth of 4% with Aerie up 11% and AE up 1%. We saw growth in transactions across brands driven by higher traffic. The average unit retail price was flat to last year. Gross profit dollars of $552 million increased 5% reflecting higher demand. The gross margin declined 40 basis points to 40.5%, compared to 40.9% last year. Net tariff pressure was as expected at $20 million or 150 basis points. Higher markdowns were largely offset by positive sales growth and lower non-tariff costs, including favorability in freight. Buying occupancy and warehousing leverage 20 basis points due to higher sales and a continued focus on operational improvements. For example, we drove lower cost per shipment within our direct business, which has been an area of ongoing focus. SG&A increased 10% due to investment in advertising as previously discussed. With our focus on long-term brand benefits, the campaigns are already delivering results and helping to advance our goal of expanding our reach and generating growth across brands. The balance of expense is leveraged reflecting our ongoing cost management program. Operating income of $113 million was above our guidance of $95 million to $100 million driven by stronger-than-expected demand. The operating margin of 8.3% declined from an adjusted margin of 9.6% last year. Consolidated ending inventory cost was up 11%, with units up 8%. Inventories balanced across brands, reflecting better in-stocks for American Eagle jeans, new store openings, and the demand acceleration at Aerie and Offline. The increase in cost includes the impact of tariffs. Third-quarter CapEx totaled $70 million bringing year-to-date spend to $202 million. We continue to expect CapEx of approximately $275 million for the year. As a reminder, this includes a one-time spend of about $40 million to relocate our New York design center. As we previously disclosed, we're on track to open 22 Aerie and 26 Offline stores which are coming out of the gate quite strong. We'll complete about 50 AE store remodels with full upgrades to our modern design. A few great examples of recent store upgrades are the Aventura Mall and Sawgrass Mills in Miami, and our new SoHo location in New York City. All of these A-plus stores are among our best and we want to ensure the customer experience is unmatched. The upgraded footprints have allowed us to showcase our signature brands, AE, Aerie, and Offline. We're utilizing new technologies to elevate the shopping journey, create a cohesive and modern retail experience. Overall, our remodeling program is generating comps nicely above the average. As we continue to position our fleet for profitable growth, we're also on track to close about 35 lower productivity AE stores. Our capital allocation priorities remain unchanged, and we're focused on prudently investing in growth to continue to build our brands while returning excess cash to shareholders through dividends and share repurchases. As a reminder, during the first half of this year, share repurchases totaled $231 million and year-to-date dividend payments have totaled $64 million. We have a strong balance sheet and ended the period with cash of $113 million, and total liquidity of approximately $560 million. Now turning to our outlook. The fourth quarter is off to an excellent start. As the team noted, we're encouraged by the broad-based strength across brands and channels, with particular strength in Aerie and Offline. Our inventory and product offerings are well-positioned to deliver a successful holiday season, and we're all focused on achieving a strong fourth-quarter result. Based on quarter-to-date sales trends and the recognition that we have important selling weeks still ahead, we are raising our fourth-quarter operating income guidance to a range of $155 million to $160 million based on comp sales growth of 8% to 9% with similar growth in total revenue. Guidance includes approximately $50 million in incremental tariff costs. Buying occupancy and warehousing costs are expected to increase due to new store growth for Aerie and Offline, and increased digital penetration. SG&A is expected to increase in the low to mid-single digits driven by investments in advertising. Given the top-line strength, we expect both BOW and SG&A to leverage in the fourth quarter. The tax rate is estimated to be approximately 28%, and the weighted average share count will be roughly 173 million. To wrap up our prepared remarks, clearly, we're very encouraged by the progress made across our brands. We're highly focused on delivering the remainder of the year, driving strong profit flow through, and sustaining this momentum into 2026. Now we'll open up the call for questions. Operator: We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star and then 2. Also, please limit yourself to one question and one follow-up. Re-queue to ask additional questions. The first question comes from Jay Sole with UBS. Please go ahead. Jay Sole: Great. Thanks so much. My first question, I think, is for Mike. You talked about the acceleration fourth quarter to date. And you raised the guidance, the comp guidance, I think you said 8% to 9%, that's pretty significant from where you ended Q3. Can you just talk about where you're trending for today to be able to guide to that level? And what's driven the acceleration? And then maybe Jen, you mentioned strength in denim, if you could elaborate a little bit. If people aren't wearing skinny denim like they were, like, what are the new silhouettes that are working? And how durable are those trends? Do you think the trends that you're seeing can last, you know, well into 2026? Or beyond? And if you can help us on that, that'd be great. Mike Mathias: Yeah. Thanks, Jay. I can talk you through the guidance. So the 8% to 9% comp increase includes nice improvements or acceleration for both brands quarter to date what we just reported in Q3. I would say if when to break it down by brand, we'd be looking for the AE brand to be in the low to mid-single digits. And Aerie in the high teens. Mixing to that 8% to 9% comp in both brands are ahead of that quarter to date. But we know we've got, you know, some big weeks ahead of us. It's only about half a quarter in. But definitely pleased with how November turned out and where we are quarter to date through Thanksgiving weekend. Jennifer Foyle: Yeah. And denim has been very strong. In fact, particularly in women's, we saw acceleration throughout the quarter. Getting into the back half of Q3 and into black. It's been our number one Black Friday as far as denim is concerned. The jeans are certainly winning for us, and as you know, that's our key competency business. Look. Silhouettes are changing faster than ever, and you know, I always reemphasize that our team strategically do just extensive testing, and scaling. And, you know, we did have some out of stocks, particularly in women's Q3. KneeSweeney certainly accelerated some of that, and we needed to move swiftly to get back into business. And, I like what we're seeing in the denim business. So we're excited, you know, at the end of Q3 and headed into Q4. Operator: And the next question comes from Matthew Boss with JPMorgan. Please go ahead. Matthew Boss: Great. Thanks, and congrats on the improvement. Jay Schottenstein: Thanks, Matt. Matthew Boss: So, Jen, at Aerie, maybe if we could dig a little deeper. Could you speak to the drivers of the same-store sales improvement over the past two straight quarters? And with that, I guess maybe could you break into customer acquisition trends that you're seeing initiatives in place to sustain double-digit comp growth in your view? Jennifer Foyle: Yeah. It's certainly exciting to see Aerie back on track. You know, coming off of Q1, we definitely needed to pivot as a team. And we really hunkered down and really, you know, thought about our strategy and what we needed to get back to win. Not only coming from our core competency businesses, which all accelerated and have been accelerating, starting in Q3 into Q4, but also there's new businesses in town. You know, sleep is doing quite well for us, and it's proving to be a year-round business for us, so a new category there. So, obviously, we have Offline too, which is, you know, our secondary business. Coming off of the Aerie, and that business is proven where you're hearing some desal in the athletic apparel areas. We're holding our own, and our leggings are still tried and true and winning for us. The customer acquisition has been strong. Our customers are spending more. We're seeing even so. So coming off of Q3, their actual acquisition has been accelerating. As we head into Q4, last week was an incredible week for Aerie where we saw a huge amount of customer acquisition. So we are taking advantage of our traffic. We're winning our customers. I think we're showing up really proudly. You know, we launched our new 100% real campaign. Which is tied to our core competency of how we launch this business, what our platform is. And it's talking to our community. It's speaking to her. It's playing off of no airbrushing our models. And now we've leveraged some of that into the AI world and thinking about how we approach that differently. So Aerie does things differently. We always think, you know, into the white space that sometimes can be scary, but we're so proud of what we do in this brand. And I think the team is doing an incredible job leveraging our community, amplifying marketing, but also it's 100% about our product. What we do every day is about our product and winning our customer. Matthew Boss: That's great. And then, Mike, could you speak to expectations for markdowns in the fourth quarter relative to the third quarter, just overall health of your inventory and how best to think about gross margin levers remaining into next year? Mike Mathias: I can start with inventory, Matt. I mean, we're very pleased and comfortable with the plus 11 in total dollars, plus eight in units. It's positioned well to continue to fuel this Aerie and Offline trend. We definitely, as Jen talked about in her remarks, kinda resetting some denim inventory to make sure we're continuing to be in stock and, you know, don't miss a sale within the AE jeans category. And, again, that plus 11 cost includes the impact of tariffs along with, you know, just supporting those businesses. On the markdown front, look. We competed in the third quarter. Markdowns are up a little bit in terms of, you know, the total impact of the quarter. Expect Q4 to be similar. We're just gonna ready to compete in these big days. We competed over the weekend. This November to trend that we've seen or the quarter day trend includes a little uptick in markdowns to compete, but definitely winning in terms of the top-line growth and the overall margin dollar growth is a testament to that. And it is in a couple places. I mean, Aerie is similar markdown rate to last year. So you're we're driving this trend on yeah, on markdown rates similar to history. We're not driving it through promotion. And then it really is competing in jeans more than anything from a category perspective that's adding to the markdown a bit. But we're you know, we think that's the right strategy from here. Gross margin then in total, really pleased with the third quarter results. We talked we disclosed the or we hit the $20 million guidance roughly on the tariff impact. That's about 150 basis points. But as you can see, gross margin only deleveraged by 40 on the four comp. So the team is doing a great job not only just mitigating tariffs on the front end, but then finding cut-off opportunities and efficiencies on other non-tariff impacted line items within our cost. We highlighted freight but there's more work than just on the freight line. So Q4 is similar. I mean, we're guiding to a $50 million impact in the kind of the net absolute value or the net impact of that absolute impact of that would be about 300 basis points. But we're obviously not guiding gross margin down that much. So we expect to see the same opportunities in terms of offsets and other line items. And then just on an eight to nine comp, obviously, we're leveraging a lot of expense lines that are up in gross margin, including NBOW, so including rent, digital delivery, distribution, cost, compensation up there as well. But other cost line items within our product costs are being leveraged too. Continue to expect to do that go forward. Operator: And the next question comes from Paul Lejuez with Citi. Please go ahead. Paul Lejuez: Hi. This is Kelly on for Paul. Thanks for taking our question. First question for you guys, just could you talk about why you know, given you've had these very splashy and high-profile marketing campaigns that were more kind of you know, more based on or were American Eagle marketing campaigns and why you didn't see that accrue more to AE versus you know, what you're seeing in Aerie where it seems like you're benefiting a lot from whether that's the product assortment or maybe some of the marketing campaigns. Just help us kind of understand what's happening there. And then just secondly, on the tariff impact, I think you said $50 million impact in the fourth quarter. Is that the right net tariff impact that we should be thinking about for the 2020? Thanks. Jennifer Foyle: Sure. You know, as a company, we're leaning into advertising. We need to compete, you know, when we see what our competition's doing. You know, there was definitely opportunity for us to lean in and certainly, Sydney Sweeney and Travis, I mean, with the 44 billion impressions, really it was, you know, something that we did not expect. And certainly, you know, I mentioned some of the out of stocks in women's particularly, but men's certainly turned around, in the mid-single-digit comp zone, and that was really we were we were so pleased to see that. And I just wanted to say sometimes there's a halo effect in marketing. Right? So as we saw the as we got into in stock as denim, you know, we got our stock in stocks back to, more normalized levels towards the end of the quarter. We saw acceleration particularly in women's and into black, as I mentioned. It was, an incredible week for us, Thanksgiving week, and you know, Friday was amazing. So, we're seeing the results now. And, look. This is important for our future. We need to remain strong and competitive, and we need to amplify our product. The teams have been working tirelessly on, this, you know, price value equation that I think American Eagle does better than anyone. And, and we're leaning in. And this marketing will certainly amplify. Jay Schottenstein: Okay. Then Jen, I'd like to also add. We also seen a significant increase in our loyalty members too. Saw over a million more loyalty members join us. In these past NBA in these past few months. And as Jen said, you don't see it right away. And she also pointed out that it's interesting with Cindy Sweeney, the jeans that we had made specifically for Cindy Sweeney, they sold out, like, within two days. They boomed right out right away. Mike Mathias: Then I can take the tariff question? I think maybe the best way to provide some color is just to give the quarterly impact. So we'd expect to go forward if tariffs hold as is in terms of the impact. We'll see how that continues to progress. About a $25 to $30 million impact in each of the first and second quarter. So call it somewhere between 200, maybe 225 basis points of impact in Q1. Same impact in Q2. $40 to $60 million, call it, in the first half. Next Q3, on the $20 million we just incurred in Q3, we expect Q3 on a full basis to be about a $35 to $40 million. So call it $15 million to $20 million impact incrementally next year. And then we'd anniversary the roughly $50 million that we're guiding to this fourth quarter. So it's about a 200 to 225 basis point impact on a full-year basis. But, again, with continued offsets in work, we'd expect the gross margin to not be impacted to that level just like we've seen here in Q3 and Q4. Jay Schottenstein: Really, Mike, there may be, like, a Supreme Court ruling coming on shortly too. Like, you know, and, you know, it may have changed everything right away. Who knows? Paul Lejuez: So the assumption then would be that you would be taking some like-for-like pricing into next year? Mike Mathias: Yes. I think, I mean, on the pricing front, we definitely do not have a specific strategy to pass through the impact of tariffs to our customers. We continue to take shots where we know we can, where we're making price moves that, you know, we still fit within our price value equation that the customer expects, and we don't see any resistance to those price changes from the customer. And just ticket changes that allow us to create a little more room on the promotional front too to make some decisions within our lease lines. So continue to do that. I think we're seeing success doing or approaching it that way in the back half right now. We'll continue to do that next year. Paul Lejuez: Thanks, Pete. Thank you. Best of luck. Operator: And the next question comes from Jonah Kim with TD Cowen. Please go ahead. Jonah Kim: You mentioned strong customer acquisition across both brands. Maybe you can give us a little bit more detail around who those customers are and if you're gaining more higher-income cohorts. Just curious on who you are gaining share from as you acquire new customers? And then another question as a follow-up to that is what are your strategies around retaining those customers you gain in the last two quarters? Thank you so much. Jennifer Foyle: Look. Both brands have, you know, our customer file is stronger than ever. And we certainly have seen acceleration, as I mentioned, with some, you know, really high it's going into even leaving Q3, you know, exiting Q3 and going into Q4. It's really high-end problems here that we're seeing. Look. It's what we do every day. Our teams need to certainly focus on the retention, and we've been all year long. That's what we've been up to. Our retention is not even we're winning on retention. We are winning on customer acquisition. The teams have strategies. You know? Those tend to not share publicly, but the strategies are already, you know, paying off. You can see it in the news that we're reporting today. You know, we're getting talent. We're working on our influencer programs. But we're also working on our communities. And that is the most important thing. You know, we have powerful brand platforms that we stand for something. And it wears the test of time. And when that works and we have the great product attached to it, we can win and show up in a new way. And the teams have very many strategies, whether it's, you know, upper funnel, getting out there and bringing in new customers or working on our performance marketing spend and our influencer strategies. So it's not only it's never about one part of the strategy. It's about getting the product right first and making sure that our tactics will amplify that strategy. Certainly, Sydney you know, an example, Sydney and Travis, but even the more recent Martha, I mean, that is talent that's upper funnel. You know, that is you know, us getting our brands out there in new ways. But if you let lean into Aerie and how they're working, their marketing strategy, they're leveraging our community in a new way and showing up with how do we go from not airbrushing our models, I just mentioned, into what does AI mean to, such a pure brand as Aerie with such an amazing platform. So it is about we have two different brands. We have a portfolio of brands at the same token that we leverage our brands. Certainly, we share platform, but it is about making sure that we play up each brand DNA in the right way and it's working. That strategy is working. I can just I can say that now, and there's work to do always. As we look ahead, we have exciting collaborations, new talent, and just new ideas. We're constantly thinking of new ideas. Jonah Kim: Got it. Thank you. Operator: And the next question comes from Rick Patel with Raymond James. Rick Patel: I wanted to double click on your expectations for AUR in Q4. As we think about the company remaining competitive with promotions, but also factoring in some product and perhaps some pricing wins, where do you see AUR landing in the fourth quarter? And then second, what are your expectations for where inventory will end the year, both in terms of dollars and units? Mike Mathias: Eric, yes. The AUR for the third quarter is flat even with a bit of a markdown increase just the mix of the mix of the businesses between the brands, category mix, our AURs relatively flat at company level. We're expecting a similar thing in Q4. November to date here, we saw it play out that way. Aerie's actually driving these comps on some uptick in AUR. Know we're spending a little more markdowns in the jeans category in AE to drive the business. So the mix for the quarter we'd expect right now to be similar. Around a relatively flat AUR for the fourth quarter. And I think, you know, way we'd really expect to plan the business go forward. Rick Patel: Great. Any thoughts on inventory? Mike Mathias: Q4, we're not providing specific guidance. But, at the end of the day here, with the uptick in the trend, exceeding plans, we're definitely in chase mode here. Which is a good thing. So when we make a we we we have we see a lot of profit flow through when we're doing that. Especially on the Aerie side of the house. So we expect, you know, inventory in line with sales. You know, we're guiding to the plus, eight to nine comp. And as of now, I'd expect similar kind of, you know, inventory line with sales or lease units in line with the sales growth knowing there'll be a tariff impact. Ongoing. But we're not not providing specific guidance at this point, but that's what we'd expect to see. Rick Patel: Thanks very much. Operator: And the next question comes from Chris Nardone with Bank of America. Please go ahead. Chris Nardone: Thanks, guys. Good afternoon. So first, can you just refresh us on how we should think about plans for both the Eagle and Aerie store fleets heading into next year? And if the recent results of both businesses have changed, how you're thinking about that versus maybe ninety days ago? Mike Mathias: Yeah, Chris. I think for the AE brand, we talked about closing roughly 35 stores at the end of this year. You know, we're looking forward into plans next year, and we expect that to slow down as we've largely closed, I think, over the last three, four years kind of the lower productivity stores in the fleet. On the in the mainline AE fleet. So 35 at the end of this year here in January, maybe something lower than that, I would expect next year. On the Aerie and Offline growth front, we talked about 22 Aerie 26 Offline openings this year in 2025. We're looking at a similar 40 to 50 store count at the moment. Probably similar waiting Offline, a little higher count Offline than Aerie. But we are looking at this tremendous growth, and if we did anything, we'd maybe accelerate some openings on the Aerie and Offline side, but those plans are still in work. Right now, a similar 40 to 50 count is what's in the plan. Chris Nardone: Okay. Got it. And then just a quick follow-up. Think you alluded Aerie comps are running above the high teens for the quarter, quarter to date. And if AUR is roughly flattish, can you just unpack a little bit further? It sounds like you're seeing inflections across the product suite. But are there particular channels, whether that's digital versus retail, or certain categories where you're seeing the biggest inflection? Just trying to understand a little bit better what has changed so drastically over the last six months. Mike Mathias: Yeah. Look. Correct. The guidance we're giving at the eight to nine comp I'll just reiterate, American Eagle low to mid-single expectations, Aerie high teens, both brands are running ahead of that trend November to date or through the Thanksgiving weekend. Digital ahead of stores. And I think you know, the marketing campaigns that Jen and Jay are talking about, the traffic we're seeing digitally off of those campaigns, is significant, and that's where we're seeing a lot of the gains from those efforts and from the effectiveness of those campaigns. So digital was both channels were positive in Q3, but digital was on a the high end or the high single-digit level for Q3. And we'd expect for Q4 at a plus eight to nine, same kind of outcome that digital would really outpace stores, and we've seen that through November and especially over the holiday weekend here where both channels were positive, and we're happy with success in both channels, but digital is where we're seeing the outpaced growth at the moment. Jennifer Foyle: And in Aerie specifically, I mean, as I mentioned before, men's, we saw an incredible turnaround. In Aerie specifically, all categories are working. Look. The team when you have to pivot coming off of Q1, we focused on our product and winning that customer back and ensuring that we could get that momentum, that we deserve again. This brand is incredible. And I did want to say, I need to remind everyone on this call that Aerie's brand is only at 55 to 60%. So when I think about our opportunity as we, you know, build into February 2026. We have an incredible runway in front of us. So we're pulling in product as we speak. We're chasing and the team's working fast and furiously so that we can continue this momentum into next year. Jay Schottenstein: And also, Jen, I think our merchandise is better too. Which helps. Jennifer Foyle: I'd like to say that. Yes. Chris Nardone: Alright. Thank you, guys. Best of luck. Operator: And the next question comes from Alex Straton with Morgan Stanley. Please go ahead. Alexandra Straton: Thanks so much, and congrats on a nice quarter. On these big campaigns that you guys have pursued, you just give us some context on where you think you'll end the year on marketing expense as a percentage of sales versus typical. Like, are you investing more than history? And then as we think about next year, should that line item continue to move higher? Or how do you think about kind of that flywheel between the marketing investment and growth? Mike Mathias: For this year, yes. We're I mean, obviously, we made a significant investment in Q3. Q4 is up as well within our guidance, not anywhere near the increase on a percentage basis to Q3 was. Really pleased with the SG&A leverage we'll see in Q4 off of this comp guide. Advertising is still deleveraging a bit, but we're leveraging all other expense categories as intended pretty significantly in the fourth quarter. For the year, we're gonna wind up somewhere in the mid-fours as a percentage. And historically, we've been more in the like, last year, for example, around 4%. So we're definitely resetting a baseline for advertising spend at the moment. It's working. We're continuing to monitor it. Jen and I have and our teams are working very closely and cross-functionally on really on a week-to-week basis, how we're pulsing the spend in advertising on top of the campaigns that are obviously planned well ahead of time. I'd expect we expect in our initial plans here for next year is to continue this in the first half. Possibly passing more toward a 5% type of rate to reset ourselves and then leverage all other expense lines, funnel some expense some investment toward advertising. An anniversary this come next, you know, next year around this time in the third quarter. I think that 5% is a good sweet spot that we'd like to maintain over time. So as we're kinda resetting the baseline, we're passing toward 5%. Like the top-line growth we're seeing from it, again, just to reiterate, anniversary it come next year and start to just maintain that type of rate, and we'll evaluate things from there. Jay Schottenstein: And, Mike, can we have some other we have some tricks in the bag too? We're not saying, but we have more tricks in the bag. Mike Mathias: Yeah. There's more to come. We'll talk we've seen things on our fourth-quarter call in March probably to talk about more exciting things to come. Alexandra Straton: That's great. Maybe one follow-up for you, Mike. Just kinda zooming out here. I know there's been some wrenches in your medium-term outlook since you provided it a couple of years ago. But maybe as we move into the final year of that plan and excluding some of the non-controllable headwinds like tariffs, can you just like big picture talk about where you've made the most progress versus that plan and where there's still more work to be done in this final year here? Mike Mathias: Yeah. I mean, I'll stop on starting the top line. I know it'd be obviously had a few missteps here in the first half of the year in the first quarter, but the net result of this year with this guide is actually gonna wind up kind of in that low to mid-single or, you know, within the algorithm we talked about wanting to achieve every year. So, you know, we'll be at a kinda low single-digit trajectory on a full year with this back half being, you know, kinda mid to high mid to high single-digit range. So I think that's the continued focus. I'd also say we made a lot of headway in just the culture change around expenses in total. We continue to control costs across the P&L. I think the leverage that we see that we're seeing here in BOW this back half of the year and then SG&A in this fourth quarter is a testament to that. Even with the significant increase in advertising this year, you know, you just asked about, I just provided the color on, all the other SG&A line items are leveraging in this year. And SG&A in total will be relatively flat. On the year at the kind of low single-digit total year outcome. So that's a big change for us over the last several years. It's been a massive focus to have a different mentality around controlling expense, allowing us to funnel some of these dollars toward advertising. And so we'll continue to do that. Yeah, to your point, you know, the tariff headwind is something we can't control, but mean, our goal is still this 10% aspiration. Tariff's gonna set that back a little bit. But we're gonna continue down the path that we're on on controlling all other costs. Investing some dollars in advertising, fueling Aerie and Offline, you know, hitting that kinda low single plus trajectory in AE. And, you know, pathing back toward that 10% that is still our ultimate goal. Jay Schottenstein: Yeah. And, Mike, you know, as a general thing, this team, after the first quarter and, you know, Jen couldn't emphasize it enough. Really took a hard look at everything. We went through all the different areas of the business. Every single area, every opportunity, the merchandise, to the operations, looking where, you know, where you know, what you know, what's important, what's not important to the company. The dedication of the associates has been amazing the last few months. And I'm so proud of this team because that first quarter, we got kicked very hard and nobody quit. Nobody cried about it. Nobody quit. Everybody went to figure out how can we do things better. Transformational, looking for where the real opportunities are, looking for where we should go in the future, where the opportunities are, and what's it gonna take to be the best. And one thing I'm very proud of, if you go into our stores, we have the best-looking stores, the best-maintained stores in the mall. If you walk in the mall, our stores look the best. If you don't look at our new store, stores, you go to down to Soho, and you look at our new store we just opened in Soho, you go to Aventura down in Miami, you'd be very impressed by the stores. They're very, very impressive stores. They're very functional stores. And so, you know, I think that, you know, that we're very excited. I know what we have planned for marketing next year. Know where the merchants are focused. I know the excitement that everybody has in this company. And it's gonna be great. Operator: And the next question comes from Janet Kloppenburg with JJK Research Associates. Please go ahead. Janet Kloppenburg: Hi, everybody, and I'm glad congratulations, and Jay, I agree the stores look terrific. Aerie in particular, but American Eagle as well. I just wanted to ask about I think you had to chase product earlier in the year. As well. Jen. And I'm wondering what's going on there. And if that situation is resolved now. With the comps being as healthy as they are, and then for Mike, on a 4% comp, you weren't able did did you leverage buying an occupancy? I think you may have. And what is the is the target point on that? And in terms of price increases, are they all behind you now? Have you taken them all? Or are there more to come? Thank you. Jennifer Foyle: Yes. For sure. Thanks, by the way, Janet. It's primarily, it's been in women's denim. To be frank. We've been sort of on in chase mode since Q1 and, you know, quite frankly, we haven't been able to keep up with the demands. And, you know, as you know, we have a huge short business, and that business never really turned on. You know, we expect shorts to turn on and that never happened. So then we continue to see as we enter Q2, you know, back half of Q1 into Q2, this demand in long legs, and we really couldn't keep up with that demand. So moving into Q3, we felt like we were in a better position, but we wanted to be prudent as well with our inventories as as you know, denim is probably our higher cost of goods as well. But it's our biggest business. So it's always an art managing that business. And, with the launch of the Sydney Sweeney and actually Travis, you know, we couldn't really keep up with that demand. The team's worked swiftly. We were definitely in the right businesses. We definitely had the right silos and the right investment in silhouettes. Which led to some of that out of stock. Good news there. Bad news, we needed a little bit more inventory to carry and to and to get that business move you know, to get women's in total, because of the penetration of denim. So good news is, certainly in the back half of Q3, we saw nice, levels of inventory getting back into our key silhouettes. The top five jeans, just to give you some perspective, we planned at up this is, you know, just top five jean styles in women's. We planned up 25%. They were up 50% on demand. So, we had a lot of work to do. We feel better as we head into Q4. And nodding to what Mike mentioned, we're going to look at denim a little bit differently so that we're all you know, we're maintaining that business while we grow new categories. Mike Mathias: And, Jan, on 20 basis points in the third quarter on the four comp. And then, you know, that's a good target for us, that low to mid-single-digit result to leverage expense really across the board other than this advertising reset we're talking about. And then the fourth quarter on the eight to nine comp, we'd obviously definitely expect a large BOW with that kind of result as well. And SG&A will leverage significantly on that kind of result for the fourth quarter. Janet Kloppenburg: Okay. And then just on pricing. Mike Mathias: Yeah. We talked about a little earlier. We're not I mean, AOR is flat for Q3. We're expecting similar AUR in Q4. We're not passing through the impact of tariffs to the consumer purposely. We are taking our shots on price moves where, you know, as Jen has said, keeping maintaining that price value equation that our customer expects and making sure we're not impacting conversion. And give ourselves a little room on the promotional side when we do that as well. So we'll continue to kind of optimize that, take our shots, but you know, net AUR similar to last year, is the intent. Operator: And the next question comes from Janine Stitcher with BTIG. Please go ahead. Janine Stitcher: Hi. Thanks for taking my question, and congrats on a great quarter. With this quarter-to-date acceleration, it sounds like a lot of it's been driven by traffic and new customer acquisition. Just wondering what you're seeing on conversion, particularly with some of the product improvements you've made. And then maybe if you can just share your thoughts on the Gen Z consumer. We've certainly heard a lot about that consumer potentially being pressured and pulling back, but does it seem like you're seeing that at all in your business. So I'd just love to hear your thoughts on kind of where the consumer is and how they're spending. Mike Mathias: Yeah. I think on the metric side of things, traffic was definitely a driver in Q3. We continue to see that here in the fourth quarter through November. With AUR flat, it's been a mix of sort of traffic and then ADS or, you know, the UPT part of the ADS equation. AUR flat, some uptick in UPTs, and then traffic with conversion being relatively flat. With AUR being relatively flat. That's sort of your mix of metrics that, we saw in the third quarter and, you know, early days here in Q4. Obviously, a big traffic uptick that we've capitalized on through November and through Thanksgiving, and we'll see how that continues to play out, but with AUR relatively flat. Would assume a similar kind of mix of metrics. Traffic being a driver, ADS being a driver with AUR flat, conversion relatively flat. And we'll see how it pans out through December. Jennifer Foyle: Yeah. We are we're not feeling that you know, we're entertaining Gen Z in all of our brands. So, even when you look at Martha Stewart, that might be a question mark. Right? Why Martha Stewart? But Martha Stewart resonates with Gen Z. That's a perfect example of what we're up to. We're seeing momentum in all age groups. We do have still some opportunity on the lower age scale in AE women's in particular. And we're up to, you know, invigorating some product to entertain that age bracket. But, honestly, you know, we're not seeing it. And, also, this is a critical time too for giving too. So we see mom and dad out there purchasing as well. Operator: We have time for one more question. Last question comes from Corey Tarlowe with Jefferies. Please go ahead. Corey Tarlowe: Great. Thanks for taking my question. Mike, I just wanted to ask on SG&A for Q3 and Q4 and just kinda how to think about it next year from a dollar perspective. Is there anything that either comes in or goes out, whether it's marketing, I think you talked maybe you talked about incentive comp in prior years, how to think about that. Just structurally understanding on a rate basis, obviously, with Q4 sales being so strong. Gonna be a bit of a delta there, but curious what you could unpack for us. Thanks so much. Mike Mathias: Sure. Yes. I think, as I said, we'd expect to see continued investment in advertising through the 5% rate annually. So we'll anniversary things in the back half that we're doing currently. Incentive comp's a bit of a TBD. We're still setting plans for 2026. Those annual plans are based on our EBIT target is the success metric. So we'll probably we'll give more color in March around 2026 SG&A and how we think that'll pan out by quarter. With advertising and possibly a bit of more incentive comp in the mix. The more to come in March. Corey Tarlowe: Great. Thanks. And then just a quick follow-up on Aerie. The momentum has been very, very strong. Curious what you think is specifically working there versus the competition when you either walk the mall or view kind of the competitive set? How you think about your market share gains and the opportunity there? Thanks so much. Jennifer Foyle: Yeah. I did mention the brand awareness still is, you know, we have opportunity there. We're still only at 55% to 60%. So as we gain, you know, and look towards the future, we have a lot of opportunity there. You know, it's never about one thing. Certainly, we double downed on the product. The design team and merchant team really came together. And thought about our future strategies and where we were seeing some, you know, losses and how we recalibrated all of our categories. And the team did an excellent job from launching new ideas to, you know, rebuilding old franchises, i.e., undies. Undies is a fire starter for an or for, you know, any order, any basket. And, our undies tables have never looked better. So it's all about the product. But, strategically, we built into promotions that make sense. But we pulled back in other areas where it doesn't make sense. And then you layer on this great marketing campaign that we've had in Aerie, which it's been really resonating, 100% real. It's what we're all about. And you know, the team's doubled down. And our influencer campaign getting our clothes on our influencers, has been a real win. And, there's more to come. We have so many great new ideas, innovations for the future. The team's 100% locked and loaded on thinking about each category, new fabrications, new ideas, new launches, newness in general, has been a win for Aerie. Our new drops, and that's been really working. So, we have a lot in store for 2026. But in the meantime, we're pulling goods in for to pull out Q4. We're excited about what's happening right now. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, everyone, and welcome to today's GitLab third quarter fiscal year 2026 conference call. At this time, all participants are in a view and listen-only mode. Later, you will have the opportunity to ask questions during the question and answer session. If you would like to ask a question, please use the raise hand feature located in the menu at the bottom of your Zoom toolbar. In addition, ensure your Zoom name reflects the full name and firm you are with. If you are joining via phone, you may press 9 to ask a question. Please note this call is being recorded. And it is now my pleasure to turn the conference over to Yao Chu. Yao Chu: Good afternoon. We appreciate you joining us for GitLab's third quarter 2026 Financial Results Conference Call. With me are Bill Staples, our CEO, and James Shen, our Interim CFO. During this afternoon's call, we will provide an overview of the business, commentary on our third quarter results, and guidance for the fourth quarter and fiscal year 2026. Before we begin, I will cover the Safe Harbor statement. I would like to direct you to the cautionary statement regarding forward-looking statements on Page two of our presentation and in our earnings release issued earlier today, both of which are available under the Investor Relations section of our website. The presentation and earnings release include a discussion of certain risks, uncertainties, assumptions, and other factors that could cause the results to differ from those expressed in any forward-looking statements within the meaning of the Private Securities Litigation Reform Act. As is customary, the content of today's call and presentation will be governed by this language. Additionally, during today's call, we will be discussing certain non-GAAP financial measures. These non-GAAP financial measures exclude certain unusual or non-recurring items that management believes impact the comparability of the periods referenced. Please refer to our earnings release and presentation materials for additional information regarding these non-GAAP financial measures and the reconciliations to the most directly comparable GAAP measure. I will now turn the call over to Bill. Bill? Bill Staples: Thank you, Yao, and good afternoon, everyone. Thank you for joining us today. I am pleased to report strong third quarter results. Revenue grew 25% year over year to $244 million, two points above our Q3 guidance. Non-GAAP operating margin reached 18%, a full five points above our Q3 guidance. It is my first anniversary as GitLab's CEO, and I wake up every day feeling incredibly lucky to build upon the foundation that Sid and the team have created. When I first got here, I said three things. There has never been a better time to serve developers. We are in the early stages of how software gets transformed through AI. And GitLab sits at the heart of the software development life cycle and has the best and most comprehensive platform to enable this transformation. My conviction in the company and our opportunity has only grown stronger. A year into this journey and hundreds of customer conversations later, I can confidently say that we are stronger today than even one year ago. We have built the foundation to deliver more value through AI in the coming year, architecting GitLab and Duo Agent platform to remain mission-critical and delivering increasing value as LLMs and markets evolve. I truly believe there has never been a more exciting time to be at GitLab. We are seeing the rise of AI expand our total addressable market. AI has drastically reduced barriers to entry of software creation and is driving the marginal cost of code generation towards zero. However, software is more than just code. Software with all its embedded business processes and sensitive data is business-critical. The global economy runs on software. Human lives rely on software. Businesses cannot afford negligence in their quality assurance, security, compliance, or governance of their software development and delivery practice. I believe what we do becomes even more critical in a world where teams want to take advantage of agents to author code given the nondeterministic nature of AI. For decades, I have watched my own teams and countless customer teams struggle to stay on top of bug backlogs, technical debt, and business requirements all while innovating. The pattern is universal and long-standing. The tools for building software are technically pretty good, but things consistently break down wherever people and processes are required. GitLab has been solving this problem by providing teams an opinionated view with proven ROI. The key differentiator we automate the end-to-end software delivery flow, including quality, security, compliance, and governance, in a single process flow as part of our unified platform. Ironically, as we have studied teams using agents and new AI tools, we see the familiar pattern. Agents act eerily like humans. Sometimes they follow prompts. But sometimes they do not. Sometimes they write secure code, but sometimes they do not. Why is this? Because LLMs will always be nondeterministic. It is the nature of the algorithms used to build them. And every business has unique requirements that LLM simply cannot guess. Even if LLMs become superior at code to humans, external validation of that code which will also be driven agentically with human oversight, will be required to ensure they meet the complex human requirements of doing business. We believe LLMs will continue to improve in accuracy and cost but they will always require systems that can validate they are supporting complex business requirements. Let's take a look at how that shows up today. IDE tools like Cursor, Copilot, and Cloud Code have contributed to an explosion in code generation. The downstream effects are now clearly visible to us in our business. GitLab engagement has grown significantly across our gitlab.com SaaS customer base. In the first ten months of 2025, key activity metrics CI pipelines, deployments, and releases, are up about 35% to 45% year over year. Similar to what peers are seeing. For customers paying us more than $5,000 in ARR, usage proxies like deployments and CI pipelines on a per seat basis are up 20% to 40% annually. Simply put, more code means more of a need for GitLab. Our 2025 global DevSecOps report shows that while AI accelerates coding, more code does not necessarily mean better outcomes. We call this the AI paradox. We believe long-term winners are not the vendors who can generate code the fastest, but those who can maximize the customer's ability to deliver high-quality secure software to the consumers of their business and drive meaningful business outcomes through software. GitLab is in position to do that better than anyone else. How? We have extended our end-to-end platform which already powers full life cycle actions for more than 50% of the Fortune 100, and hundreds of thousands of organizations across 100 different countries around the world, and now provide that same set of capabilities natively to agents along with shared context for both humans and agents. This not only facilitates greater trust and accuracy, but will help accelerate the end-to-end software process required to win. Instead of just building new AI assistance tools, and agents to solve specific use cases, like our competition we have extended our platform to provide intelligent orchestration across the software life cycle, enabling our partners, customers, and ourselves to solve any engineering problem across the life cycle. GitLab Duo agent platform is our answer to the AI paradox most companies are experiencing today as they adopt new AI tools and will be a driver of new revenue stream beyond seats. The context we have is rich. It includes semantic understanding of the code and dependencies across repositories, granular changes to it over time, quality assurance tests, planning and issue tracking, and collaboration on those plans, security and compliance checks, and build, integration, and deployment pipelines, just to name a few. Our underlying platform becomes more valuable as the volume of code explodes regardless of whether a human or agent made the change. I believe the primitives of code collaboration will prove to be powerful moats. And with Duo Agent Platform, we are in a great position even as LLMs improve and the market evolves. I am pleased to share that Duo Agent platform is on track for general availability in the coming weeks. Turning to the quarter. The highlights this quarter were continued strength in GitLab Ultimate, which is now 54% of total ARR. And was in seven of our top 10 net ARR deals this quarter. Ultimate represents one of the best value propositions for companies who need a single DevSecOps platform. Ultimate drove expansions at customers like Indeed, SBI Securities, and Currys. We executed well on the initiatives we discussed last quarter that served to strengthen the foundation of the company. I am pleased with the steady progress we are making on our first order build-out, and rollouts of GitLab Duo Agent platform. We also saw stronger international results. Overall, sales cycles and win rates remain consistent. However, softness in the US public sector offset part of that performance. GitLab continues to be viewed as the preferred software factory and trusted partner to leading US agencies. But slower decision-making related to the subsequent government shutdown created some new headwinds in the quarter. Our differentiated platform approaches seeing strong third-party validation, as GitLab was named a leader in the 2025 Gartner Magic Quadrant for DevOps platforms, for the third consecutive year. And a leader in the 2025 Gartner Magic Quadrant for AI coding assistance for the second consecutive year. Now let me turn to our key growth objectives. Our first objective is to add more new paying customers, especially in the mid-market and enterprise segments. We are starting to see some cases of AI mandates catalyzing enterprises to look for a future-proof solution. GitLab's approach to a cohesive workflow on a unified platform across developer, security, and operations teams has never been more relevant. Mediametry France's leading media measurement company needed to accelerate their internal development processes and had an AI mandate to reduce maintenance costs. While they were already using a free version of GitLab for source code management, this first order, Ultimate, and GitLab Duo win saw us replace seven different other tools out of the gate. While maintaining ISO 2701 compliance. Duo will enable secure AI-powered development allowing media metric to deliver new measurement products and data analysis at a much faster base. We won a landmark deal with a global consumer tech platform this quarter, to our dedicated offering. They had grown frustrated after experiencing critical reliability issues with their incumbent source code management provider. This customer has over 5,000 developers, is well known for world-class engineering, and has exacting standards on reliability responsiveness, and technical excellence. GitLab dedicated was chosen to provide the environment for their most mission-critical code repositories, ensuring business continuity and operation resilience. While our mix of first order versus expansion improved slightly this quarter, it is still not where I would like it to be. We are expanding our go-to-market capacity and have hired a new business leader to build out our global first order team with a focus on acquiring new logos. It is important to note that resourcing and ramping up this team will take time, I believe the payoff will be worth the investment. Every new customer we win today matters. Given their lifetime value. We are operating with urgency. We work every day to earn the trust of our customers, which is reflected in our best-in-class gross retention rates and demonstrated cohort growth across multiple cycles. We see a long runway for growth in our core DevSecOps opportunity as our TAM continues to expand and our competitive position remains strong. We offer choice, neutrality, and openness in ways that others do not, and that message is resonating. Our competitors are actively choosing to limit choices for their customers in the form of hyperscaler infrastructure, or self-managed versus SaaS options. Indirect contrast, we recognize that every customer journey is different. And make active efforts to meet our customers where they are. Our second objective is to help customers realize the value of our platform more quickly thereby driving revenue expansion. Our biggest expansions this quarter share a compelling pattern. They are all spending on some form of AI tooling in their engineering org but they continue to use GitLab as the back of their SDLC. We continue to see strong potential for up-tiering and attach within our existing customer base. Which the following customer stories help illustrate. A leading financial SaaS provider for small businesses has been a happy GitLab customer since 2017. This quarter, they have created from premium to ultimate across almost a thousand engineers. GitLab's approach to scanning the code at the point of commit before it ever leaves developer's hands allows us to replace multiple fragmented security tools. GitLab will help this customer reduce false positives cut down manual overhead, and empower their developers with AppSec results immediately. A large European public sector organization expansion demonstrates the potential within our existing customer base. Like many large enterprises, they had multiple silo deployments across different groups, and 4,000 developers. This meant maintenance complexity and inconsistent developer experiences. After working closely with them for years across more than 120 stakeholders, they chose GitLab dedicated and Duo this quarter as a foundation of a modern and secure SaaS-based software delivery platform. GitLab meets the highest customer standards in regulated industries and critical national infrastructure. Our third objective to accelerate customer-focused innovation. We continue to invest across three pillars, core DevOps, security, and AI. In core DevOps, we delivered a redesigned interface and a new intelligent pipeline repair flow that helps developers resolve issues faster. Directly translating to increase the development velocity and reduce troubleshooting time. Security and compliance are mission-critical customer priorities, as companies deploy AI toolkits and remain key drivers of ultimate adoption. We introduced new security capabilities, including static reachability analysis, secret validity checks, and diff-based scanning to bring security directly into the development process. The new security analyst agent also introduced this quarter simplifies access to these sophisticated tools and can provide recommendations for engineers on where to focus. And with DuoAgent platform, we launched the AI Catalog. A central place where teams can discover foundational GitLab Duo agents best-in-class external agents like Claude, OpenAI Codex, Google Gemini CLI, as well as create, share, and their own custom-built agents for any software engineering task. Customer feedback has been strong. Many now tell us that GitLab is ahead of our peers in our vision and rapidly evolving capability. We closed our first few GitLab Duo agent platform-based expansions this quarter. Even before general availability. While our progress is rapid and early results are promising, we are at the very start of our journey on this massive opportunity. Pricing and packaging will likely be an iterative process as the platform matures and we discover the most effective ways to deliver value to our customers. And a reminder for any new investors much of our customer base remains on self-managed solutions. And may be slower to adopt some of these solutions. We will be live streaming a product-specific event in February where more details will be made available. As the only pure-play cloud and model-neutral independent public company, delivering DevSecOps we offer true independence. Bill in the cloud you choose with the vendors and tools that you like best. While giving your engineers the very best possible experience. The world needs GitLab more than ever. I want to thank our team members for living our values and our mission and to our customers for their trust our partners for their support, and the broader GitLab community. Before I turn the call over, I also want to thank James Shen for his contributions during this period of transition at GitLab. He is one of the rock stars of this company and has done an amazing job rising to the occasion as interim CFO. I am excited to welcome our new chief financial officer, Jessica Ross, who will be starting in January. Jessica was most recently CFO of Frontdoor and has more than 25 years of experience in finance, accounting, and operational leadership at companies like Salesforce and Stitch Fix. You will all have an opportunity to get to know her in the coming months. With that, I will turn it over to James. James Shen: Thank you, Bill. And thanks again to everyone for joining us today. I am happy to report that we beat our guidance across the board as the team executed through a dynamic environment. Third quarter revenue reached $244 million. An increase of 25% from Q3 of the prior year. We now have 10,475 customers, Our larger customer cohort with ARR of at least $5,000, which contributed over 95% of total ARR in Q3. of $100,000 plus in ARR increased 23% year over year and reached 1,405. Our customer base is well diversified across industry, and geography. And no single customer accounts for more than 2% of ARR. On the expansion front, we ended the quarter with a dollar-based net retention rate, or DBNRR, of 119%. Total RPO grew 27% year over year to $1 billion while CRPO grew 28% year over year to $659 million. We remain pleased with this very healthy growth rate. Non-GAAP gross margin was 89% for the quarter. The team continues to do a good job of driving operating efficiencies even as our SaaS business has become a greater portion of our mix. Driven in part by the continued strength in GitLab dedicated and 31% of total revenue and grew 36% year over year. Q3 non-GAAP operating income was $43.7 million, compared to $25.9 million in Q3 of last year. Non-GAAP operating margin was 17.9% compared to 13.2%. In Q3 of last year, an increase of approximately 470 basis points year over year. We are making steady progress on building out a dedicated first order team and increasing our quota-carrying capacity. Q3 FY 2026 adjusted free cash flow was $27.2 million, with an adjusted free cash flow margin of 11.1%. Compared to $9.7 million in the prior year. We ended the quarter with $1.2 billion in cash and investments. Our strong balance sheet and predictable business model give us the flexibility to continue to invest in our AI capabilities, platform enhancements, and go-to-market organization. As we deliver strong margins and cash flow for our shareholders. Separately, I would like to provide an update on Jihue, our China joint venture. In Q3 FY 2026, non-GAAP expenses related to Jihoo were $3.3 million compared to $3.5 million in Q3 of last year. Our goal remains to deconsolidate Jehu. However, we cannot predict the likelihood or timing of when that may potentially occur. Thus, for FY 2026 modeling purposes, we forecast approximately $16 million of expenses related to Jehu. Compared with $13 million from last year. Now turning to guidance. While we are encouraged by our strong year-to-date performance, the SMB softness that we called out last quarter persists. Additionally, the lingering effects of the recent US government shutdown are likely to impact deal dynamics in our US federal business into Q4. These dynamics are factored into our guidance. For the '26, we expect total revenue of $251 million to $252 million representing a year-over-year growth rate of approximately 19%. We expect a non-GAAP operating income of $38 million to $39 million. And we expect a non-GAAP net income per share of 22¢ to 23¢. Assuming 172 million weighted average diluted shares outstanding. For the full year FY '26, we expect total revenue of $946 million to $947 million, representing a growth rate of approximately 25% year over year. We expect a non-GAAP operating income of $147 million to $148 million and we expect a non-GAAP net income per share of 95¢ to 96¢ assuming 171 million weighted average diluted shares outstanding. While we are not providing guidance for FY '27, I would remind you for modeling purposes that the April FY '24 premium price increase has now been largely implemented. And will not be a discrete tailwind in FY '27. In summary, I am pleased with our third quarter results. We are building GitLab for healthy growth at scale. Investing strategically against opportunities that drive long-term value, and enhancing profitability and delivering free cash flow. GitLab is positioned for long-term success and to take advantage of a rapidly transforming market from a place of strife. Thank you for joining today. With that, I will turn the call over to Yao who will moderate the Q&A. Yao Chu: At this time, if you would like to ask a question, please use the raise hand function located on your Zoom toolbar. Or if you have joined by phone, please press 9. We request to limit yourself to one question in the interest of time. Take our first question from Koji Akeda from Bank of America. A following question will be from Matt Hedberg from RBC. Koji, go ahead, please. Koji Akeda: Yep. Hey, guys. Thanks so much for taking the question. My one question here is on the guide, the fourth quarter guide. And specifically on subscription revenue growth. You did grow subscription revenue in the third quarter 27%. That is pretty darn good for a, you know, primarily a seat-based model. But it is a deceleration from 30% last quarter and I do hear you on the public sector softness. I get that. And so I wanted to ask on the implied fourth quarter total revenue guide of 19%. Can you help us walk us through a little bit more on the demand environment, any sort of Fed sector catch-up that has already happened? Pipeline coverage into the fourth quarter, and any additional color on how to think about what the guide means for fourth quarter subscription revenue growth. Thank you. James Shen: Thanks, Koji. You know, our guidance approach this quarter was fairly similar to the one we took last quarter. We developed independent roll-ups across the field. Across CRO leadership teams. And across the finance team. You know, the prudence that we called out last quarter for both the SMB weakness and the go-to-market disruption were well warranted. And some of that remains into Q4. Additionally, as you called out, we will see some lingering effects from the recent US government shutdown. Guidance, you know, at the end of the day, reflects our best view of the business today. With what we know, and we feel good about the guidance heading into Q4. Yao Chu: Next question, Matt Hedberg followed by Rob Owens from Piper Sandler. Matt, go ahead, please. Matt Hedberg: Great. Thanks, Yao, for the question. Bill, in your prepared remarks, you noted progress on the first order business was better than last quarter, but I think you said it is still not where it needs to be yet. Understanding this is probably a multi-quarter trend, could you provide a bit more color on from your perspective, what is left from the team? And perhaps how long we think to see some of the full benefits from that? Bill Staples: Yeah. Thanks, Matt. As we shared last quarter, we decided to hire a global leader focused just on acquiring new business reporting to the CRO. I am happy to share that we closed that search and hired the individual. Exceptional executive that has now joined us and is onboarding. We are beginning the hiring ramp for that team. Which again will be a global team reporting to him directly into the CRO. Expect that hiring ramp to take a couple of quarters with results in the back half of FY 2027. In addition, I will share on the product-led growth front. Manav, our chief product and marketing officer, has now been in seat for a quarter. Has begun digging in there. Looking really at two things with regard to product-led growth. First, tightening the feedback loop with customers who are earlier in their journey with GitLab, as well as removing friction in the customer journey to make it easier to go from a free into a paid product with GitLab. And the early results there are really promising. It is exciting to see the efficiency in the funnel improving. Very early results. But here again, I would expect, you know, these kinds of incremental gains to aggregate over time. And would expect to see that show up in terms of new customer acquisition acceleration the later half of FY 2027. Yao Chu: Great. Next question, Rob Owens from Piper Sandler followed by Sanjit Singh from Morgan Stanley. Rob, go ahead, please. Rob Owens: Great. Thank you guys for taking my question. I was hoping you could drill down a little bit more into the Fed impact that you spoke about, you know, since it probably impacts the license line. Anything you can do to quantify that would be great. And then was that something that impacted your retention rate as well, or are there other things at play in that metric, ticking down a couple points sequentially? Thank you. Rob, any important thing to keep in mind here is that our long-term public sector thesis remains very much intact. You know, we are the preferred software factory to a lot of these countries. Leading federal agencies. PubSec is about 12% of our ARR, Haven't quantified specifically the headwind that we saw in Q3. What I would say is that we did see disruption from both the shutdown and the ongoing effects of Doge that are rolling through the government and we are very much partnered with our customers and these agencies. In helping them overcome these challenges. Yao Chu: Next question from Sanjit followed by Shrenik Kothari from Baird. Sanjit, go ahead, please. Sanjit Singh: Yeah. Can you hear me? Bill Staples: We can. Sanjit Singh: Awesome. Thank you. Bill, I think we can all agree that no matter what the debate is around seat-based models, there is tons of software being developed and created particularly right now. And, again, you pointed to some of the metrics around activity and usage in the platform, which is well above the revenue growth that you guys are delivering at least for right now. And so it is kind of a longer-term question, Bill, but what is the ultimate, you know, ultimate sort of answer solution on how to get activity in the platform to converge with the revenue growth that you would like to see. Is that is the answer there sort of dual agents, or is there anything beyond that? That we should be thinking about over the medium term? Good question, Sanjit. Yes. Bill Staples: I believe the medium to long-term answer there does lie in our shift from a pure seat-based business model to more of a hybrid seat plus usage-based business model, as we introduce Duo Agent platform I mentioned in my prepared remarks, that we are on the cusp of that in the coming weeks, declaring general availability and introducing pricing. So that will help monetize the activities downstream from AI code generation. By bringing AI acceleration across the software life cycle and solving that AI paradox that we talked about in our prepared remarks. In addition to that, we are looking at incremental innovation on top of our premium and ultimate SKUs which, you know, provide customers additive value at an incremental cost, which would also be part of our FY '27 road map and provide new monetization opportunities as well. Yao Chu: Great. Next question, Shrenik Kothari from Baird, followed by Raimo Lenschow from Barclays. Shrenik, go ahead, please. Zach (for Shrenik Kothari): Hey, guys. This is Zach on for Shrenik. Thanks for taking the question. So one on Duo for me. You know, you have consistently emphasized Duo's arch importance and its mission-critical value. But how are you really tracking the monetization of Duo-specific capabilities? Today versus just core DevSecOps or CICD functionality? And then maybe what percentage of new ACV includes Duo or Duo-related features? Thanks. Bill Staples: Yeah. Today, in our Duo Pro and Duo Enterprise products, they are monetized with seat-based add-ons. And we have not shared the specifics of the revenue contribution of those products. But they have been in the early stages. What we did earlier this year is shift or pivot from a use case-driven innovation agenda around AI to a platform-driven agenda. Meaning, we have augmented our core platform with AI capabilities at every layer, unlocking an agentic approach to AI that can help customers solve any number of challenges across the software life cycle. It allows them to choose the best-in-class AI tools, like those from Amazon, Google, OpenAI, and Anthropic. As well as create their own agents using Duo technology to solve, again, any class of engineering problem across the software life cycle. That has been in beta now for a couple of quarters. And is reaching general availability. And will introduce usage-based pricing once we reach general availability. So the very early stages of both the innovation and introduction of that monetization stream but it is the tone and the conversation with customers I have engaged over the last year on the topic of AI just continues to grow stronger and more excited about the platform approach that we are now taking. So I am really excited about the future opportunity. Do see that as expanding our TAM and incredible new value to customers. Yao Chu: Great. Next question, Raimo Lenschow from Barclays. By Howard Ma from Guggenheim. Raimo, go ahead, please. Raimo Lenschow: Hey. Thanks. Thanks for squeezing me in. Bill, one for you. Like, the, you know, the SMB weakness is obviously something that impacts everyone. And it is just, you know, it is, you know, you cannot control that. But is there anything that you could do, for example, from a SKU perspective? Etcetera, to kind of help kind of play better in market? Anything is doable, or do we just have to wait for the kind of improvement in the overall market sentiment there? Thank you. Bill Staples: Yeah. SMB is a very small share of our overall revenue. And not something we optimize for from a business, you know, strategy and go-to-market perspective. However, it is in particular, business, you know, start-ups and smaller companies that are on a growth path. Are important for us to, you know, drive awareness and early adoption. On. I would say, primary approach there has been to deliver a really great free product in the form of our open-source packages and free tier on gitlab.com. Which we have seen healthy adoption of in a very, very broad community. I do think Duo Agent platform brings new opportunities for us to convert those free customers into a first paid engagement with GitLab as we deliver AI on top of those free products in the coming year. Obviously, that has not been in a path that we have pursued to date with the Duo Pro and Duo Enterprise add-ons. But it is something that I think we will look seriously at Duo agent platform reaches GA. And I do think it plays into customers of all sizes who want to start their GitLab journey on a free DevSecOps platform but are willing and excited to pay for AI because they understand incredible value and the cost associated with delivering that. Yao Chu: Great. Next question, Howard Ma Guggenheim followed by Mike Cikos from Needham. Howard, go ahead, please. Howard Ma: Great. Thanks. Last quarter, you shared a stat that seat count is double digits year over year and has been accelerating. My question is, does that trend still hold? And what does seat count growth look when you exclude Duo seats? Howard. James Shen: That was a one-time disclosure that we gave last quarter to help you think through and understand the seat dynamics in the business. We are happy with the seat growth. This quarter, but we will not comment on the specifics that we gave last quarter. Yao Chu: Great. Next question, Mike Cikos followed by Needham followed by Kingsley Crane from Canaccord. Mike, go ahead, please. Mike Cikos: Great. Thanks, team. I just wanted to come back to the public sector element for a second, and I appreciate the disclosure in the headwinds from that shutdown. Can you help us parse out when we think about the 4Q guide that we have versus the 3Q results that you guys just posted? Are you expecting the public sector headwind from the shutdown in Doge to actually compound or increase in magnitude when we think about this January? And, again, I know we are getting to, I guess, a fine-tooth comb here, but just wanted to see how you guys are thinking about your assumptions here as we look at this forecast. Thank you so much. James Shen: Yeah. Thanks, Mike, for the question. You know, I comment on the specific magnitude and whether larger or smaller quarter over quarter. What I would say is that we are seeing lingering effects from the shutdown. You know, the US federal government does not turn on overnight. And we are working with our customers through these deals and renewals that have pushed from Q3 into Q4. Yao Chu: Great. Next question, Kingsley Crane, Canaccord, followed by Derrick Wood from TD Cohen. Kingsley, go ahead, please. Kingsley Crane: Great. Thank you. And it was nice to hear about the Duo agent expansions even pre-GA. I know investors are eager to see the impact of '27? Thank you. James Shen: Kingsley, could you repeat your question, please? You have cut out on our end. Can you hear us? Kingsley Crane: Yes. Can you hear me? James Shen: Yep. We lost you at Investors. Right? Excited, and then you cut out. Please repeat the question. Kingsley Crane: Sure. So investors are excited about the impact of DuoAgent in the market, the eventual impact. Just want to know more about the product proof points that you are evaluating signal GA readiness and then how to think about the ramp in twenty-seven. Thank you. Bill Staples: Yeah. We have said a number of criteria to evaluate readiness. You know, first and foremost, being the reliability, the performance, and the overall stability of the platform in meeting our customers' expectations. Also measuring the quality of the responsiveness and the responses of the agents that we are building and our customers' ability to build their own custom agents and get quality responses. And then finally, you know, we obviously must ensure that we meet our own high-security standards. And avoid shipping vulnerabilities or exposing our customers to any kind of vulnerability. So a number of quality-related criteria that we are measuring in addition to customer adoption and usage. And we think we are reaching the point of meeting all of that criteria as I mentioned in the coming weeks. And once we do, we will be declaring general availability. In terms of adoption and usage, you know, in the quarters ahead, it is hard to forecast exactly how fast that will go. I will just repeat what I have shared previously, which is you know, 70% of our revenue is based on self-managed customers who do require an upgrade to take advantage of Duo Agent platform, and that does take often multiple quarters to get a majority of the customer base onto a new version. So, you know, we will see some slowness there versus a pure cloud SaaS business. And you know, I will also share I am pretty excited about the opportunity to deliver the Duo agent platform into the public sector since that has been a topic of conversation today. Unlike many AI tools, in the market today, which rely completely on cloud-hosted models, DuoAgent platform delivers both cloud-hosted models, but also the ability to run-in completely air-gapped environments against custom self-hosted models which many of our public sector customers have as a configuration today. So we look forward to delivering that into those environments as those customers are able to adopt. Yao Chu: Great. Next question. Derek Wood from TD Cohen followed by Cyrus Nautica from Wells Fargo. Derek, go ahead please. Derek, are you on? It looks like your phone is muted. Derek Wood: Sorry about that. Okay. Can you hear me? James Shen: We can. Derek Wood: Yeah. Okay. Thanks, guys. James, can you give us the mix within the net revenue retention rate of seats versus tier upgrades versus price yield? And I think last Q4, you guys had a very large seat expansion deal. Any color, to provide on how to think about the impact on NRR? As we anniversary this large deal in Q4 this year? James Shen: Derek, I am happy to share the mix of DB NRR this quarter, and I also want to talk about this specific disclosure more broadly. So Q3 was similar to Q2, where seats contributed slightly over 80% of the mix. Yield was about 10% and the remaining from up-tiering. As our business evolves, this disclosure will become less relevant, both because we have evolved from a two SKU company into multiple SKUs but also because we are augmenting our seat-based business with a usage-based business that Bill referred to. And so we will look to share more in the quarters to come on this topic. Yao Chu: Great. Next question, Cyrus from Wells Fargo followed by Jason Celino from KeyBanc. Cyrus, go ahead, please. Ryan McWilliams (for Cyrus Nautica): Hey, guys. It is Ryan McWilliams on for Cyrus. So now that you are past the price increase, and you are adding more features, onto your more premium plans, and since you have seen competitors for their higher-end plans, like Cursor and Cloudcode come in at $200 a month for those plans, think there is an opportunity to take price on GitLab's higher-end plans? As AI becomes more integral, to DevOps overall? What do you think, capturing that through usage is more likely? Bill Staples: Yeah. Our plan is to capture through usage. I believe, you know, the right long-term approach to monetization is to have a pricing plan that provides an equal exchange in value for cost. And what I see competitors doing with AI pricing is really all over the place, and it has been rapidly evolving. I expect some evolution with regard to our price. But rather than introduce another seat-based price, as I shared earlier, we will be moving to a more usage-based pricing model where customers can pre-commit upfront for usage, to earn the very best rates. But that commitment is a pool of usage that could be shared across all users. And as we have tested that and introduced it to customers, they are very excited about that approach. And I believe, ultimately, when customers are excited and see the value they buy more over time. Yao Chu: Great. Next question, Jason Celino from KeyBanc followed by Steve Koenig from Macquarie. Jason, go ahead please. Jason Celino: Perfect. Thank you. Bill, you in your prepared remarks, you talked about some interesting stats. On the deployment activity you are seeing across the platform. You know, I forget the exact percentages, but how much of this elevated activity you think is from, you know, customers developing applications, you know, for AI. Like the underlying development activity. Or do you think it is from more, you know, better productivity from, you know, AI going tools? Hope you understand kind of the difference in the question, but curious you are seeing. Bill Staples: Yeah. It is exciting to see the downstream effects of AI coding on the platform. And I think it is driven through a mix of things. Probably both of the dynamics that you described. But, you know, ultimately, what a software team is doing is not just thinking about the code they are generating. They are thinking about the innovation they are delivering to customers. That is really, you know, the full software life cycle that is required. Everything from, you know, planning those changes, to testing them, to integrating deploying them, making sure that they meet the security and compliance standards. And that is what GitLab does. And because the code volumes are increasing, because engineers are able to take on more projects faster we see that acceleration in the rest of the stages of the software life cycle. To date, none of those have been AI accelerated, That is what we are doing with Duo Agent platform. And once we bring that full life cycle acceleration, I believe, we will begin to see the monetization benefits that we have talked about on the call. Because customers want to take advantage of those as well to accelerate not just the cogeneration, but the entire software delivery process. Yao Chu: Great. Next question, Steve Koenig from Macquarie. By Miller Jump from Truist. Steve, go ahead, please. Steve Koenig: Okay. Thanks, Yao. Can you guys hear me okay? James Shen: We can. Steve Koenig: Great. Okay. Yeah. So maybe building on the last question, you know, Bill, I understand, like, the platform, the value there is holistically throughout the software development life cycle. I am wondering, as you begin to deploy Duo Agent platform, is generally available, and it starts to be adopted. What where do you think it is going to make the most immediate impact in terms of improving productivity of the various aspects of the life cycle? And then if I could just sneak in, I am wondering more color on the SMB softness. Is that more of a macro or execution on your part? Thanks a lot for taking my question. Bill Staples: Yeah. I will answer the first part on Duo, and maybe, James, you can take the SMB one. So on Duo Agent platform, the important thing to understand about it versus other AI tools is that it is really a platform approach to AI, meaning customers can take advantage of the capabilities of the platform that is now AI native to orchestrate actions with AI tools for any class of engineering problem. So we have seen customers take advantage of it, for example, in terms of helping them plan and document what they are going to go work on upfront before the code even gets generated. To help analyze bugs and help triage and prioritize the work that needs to be done in code. We have also seen them take advantage of Duo Agent platform to author and to review the code. We have seen them take advantage of Duo Agent platform to do security analysis. To do prioritization, based on the advanced characteristics that we capture as part of our security scanning capabilities. We have seen them take advantage of it in terms of troubleshooting pipelines that are failing when, you know, code is not passing the quality standards, security standards, or other compliance guardrails that a company has put in place. So it is really across the board. And that is what is so exciting because, you know, having spent many decades now, software engineering, the process of software engineering is very complex. And there is any number of ways that things can break down. What customers will be able to do with dual agent platform instead of waiting for a human to engage in a manual process to recover from any one of those failure classes or any of those work tasks, they can now apply an agent that can automatically work on their behalf to triage, to analyze, to debug, and to recommend a fix or even automate a fix. And we believe that is what is going to bring incredible value to our customers. James, on the SMB question? James Shen: Yeah. Just quickly on SMB. This is segment-specific weakness that we have called out for a few quarters now. What I would say is a few things. One is we have a very strong free offering as you heard Bill talk about, and we see price sensitivity in this so both price and overall spend sensitivity. And as these are coming up for renewal, there is a lot of scrutiny and auditing around license usage. SMB is a small part of our business. It is roughly about 8% of ARR. And we are assuming that this weakness continues into Q4 in our guidance. Yao Chu: Great. Next question from Miller Jump from Truist followed by Mark Cash from Raymond James. Miller, go ahead, please. Miller Jump: Hey. Great. Thank you for taking the question. You all mentioned in the prepared remarks that all of your largest expansions in the quarter were with customers using some form of AI tooling. I guess, I am wondering, are most of your customers using AI tooling at this point? Or is that indicative of a smaller subset of the group? And, you know, was there any difference in the growth drivers for those accounts between the seats, customer yield, and up-tiering that you talked about for the broader business? Thanks. Bill Staples: Yeah. I think I shared last quarter, we did a customer survey where we analyzed a few different questions around customer AI tool usage, there. Forecast in terms of, you know, increased GitLab usage, as well as seats. And we did see in that survey fairly pervasive use of AI tools, along with GitLab. It is important to remember it is an and and not an or. Many times, I have heard investors refer to some of these other AI tools as competitors. And while it is clear there is some overlap in terms of what we are doing and what they are doing, ultimately, customers see them as complementary because they serve a variety of different use cases and support one another. So, yes, I believe AI tool usage is pervasive across our customer base. Many of them implementing multiple AI tools as part of their current AI strategy. And, I believe we are in a good position with Duo Agent platform to capture our fair share of that demand because we are solving inherently different problems than other AI tools on the market. Yao Chu: Great. Final question will come from Mark Cash of Raymond James, and I will pass it over to Bill for closing remarks. Mark, go ahead, please. Mark Cash: Yeah. Thank you. Yeah. Bill, maybe building on that last question. So we have seen some larger players like OpenAI and Google add more DevSecOps functionality alongside the smaller AI natives this quarter, and just kind of curious how you are considering deploying that $1.2 billion of cash and really strong free cash flow we are seeing maybe help further wedge GitLab's differentiation that spans this software development lifecycle against those guys. Appreciate it. Thank you. Bill Staples: Yeah. There is probably two parts to that question. You know, how do I think about what Git how GitLab competes with small and large vendors? And then there is, you know, deployment of cash. Maybe, James, you can take the second part. I will take the first part. Yep. Really, you know, when you think about what agents are made up, there are really four ingredients to every agent. There is an LLM, and we provide, like, almost every vendor access to all of the major foundational LLMs on the market. And the cost of those is going to continue to go down. The quality of those is going to continue to go up. Not a lot of differentiation to be had there. It is just, like, electricity for any kind of electronic system. Second part of an agent is the prompt that steers the LLM into solving the problem. And that is, you know, defined with human language, and, again, here, the IP value is fairly shallow. There are many, many libraries of open-source prompts. Out there and available. There are only so many ways you can tell and then allow them to solve the problem. And, you know, we provide dual agents with great prompts out of the box, but we also allow customers to customize and extend those prompts. So a little level of extensibility beyond what competitors offer today. But those two ingredients, would say, largely are commodity, and it is really the second two ingredients that make GitLab stand out and that even the large AI vendors cannot match. The first is context. We provide not only the system of record for all of the source code that our customer store, but all of the changes to that source code over time all of the testing and quality validation of that source code, the security of that source code, all of the related plans, and bug tracking, and everything else. That context all goes into feeding agents the ability to reason and make good decisions. And, virtually no other competitor has the breadth of context that we have as part of our unified platform approach. And we believe that is a durable differentiator over time. The fourth ingredient that agents have or are made up of is tools to actually action on behalf of users various actions. And here again, our unified platform really comes out as a strength because anyone can generate code. It basically involves generating streams that get written into text files. Right? But when it comes to full life-size cycle software engineering, you are talking about much more sophisticated operations, everything from planning and testing and securing and integrating and deploying code that requires a rich set of capabilities that have to be integrated one with another. We have delivered that to humans for now more than a decade. But with Duo Agent platform, we are unlocking all of those rich capabilities for agents as well. So agents can take those actions. And that is the really exciting differentiator and value that we provide our customers that I really do not think either small or large AI competitors can match. James Shen: Yep. On the cash position, you know, the $1.2 billion of cash and investments really puts us in a position of strength. In this market. And, you know, we have a strong track record of fiscal discipline here, and we are constantly looking at the most optimal avenues for capital allocation. That best deliver value both to our customers and to our shareholders. Yao Chu: Great. With that, that concludes our Q&A. I would like now to turn the call over to Bill for closing remarks. Bill, go ahead, please. Bill Staples: Hey. Thank you everyone for joining today's call. One year into my journey with GitLab, and I believe we are executing stronger than ever with a blueprint towards scaled responsible growth. As we shared, we are expanding our sales capacity in our field, investing behind a dedicated first order team in order to take advantage of our growing TAM. Product innovation and differentiation are also accelerating, and we are earning our right to define the future of software development with AI. We are now on the cusp of declaring general availability for our Agentic AI platform which will evolve our business model from a purely seat-based model to a hybrid seat plus usage-based model as we create new pathways to deliver value for our customers. These are all really significant structural improvements to GitLab. One thing that is not changing remains committed to investing and building for responsible growth, to drive shareholder value. I will close the call where I started off. There has never been a more exciting time to be at GitLab. James and I are in Phoenix, Arizona this week, and we will be speaking at the UBS Global Technology and AI Conference. We hope to see you there or elsewhere during the quarter. Thank you again, and good night.
Operator: Thank you for standing by, and welcome to Asana, Inc.'s Third Quarter Fiscal Year 2026 Earnings Conference Call. At this time, participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. To remove yourself from the queue, you may press star 11 again. I would now like to hand the call over to Eva Leung, head of investor relations. Please go ahead. Eva Leung: Good afternoon, and thank you for joining us on today's conference call to discuss the financial results for Asana, Inc.'s third quarter fiscal year 2026. With me on today's call are Dan Rogers, our CEO, Anne Raimondi, our chief operating officer and head of business, and Sonalee Parekh, our chief financial officer. Today's call will include forward-looking statements, including statements regarding the expected release and benefits of our product offering, and our expectation for revenue to be generated by those offerings, our retention and expansion opportunities, our expectation for our financial outlook, including our revised full-year guidance, strategic plans, our market position, and growth opportunities, and our capital allocation strategy, including our stock repurchase program among other items. Forward-looking statements include risks, uncertainties, and assumptions that may cause our actual results to be materially different from those expressed or implied by the forward-looking statements. Please refer to our filings with the SEC, including our most recent annual report on Form 10-K and quarterly report on Form 10-Q, for additional information on risks, uncertainties, and assumptions that may cause actual results to differ materially from those set forth in such statements. In addition, during today's call, we will discuss non-GAAP financial measures. These non-GAAP financial measures are in addition to and not a substitute for or superior to measures of financial performance prepared in accordance with GAAP. Reconciliation between GAAP and non-GAAP financial measures and a discussion of the non-GAAP measures versus their closest GAAP equivalents are available in our earnings release, which is posted on our investor relations page at investors.asana.com. And with that, I'd like to turn the call over to Dan. Dan Rogers: Thank you for joining us today. This was a solid quarter. We believe the future of work is one where humans and AI collaborate with the right context, controls, and checkpoints. That's the foundation of AI Studio and our newly announced AI teammates. And customers use these capabilities in production, and are already delivering real productivity gains. I'm excited to share more about our AI platform in a moment. But first, let's turn to the financial highlights from the quarter. Q3 revenues were $201 million, growing 9% year over year, exceeding the high end of our guidance. We generated non-GAAP operating income of $16.3 million or an 8% operating margin, also exceeding the high end of our guidance. Our margin improvement reflects disciplined cost management and a thoughtful reallocation of spending towards high leverage areas while still preserving capacity to invest in our AI platform. Free cash flow was also strong at $13.4 million in the quarter, or 7% on a margin basis. Overall, NRR was 96%, a slight improvement across all cohorts from last quarter, even with a heavier volume of large, predominantly tech renewals this quarter. Retention within our monthly customer base is at a twelve-month high, reflecting the work we've done to strengthen customer satisfaction and in-product experience which Anne will share more about in a moment. We expanded with some key customers this quarter, including one of the largest multinational entertainment companies in the world, two of the largest Fortune 100 healthcare service providers, and several large tech sector customers, including a Fortune 500 People Cloud platform as well as a leading AI data platform. AI Studio delivered another good quarter with solid growth in sequential bookings, including early traction with self-serve users. I want to highlight two AI Studio wins that demonstrate how customers across industries are already using our platform to modernize mission-critical workflows. A global premium glassware manufacturer serving hospitality and luxury brands worldwide is using AI Studio to modernize core marketing workflows, from campaign management to rapid content generation. One of Europe's largest and most influential trade show operators is now leveraging AI Studio to digitize their planning processes, streamline cross-department collaboration, and accelerate decision-making on major strategic programs, including the OKR rollout. Asana, Inc. has pioneered three waves of work transformation: collaborative work management, workflow automation, and now AI transformation. These form the basis of our strategy to help companies on their journey to the agentic enterprise, unlocking productivity for teams as they deliver against their goals smarter and faster. Let's take a closer look at each of these waves. The first wave was all about solving the most fundamental challenge in modern work: creating clarity and accountability for a company's work. Many of our customers' work was once scattered across emails, spreadsheets, and disconnected tools. Asana, Inc. created the structure and visibility teams need to stay aligned and accountable with our collaborative work management platform. Powered by the WorkGraph, teams now have a shared understanding of who is doing what, by when, how, and why. The second wave centered on workflow automation. Once teams had this clarity, they also wanted to increase their velocity. Asana, Inc.'s no-code workflow builder makes it simple to standardize and automate repeatable processes, from marketing intake to engineering sprint planning. To make it easy, we created a workflow gallery to let you launch any workflow instantly, so teams get to value in a secure, fast, context-aware way. Now we're entering a new wave with AI transformation. Every customer I speak with sees the immense potential, but the reality is many AI projects today are just not delivering. In fact, a recent MIT report said as many as 95% of AI pilots are failing to deliver on their productivity promise. Why is that? Our point of view is that a lot of AI solutions and applications today lack three fundamental things. Number one, they lack context. If you think about the foundational models, they understand very little of the work that's actually getting done within your organization. They don't have the memory of how things have been solved in the past. They aren't properly informed, so they can't be accurate or effective. They also lack checkpoints. AI can't be trusted to just run an end-to-end process without having humans in the loop. But these checkpoints today are nonexistent in many of the tools. And finally, they lack controls. What we see and what I hear from executives is that AI agents often have more access to data than the employees themselves. Employees are carefully given things like role-based access control, but this somehow doesn't translate to the agents that they have in their organization, which, of course, is a risk. This is exactly what Asana, Inc.'s AI platform was built to solve. As a platform for human-AI collaboration, Asana, Inc. delivers the context, checkpoints, and controls that enterprises require. The context is really the who, the what, the when, the why, and the how. Context is king. If you want AI to be useful, it needs to understand how this was solved in the past, who was involved, who needs to be involved next, and what approval process we need to have. Thanks to the WorkGraph data model, Asana, Inc. can give AI this rich and relevant context. And you also need these checkpoints. It's our strong point of view that humans need to be in the loop on most of these AI processes to approve things and course correct if needed. In Asana, Inc., you can check the quality of AI's work and iterate with it so that it will continue to improve. And finally, unique controls. We have a strong belief that AI agents should not have more access to data than your regular teammates. They should follow the same governance process, the security controls, the access to proprietary customer data that you've already established. These are the three C's as we call them: context, checkpoints, and controls. Another foundation of our AI platform. Built on that foundation of context, checkpoints, and controls, the first AI add-on product we introduced was AI Studio. Think of AI Studio as supercharging your workflows. I like to think of it as inserting nodes in a given workflow to consult those foundational models, but doing so in the context of that workflow and the context of that work. It allows you to insert AI nodes directly into the process to handle specific tasks. For example, an intake node can check an incoming request, see if it's missing a due date, and assign it back to the requester automatically. A triage node can analyze that request against your company's goals and flag it as high priority. A quality node can check a deliverable against the predefined knowledge base to ensure it meets specifications. A risk monitoring node can proactively flag when tasks are falling behind schedule well before they cascade, and a translation node can automatically convert content for global markets and route it to the right local teams. This is our first step towards enabling the agentic enterprise, ensuring smarter, faster delivery of your goals. Which brings us to the next strategic step in building an agentic enterprise: enabling AI not just to coordinate work, but to do the work alongside your teams as a true collaborative teammate. At our Work Innovation Summit events in London and New York, we announced Asana, Inc. AI teammates, and we're already receiving strong positive feedback from our initial set of 30 beta customers. We expect AI teammates will be generally available early next year. Asana, Inc. AI teammates are collaborative agents to help you deliver real business outcomes. They remember, take action, and adapt with full context on projects, goals, and how your teams operate. They show their work and have built-in checkpoints you can course correct. And with our AI teammates, you are always in control. And we've already built out 12 out-of-the-box teammates across engineering, IT, marketing, operations, and PMO. These aren't prototypes or demos. They're prebuilt, tested, and ready to deploy. Each teammate operates with full context from the WorkGraph, clear checkpoints for human guidance, and enterprise-grade controls. Marketing teammates that manage campaigns and create content, PMO teammates that track projects and flag risks, IT teammates that triage tickets and optimize resources. Customers can also build their own AI teammates in minutes by defining the role, connecting it to the right data sources, and refining behavior through checkpoints. This makes agentic AI accessible to every team, not just technical teams. So what makes our agents different? Well, first, they have context powered by the Asana, Inc. WorkGraph. They understand from the moment they are assigned how your work gets done, how you solve problems before, and exactly who to involve. That context allows them to be truly collaborative. Because they understand the work, they can actively drive execution alongside people in the team. And, crucially, are multiplayer by design. Our teammates publish their plans openly. This creates a shared transparent starting point where everyone can provide feedback, ensuring the AI learns from your team's collective input. The early response from customers has been positive and reinforces the opportunity ahead. Morningstar, an early adopter of Asana, Inc. AI, is leveraging AI teammates to tackle complex strategic work that requires deep analysis and human-like reasoning. By creating a specialized AI teammate, the product management team was able to complete tasks that normally take up to two weeks in just ten to twelve hours. Level Agency has built AI teammates for marketing to act as a workflow accelerator, saving three to five hours per content project, as well as for IT to help triage support tickets and company-wide to intelligently review and operationalize new process ideas. Also using AI teammates internally at Asana, Inc., our product, design, and engineering teams use a Figma and CursorTeammate to convert prototypes into production-ready UI code in roughly fifteen minutes with more than 90% accuracy. Our brief buddy teammate supports every marketing kickoff and removes about an hour from the start of a project. And our marketing team's localization teammates achieved roughly 90% language parity at about half the cost, allowing us to reinvest savings into SEO and global growth. These examples reinforce that agentic AI is not theoretical; it's already improving how we run our own business. Across all these deployments of our AI products, trust is central. Teammates only see the data they're explicitly granted access to. Admins control who can create or modify them. And customers have full visibility into the usage and cost with the ability to set limits to ensure strong ROI. We built these capabilities into AI Studio and teammates from day one because enterprise adoption depends on governance as much as capability. This focus on enterprise-grade AI is the foundation of our strategy. But in addition, operational priorities I led up last quarter remain consistent. And our Q3 results show clear measurable progress against them. First, as I shared last quarter, when we go deep in this vertical, speak the language of that persona, and align to the core workflows of that industry, we win. I want to highlight this playing out in a meaningful way. For example, in the healthcare vertical, where we closed several marquee expansions this quarter. One of the largest health insurance organizations in the US expanded to more than 3,000 seats and crossed the $1 million ARR threshold. It standardized their clinical service intake across a 20,000-person business unit and is expanding into adjacent teams like analytics, pharmacy, and student health, all running mission-critical workflows in Asana, Inc. Another major diversified healthcare company, now well above $1 million ARR with us, embedded Asana, Inc. deeply in their Medicaid organization to support the creation and expansion of Medicaid managed care plans across local markets. Asana, Inc. is also being adopted across many new teams. And a global pharmaceutical leader selected Asana, Inc. as a preferred PMO solution, including for mobile clinical trial workflows, an innovation model designed to expand trial access to patients far beyond traditional sites. These telco wins are a testament to Asana, Inc.'s ability to adapt to industry-specific solutions with ease. Second, we're improving go-to-market execution and value realization across our sales and self-service motions. We believe our focus on customer health improvement initiatives is contributing directly to the continued improvement of NRR. We delivered our strongest retention in more than a year amongst monthly self-service customers, an encouraging signal that our self-service engine improvements across product experience and support are taking hold. Third, we're maintaining our focus on disciplined, profitable growth. Our significant improvement in non-GAAP operating margin and strong adjusted free cash flow are direct results of this discipline. Our operating leverage and continued commitment to driving higher productivity from our cost base gives us the capacity to keep investing in high leverage areas, especially our AI platform, all while expanding our margins. Next quarter, I look forward to sharing additional proof points, customer stories, and outlining the FY '27 priorities that I believe will support long-term growth acceleration and continued margin expansion. Before I hand over to Anne, I also want to take a moment to share that Anne will be leaving Asana, Inc. after seven years. I'm so grateful for all that Anne has done. Anne has played a major role in our story, first as a highly engaged board member, and then as our COO and head of business. She was instrumental in building an enterprise go-to-market motion and serving as one of our most trusted customer voices. I personally want to thank Anne for her leadership, partnership, and the foundation she's helped shape across our product, customer, and field teams. As we look ahead, given our size, scale, and the need to drive tight alignment across product, product-led growth, sales-led growth, and marketing, our go-to-market leaders, including the CRO and CMO, will now report directly to me, and we'll not be backfilling the COO role. This structure strengthens our ability to move with speed and focus, and it best positions us to accelerate growth over the long term and capitalize on the large and growing opportunity we see in leading the market for human-AI collaboration. I'm grateful for everything Anne has done to help us get to this point, and wish her the very best. With that, I'll turn it over to Anne. Anne Raimondi: Thanks so much, Dan. It's been a privilege to spend the past seven years helping build Asana, Inc., first in the boardroom and then alongside the team every day. I've loved this company from the start, and that hasn't changed. I'm proud of the progress we've made building a true enterprise-grade platform and deepening our relationships with the most innovative customers around the world. I want to sincerely thank the entire Asana, Inc. team for their incredible passion and dedication. I'll continue to be a strong advocate for Asana, Inc. and a dedicated Asana, Inc. user. I genuinely believe that the foundations are in place for the company to lead the next wave of work centered around AI-human collaboration and to define how teams work for years to come. That progress was evident again in our Q3 results. In Q3, our enterprise motion continued to scale. The number of customer net adds from the $100,000 plus cohorts grew 15% year over year, while core customers spending $5,000 or more grew 8% year over year. International markets remain a strength for our business, especially EMEA and Japan. Our international revenue grew 12% year over year, and the US market grew 7% year over year. An example of that: we landed a new multiyear competitive deal with Guardian, the British-based global news organization, to consolidate their tech stack and improve cross-departmental collaboration. Asana, Inc. was chosen over competitors for its flexibility, enabling teams like product, advertising, and group technology and data to streamline everything from agile road mapping to resource capacity planning on a single platform. We continue to increase our presence in non-tech, with those sectors once again growing in the teens. Dan noted some of the momentum we saw in healthcare, I want to call out two other important areas where we saw meaningful wins this quarter: financial services and the public sector, both key growth verticals for Asana, Inc. In the financial service vertical, we expanded with a large North American financial services company. Their goal was to cut marketing campaign execution time by 25 to 50%. Their existing intake process had 29 steps, and they needed a single system that could simplify workflows, automate handoff, and improve reporting. After evaluating Asana, Inc. against our peers, they chose Asana, Inc. for its superior user experience, flexibility, and ease of adoption requiring minimal training, while still offering the customization needed to modernize their workflows. We also saw strong momentum in the public sector this quarter, including a meaningful new win with a major German government research agency that manages roughly 6,000 projects each year. This was a competitive win. They selected Asana, Inc. for its ease of use, templates, workflows, WorkGraph-driven OKR support, and enterprise-grade security. They're implementing Asana, Inc. as an audit-compliant system to manage thousands of research and innovation funding projects across Germany and Europe. Asana, Inc. gives them real-time visibility into project progress, budgets, team allocations, and much more. We're also seeing sustained momentum in our channel ecosystem, with partner-attached growth for the third straight quarter, and consistently higher NRR in accounts where partners are engaged. The global biopharmaceutical customer win that Dan mentioned was secured in partnership with a global SI partner. We also landed key new logos with partners at a leading automotive manufacturer in India, a major UK food delivery platform, and a global enterprise digital experience platform. While the tech sector continued to be a headwind to our growth this quarter, we successfully renewed with several large tech companies, as Dan noted. This is one of the key factors impacting NRR improvement quarter over quarter. Core customer NRR and a $100,000 plus customer NRR both improved 100 basis points to 97% and 96%, respectively. In quarter NRR improved across all cohorts. Enhancements in our support infrastructure, improvements in customer status metrics, and AI-driven onboarding for self-serve customers resulted in our lowest churn numbers from monthly customers in the past year. In our SMB business, we continue to be affected by the evolving top-of-funnel dynamics we mentioned last quarter, particularly in relation to LLM-driven changes in search and paid media investments. Our approach to mitigate these pressures focuses on three areas. First, we're building modern self-serve experiences that get users to value fast. Our new prompt project flow takes someone from a prompt on our website to a working Asana, Inc. project in seconds. We're optimizing each stage of the buyer journey to turn that engagement into durable. Second, we're evolving our content strategy and technical foundation to maintain authority as AI-led changes, strengthening our presence where LLMs train and ensuring Asana, Inc. shows up as the leading answer in our category. Third, we're implementing smarter behavior-based personalization for high propensity accounts to improve both acquisition and expansion. As we shared last quarter, we expect these headwinds to persist through Q4. We concluded the quarter with our customer event at the Work Innovation Summit in London and New York where we officially introduced AI teammates to the world. Across the two events, we had over 1,600 customers, partners, and analysts in attendance. Our sponsors included Google, AWS, KPMG, and Deloitte. The strategic impact of these events was immediately clear from the response from third-party experts. We held over 30 industry analyst briefings with one analyst noting, "No one is doing agentic like Asana, Inc. That's what makes you best in class." This is echoed by another industry analyst who called our multiplayer human plus AI collaboration approach "unique in the market." These global events are a critical component of our go-to-market motion. They are driving new business, strengthening executive relationships, and validating our strategy as a leader in agentic AI. Quoting from one of our financial services customers, "The event was one of the most stimulating, engaging conferences I've been to in a while. Asana, Inc.'s application of AI is like no other company today." Another Fortune 100 multinational mass media and entertainment customer said, "I love that this event was focused on helping me get more out of what we're already doing, which inspires me to want to buy more." We are energized by this feedback and the validation of our strategy. With that, I'll turn it over to Sonalee to walk through the financial highlights for the quarter. And I want to thank you for your partnership and everything you've brought to Asana, Inc. I'm grateful for the support, clarity, and customer focus you've helped instill across the business. You've had an enormous impact on the company, and so many people here. Now let's turn to our financial results for the quarter. Q3 revenues came in at $201 million, up 9% year over year, which exceeded the high end of our guidance by almost one percentage point. We have 25,413 core customers, or customers spending $5,000 or more on an annualized basis. Revenues from core customers grew 10% year over year. This cohort represented 76% of our revenues in Q3. We have 785 customers spending $100,000 or more on an annualized basis, and this customer cohort grew at 15% year over year. As a reminder, we define these customer cohorts based on annualized GAAP revenues in a given quarter. Our overall dollar-based net retention rate was 96%. Core customer NRR was 97%. And among customers spending $100,000 or more, NRR was 96%. As a reminder, our NRR is a trailing four-quarter average, and therefore a lagging indicator of more recent trends. Our in-quarter NRRs improved across all cohorts. The $100,000 plus cohort had the largest improvement amongst the cohorts. Q3 in-quarter NRR increased mostly due to improvements in downgrade and expansion thanks to our multiproduct strategy and seat reach. While we have more work ahead, I am encouraged that Q3 marks our second consecutive quarter of in-quarter NRR improvement. While Q4 includes several large enterprise renewals that are concentrated in our technology vertical, we believe that we are at or near the floor. And the initiatives we have in place position us for continued NRR improvement over the intermediate and long term. This continues to be a key area of focus, and we believe the initiatives in place on the retention side and the expansion opportunity with our AI platform set us up for continued improvement going forward. Now moving to profitability, where I will be discussing our non-GAAP results. We continue to be extremely focused on driving efficiency and productivity throughout our business, maximizing the operating leverage we enjoy from our strong gross margin at 89%. We expect to maintain these levels of gross margin in fiscal year 2026 while expanding operating margin as we continue to scale. We continue to make meaningful improvements in our operating expenses as a percentage of revenue. R&D expenses were $47.3 million, or 24% of revenue, down 14% year over year. Sales and marketing expenses were $86.5 million, or 43% of revenue, down 3% year over year. And G&A expenses were $29.1 million, or 14% of revenue. As a result of driving productivity and efficiency gains, we delivered an 8% operating margin or $16.3 million of operating income in the quarter, which is a 12 percentage point improvement year over year. Net income was $17.9 million or 7¢ per share on a diluted basis. Our profitability improvement continues to be driven by operating leverage, reallocating spend to the highest ROI go-to-market motions, optimizing infrastructure and cloud costs, and exercising discipline across discretionary spend. We're also aligning our talent footprint with industry benchmarks by shifting certain roles to more cost-effective regions, creating a strong foundation for sustained efficiency and multiyear margin expansion. Moving on to the balance sheet and cash flow. Cash, cash equivalents, and marketable securities at the end of Q3 were approximately $463.6 million. Our remaining performance obligation or RPO was $500.9 million, up 23% from the year-ago quarter. Current RPO will be recognized over the next twelve months and was 77% of RPO, and grew 15% from the year-ago quarter. Our total ending Q3 deferred revenue was $305.1 million, up 8% year over year. Building on our operating margin strength, Q3 adjusted free cash flow was $13.4 million or 7% on a margin basis. We continue to take a disciplined approach to capital allocation. Given our strong balance sheet, positive free cash flow, and confidence in our long-term strategy, we believe share repurchases are an effective way to return value to shareholders while offsetting dilution. This quarter, we bought back $30.8 million of our class A common stock, or 2.2 million shares, at an average price of $14.10 per share. As of October 31, we had $97.5 million remaining for repurchases moving forward. Now moving to guidance. For Q4 fiscal 2026, we expect revenues of $204 to $206 million, representing 8 to 9% growth year over year. We expect non-GAAP operating income of $14 million to $16 million, representing an operating margin of 7 to 8%. And we expect non-GAAP net income per share of 7¢, assuming diluted weighted average shares outstanding of approximately 244 million. For the full year, we are updating our revenue guidance to $789 to $791 million, representing 9% year over year growth, from $780 million to $790 million previously. Currency is about 40 basis points growth benefit to our full-year guidance, 10 basis points less of an impact from what we guided last quarter. We are raising our guidance to incorporate our actual Q3 results. SMB continues to grow at a healthy double-digit pace. Though, as Anne noted earlier, we are seeing top-of-funnel pressure given the evolving search landscape, which we expect to be a continued headwind to our small business growth in Q4. These dynamics are fully reflected in our updated Q4 and full-year fiscal year 2026 revenue guidance. On a non-GAAP basis, we expect full-year operating income of $52.5 to $54.5 million, representing an operating margin of 7%, up from our prior guidance of 6%. We are reinvesting a portion of our Q3 operating profit outperformance back into the business, primarily in our AI platform and product development initiatives. As a result, our Q4 operating margin guidance reflects the impact of this reinvestment as we support the roadmap and build toward long-term growth acceleration. In addition, we expect non-GAAP net income per share of 25¢ to 26¢, assuming diluted weighted average shares outstanding of approximately 243 million. Across the leadership team, we're aligned on the priorities that position Asana, Inc. to lead in the agentic enterprise and accelerate both growth and margin expansion over the long term. AI Studio momentum continues to strengthen, and we believe scaling our AI platform with teammates will be a major driver of durable growth. And with that, operator, ready for questions. Operator: As a reminder, to ask a question, you will need to press 11 on your telephone. To remove yourself from the queue, you may press 11 again. You will be limited to one question and one follow-up to allow everyone the opportunity to participate. Our first question comes from the line of Matt Bullock of Bank of America. Please go ahead, Matt. Matt Bullock: Great. Thanks for taking the question. I first, I wanted to ask about AI Studio, specifically the self-serve launch. Anything you can share in terms of early learnings from that launch? Any feedback in terms of ARR contribution from the self-serve launch? And then separately, would love to hear more color on the influence AI Studio is having on the renewals of this year, given that it's the first renewal cycle you guys have had being a multiproduct company? Anne Raimondi: Hi, Matt. It's Anne. I'm happy to answer that. In terms of AI Studio self-serve, we just launched that last quarter, and so we are what we're pleased with is just the wide adoption and customers really trying it out. Customers of all sizes, including those that regularly buy self-serve from us. So that's the good news is it just really democratizes access to AI Studio, and people get to try it and actually get value out of it. So we're continuing to watch that and watch consumption. On that. It also gives us signal and the sales team signal on where to call into, into the self-serve, you know, signals in corporate and enterprise. So excited about that and continue to watch that. You asked a good question about renewals. I think AI Studio has been a real help in renewal conversations. One, it's strategic. There's just more for us to sell to customers. And we're really helping to advise them on their AI strategy overall. So we're pleased with how that's been, helping renewals. And then for customers that have bought AI Studio, what we're really paying attention to is adoption and consumption. And so getting as many use cases implemented as possible having them see real value. So those are how we're monitoring everything around AI Studio. Matt Bullock: Thank you. Operator: Our next question comes from the line of Steve Enders of Citi. Please go ahead, Steve. Steve Enders: Okay. Great. Thanks for taking the questions here, and great to have worked with you, and yeah, best of luck on your next adventure there. Guess just to start, I want to ask on I guess, within the tech vertical specifically, and I think there's been some further high-profile layoffs in that space. I guess, what is it that you're seeing that's maybe giving you confidence that we're near a trough there, things are going to improve and just how are you kind of viewing the impact of that into Q4 and maybe into the next year? Dan Rogers: Yeah. Hi. First, to kinda answer your question on, we do see the tech vertical stabilizing. It does remain an overall headwind to us. There are a few important dynamics worth calling out. First is we don't see a follow-on downgrade path with those tech customers. Once they've downgraded once, they tend not to downgrade again, and that's a meaningful shift. So in fact, several of our largest tech customers this quarter actually expanded as they renewed, and logo churn continued to improve. We also saw, and certainly we'll touch on this later, I'm sure, a twelve-month high in gross retention amongst our monthly customers. And then we do see this nice and you're just kinda rounding out the PCR on AI Studio. A nice move for multiproduct moving us off of seat-based products. AI Studio and AI teammates open up new budgets for us. New use cases. And they do create a strong lever to mitigate OC downgrades. They also introduced a new consumption-based revenue stream. Have our foundational service plans, and those drive deeper adoption. And much higher utilization in our customers and making it even stickier. And then as customers stick with us to do cross-functional workflows, even more deepened by AI Studios, that helps us expand to new budgets. And makes us a lot more less dependent on employee count of those tech companies. Steve Enders: Okay. That's helpful. And maybe just to follow-up just to get a little bit more clarity on the four Q guide. You know, it looks like a pretty healthy raise here, and just kinda wondering maybe what changed in your assumptions for Q4 versus how you're thinking about it last quarter when you provided the guide there? Sonalee Parekh: Yeah. Sure. Thanks for the question. So four things I'd really call out that I'm seeing which are giving me confidence this quarter to raise that full-year guide. So the BEAT in Q3 was driven by consistent execution across most of our core pillars. So first thing to call out is enterprise strength. We saw a 15% year-over-year increase in customer spending $100,000 or more. And we're seeing stable demand trends in this segment. And improvement in pipe conversion that is leading to productivity gains. So the other thing I would just mention there is that whilst we don't typically break out $50,000 to $100,000 customer cohort, we saw exceptional strength there. This quarter. On the international side, that remains a strength for our business. So especially EMEA and Japan. So continued strength there. International revenues grew 12% year over year, outpacing our, you know, overall corporate growth rate. Improving an NRR. And I think this is really key, and you'll have noted, like, my commentary around this changed. So we successfully renewed with several of the large tech companies that I called out last quarter that were looming. This was one of the key factors that impacted our NRR improvement quarter over quarter. Retention within our monthly customer base, as Dan said, is at a twelve-month high. That reflects a lot of the work and investments we've made to strengthen customer satisfaction and the in-product experience, which you've heard Anne talk about over the last several quarters. And then finally, AI momentum. So we saw continued momentum with AI Studio. We saw sequential strong quarter-over-quarter growth. That's helping drive conversations with customers at renewal, which Anne just touched upon. So AI Studio and FSP are leading to larger initial lens. Expansion, and mitigation of downgrade. So, you know, just a reminder is what I said in my per remarks is that I'm really encouraged by the Q3 trends in NRR. And that was part of what gave me the confidence on raising the guide overall. Josh Baer: Our next question comes from the line of Josh Baer of Morgan Stanley. Please go ahead, Josh. Josh Baer: Yes. Thank you. Questions for Dan. Just as AI agents become embedded across probably most productivity tools, how should we think about Asana, Inc.'s competitive position there? I mean, are you expecting Asana, Inc. to be one of many agents that knowledge workers engage with? Or is it important for Asana, Inc. to really become that orchestration layer that coordinates all agentic workflows across the enterprise? And if so, what really differentiates you, gives you the advantage to win that opportunity? Dan Rogers: Thanks, Josh. Appreciate the insightful question. Yeah. Look. Here's how I would frame it. This is not gonna be a winner-takes-all opportunity for us. In fact, we will sit alongside many of the other agentic players. But to turn to your question of differentiation, the way I think about it is today, broadly speaking, the alternatives fit into three different buckets. Bucket number one, single-player copilots and personal assistants. Now they're great for personal productivity. They're very easy to pilot. They're great at doing lightweight individual tasks. But they don't scale across an organization. Each person is kinda building their own version, and that is leading to agent sprawl. Context often stays siloed. The knowledge doesn't compound. Quality and cost varied by individual. There's no shared governance model. Second approach we see are bucket two for agents. We see as point solutions, and these are from some of the systems like CRM or ITSM solutions. Those are deeply integrated into tools so that they're already being used, and so they're really good for structured workflows within their domain. As you can imagine, they're limited in that narrow ecosystem. They don't address a lot of cross-functional work or the unstructural work between the spaces and between the departments. Third bucket is DIY solutions that people are really hacking and building directly on top of LLM providers. They're super flexible, for experimentation, attractive for quick prototypes or bespoke workflows. But, again, these seem to run into issues with governance, duplication, scaling costs, cross-team coordination, and maintaining those prompts and controlling that access and ensuring consistency all requires ongoing admin. So Asana, Inc. would take a completely different approach. Our AI platform has context, controls, and checkpoints built in. So if you look at AI teammates, these address many of those gaps because they operate as true members of the team, not just individual copilots. So if you think about all of the context that Asana, Inc. has in our WorkGraph, who's doing what by when, how, and why, those are the key ingredients that's missing in those other approaches. Intelligence alone isn't enough. AI needs this rich context and rich workflows to be effective. But Asana, Inc. also provides the checkpoints, review steps, permissions, and governance models to prevent that sprawl and maintain quality and cost control at scale. And because AI Studio and AI teammates work together in one system, customers get reliable automations that are repeatable for work as well as flexible agents for more nuanced judgment-based work. So this is all without that overhead that we talked about on those DIY agent solutions or without the limitations of some of those functional silos of CRM and ITSM native tools. The result is an AI layer that actually scales across teams and not just within them. Josh Baer: Great. Thank you for your insights. Rob Oliver: Our next question comes from the line of Rob Oliver of Baird. Please go ahead, Rob. Rob Oliver: Great. Thank you. Good afternoon. I also wanted to extend my best wishes to you, Anne. It's been nice working with you. Dan, my question is for you just around the channel ecosystem and some of the momentum that you guys called out there. Partner-attached growth being strong again. Can you give us some sense for where you see kind of the partner ecosystem currently as someone who has a background with a lot of companies that have pretty advanced partner ecosystems? Where is it today? Kind of what inning are we in? Where does it need to be? And where in particular are you guys seeing that traction today? And then I had a quick follow-up as well for Sonalee. Thanks. Dan Rogers: Yeah. And Anne mentioned, we're hot on the heels of our London and New York summits, and we had the opportunity to partner breakouts at both of those. And I couldn't be more excited about our channel ecosystem. Our product and our category lend themselves very well to the channel. And so I see nothing but opportunity for us in building out that channel ecosystem. As I talk to many of our partners today, they just want to do more. They want us to be more consistent in how we help them to be successful. And so I do see it as a true ecosystem and partnership where we help ensure their success and not just a transactional channel for us. So yeah, very excited about the partner opportunity. Think we're at the early innings of it. Rob Oliver: Great. Very helpful. Thanks. Appreciate that. And then, Sonalee, just for you, obviously, a lot of work has been done by you and the team on the cost optimization side, infrastructure, cloud. And just was curious, you know, I know you've been reallocating kind of stuff around the organization to try to drive higher ROI. When it comes to those costs, how much more runway do we have on that? Have they been optimized? Is there more to go? If you can give us flavor for what might be left, that would be great. Thank you. Sonalee Parekh: Yeah. So the work is definitely not done. Thank you. Appreciate your support, but there is more margin upside to go for as we think about the remainder of this year, fiscal 2027, and beyond. So growing profitably continues to be a key focus of this team, you know, with continued emphasis on GeoMx benefits in terms of where our headcount sits, vendor rationalization. There's more to do there. Productivity improvements in sales and marketing, Dan has been, you know, very focused on. And that will allow us to continue expanding margins sequentially and for multiple years to come. That being said, we are balancing margin expansion with reinvestments in our AI platform to sustain our product leadership and to accelerate growth. Both are priorities, but we are investing alongside expanding margins to support that revenue acceleration goal. So if you think about fiscal 2027, we will build off our exit margin in Q4, which, you know, you see how I guided today. The only thing I would just caution is don't expect the same rate of margin expansion in '27 as you saw in '26. But I think, you know, that's well captured by consensus today. But, you know, by no means is the work done. And the other thing I would just say is, you know, we are reallocating spend, and what we're doing is to areas where we see higher ROI. So you know, that should have an overall benefit to operating margin. And the final point I would make is just gross margins continue to be, you know, in the 89% to 90% range. So just the operating leverage that we get as we continue to grow and scale will continue to play through and have a positive impact on margins. Jackson Ader: Our next question comes from the line of Jackson Ader of KeyBanc Capital Markets. Please go ahead, Jackson. Jackson Ader: Great. Thank you. The first question, it's really nice to see the retention rates picking up. And it sounds like, you know, that was due to lower gross churn. But if I think about, you know, revenue growth slowing just a little bit, should we read into this to mean that maybe the expansions or the upsell of existing customers was more muted than it has been in the prior quarters? Anne Raimondi: Hey, Jackson, it's Anne. I'll take that. Yeah. I do think what we're pleased with is the improvements we saw in downgrade. And then as Dan mentioned, seeing some good expansions in some of our large tech renewals. And we really are investing in the multi-strategy, multi-product strategy approach. So in some cases, what we're seeing is that because we've got FSP and we've got AI Studio, what we're able to do is drive, you know, flat or slightly uptick in renewal, but both of those are great for future retention and expansion. And so that's really where we've been making the investments as well as on the monthly side. So, you know, a large portion of our base is still monthly customers, and that retention has been at a twelve-month high. And so that's a lot of the work that we're doing both in customer support and in product experience. So both of those levers in terms of what we can sell to larger customers as well as continue to make sure the monthly base is healthy I think will ultimately lead to healthier retention. Jackson Ader: Okay. Alright. Got it. Thank you. And then a quick follow-up. Sonalee, it was this time a year ago, your first call with the company. You said, you know, the goal I can't remember exactly. That Asana, Inc. could do both. Right? You could both reaccelerate revenue and also expand operating cash flow margins. I think on the margin side, like, pretty clear what you were just talking about with Rob. Absolutely delivered. But if we think about revenue acceleration, coupled with that, margin expansion, is that still doable? Is that still the goal, the expectation as we kind of head into 2027 or even or beyond? Sonalee Parekh: Yeah. So without guiding to fiscal 2027 because, you know, I always do that in March, what I will say is that, you know, we are early innings on our new product strategy, our multiproduct strategy. And I believe AI Studio and AI teammates are going to be the key unlock in terms of driving that growth reacceleration. We, by no means, have given up on that, and it is absolutely this team's strategy to continue to do both. And, you know, I am strongly encouraged by what I saw on the NRR side. You know? And if you think about NRR, if we can even drive it a couple of points, you're looking at a very, very different growth profile. A very, very different financial profile. And, you know, I didn't when I put the comment in the prepared remarks about being at or near a bottom, you know, I didn't put that in lightly. You know, what's giving me confidence is the data that I'm seeing underlying the Q3 trends. So, you know, it's second consecutive quarter of in-quarter improvement. I don't know if you remember, but when I saw the first quarter improve, I said, you know, one quarter does not make a trend. Well, two quarters certainly gives me a lot more confidence. Secondly, you know, what a couple of us have called out on improvements in gross retention, that is across the board that we're seeing. And then, you know, the multiproduct it's early days. And I talked about the impact of AI Studio being small for this year. But as we look ahead, and when I think about the contributors to our net bookings for fiscal 2027, AI Studio and AI teammates will play a much stronger role there. So you can count on us to be delivering both for you. I'm gonna hand over to Dan because I think he wouldn't have taken the job if he didn't feel like he could do both. Dan Rogers: Thanks, Sonalee. Maybe I'll just add a little color. And the color really is around, look, number one, collaborative work management. Our category is about to have its moment in the sun because of AI. CWM becomes the system of record for work, which means we've got the who, the what, the when, the where, and the why and the how of the work. And that context is just great to make AI effective. And that's exactly why we launched AI Studio. And why we followed up this quarter with the beta launch of AI teammates. Secondly, the PLG opportunity for us remains massive. Today, it's about 40% of our business. And in an AI search and LLM-driven world, we can double down on those high-performing channels with AI search and really target our marketing dollars towards higher propensity customers. So we're optimizing that trial experience, and we continue to help customers to reach value faster. CWM itself, this is number three, is a large and growing TAM. We have a recognized leadership position. But our work here isn't done. There's a huge runway for us to innovate and expand the surface where work gets done and deliver even more value to our customers. And fourth, and as Sonalee touched on, whilst we've made some progress in our go-to-market motion and efficiency, there's a lot more work to do. So I'll be focusing on everything from persona-based selling, tightening our execution and customer success, improving productivity, through high propensity leads and routing across all of our segments to unlock the potential in our go-to-market motions. And finally, for me personally, you know, my style is really about injecting tempo. It's about creating velocity for the organization, which is around faster decision-making, faster learning cycles, getting to beta faster, and strengthening the operating rhythm of the company. So all of these will lead to an improvement in innovation and execution velocity. Patrick Walravens: Our next question comes from the line of Patrick Walravens of Citizens Bank. Please go ahead, Patrick. Patrick Walravens: Oh, great. Thank you. I'm gonna change my question, Dan, because what you just said was super interesting. So I love the idea of increasing the velocity. How do you actually do it? Like, how do you get everyone to run faster? And, you know, we have all the, you know, code red stuff going on with OpenAI and Google right now, and so many people are commenting that, you know, just telling everyone to run faster doesn't mean it's gonna work. And sometimes, in fact, it backfires. So how do you do it? How do you increase the velocity? Dan Rogers: Yeah. And I'd say, you know, my, fortunately, my prior experiences really were training ground for velocity, you know, high tempo organizations, executing scale. And so it's how I drive myself, but also the organizations. The first piece is around decision-making. And, you know, ensuring that you have a tight way to make decisions quickly with the right people involved and the right information that you need. The second is really a mindset or an operating principle around getting things to beta, and that is about launching new products, launching new capabilities in the knowledge that you're going to quickly iterate on them afterwards. And so it reduces the fear of kind of launching because you know that afterwards you're going to rapidly iterate. If you think about our AI studio self-service experience, this gives us a massive set of data points to continue to improve that product, you know, get it right to the middle of the bell curve. And then having the right operating rhythm so that everybody understands exactly what needs to be done by when and really kind of pushing the pace and the expectations around that with all of our leaders. Those are some of the things that we can kind of inculcate into the culture. Patrick Walravens: Great. Thanks. And, Sonalee, if I can just ask a follow-up. I mean, not with the time frame on it, but, you know, when you talk about multiyear margin expansion and, you know, this company is gonna come up on a billion dollars pretty quick. Where can the margins be? I mean, can they be in the twenties? Where can they be? Sonalee Parekh: Yeah. So when I think about the expansion that we've been driving thus far, you know, it all starts with that 90% gross margin or 89 to 90% gross margin. And the inherent operating leverage there. So think about it. If we continue growing even if like, I'm not gonna guide, but it's just even if you use consensus, you know, just if we kept expenses, you know, fairly flattish in many areas, you would still get consistent, you know, several percentage points of margin improvement every single quarter on a sequential basis. So there is no reason in my mind that we can't, you know, eventually aspire to be among the best in class in terms of enterprise SaaS software companies on margin. I always think, you know, we're the envy of many software companies with the gross margins that we have today. And, you know, even if AI Studio and AI teammates take off the way we hope they do, and there's, you know, a little bit of pressure on the gross margin, there is still a ton of runway. So, something with a two in front of it is certainly within the realm of possibilities. Arsenije Matovic: Our next question comes from Arsenije Matovic of Wolfe Research. Please go ahead, Arsenije. Apologies. Arsenije, your line is now open. Go ahead. Arsenije Matovic: Hey. So sorry. Can you hear me? Dan Rogers: Yes, sir. Arsenije Matovic: Alright. So just thanks again for the question. How did the large tech renewals in March trend versus your expectations given that heavier renewal volume in 4Q? Are you more confident in expansion and retention in 4Q than you were heading into March? And is that also now reflected in the updated guidance? Just a follow-up. Anne Raimondi: So they did perform better than we expected. Yeah. I'll take the Q3 renewals and what we're seeing in Q4. And we were very pleased by that. I think that's a combination of operational rigor on that as well as more product to sell. I think we're bringing that same approach into Q4. In Q4, while we have a higher volume of tech renewals, so continuing to make sure we bring that operational discipline. They're more mid-sized compared to the larger ones that we had in Q3, as well as now with the launch of teammates, you know, even more to sell and more conversations to have. Sonalee Parekh: Yeah. And I'll just add to that. Just on the guidance side of things, when we look into Q4, even though we do have a large renewal base in Q4, as is typical, I would say I am more confident going into Q4 versus where I was when I guided on Q3. Arsenije Matovic: Got it. And just to follow-up on that, you did mention the four factors supporting that confidence as well, but still embedding conservatism on new business. So I guess we just kind of unpack what specifically is supporting confidence in passing through, I think, double the beat in three Q even with that slightly lighter FX tailwind than you expected entering last quarter? Sonalee Parekh: Yeah. So net retention is a big factor there. So, again, you know, it's two consecutive quarters now of in-quarter net retention improvement. And then the gross retention improvement across all cohorts. And importantly, the $100,000 plus cohorts saw the largest improvement among them. So that was even with the headwind from that large customer downgrade that we called out in Q1, but actually impacted from Q2 and will continue to impact for the next couple of quarters. So the fact that, you know, in Q3, we managed to improve in spite of that, you know, that added to my confidence levels. And then, you know, the multiproduct strategy in specifically AI Studio and the foundational service plans or FSPs, those are actively driving expansion and helping to mitigate downgrades. And certainly have been extremely helpful in renewal conversations. And then, you know, there are the other items that I called out earlier, but, you know, we're seeing strength in other areas of our business, including new business. So, you know, the enterprise strength and that mid-market cohort, that $50,000 to $100,000, you know, we don't break it out, but what I can tell you is what I saw this quarter was a lot of strength there. International, I continue to expect to, you know, it's been strong for the last two quarters, expect continued strength. And then even in the enterprise side of the house, we saw, you know, 15% year-over-year increase in customers spending $100,000 or more. And if you couple that with stable demand trends and improvement in conversion, which leads to productivity gains, you end up with a or I ended up with a more confident picture as I look towards Q4 and the full year. Operator: Thank you. I would now like to turn the conference back to Eva Leung for closing remarks. Eva Leung: Thank you everyone for joining the call. We'll be on the road attending the UBS and Barclays Conference this and next week. Looking forward to seeing all of you. As always, if you have any questions, please reach out to me at ir@asana.com. Thank you very much. Operator: And this concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Good day, and welcome to the Pure Storage Third Quarter Fiscal 2026 Financial Results Conference Call. Today's conference is being recorded. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. If you would like to ask a question, please press 1 on your telephone keypad. At this time, I'd like to turn the call over to Paul Ziots, Vice President of Investor Relations. Please go ahead. Paul Ziots: Thank you. Good afternoon, everyone, and welcome to Pure's Third Quarter Fiscal Year 2026 Earnings Conference Call. On the call, we have Charlie Giancarlo, Chief Executive Officer, Tarek Robbiati, Chief Financial Officer, and Rob Lee, Chief Technology Officer. Following Charlie's and Tarek's prepared remarks, we will take questions. Our press release was issued after close of market and is posted on our website where this call is being simultaneously webcast. The slides that accompany this webcast can be downloaded at investor.purestorage.com. On this call today, we will make forward-looking statements, which are subject to various risks and uncertainties. These include statements regarding our financial outlook and operations, our strategy, technology and its advantages, our current and new product offerings, and competitive industry and economic trends. Any forward-looking statements that we make are based on facts and assumptions as of today, we undertake no obligation to update them. Our actual results may differ materially from the results forecasted and reported results should not be considered as an indication of future performance. A discussion of some of the risks and uncertainties related to our business is contained in our filings with the SEC and we refer you to these public filings. During this call, all financial metrics and associated growth rates are non-GAAP measures other than revenue, remaining performance obligations or RPO, and cash and investments. Reconciliations to the most directly comparable GAAP measures are provided in our earnings press release and slides. This call is being broadcast live on the Pure Storage Investor Relations website and is being recorded for playback purposes. An archive of the webcast will be available on the IR website and is the property of Pure Storage. Our fourth quarter fiscal 2026 quiet period begins at the close of business Friday, January 16, 2026. With that, I'll turn it over to Charlie. Charlie Giancarlo: Thank you, Paul. Good afternoon, everyone, and welcome to our Q3 FY '26 earnings call. Thank you for joining us. Pure Storage delivered a strong Q3, continuing to expand revenue growth as customers increasingly look to Pure to solve their most pressing data management requirements. Our results were underpinned by continued strength in enterprise and sustained momentum in our Evergreen One and modern virtualization solutions, which includes CBS and Portworx. During the quarter, we also exceeded our full annual forecast of two exabytes of hyperscale shipments and expect to ship more in Q4. Our strong Q3 performance translates to an increased outlook for Q4 and improved guidance for FY 2026, which Tarek will discuss in his prepared remarks. Our enterprise momentum continues to be driven by the power of the Pure Storage platform, built on our purity operating system, now enhanced with Fusion. Purity delivers the reliability, simplicity, and long-term value that customers depend on to manage their data with confidence. It also powers our evergreen subscription model, the industry's only continuously modern nondisruptive storage experience. With Evergreen One Infusion, customers can build their own modern enterprise data cloud, automating storage, simplifying management, and achieving faster, more efficient, lower-cost operations with zero downtime. Since the beginning of the year, the number of customers deploying Fusion has more than tripled to the mid-hundreds, proof of the platform's momentum and market demand. Data is now increasingly vital because of the promise of AI and requires that customers elevate its role in their technology architectures. While software may have been eating the world in the last decade, it appears that data will be eating the world and potentially even eat software in the next. Since the beginning of modern computing, data has been structured below the applications that create it. It's been locked beneath databases, file systems, and backup systems, each designed for a specific purpose, but ultimately isolating their in silos confined to those services. This application-centric model limits data visibility and mobility. It slows efficiency and innovation and prevents companies from realizing the full potential of their information. Consequently, data is repeatedly copied and to be useful for other applications, such as analytics and AI. Each copy is created and maintained by different individuals by manual processes. With the massive proliferation of data and copies of data, in enterprises managed by manual processes, data is poorly governed. Often overproduced, and highly fragmented. We believe the era of data being subservient to application in data center architecture is ending. Data, the lifeblood of modern organizations, must now take center stage in data center architecture. In a world where artificial intelligence, automation, and analytics are redefining competitive advantage, enterprises can no longer afford to treat data as captive to specific applications. Data must be architected to stand on its own. Self-describing, stateless, and managed globally by policy set in software. The Enterprise Data Cloud makes this possible. It gives organizations the ability to access and leverage all their data. Securely, seamlessly, and in real-time. Regardless of where it originates. With the right authorizations, any application will be able to access integrated pools of data enabling faster insight, more intelligent decision-making, and greater operational velocity in business. By freeing data from legacy silos, the enterprise data cloud lets companies operate with the same flexibility scalability, and efficiency as the cloud itself. Customers who use our PureFusion capability embedded in Purity can now manage their datasets globally with policies embedded in software. Rather than by fingers on keyboards. Enabling storage and data management that is truly defined by software. At our Accelerate Roadshow in New York, and around the world, we extended the enterprise data cloud into Azure with our Pure Storage Cloud. Which enables customers to unify their data landscape across public and private environments. This Azure native service for AVS, enables seamless migration from on-prem VMware environments with enterprise-grade resiliency and efficiency. In New York, we continued rolling out powerful innovations across all three pillars of the enterprise data cloud. First, we expanded our unified data platform with new systems like the XL190. And we improve data reduction efficiency on all our platforms giving customers more capacity and performance on their existing systems. Second, we enhanced our intelligent control plane with an AI Copilot, which simplifies management and automates complex tasks. Making storage operations faster, smarter, and more reliable. Third, we expanded our partner ecosystem to deliver greater value through integrated cybersecurity and data protection. As the pace of our technology advancement accelerates with scale, we expect to continue to gain market share in more and more segments of the data storage and management space. In the quarter, we were recognized in the two most important Gartner Magic Quadrant for our industry. In the enterprise storage platforms Magic Quadrant, Pure was positioned highest for execution and furthest provision. We were also recognized as a leader in the first-ever infrastructure platform consumption services magic quadrant. Additionally, Pure was recognized as a leader in the IDC marketscape on support services globally. Reflecting our strengths in reliability proactive connective support, and our customer-first mindset. Portworx continues to lead the industry in defining storage in the cloud-native Kubernetes and container world. Customers want more flexibility, lower cost, and modern architectures that support cloud flexibility. It's why companies like NVIDIA, SiriusXM, and a major global bank have chosen Portworx. In Q3, one of the world's largest enterprise software companies selected Portworx to overcome multi-cloud fragmentation. They accelerated the deployment of their cloud services across AWS, Azure, Google Cloud, and Alibaba Cloud, ensuring a consistent operational experience enterprise-grade data protection, and high availability. Modern virtualization is a subject in great demand with our customers. Across the industry, three trends are driving this shift. The search for alternatives to expensive legacy virtualization models, the rise of containers in KubeVirt, and the significant increase of AI and machine learning built on Kubernetes. Portworx and our solutions in partnership with Nutanix, Microsoft, Red Hat, and others are leading this transition away from traditional virtualization solutions. Portworx is now becoming practically mandatory for any scaled Kubernetes virtualization deployment. As Kubernetes extends beyond virtualization, to power modern applications and AI workloads, Portworx's role continues to grow. Portworx lets customers run any application anywhere. Securely, efficiently, and up to two or three times lower cost. So they can modernize faster, and operate with greater speed and flexibility. Neo clouds represent another fast-growing market for specialized storage technology. This new generation of specialized high-performance cloud platforms built for AI, machine learning, and other compute-intensive workloads represent a new segment of cloud infrastructure driving new benchmarks for performance and scale. Recently, we published our latest benchmarks for FlashBlade X at supercompute. A leading conference on high-performance computing and AI. FlashBlade Exa delivered data to thousands of GPUs twice as fast as competing systems in less than half a rack. FlashBlade Exa extends the power of our purity architecture to these next-generation clouds, pushing the limits of performance for AI and high-performance computing superior, sustainable throughput and scalability. As we have discussed over the past year, Pure provides a compelling alternative to hyperscalers. Who face mounting hard disk and SSD cost and power constraints. As I stated earlier, we have already exceeded our annual plan for shipments by the '3. But consistent with our statements at our September financial analyst conference, we will not be providing specific information on shipments to hyperscale customers going forward. We will share more information next quarter about the outlook for FY 2027 and the economics of our hyperscale business as it impacts our financials. Turning to the macro environment, we foresee increased commodity pricing and excess demand putting pressure on global supply chains. As in the supply chain crisis of 2021 and 2022, we anticipate both extended component lead times and higher component pricing across the technology industry in the quarters ahead. Pure is well prepared for this challenge with a resilient supply chain a broad global supplier base, manufacturing sites on three continents, and strong business continuity plans. As we've noted a number of times before, given our industry's dynamic pricing environment, the effect of commodity pricing tends to affect our top line more than gross margin. Thus, we would expect higher commodity pricing to positively affect revenue growth. Finally, I am pleased to welcome Pat Finn to Pure as our next chief revenue officer. Pat brings extensive experience in scaling sales and go-to-market organizations within high-tech infrastructure companies along with a proven record of building lasting customer relationships with leading global enterprises. I also want to extend my gratitude to Dan Fitzsimmons for his dedication and contributions to Pure over the last decade, and for his continuing engagement with Pure to maximize our opportunity. His leadership was and is instrumental in expanding our operations advancing our enterprise and commercial strategies, and helping advance Pure from its early days to the global enterprise it is today. With that, I will hand it over to Tarek. Tarek Robbiati: Thank you, Charlie. In Q3, we delivered strong revenue and operating profit results, both exceeding the high end of our guidance range. Revenue of $964 million grew 16% year over year, operating profit grew 17% year over year to $196 million, which is a record for the company and resulted in an operating margin of 20.3%. Our Q3 results demonstrate sustained demand for our differentiated data storage management offerings. Sales across our portfolio remained robust, led by ongoing strength in the enterprise and our hyperscaler business. We also continue to see strong traction of our Evergreen One and modern virtualization solutions which include Cloud Block Store. Our success this quarter continued to be driven by the strength of the Pure platform value proposition across multiple customer segments. Our single operating system, Purity, delivers simplicity and reliability across just two hardware offerings, blades and arrays. We provide the industry's only truly nondisruptive upgrades and the only genuine storage as a service offering to Evergreen One. In terms of data management, no competitor can match the capabilities we are delivering with Fusion and the enterprise data cloud. And with our differentiated direct flash technology, we are able to expand into a large newly addressable hyperscale market where traditional storage system vendors cannot compete. Underscoring this competitive advantage, hyperscaler shipments as of Q3 year to date exceeded our original forecast for fiscal year 2026 of one to two exabytes. We expect momentum in our hyperscaler business to continue in Q4 and obviously for fiscal year 2027. We will not be providing any additional quantitative guidance on our hyperscaler business fiscal year, but we do expect to provide additional color for our next fiscal year at the end of Q4. Product revenue of $534 million grew 18% year over year. As a reminder, our product revenue category now includes royalties that we receive from hyperscale shipments as well as a portion of Portworx software revenue when sold as term licenses. Q3 TCV sales for our storage as a service offerings grew 25% year over year to $120 million. This consistent growth reflects Evergreen One and subscription-based offerings, strong resonance with our customers, by delivering a consistent, nondisruptive operating and management environment. Subscription services revenue in Q3 reached $430 million, up 14% year over year accounting for 45% of total revenue. ARR grew 17% to $1.8 billion while total remaining performance obligations, or RPO, grew 24% to $2.9 billion. RPO encompassing our storage as a service offerings and evergreen subscriptions across our installed base grew 22% exiting Q3. With respect to our geographic mix of revenues, US revenue was $683 million growing 22%, and international revenue was $281 million, growing 4% year over year. Overall, we added 258 new customers our penetration of the Fortune 500 is now 63%. Turning to margins and profitability, total gross margin increased to 74.1%. Subscription services gross margin was 75.5% and product gross margin increased to 72.9%. Growth in product gross margins reflects a stronger mix of higher performance flash arrays a slightly larger proportion of Portworx software sold as term licenses as well as hyperscaler shipments. On a full-year basis, we expect that product gross margins will sit closer to 70% with some variability in magnitude quarter to quarter. Operating profit of $196 million and operating margins of 20.3% in Q3 were both positively impacted by revenue strength and robust gross margins. Our headcount increased sequentially by 104 employees to approximately 6,200 employees. Our balance sheet remains strong with $1.5 billion in cash and investments. Q3 operating cash flow was $116 million our capital investments of $63 million included tests and infrastructure equipment to support data center expansion and funding of Evergreen One subscription growth. In Q3, our free cash flow performance was strong as we generated $53 million of free cash flow a free cash flow margin on revenue of 5.5%. We returned $53 million to shareholders through the repurchase of 600,000 shares and offset roughly 1,000,000 shares in employees award withholding taxes and we currently have $56 million of our buyback authorization remaining. Intend to update you on a new share repurchase authorization at the end of our fiscal year 2026. Now turning to our guidance for fiscal year 2026. Strong Q3 results and higher expectation for Q4 contribute to an increase in full-year revenue and operating profit guidance for fiscal year 2026. For Q4, we anticipate revenue to be in the range of $1.02 to $1.04 billion representing approximately 171% year over year increase at the midpoint. We also expect operating profit to be in the range of $220 million to $230 million representing approximately a 47% year over year increase at the midpoint. As a result of our Q4 guidance, for fiscal year 2026, we anticipate revenue to be in the range of $3.63 to $3.64 billion representing 14.7% year over year growth at the midpoint. This is a 70 basis points increase from our previously provided revenue guidance of 14% year over year growth. We expect operating profit to be in the range of $629 million to $639 million representing approximately a 13.3% year over year increase at the midpoint. This is over a 330 basis points increase from our previously provided operating profit guidance. The projected increase in operating income fiscal year 2026 reflects the strength of our business and the impact of hyperscaler revenues on gross and operating margins. Most importantly, I would like to emphasize and reiterate that beyond fiscal year 2026, we are planning to capitalize on the financial benefits from hyperscaler revenues to continue making significant incremental investments in R&D and sales and marketing in order to sustain our momentum and capture additional profitable growth opportunities in the enterprise aligned with our long-term strategy. As we close fiscal year 2026, will provide guidance for fiscal year 2027 that will factor in these increased investments. In addition, and as foreshadowed by Charlie, we plan to grow our hyperscaler business. In doing so, we will be evaluating additional business model options that may result in changes in gross margin economic for the hyperscaler business in fiscal year 2027 relative to fiscal year 2026. We will also provide an update to the market as we finish fiscal year 2026 and provide guidance for fiscal year 2027. With that, I'll now turn the call back to Paul for Q&A. Paul Ziots: Thanks, Tarek. Before we begin the Q&A session, I'll ask you to please limit yourselves to one question consisting of one part so we can get to as many people as possible. If you have additional questions, we kindly ask that you please rejoin the queue. And we'll be happy to take those additional questions as time allows. Operator, let's get started. Operator: Thank you. If you would like to ask a question, please press Again, to ask a question, press 1. Our first question comes from Amit Daryanani from Evercore ISI. Please go ahead. Your line is open. Amit Daryanani: Yes. Good afternoon. Thanks for taking my question. You know, I guess there's been a lot of focus on memory price inflation across both NAND and DRAM and, you know, some of your product gross margins near 73% don't suggest this is an issue in October. But can you just talk about how should we think broadly both on the direct impact on your P&L from a margin and revenue perspective from this commodity inflation? And then also maybe just touch on the indirect impact you could see from competitors' pricing changes as you go forward. Thank you. Charlie Giancarlo: You bet. Thanks, Amit. Well, you know, as I think many of the analysts who have followed us for many years have come to understand. Is that, you know, in in our market, which has a very dynamic pricing environment, your prices are are set at the time of purchase, and we we compete with other vendors many of whom are cost plus vendors. And as such, the pricing of our systems tends to float more with commodity pricing. What that means is that it doesn't it tends the commodity pricing tends to be a lesser effect on our gross margins and, frankly, a greater effect on the overall market. That is when prices are higher, to the extent that customers require the same amount of of capacity they'll be paying, you know, higher prices on average. So, you know, this is something that customers understand. The sometimes the customers will will buy ahead. But what we expect is that higher prices would generally translate to a rising tide, if you will, in the storage market overall. Of which we'd be a beneficiary. So, yes, 73 is a is a bit high as you're pointing out. You know, our our generally, long term trend, we believe, is in the 65 to 70% range. And, you know, that's the way we'll continue to guide for for the foreseeable future. Paul Ziots: Thank you, Amit. Next question, please. Operator: Our next question comes from Aaron Rakers from Wells Fargo. Please go ahead. Your line is open. Aaron Rakers: I guess maybe building on Amit's question a little bit. I think that the one number stands out to me in this print is like you had a 76% sequential increase in inventory. I'm curious if that is reflective of any kind of strategic purchases. Appreciating, you know, any color you can give us of how much maybe, you know, purchase obligation stands coming out of this quarter? Or does that not necessarily relate to the component pricing environment? Is it more of a reflection of your procurement for your hyperscale customer? Any color there would be helpful. Thank you. Charlie Giancarlo: Well, let me start, and then I'll pass it over to Tarek. We as you may know, Aaron, we don't crow about making about our purchase decisions being ahead or or on the spot market on a quarter by quarter basis. We do believe we've got one of the best supply chain and purchasing organizations, frankly, in our industry. But we're always taking advantage of what of our own internal forecast of what the market will will be like. I'll have Tarek comment on the specific numbers. Tarek Robbiati: Yes, Aaron. Hi. Thank you for the question. Look. We we track and manage levels closely, and there are a couple of drivers in the increase you referred to. First, we had tariff mitigation purchases at the beginning of the year, and, also, the hardware components market is tightening all over world, and we've taken a couple of positions in some key parts to avoid disruption in our supply chain. Which is why you could see that increase. But overall, I would say that our inventory levels at about $46 million in Q3 are low. Compared to the overall size of our business. And, we think that they could stay about the same level moving forward. Paul Ziots: Thank you, Aaron. Next question, please. Operator: Our next question comes from Howard Ma from Guggenheim Securities. Please go ahead. Your line is open. Howard Ma: Great. Thank you for taking the question. If we make an estimate for hyperscaler shipments in the quarter, the implied product gross margin, I believe, was still quite strong and perhaps a a notable sequential uptick. So my question is, was there a continued mix shift to higher end products in the quarter? And what is your ability to maintain this level of product gross margin in coming quarters especially when considering potential sales to to Neo Cloud, Sovereign Cloud that I believe probably will carry lower gross margin. Tarek Robbiati: Yes, Howard. Thank you for the question. It's Tarek here. There are three vectors that drive the overall product revenue gross margin. Number one, the product mix in itself. And we did see higher and greater configs being bought by customers in Q3, and this is usually good news for product revenue gross margins. The second element that drives the product gross margins is, to a large degree, purchases of Portworx licenses that are purchased on a terms basis. Sometimes customer choose term licenses instead of subscriptions, and we did recognize some ports revenue in, product revenue this quarter in Q3. Thirdly, obviously, there is a contribution from hyperscalers revenue, which we recognized in Q3, as, we mentioned earlier on we exceeded the prior goal of one to two exabyte, shipments for fiscal year 2026. Q3 year to date, we already attained that goal and we can see some additional growth in Q4 and beyond that point. Paul Ziots: Thank you, Howard. Next question, please. Operator: Our next question comes from Mike Cikos from Needham and Company. Please go ahead. Your line is open. Matt Galitri: Hey, guys. This is Matt Galitri on for Mike Cikos over at Needham. Thank you for taking our questions. I'm wondering how early feedback has been on the enterprise data cloud with Pure Storage Cloud and and how this expanded offering is impacting the way that customers are approaching their storage architectures? Charlie Giancarlo: Yep. It's still early days. We're in the first year and in but the response has been extraordinarily positive. We are seeing a lot of demand for placement or for the feature to be placed on the systems that already exist. That they have to go through a software upgrade to do that. And since the release of what we call our long-lived or enterprise release, which, of course, some of the larger companies will wait for. Since that time, it's been expanding very rapidly. So and now that we've released the Pure Storage cloud, which is effectively if you remember our cloud block store, it's effectively Cloud Block Store, but but, complete cloud native in Azure and managed by us. So it is, in fact, a cloud service. And it's part of the enterprise data cloud. So now customers can very easily manage their global estate, including what's in Azure now on on on Pure Storage Cloud under the EDC umbrella. So, you know, this is we believe this is part of what's driving customers in our direction. You you saw our growth this quarter. Well above the industry as a whole. We think that the the vision and the capabilities that we're bringing with enterprise data cloud is a significant portion of that. Rob Lee: Yeah. And, Matt, this is Rob. Just to add on to what Charlie said. Know, I think one of the things that's been quite notable in terms early customer feedback with Fusion PureFusion and Enterprise Data Cloud is both not only how positively it's being received, but how it's being by multiple persona sets within our customer base. As we've discussed, you know, in prior calls, we have historically, you know, interacted with subject matter experts storage administrators, and and the like, within our customer, states. You know, that group of customers, you know, really know, is gravitating towards storage automation, the ease of you know, performing operational tasks that used to be quite manual, nature. But as we further articulate the enterprise data cloud vision, we're now having very meaningful conversations you know, chief information security officers, CIOs, folks that are really recognizing the benefits of governance, you know, data security, data provenance, that we can go and deliver. So, you know, as Charlie's mentioned before, one of the things that enterprise data cloud is allowing us to do is now have much more strategic interactions with our largest and and most valuable customer. Paul Ziots: Thank you, Matt. Next question, please. Operator: Our next question comes from Samik Chatterjee from JPMorgan Chase. Please go ahead. Your line is open. Samik Chatterjee: I know you're not guiding quantitatively to the hyperscale or sort of outlook here for, next year. But, wanted to see if you can give us a sort of update on what the engagements with the hyperscalers beyond the first customer that you have are progressing. And when you talk about in further investments to capitalize on those revenue opportunities, if you could flesh that out a bit in terms of these investments in sort of more product SKUs? Or what are the nature of these investments that you're looking to ramp into next year? Thank you. Rob Lee: Yeah. Samika, this is Rob. I'll take that one. Look, you know, as we continue to progress with our existing hyperscaler customer and and you know, work with additional ones. Those activities are are progressing well. You know, we continue to be engaged with majority of, let's say, the top 10 hyperscalers in one way or another. With multiple proofs of concept that, you know, being undertaken you know, and and and are underway. You know, as we look at, you know and I think the second part of your question, correct me if I'm wrong, was areas of investment that we'd be looking at across the board. You know? So, certainly, you know, we have continued investments we've discussed around our direct flash road map, driving greater densities that continue to allow us to penetrate you know, wider swath of price performance tiers. But then as we look at the enterprise portfolio as well, when we look at you know, delivering on the enterprise data cloud vision, if we look at you know, AI, what we're doing with FlashBlade Exa, there's a number of areas where, you know, we'll be directing that continued investment to drive growth in not just the hyperscaler, of the market, our enterprise market, but also, AI and and NeoClouds. Paul Ziots: Thank you, Samek. Next question, please. Operator: Our next question comes from James Fish from Piper Sandler. Please go ahead. Your line is open. James Fish: Hey, guys. Could the increase in memory cost actually lead to a change on on the demand dynamics between essentially your your OpEx and your CapEx model? In your view? And can you just remind us or walk us through every you know, percent or two or 10% increase in in commodity costs, especially on the flash side? What that, you know, leads to in terms of that revenue versus gross margin delta that you guys are saying, like, hey. It doesn't impact as much. I get why. Just just trying to understand the magnitude here. Thanks, guys. Charlie Giancarlo: Yeah. So let me take a stab at part of the the question. Generally, we do when economics in the market change, whether that's, interest rates or, you know, changes in expectations, on the, pricing side, you're going to see shifts between Evergreen One and the and our cap you know, the the traditional product purchase. So I would expect it. Now we've been fooled before, to be honest. But but I would expect it to that increasing prices to drive more relatively more customers towards the Evergreen one model. The other part, though, I I would say is that because we have longer depreciation cycles on the Evergreen one model, it really isolates or insulates us quite a bit from spot pricing in the in in the commodity market. So, you know, I think it again, that's another place where we're also able, as you may recall, to use existing and returned equipment that has been renovated in the ever green One model. So there's always a mix of new and and existing and and and renovated product that goes into the Evergreen One environment. Again, that isolates us, if you will, from from spot pricing. Paul Ziots: Thank you, Fish. Next question, please. Operator: Our next question comes from Simon Leopold from Raymond James. Hi. This is Victor Chew in for Simon Leopold. You noted in your prepared remarks that scaling the hyperscale business, you know, you could could change the gross margin dynamics. Can you expand on this a bit? I'm presuming that you're expecting a, you know, a structural expansion. A shift in gross margin, you know, as you scale that business up. Can you help us understand kind of the leverage around that and and what your expectations would be, based on what you know, you're expecting for next year. Tarek Robbiati: Alright. So first of all, I would say you have to look at product gross margins excluding hyperscalers We guided in the past that our typical product gross margin range is between 65-70%. If you think about the nature of what we sell to hyperscalers, right now, we recognize only software licensing revenue, which is very high gross margins. As we said on prior occasions, this is a 90 plus percent gross margin revenue stream, and therefore, as you combine the two traditional products revenue and software licensing revenue, this has a very positive impact on gross margins moving forward. Having said that, I also said in my prepared remarks that we are exploring new and different revenue models with hyperscalers. In addition to recognizing the net revenue, we may think, in thinking right now that in the future, we will be recognizing a different type of revenue streams and licenses, and this would have a impact on the gross margin economics of their revenue stream moving forward in fiscal year 2027. I will update you about this in our Q4 call. So for the moment, no change. Thank you, Victor. Paul Ziots: Next question, please. Operator: Our next question comes from Wamsi Mohan from Bank of America. Please go ahead. Your line is open. Wamsi Mohan: Yes. Thank you so much. I was wondering, when you look at sort of your overall results, you obviously exceeded your forecast of one to two exabytes at at hyperscalers, which should be coming in at at very high margin. But you have the lowest magnitude of of earnings beat in in a while. And so we think about that, probably, it's coming from the higher investments that Tarek alluded to. And and so as we think about this, you know, sustaining into fiscal 2027, does it really mean that we're going to see a year where potentially operating margins could be down year on year, want to understand, Tarek, you really seem to emphasize that point and and just wanna make sure that we walk away with the right conclusion around trajectory of of margins. You so much. Charlie Giancarlo: Well, Wamsi, let me start, and then I'll hand it over to Tarek. You may recall that as we entered this year, we actually guided to a flat operating margin business for for the year. At you know, in anticipation of higher investment in the hyperscale business that was yeah. Without a full understanding of what the revenue would look like in that you know, from from the hyper business. As we are here sitting today, it is a substantial increase over our original guide. So we're coming in we'll be coming in. Our expectation is higher than than our original guide which is a positive which which is very positive. And we stay committed to continuing to increase operating on a year over year basis. So that that shouldn't that shouldn't be in it under there shouldn't be any question of that at all. Tarek Robbiati: Derek, do want Yeah. No. Thank you, Charlie. Wamsi, I'd say, the following to you. First of all, with respect to fiscal year '26, the new guide implies a pretty substantial growth in in operating profit. I mean, if you really look at it on a year over year basis in Q4, at the midpoint, the operating profit growth implied is 47%. When I joined Pure, almost six months ago, we observed that there were several opportunities in the enterprise space that we wanted to capture, and we can see substantial growth there. We intend to continue to deliver the levels of growth that you're seeing in in in Q3, in Q4 with the guidance that we implied, but also that into fiscal year 2027. But to go after that growth, we have to make some investments in '2 earnings call, we changed our guidance philosophy to guide on operating profit growth with a range as opposed to a single operating profit margin figure. However, you know, as Charlie mentioned, we continue to expect operating profit to grow beyond fiscal year 2026 And, yes, you can expect a degree of, operating profit margin expansion in fiscal years beyond fiscal year 2026. Paul Ziots: Thank you, Wamsi. Next question, please. Operator: Our next question comes from Eric Woodring from Morgan Stanley. Please go ahead. Your line is open. Eric Woodring: Great. Thank you so much for taking my questions, guys. I'm going to go back to the kind of memory questions that a lot of us are asking. And Charlie, I would just love to get your opinion on why demand why or if demand elasticity in your markets could be different this time versus 2017 or '21? I'm just trying to think of looking back at memory cycles, it's clear that you were able to kind of pass this pricing through. Could that be an inhibitor to market demand this time around? And if so, why or why not? Thank you so much. Charlie Giancarlo: Yeah. It's actually a great question, Eric, because obviously, the two factors go together, right, which is to say that just because prices go up doesn't mean that customers have an unlimited ability to pay. And so demand may go down. What we've seen overall, though, you know, in the years and you're you're right. 2037, '20 roughly 2021 was that that commodity pricing tended to to have a much greater effect on the top line, or you might think of it as the overall market size or growth in the in the flash storage industry than it did at least on our gross margin. Overall. We're we're able to manage the gross margins actually quite well. And part of that is because we do compete with the event with competitors that that largely sell on a cost plus basis, and that tends to then float pricing along with with commodity prices. There's not much more than that. You're right. It could constrain demand a little bit from a overall terabyte standpoint. But the dollar generally, dollars you know, continue to scale along with commodity pricing. I think the the main thing, of course, is with AI, yeah, we are seeing more demand for data just in general, and data has become and data architectures you know, have become more top of mind. For our customers. So I don't see I I think that will continue. Even though, as you point out, you know, budgets are not necessarily unlimited. Paul Ziots: Thank you, Eric. Next question, please. Operator: Our next question comes from Krish Sankar from TD Cowen. Krish Sankar: Yes. Hi. Thanks for taking the question. And Derek, I understand you're going give us more color on the next earnings call regarding the hyperscaler business model shift. I'm just curious from the economics of this opportunity standpoint, is the rising NAND prices one of them catalyst solutions where the hyperscalers don't wanna deal with the volatility? Or in other words, if two years from now, if NAND prices do crash, will the business model again shift? Charlie Giancarlo: I I would say prob let me jump in. I would say that's at the moment, that doesn't seem to be a a big factor in this. I would say that we're just seeing different different hyperscalers have different points of view as to how they'd like to purchase. And given that, there's gonna be a a different a different mix of options that carry different cogs associated with it. And that's that's going to be a a large part of us having a somewhat more mixed and nuanced model in the hyper hyperscale business. It it is certainly true that the the hyperscalers, in some ways, would rather be more insulated from commodity prices. But there's only so much that we could do some of that, but but we can only do so much of that. Paul Ziots: Thank you, Krish. Next question, please. Operator: Next question comes from Asiya Merchant from Citi. Please go ahead. Your line is open. Asiya Merchant: Great. Thank you for taking my question. Charlie, at the Accelerate event in New York, I think I asked about the Neo Cloud opportunity, and I think the response there was a it's a little bit more you know, nuanced and relative to the size of the hyper opportunity, of course. And and can you just double click a little bit about how you're thinking? Has that thinking changed about how you're looking at the Neo Cloud opportunity ahead? And it doesn't relate to any of your product offerings? Lately. Thank you. Charlie Giancarlo: Thank you, Asiya. We try to be very structured in terms of how we qualify hyperscale opportunity and how we qualify, for example, Neo Cloud and and AI opportunity. And and let me just repeat that. And then I'll go directly to your answer. So when we sell into the hyperscale into their traditional structured storage environment. Much of which is used for AI, but it's not specialized for AI. We discussed that as being the hyperscale opportunity. When we sell specialized product that's designed specifically for AI, which comes under our FlashBlade product traditionally and typically the FlashBlade S, but now the FlashBlade Exa. And that that is what's typically sold into the Neo Clouds. Sovereign clouds, and other AI environments. We discussed that as being the AI our AI market. So just to put those two in a make that clear because a lot of the product that we will be selling into hyperscale, despite the fact that it's going into their standard storage environment, will be used for their AI systems. In fact, they tend not to buy specialized product for in the storage space for AI. So so in that sense, it's not nuanced. You know, obviously, we're a little bit further along if you will, on, you know, on having you know, really scaled, sales into the the the AI environment. We've been selling FlashBlade S now for for five years. You know, we we have hundreds of of directly tied to GPUs for AI. With FlashBlade Exa now, they can scale to even larger sizes. And we're seeing good good interest right now in FlashBlade Exa. In the Neo Cloud environment. So does that does that answer your question, Asiya? Paul Ziots: We'll take that as a yes. And Okay. Next question, please. Operator: Our next question comes from Eric Martinuzzi from Lake Street Capital. Please go ahead. Your line is open. Eric Martinuzzi: Yes. I wanted to based on the investment comments that you had, Derek, around the R and D and sales and marketing, Just for those of us modeling at home, that mix the skewing of the investment, just curious to know if there's an expectation that next year would be significantly different than this year. In other words, based on my math, I've got about 34% of your non-GAAP operating profits in the '26. And 66% in the '6. Is the expectation that, that would skew abnormally in FY 2027 such that it would be more back half loaded? Tarek Robbiati: Look. And it's we're still in the middle of our planning cycle, and we have yet to give guidance for fiscal year '27, and we'll do so in Q4. But I think the the the point to take away here is that we would like to continue to grow to the levels that we're witnessing right now in fiscal year 2026 into fiscal year 2027, and beyond. And, therefore, this growth comes at a cost and this is in R&D, in sales and marketing, and in back office system operations. But if you are looking at the various OpEx lines as percentage of revenues, they won't be. Material disruption to the levels you're you're seeing today in R&D, sales and marketing, as percentage of revenues. But the dollars overall will increase. Thank you, Eric. We have one This will be the last question coming up next. Operator: Our last question comes from Mehdi Hosseini from Susquehanna. Please go ahead. Your line is open. Mehdi Hosseini: Yes. Thanks for squeezing me in. Charlie, wanna go back to that two exabyte shipment. When I look at the overall size of the enterprise SSD market, tracking close to about 400 exabyte. And my question to you is, what would be need to happen for you to scale and actually account for one or 2% of the exabyte shipment, especially given the fact that hyperscalers are driving the growth for enterprise SSD demand? And let me know if my question is not clear. Charlie Giancarlo: Well, I think I I understand what you're asking. Would is what it what would it take for us to continue to grow in the hyper business and become a much more substantial portion of their overall, storage per purchases, which today is hard disk and and SSD. You know, our our our view is that we provide a superior solution in both environments. That is hard disk and SSD. And now, of course, the design cycle within the the within the hyperscalers is quite long. You have to, first of all, meet the beginning of their design cycle, and then their design cycle is about two years. And so and we are a different to be clear, we don't opt in the same way as an SSD or a hard disk. And therefore, it requires a change in their in their technology and operating process. That being said, as Rob mentioned earlier, we're in a lot of POCs. We're in a lot of engineering meetings with the majority of the top 10 hyperscalers. The the value that we provide in the in the area of power and space reduction, in the area of performance increase, and inconsistency, consistency because whether it is the lower performance, low price, range, or the high performance, and therefore, higher price range, we we provide them a single solution from a software perspective that doesn't require them to modify their operating systems. These are all very powerful incentives for them to make that investment and make that change. So know, our belief is that over time, obviously, we're going through right now a supply chain crunch that is that the the hyper scalers are seeing that supply chain crunch in every form of memory. And every form of storage now is basically on back order. And when we see that, it it does give us an opportunity to get in, but we think that when that when supply chains come back to normal, which always occurs, there's always a reversion to the mean, it will have us be in place with superior economics and performance. So you know, we we do believe that we can, continue to take share. And become a significant portion of hyperscaler storage environments. Rob Lee: Yeah, buddy. I I would just set it out to three things. Right? One is making our existing customer successful in the environment and tier that we've been designed into. Two is expanding our offering and value to multiple tiers of price performance. And three is expanding the reach of our technology into other firms. So Charlie, talked about a lot of the process and and steps along that path where pursuing it afoot and but that's how I think about, you know, what are the unlocks and what are the drivers to get there. Paul Ziots: Thank you, Mehdi. Charlie has some concluding remarks. Charlie Giancarlo: Yeah. I wanna thank you and thank everyone for joining us today. Data is now becoming, we believe, the primary engine that gonna drive economic growth in the decades ahead. It needs to be elevated to be useful and available to for a wide range of uses. And the Enterprise Data Cloud makes that possible. It gives customers a unified and virtualized way to control their global data state with the reliability and the simplicity that we, Pure, are known for. So once again, as always, I wish to thank our customers, partners, our suppliers, our employees, and our investors. Your consistent support drives our success. Operator: Thank you. That concludes the Pure Storage third quarter fiscal 2026 financial results conference call. Thank you for your participation. You may now disconnect your line.
Operator: Ladies and gentlemen, thank you for standing by. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Box, Inc. Third Quarter Fiscal 2026 Earnings 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. If you would like to ask a question during that time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star 1 a second time. Thank you. And I would now like to turn the conference over to Cynthia Hiponia, Vice President of Investor Relations. You may begin. Cynthia Hiponia: Good afternoon, and welcome to Box, Inc.'s Third Quarter Fiscal 2026 Earnings Conference Call. I am Cynthia Hiponia, Vice President, Investor Relations. On the call today, we have Aaron Levie, Box Co-Founder and CEO, and Dylan Smith, Box Co-Founder and CFO. Following our prepared remarks, we will take your questions. Today's call is being webcast and will also be available for replay on our Investor Relations website. Supplemental slides are now available also on our website. On this call, we will be making forward-looking statements, including our fourth quarter and full-year fiscal 2026 financial guidance, and our expectations regarding our financial performance for fiscal 2026 and future periods, including gross margins, operating margins, operating leverage, future profitability, net retention rates, remaining performance obligations, revenue and billings, and the impact of foreign currency exchange rates and deferred tax expenses, and our expectations regarding the size of our market opportunity, our planned investments, future product offerings and growth strategies, our ability to achieve our revenue, operating margins and other operating model targets, the timing and market adoption of and benefits from our new products, pricing models, and partnerships. Our ability to address enterprise challenges, enhance our product capabilities, and deliver cost savings for our customers, the impact of the macro environment on our business and operating results, and our capital allocation strategies, including potential repurchase of our common stock and settlement of our convertible debt. These statements reflect our best judgment based on factors currently known to us, and actual events or results may differ materially. Please refer to our earnings press release filed today, and the risk factors and documents we file with the Securities and Exchange Commission, including our most recent quarterly report on Form 10-Q, for information on risks and uncertainties that may cause actual results to differ materially from statements made on this earnings call. These forward-looking statements are being made as of today, December 2, 2025, and we disclaim any obligation to update or revise them should they change or cease to be up to date. In addition, in today's call, we discuss non-GAAP financial measures. These non-GAAP financial measures should be considered in addition to and not as a substitute for or in isolation from our GAAP results. You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP results in our earnings press release and in the related supplemental slides, which can be found on the IR page of our website. Unless otherwise indicated, all references to financial measures are made on a non-GAAP basis. Thank you. With that, let me turn the call over to Aaron. Aaron Levie: Thanks, everyone, for joining us today. Building on the momentum and strong results we delivered in the third quarter of 2026, revenue exceeded our guidance, growing 9% year over year and producing operating margins of 28.6%. We drove a net retention rate of 104%, ahead of our expectations of 103%, driven by both price per seat increases and seat expansion. Our ongoing strategic investments in go-to-market and products are driving growth, reflected in our Q3 billings growth of 12% year over year and RPO growth of 18% year over year. Our strong financial results clearly demonstrate that our intelligent content management platform is building momentum in the market. Just a few weeks ago, I met with dozens of CIOs and IT leaders in New York. What struck me was how the conversations have evolved over time, where the vast majority of these discussions now focus on new use cases for Box, around using AI agents for extracting structured data and insights from documents, using AI agents to automate knowledge worker tasks, or leveraging AI agents to democratize access to expertise across their organizations. The full power of AI agents is delivered when you can begin to augment knowledge worker tasks with infinitely scalable automation. But as companies try to do this, they quickly come to the same conclusion. The key to success is ensuring agents have access to the right data, in the right format, and can process it effectively and securely at scale. When trying to solve this problem, most enterprises experience how difficult this can be. Enterprises are understanding that not only do you have to excel at everything required for AI on unstructured data, which could mean combining and keeping up with dozens of different technologies, you also need a platform that can handle the security, compliance, access controls, creation, sharing, and storage of all of this enterprise content. The problem is only getting harder as more platforms emerge that need to talk to the same unstructured data assets. You cannot easily replicate your files across agentic systems like Salesforce, Google, ChatGPT, ServiceNow, and hundreds of other platforms, all of which have different security and governance models, access controls, and more. Companies will increasingly need a trusted AI platform to manage their most important enterprise content that can work with all of their agentic AI platforms. This is what we are building with the Box AI platform. Box is the secure, neutral AI content platform for the most important enterprise content. It is the single source of truth that connects AI models and agents, prevents the content sprawl and security risks of DIY solutions, and ensures data governance and compliance. Best of all, we integrate with OpenAI, Google, Anthropic, AWS, IBM, and more, so customers can use any model without fragmenting their enterprise content. As we have shared, we introduced Enterprise Advanced less than one year ago to bring together our full suite of powerful AI intelligent workflow automation capabilities. Enterprise Advanced continues to drive both upgrades and new logo wins across verticals, segments, and geographies. Examples in Q3 include a leading financial services organization that upgraded from Enterprise Plus to Enterprise Advanced to improve management and search across repositories, including an archive of historical records. By using Box apps and metadata extraction, the organization is streamlining workflows in claims management, HR, legal, member services, and migrating nonmember documents from legacy systems to Box. This supports AI-assisted research into over a century of corporate history and provides updated interfaces for data management. A leading international law firm, an early adopter of Enterprise Advanced in 2025, expanded its use of Box by hundreds of seats in Q3. Driven by Box's proven ability to deliver secure solutions and AI-driven workflows, our platform will support projects with government clients requiring FedRAMP high compliance, enabling lawyers to collaborate securely and efficiently on sensitive matters. Finally, a leading renewable energy company in EMEA, a new logo for Box, chose Enterprise Advanced to modernize its document management and collaboration processes across multiple departments, including legal, compliance, security, and IT. By implementing Box, the company aims to streamline document workflows, improve metadata management, and enable secure external collaboration with partners and regulators. To build on the momentum we are seeing with customers, we recently announced a new set of next-generation AI agent and automation features at BoxWorks to drive intelligent workflows in the enterprise. This included Box Extract, a data extraction solution powered by AI agents that delivers accurate data and insights from a multitude of content types, including documents, presentations, images, and more. This new capability allows enterprises to easily extract any structured data and insights from their unstructured documents, from contracts and invoices to healthcare records to insurance claims and more. We also announced Box Automate, an agentic workflow automation solution designed to orchestrate work across agents and teams. Box Automate allows customers to design sophisticated workflows, leverage their content in Box, as well as connect to other systems via APIs to power any end-to-end document workflow. Additionally, we announced powerful AI capabilities for Box apps, our no-code solution for quickly building content apps that will continue to get major product upgrades that enable our customers to power more advanced business processes on Box. We announced Box Shield Pro, a powerful new suite of security capabilities powered by AI, allowing customers to automatically apply AI-driven classification, accelerate threat response with agentic insights, and proactively strengthen their security posture against an evolving threat landscape like ransomware attacks. As we have seen, the rate of innovation continues to accelerate from AI model providers, and Box is quickly evaluating and enabling updates for our customers to access the latest features and models directly in Box. We have announced integrations for the newest models from Mistral, Anthropic, OpenAI, and Google, including being a day-one launch partner of GPT 5.1, Gemini 3, and 4.5. We have added support for OpenAI's agent kit so customers can bring Box content into their agentic workflows. Made Box AI available in Gemini Enterprise through the Google Cloud Marketplace, and introduced support for Slack's new work objects to bring Box's intelligence capabilities directly into Slack conversations. We have also strengthened our long-term strategic partnership with AWS with a recent announcement of a multiyear AI collaboration agreement to transform agentic AI capabilities on enterprise content. Box will become available in the AWS Marketplace to streamline procurement and accelerate the value of both platforms. We are incredibly excited about this partnership and our ability to bring the Box and AWS platforms together more deeply. Now looking forward, in Q4, we are going to be focused on delivering against the major announcements we shared at BoxWorks. In particular, I am incredibly excited for the upcoming release of Box Extract. Enterprises are awash in unstructured data that they can now tap into for the first time with AI agents processing and extracting relevant data from these documents. Box Extract makes this easier than ever. We will also be releasing other major updates to Box AI agents in Box, including an all-new centralized experience where you can interact with any AI agent from Box from one central location, allowing you to use AI agents to find relevant data or answers in Box or handle much more complex work on content in Box. We will also be upgrading Box AI Studio to support improved agent capabilities, like attaching existing knowledge to agents and streamlining the agent creation flow to make it easier for anyone to build their own agents in the enterprise. Turning to go-to-market, we are driving the adoption of Enterprise Advanced and continue to see pricing improvements for Enterprise Advanced over Enterprise Plus at the higher end of our 20 to 40% target. Our focus has been and will continue to be on driving adoption of our AI-powered solutions in Enterprise Advanced, including custom Box AI agents, Box apps, and looking forward, Box Extract, and Shield Pro across our customers' workflows. Our market positioning emphasizes Box's unique strength as a trusted platform for unstructured data with built-in AI governance and security. We are continuing to double down on our Enterprise Advanced sales motion, driving more emphasis across key verticals like financial services, life sciences, government, professional services, and more. Our partner-led business is a critical part of our strategy as we power more advanced verticalized solutions for customers. We saw continued momentum with partners, delivering double-digit revenue growth in partner-led wins. These wins include, in Q3, a leading global automotive company that upgraded from Enterprise Plus to Enterprise Advanced to centralize its expanding design ecosystem and replace over 75 fragmented content repositories. A leading housing administrator in EMEA partnered with Deloitte and Box to modernize its digital housing and tenant communications. Box powers the solution for managing documents and inquiries from housing applicants, tenants, and affiliated organizations, improving efficiency and collaboration. We also launched a new partnership with Tata Consultancy Services, one of the world's largest systems integrators, to deliver AI-powered content management solutions to accelerate digital transformation. By combining Box's intelligent content management platform with TCS's global scale and industry depth, we expanded our reach across key industries, from financial services and healthcare, manufacturing, retail, and the public sector. Before I turn it over to Dylan, let me update you on how we are expanding an AI-first approach at Box, using Box AI as customer zero. As I have shared before, we are focused on Box becoming the leading AI-first company, and we want to use AI agents to augment our productivity, increase our capacity, and better serve customers. For instance, in go-to-market, we have purpose-built Box AI agents that streamline each step in a sales or customer success process. We have a research agent that analyzes the prospect's goals and challenges, maps them to Box capabilities. A discovery agent recommends the best use cases for a customer type using win-loss signals from past deals. Coaching agents give reps tips after every customer interaction and more. In customer success, a feature adoption agent suggests use cases, target personas, and enablement materials to boost adoption. All of these agents free up our sales and support teams to serve more customers and with greater personalization. This is just in go-to-market. Across Box, we are doing the same in our HR and recruiting workflows, IT organization, legal, and compliance, and product management and engineering. Outside of Box AI, for instance, in engineering, we are leveraging Cursor to accelerate our product development velocity, and we are expanding AI-assisted coding across the code base to ship features faster. AI is the biggest shift in work that we have ever seen in our lifetimes. Boxers are embracing the opportunity to demonstrate to our customers they can transform how they work with content and AI. We are seeing customers discover new use cases that tap into the value of their data, made possible with our intelligent content management platform. With that, I will hand it over to Dylan. Dylan Smith: Thanks, Aaron. Good afternoon, everyone. In Q3, we delivered another strong quarter with revenue, billings, and operating margin all exceeding our guidance. This outperformance was the result of continued execution against our FY 2026 priorities, investing in key go-to-market initiatives and enhancing the AI capabilities of our intelligent content management platform, generating efficiencies across the business, and executing on our disciplined capital allocation strategy. We delivered Q3 revenue of $301 million, above the high end of our guidance. This represents 9% year-over-year growth with sequential acceleration to 8% year-over-year growth in constant currency. We now have more than 2,000 customers paying us at least $100,000 annually, up 7% year over year. Suites customers now account for 64% of our revenue, an increase from 59% a year ago. We ended Q3 with remaining performance obligations, or RPO, of $1.5 billion, growing 18% year over year and up 19% in constant currency. Short-term RPO grew 14%, both as reported and in constant currency. This growth is being fueled by strong customer demand for AI, resulting in a pronounced upgrade cycle and longer contract durations. We expect to recognize roughly 55% of our RPO over the next twelve months. Q3 billings of $296 million were up 12% year over year, both as reported and in constant currency, driven primarily by strong bookings in the quarter. Billings growth exceeded our guidance of approximately 10% and includes an FX headwind of approximately 220 basis points versus our prior expectations. We ended Q3 with a net retention rate of 104%, up from 103% in Q2 and 102% in the year-ago period. This trend is being driven by strong Box AI and Enterprise Advanced momentum, resulting in accelerating bookings and lower dollar churn. We continue to see improvements in both seat price and seat expansion. We now expect to exit FY 2026 with a net retention rate of 104%, one point higher than our previous expectations. Q3's gross margin was 81.7%, exceeding our guidance of 81%. Excluding the tailwind from data center equipment sales in Q3 of last year, this represents an increase of 50 basis points year over year. We delivered Q3 operating income of $86 million and an operating margin of 28.6%, exceeding our guidance. In Q3, we delivered EPS of $0.31, in line with our guidance. This includes a headwind of approximately $0.15 from FX versus our prior guidance. I will now turn to our cash flow and balance sheet. In Q3, we generated free cash flow of $61 million and cash flow from operations of $73 million, up 717% year over year, respectively. We ended Q3 with $731 million in cash, cash equivalents, restricted cash, and short-term investments. Turning to our share repurchase plan, in Q3, we repurchased 2.4 million shares for approximately $77 million. As of October 31, we had approximately $35 million of remaining buyback capacity. Additionally, our Board of Directors recently authorized a $150 million increase to our share repurchase program. Before turning to guidance, I wanted to address our $250 million of convertible notes due to mature on January 15, 2026. At that time, we intend to settle the outstanding convertible debt principal with cash. With that, let me now turn to our Q4 and FY 2026 guidance. As a reminder, approximately one-third of our revenue is generated outside of the U.S., with roughly 65% of our international revenue coming from Japan. Since we last provided guidance, the U.S. Dollar has strengthened versus the yen, and the following guidance includes the expected impact of FX, assuming current exchange rates. For the 2026, we expect Q4 revenue to be approximately $304 million, representing approximately 9% year-over-year growth or 8% in constant currency. We anticipate our Q4 billings growth to be in the low single-digit range, including an expected tailwind from FX of approximately 70 basis points. We expect Q4 gross margin to be approximately 82%. We anticipate our Q4 non-GAAP operating margin to be approximately 30%. We expect our Q4 non-GAAP EPS to be $0.33. Weighted average diluted shares are expected to be approximately 147 million. For the full fiscal year ending January 31, 2026, we are proud to have delivered strong year-to-date results driven by customer demand for our enterprise-grade AI capabilities, translating into the momentum we are seeing in Enterprise Plus and Enterprise Advanced. As a result, we now expect our full-year revenue to be approximately $1.175 billion, representing approximately 8% year-over-year growth or 7% in constant currency. Adjusting for currency movements, this represents an increase of approximately $5 million versus the midpoint of our prior guidance. We expect our FY 2026 billings growth to be in the 9 to 10% range. This includes a tailwind of approximately 130 basis points from FX, 100 basis points lower than our previous expectations. Adjusting for currency movements, this represents an increase of 150 basis points versus our prior guidance. We expect FY 2026 gross margin to be approximately 81%. When adjusting for the tailwind from data center equipment sales last year, which also flows through to operating margin, this represents a year-over-year improvement of 40 basis points. We expect our FY 2026 non-GAAP operating margin to be approximately 28%, including a tailwind of approximately 10 basis points from FX. We now expect FY 2026 non-GAAP EPS of approximately $1.28, including an expected tailwind of approximately $0.02 from FX. This represents an increase of $0.01 versus the midpoint of our prior expectations and an increase of $0.03 normalizing for currency movements since our previous guidance. Weighted average diluted shares are expected to be approximately 149 million. We are proud of the strong results we delivered in Q3, with demand for Box AI and adoption of Enterprise Advanced driving an acceleration in top-line metrics. With our ongoing strategic investments in go-to-market initiatives and our intelligent content management platform delivering strong returns, we are well-positioned to capitalize on the opportunity ahead while delivering significant long-term shareholder value. With that, Aaron and I will be happy to take your questions. Operator? Operator: And we will now begin the question and answer session. If you have dialed in and would like to ask a question, please press 1 on your telephone keypad to raise your hand and join the queue. If you are called upon to ask your question and are listening via speakerphone on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Again, it is 1 if you would like to join the queue. Our first question comes from the line of Matt Balik with Bank of America. Your line is open. Matt Balik: Great. Thanks for the question here. I wanted to ask kind of a high-level question. Kind of turning back the clock to the March Analyst Day where you outlined several growth levers that you would be able to use to get to that 10 to 15% growth target over the long term. I guess, since March, could you comment directionally on how you are feeling about each of those growth levers as contributors? Are we ahead of schedule, kind of in line? How should we think about that? Aaron Levie: Yeah. So if you look back at a lot of those growth levers, I would say that certainly, all of those are tracking quite well. The adoption, just the timing of when we started to see the impact of Enterprise Advanced and some of our newer AI capabilities, is exceeding our expectations. That shows up in a lot of the trends around pricing as well as an improvement in net seat growth. So that is kind of the upsells and seat expansion dynamic. The new customer acquisition has certainly been tracking well, especially given some of the green shoots we are seeing in EMEA, and we hope to supercharge that with a lot of partner and SI investments and relationships that we are building. Finally, related to Enterprise Advanced as well, that platform expansion, especially in the form of AI units, is tracking nicely as well. Yep. So all three, certainly. Matt Balik: One quick call if I could. Aaron Levie: Oh, sorry. Go ahead. Matt Balik: Awesome. Thank you. Yeah. Appreciate it. I have also noticed sales and marketing has gradually improved as well. Maybe if you could help unpack the drivers of that sales and marketing efficiency and help us think about general Salesforce productivity, maybe your hiring intentions for this year and next year, whether or not that is in line and tracking. Or if those improvements in productivity are making you more willing to hire on the go-to-market front. Aaron Levie: Yes. We kind of laid out that this was a year where we wanted to be investing incrementally more in sales capacity, some of our vertical efforts, going deeper with system integrators and our partner ecosystem. We shared that at Financial Analyst Day and, obviously, throughout this year, various updates. We are very happy with the results that we are seeing thus far on those investments, both in the near-term productivity but also more of the qualitative impact that we are seeing. Building long-term partnerships, building more pipeline around those, as we shared today. Being listed in the AWS Marketplace, which is coming soon, will add additional channel distribution support for us. We called out the Deloitte deal, what we are doing with TCS, Slalom, DataBank, IBM, and many others. That partnership channel is going to continue to build out. We continue to believe and are bullish on the overall go-to-market investments that we have made as well as our platform investments. I think you will continue to see that from us going into next year. Operator: And our next question comes from the line of Brian Peterson with Raymond James. Your line is open. Brian Peterson: This is John for Brian. I want to start on FedRAMP High on the FedRAMP High authorization you received earlier in the year. Any details you can share on how the federal vertical is doing for you guys? Maybe how we should think about the pipeline of business there? And if the government shutdown had any impact on late-stage deals and type? Then I have a quick follow-up. Aaron Levie: Yes. So FedRAMP High was very important for us to be able to get into many of the more sophisticated and complex government deals. That is increasing our ability to serve DOD customers for more and more mission-critical work. We are seeing good momentum there on the sales conversations and pipeline build. We also announced the partnership with OneGov out of the GSA, so I think we are getting even more support and general air cover within the federal government IT ecosystem. While we did see a couple of incremental shifts on deal timing as a result of the shutdown, we feel very confident in the momentum that we are seeing now coming into Q4. Overall, we are finding the federal business to be fairly strong at the moment. Brian Peterson: Great. Great color there. I think the last few quarters, you have mentioned the return to seat growth. I want to dig in there a bit more. Is that being driven somewhat by the macro recovery? Is that fair to say that it is being driven somewhat by the macro recovery? But just more by AI-enabled workflows expanding seats? While I realize you are not guiding to it for next year, how should we think about the seat dynamics as we head into next year? Thanks. Aaron Levie: Yeah. So I would say, certainly, there is a macroeconomic back element to our business, but it does not seem as though that has been changing a whole lot over the last couple of quarters. I would mostly point to the impact we look at the deals and where we are seeing those seat expansions really coming from the newer use cases and the expansions that Enterprise Advanced and the AI capabilities enable, so we primarily point to that. Going forward, we have said that over time, we do expect that net retention rate to continue to improve from where we are and for those seat trends to continue moving in the right direction over time as well. To your point, having given specific numbers for next year, over time, we do expect continued strength, and those trends continue as well. Just actually, if I can, the one thing I was going to add to my prior comment was, we did see healthy deals in Q3 in the public sector. Obviously, the government shutdown was more later in the quarter, but we had a bunch of good wins and expansions in the public sector in Q3. Operator: As a reminder, it is star one if you would like to ask a question. Our next question comes from the line of Josh Baer with Morgan Stanley. Your line is open. Josh Baer: Great. Thanks for the question. Aaron, I was just wondering, I mean, Box and you have been very forward-thinking and strategic, innovative with all things AI and agents. What does that do for the broader core content management opportunity? Just from a competitive perspective, thinking about incumbents, legacy vendors, does it serve as a catalyst with all the market focused on AI and innovation to see some of the differences in how you have approached those changes versus legacy vendors? Aaron Levie: Yeah. So I think it is interesting. There are maybe two dynamics at play. As I mentioned in some of the conversations in New York a few weeks back, you can imagine it is sort of most of the major banks and private equity firms that we spend time with in the city. What is happening is you have two dynamics playing out. One is there is just an instant obvious recognition of, okay, if we could finally structure our unstructured data, which is take equity research, take credit data, loan origination documents, any of that information where today, you are doing a lot of manual reviews of that information. Now agents can go and extract that data from the documents, put it into the Box metadata system so you can query it. You can run analytics on it. You can import it into Snowflake or a Salesforce data cloud so you can manipulate it like structured data. But again, the source material is all this unstructured content. All of our conversations were around being able to tap into this vast array of unstructured data. The first thing that is going to happen is the content management market in general is going to grow as a result of now all of these new use cases that companies can do for the first time. I would say maybe 70 to 80% of the conversations that I had against dozens of conversations, there was not even a legacy infrastructure or document management system in the conversation. It was net new use cases where for the first time ever, a company could tap into the value of what is inside of this unstructured data. I think you are going to see just a TAM increase for the overall content management market. That will benefit us, I think, disproportionately, but it will benefit generally the space, which is great because we have sort of all been living in this world in the content management space of there is so much value in this data that companies have not been able to tap into. Now for the first time ever, they can, which will increase the overall investment and excitement around the category. The second component, which really gets to the legacy takeout, is we had a number of customers that basically say, well, okay, if I am going to now run agents on my unstructured data and I am going to plot all these insights or automate a workflow or build a Box app to power a business process, well, now I want to move even more of my data into Box to be able to go and handle that. That is really where you are seeing more and more customers say, okay, how do I get rid of a legacy ECM system? What is that migration path? That conversation also came up multiple times just in this a few weeks ago as just one interesting example. It is happening across the board. We are seeing way more interest and energy momentum around legacy takeouts and migrations where AI is the catalyst that is opening up the new use cases that are causing customers to say, okay, now is sort of time to go move our infrastructure to the cloud. We saw that a few years ago with security as one of those catalysts, but AI is going to be much bigger because you are actually now generating real new value propositions for the customer in the process. Josh Baer: Awesome. Thanks, Aaron. Aaron Levie: Yep. Thanks. Operator: Our next question comes from the line of George Kurosawa with Citi. Your line is open. George Kurosawa: Hey. Thanks. I am on for Steve Enders. I wanted to follow up on this line of thinking. When you first announced Enterprise Advanced, the obvious big opportunity was on the price per seat and the pricing uplift side. It has been interesting to hear you guys talk more and more about use case expansion and the seat growth side. I would just love to hear more on what you have seen there. How meaningful you think that could be from an NRR standpoint over the long term. Aaron Levie: Yeah. Maybe just to highlight, we are seeing continued strength in both components. What we thought Enterprise Advanced would impact the business and customer economics, but just more recently, over the past couple of quarters, been highlighting that net fee for a net growth dynamic because that is really what has changed, whereas the pricing has gotten stronger. We have been really pleased with the impact it is having. It is just that had been a driver of NRR and growth for a longer time period. In terms of the overall impact, we would say certainly, the overall seat dynamics are where we see probably the biggest area of upside. That is also when you looked at the trend and where things had declined previously, that was also the biggest driver. We do see that as probably the most variable part and biggest opportunity for the net retention rate to improve. At the same time, as we get more and more customers moving into Enterprise Advanced and adopting some of the other capabilities of the platform, we continue to see both seat count, as well as pricing, to be pretty important levers in that algorithm. George Kurosawa: Okay. Great. Then I know I am a quarter early here on asking about FY '27, just when we think about the exit revenue growth rate of 8% constant currency relative to billings growth of 12%, CRPO growth of 14%, maybe you could just help us think through your kind of confidence on maybe a path towards acceleration into next year and what that might look like? Aaron Levie: Yeah. As noted, we are squarely focused on returning to double-digit top-line growth. I would say that some of those leading indicators, billings, especially on a quarterly basis, and even current RPO, are not perfect leading indicators because of some of those dynamics around contract durations, the kind of midterm upsells that we have been seeing, and things like that that help fuel the number. I would say that the underlying momentum that you can see in the business, the trajectory of revenue, is a pretty good indication of the momentum that we are seeing in the business. Certainly, to your point, we will share a lot more about our expectations and the different parts of growth and how we are thinking about it in just a few months on our Q4 call. George Kurosawa: Thanks for taking the questions. Aaron Levie: Thank you. Operator: Our next question comes from the line of Fredrik Gooding with William Blair. Your line is open. Fredrik Gooding: Patrick Gooding here. I am just curious. I guess, slightly piggyback on the previous question, but also backing it up a little bit in terms of broader AI adoption. I guess, are we nearing an inflection point in terms of enterprises overcoming some of those barriers of AI adoption? It would be great to also get some slight additional color in terms of some of the specific capabilities within the Box platform where you are seeing some of these use cases really being unlocked. Aaron Levie: Yeah. I think we have always been in the sweet spot of AI, which is we have embedded the more kind of productivity-oriented, helping you with your daily knowledge work just into all of our plans. Instantly, customers get this added value proposition just by virtue of using Box. The capabilities that we really monetize are showing up in Enterprise Advanced. Those are going after very, very pragmatic workflow use cases, again, often oriented around data extraction being the kind of core of what the customer is trying to do. At least that is the ingredient into the workflow that they are trying to automate. We are seeing conversations across the board. I will start with the kind of most obvious ones, and then we can expand. The super obvious ones are customers are saying, hey, I have 10,000 or 50,000 or 100,000 contracts or millions of contracts in some large enterprise cases. I want to be able to extract the data from those contracts and then be able to automate workflows around them. Think about the same use case for an invoice or a lease agreement or a loan origination process. That type of conversation is causing a lot of the Enterprise Advanced upgrades to happen right now because to get access to Box apps where you would build and construct the data views and the dashboards and the applications around that, you need access to Enterprise Advanced. With Box Extract coming live in Q4, it is only going to further accelerate the adoption of Enterprise Advanced because now customers have an interface opposed to just doing the data extraction with our agentic APIs. They will be able to do that now directly built into the Box interface. That is the initial tailwind. What is really cool is we are starting to see use cases that customers have, and this is what makes us again so bullish about the overall category, where the customer was likely not in a data extraction addressable market previously. Where agent agents being able to now read documents and process them and provide insights in them or extract information is sort of expanding the use case of workflow automation around documents. These are things like where customers might have healthcare records or medical billing claim data where they were manually processing this data previously. They have never been able to really bring any form of AI automation to the workflow before. Those kinds of workflows are being automated on the platform, which just for us increases the addressable market of now what we can bring automation to. We are seeing a lot of these types of use cases emerge. There is not really the kind of typical maybe headwinds you would see, which is, okay, you have an AI adoption council or governance committees because this is squarely workflow automation where agents are just enabling the workflow to get automated. I do not think we are going to see a lot of headwinds on the momentum on this front. It is really just up to our own execution and our ability to get the whole customer base to be educated on the capabilities and to drive that upgrade cycle. Fredrik Gooding: Okay. Thanks for the color. Then, Dylan, for you, it would be great if you could rank order in terms of some of the priorities of go-to-market investment. I know you touched previously in terms of investing in the system integrators and partner ecosystem, but I am wondering if we throw in the multiproduct, multi-product slash cross-sell motion in there, and then also trying to balance that in terms of margin expansion or potential margin expansion for 2027, how should we think about that as well? Dylan Smith: Yeah. In terms of the initiatives, a lot of the focus areas, if you think about whether it is the increased focus on verticalization or really driving Enterprise Advanced, that cross-sell, upsell, that you mentioned, that is really embedded in the way that we are just enabling our entire Salesforce. From a pure investment standpoint, we are growing the size of the Salesforce, but it is hard to parse that out as individual stack-ranked priorities. In terms of the specific areas of investments, certainly one of the big ones is around the partner SI ecosystem. Another big area, in addition to just a lot of the reps we have, is really that verticalization of the Salesforce. Bringing in that industry-specific expertise, which we already have in a lot of cases, but really doubling down there, especially given the types of use cases that Enterprise Advanced enables, are a couple of big investment areas on the sales side. Really continue to scale a lot of the high ROI marketing programs that we have been delivering as well. Really pleased with the results there. That will be another area of investment. As it relates to the big picture view of the business, again, we will certainly give more specifics on our Q4 call when we talk about specific numbers for next year. Overall, we have been very pleased with the results of the go-to-market investments that we have been making this year. As Aaron has been talking about, we are in the midst of a massive AI transformation. If we continue to see the strong ROI of those investments, we plan to invest to really capitalize on that opportunity and to deliver another year of moderate operating margin expansion. Certainly remain committed to the long-term target model that we laid out at Analyst Day. Given the opportunity in front of us and what we are seeing in the business, we are very much focused on continuing those go-to-market investments. Operator: That concludes our question and answer session. I will now turn the conference back over to Cynthia Hiponia for closing remarks. Cynthia Hiponia: Great. Thank you, everyone. I appreciate you joining us here this afternoon, and we look forward to updating you again on our Q4 call in early March. Operator: Ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.
Dave Gennarelli: Hi, everyone. Welcome to Okta's third quarter fiscal 2026 earnings webcast. I'm Dave Gennarelli, Senior Vice President of Investor Relations at Okta. Presenting in today's meeting will be Todd McKinnon, our Chief Executive Officer and Co-founder, and Brett Tighe, our Chief Financial Officer. Eric Kelleher, our President and Chief Operating Officer, will join the Q&A portion of the meeting. At around the same time that the earnings press release hit the wire, we posted supplemental commentary to our IR website. Today's meeting will include forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including but not limited to statements regarding our financial outlook and market positioning. Forward-looking statements involve known and unknown risks and uncertainties and may cause our actual results, performance, or achievements to be materially different from those expressed or implied by the forward-looking statements. Forward-looking statements represent our management's beliefs and assumptions only as of the date made. Information on factors that could affect our financial results is included in our filings with the SEC from time to time, including the section titled Risk Factors in our previously filed Form 10-Q. In addition, during today's meeting, we will discuss non-GAAP financial measures. Though we may not state it explicitly during the meeting, all references to profitability are non-GAAP. These non-GAAP financial measures are in addition to and not a substitute for or superior to measures of financial performance prepared in accordance with GAAP. A reconciliation between GAAP and non-GAAP financial measures and a discussion of the limitations of using non-GAAP financial measures versus their closest GAAP equivalents are available in our earnings press release. You may also find more detailed information in our supplemental financial materials, which include trended financial statements and key metrics posted on our investor relations website. In today's meeting, we will quote a number of numeric or growth changes as we discuss our financial performance. And unless otherwise noted, each such reference represents a year-over-year comparison. And now I'd like to turn the meeting over to Todd McKinnon. Todd? Todd McKinnon: Thanks, Dave, and thank you everyone for joining us this afternoon. We're pleased to report another solid quarter of results. In Q3, we experienced strength with large customers and Okta workforce upsells, particularly with new products like Okta Identity Governance. These results are driven by our unique ability to solve complex identity challenges across the entire enterprise landscape. In my comments today, I'm going to expand on our success with new products. I'll also share how Okta secures AI, which represents a significant new opportunity and a catalyst for growth. Brett will then cover our financial performance and provide an update on the progress we're seeing with the expanded go-to-market specialization. Okta's new products continue to make meaningful contributions to our results. Customers that are frustrated trying to manage sometimes dozens of different identity systems are turning to Okta for a modern, neutral, and unified identity platform. We have been investing in innovation, and our portfolio of new products is allowing customers to dramatically reduce complexity while significantly improving their security posture. New products include Okta Identity Governance, Okta Privilege Access, identity security posture management, identity threat protection with Okta AI, Okta device access, and fine-grained authorization. Many of these new products can now be delivered as part of product suites, which provide more value and further simplify the way customers can do business with Okta. We believe these new products will continue to provide incredible value to our customers and will be a growth driver for many years to come. Earlier in Q3, we had a record number of customers and partners come to Oktane in Las Vegas to hear how Okta secures AI. The simple way to think about it is that Okta is helping customers both build more secure AI agents and manage their AI agents in a secure and scalable way. The emergence of a Genentech technology is redefining the identity security landscape. AI security is identity security. AI agents represent a new powerful identity type. However, without proper security governance, they are also highly vulnerable. Securing AI agents and nonhuman identities is not a feature. It's essential for any business looking to safely scale their deployment of AI. If an organization does not secure its agents today, they risk undoing years of security improvements and leaving themselves vulnerable to new identity-based attacks. Okta has prioritized our efforts to focus on helping customers solve this business imperative and capture what we believe will be the next catalyst for growth and meaningful market within the identity security space. Okta's neutral and unified platform, coupled with our installed base of over 20,000 customers, positions us best to become the identity layer for AI agents. That's why we're so excited about the recent launch of Auth0 for AI agents. Auth0 for AI agents allows customers to build secure agents, APIs, and users more effortlessly across their B2B, B2C, and internal app ecosystem. Based on our conversations, customers are expecting Okta to deliver the capabilities to help build and manage their AI agents. They're already turning to us to help guide them through the new security challenges that AI brings. Over just the past few months, we have experienced a surge in inbound interest for our AgenTek security solutions to manage agents. Okta for AI agents, these organizations are looking for a single control plane to observe and manage agents of all types in a way that offers flexibility as the technology continues to evolve. They also want a solution that gives them control, like the ability to embed fine-grain access into every agent. Okta is here to deliver. The excitement is real, and the interest is tangible. It's very early days on this front, but we have already been engaged with over 100 of our current customers, which combined represent over $200 million in existing ARR. To give you a sense of the interest, I want to share a great early win with Okta for AI agents. It's with a financial services customer that is in the midst of deploying AI agents across their operations. Given the sensitive nature of their data and the need to remain compliant with the regulatory environment, securing these agents was not optional. It was critical. They selected Okta for AI agents to secure their AI footprint and provide them with enhanced visibility and remediation capabilities for the agent identities. Enforce access control, identity governance, and threat detection. It was a great win-win. Okta is helping the customer to safely deploy across their business, and the addition of Okta for AI agents represented a significant ACV uplift compared to their prior contract. We are successfully executing on our strategy to capture this emerging opportunity, and this deal demonstrates our ability to lead the market by moving beyond human identities to securing agentic identities. Okta is the essential identity layer to help customers build, observe, and manage AI agents. We're the only company that is able to secure AI with a modern and neutral platform, allowing us to deliver even greater value to our customers. In addition to helping customers build and manage AI agents, Okta is driving the industry to an architecture identity that is more valuable and more secure. Last quarter, you heard me talk about Okta's role in the development of cross-app access, which brings visibility and control to both agent-driven and app-to-app interactions. This allows IT teams to decide what apps are connecting and what information AI agents can access. I'm excited to share that as of last week, cross-app access is now an extension of model context protocol known as MCP, which helps validate that identity providers like Okta will act as the indispensable control plane for the AI enterprise. To wrap things up, we're pleased with another solid quarter of results, and we believe we're best positioned to win the exciting new market segment of Securing AI. In this rapidly evolving environment, organizations of all sizes are looking to Okta to deliver modern and scalable identity security solutions that can seamlessly integrate across their networks. We are confident in our strategy and enthusiastic about the momentum of the business as we head into our seasonally biggest quarter of the year. I want to thank the entire Okta team for their tireless effort and also thank our loyal customers and partners who put their trust in us every day. And now here's Brett to cover the financial commentary and talk about how we're positioned for long-term profitable growth. Thanks, Todd, and thank you everyone for joining us today. Brett Tighe: My commentary will provide insights into our Q3 performance and then move into our outlook for Q4 and FY 2026. We remain pleased with the overall progress we're making to further specialize our go-to-market teams. Importantly, we continue to see improvement in sales productivity. Partially driving this is our average AE tenure, which has remained strong on the back of healthy attrition levels. The continued positive trends we are seeing across our go-to-market KPIs reinforce our confidence that this specialization strategy is the right path to accelerate long-term growth. Another area of sales specialization where Okta has seen strength over the past few years is the public sector. All things considered, the government shutdown didn't meaningfully change the outcome of our Q3 results. We remain very optimistic about expanding our presence with US government agencies as well as state and local agencies as we move forward. Over the past couple of years, we've done well to improve our margins to healthy levels while making investments for growth. Our disciplined investment areas remain clear: improving sales productivity through go-to-market specialization, relentless product innovation, and further leveraging our channel partners. More recently, we've expanded our investment areas to drive future growth by increasing the number of quota-carrying sales reps. Our recent results and business momentum give us confidence to add sales capacity in order to service the demand next year and beyond. Moving on to our balance sheet. In September, the 2025 convertible notes reached maturity, and we settled the remaining principal amount of $510 million in cash. We had another great quarter of cash flow in Q3 and ended the quarter with a strong balance sheet consisting of nearly $2.5 billion in cash, cash equivalents, and short-term investments. We regularly evaluate our capital structure and capital allocation priorities, which include investing in the business, M&A, and opportunistic repurchasing of the 2026 notes, of which $350 million remains outstanding. Now let's turn to our business outlook. For Q4 and FY '26, we continue to take a prudent approach to forward guidance that factors in current market conditions. For the '26, we expect total revenue growth of 10%, current RPO growth of 9%, non-GAAP operating margin of 25%, and free cash flow margin of approximately 31%. For the full year FY '26, we are raising our outlook and now expect total revenue growth of 11%, non-GAAP operating margin of 26%, and a free cash flow margin of approximately 29%. We will issue FY '27 guidance on our Q4 earnings call, which will provide a more informed view of FY '27, especially as we exit this quarter, which is seasonally the biggest quarter of the year. To wrap things up, we're enthusiastic about the trends we're seeing across the business, from the adoption of new products to customer interest in how Okta secures AI. This gives us confidence to continue making critical investments to accelerate top-line growth. We're pleased with another solid quarter of results, and now look to close out FY '26 strong and build on this year's success. With that, I'll turn it back to Dave for Q&A. Dave? Dave Gennarelli: Thanks, Brett. I see that there are quite a few hands raised already, and I'll take them in order until the time of the hour. And in the interest of time, please limit yourself to one question. With that, we'll take the first question from Gray Powell at BTIG. Gray Powell: Okay. Thank you very much, and congratulations on the good results. Can you hear me okay? It looked like I froze there. Todd McKinnon: Not unclear, Gray. Gray Powell: Alright. Great. So, yeah, it's good to hear the commentary on platform momentum. And at a high level, I definitely think it makes a lot of sense. But I do have to admit, sometimes we pick up on conflicting data points in our fieldwork. Some partners say it's great. Others are a little skeptical. So I guess from your perspective, what gets customers over the hump and convinces them to consolidate IAM, governance, PAM, customer identity, and any other components to Okta? Are there any commonalities between customers who consolidate? Can you just kind of talk about why you see those win rates? Todd McKinnon: I think the answer is it's always wrapped up in some other technological change. If you're not changing your data center, you're not changing your apps, if you're not investing in AI, you're not going to change identity. So in all the customers I work with, it's about some other catalyzing technological change. For many years, it was cloud and building mobile apps and still cloud transformation too, but what we're seeing more and more is companies are trying to move technology so they can take advantage of AI. They're modernizing apps. They're modernizing their security stacks so they can give AI agents access to all of their data resources, and that's been a catalyzer. I think on the partner side, we had actually a pretty strong quarter with the partner channel. Many of the largest deals went through a partner. It's an area of strength. I think just compared to other companies, a lot of times, we're not as deep and relying on partners. So maybe that's why some of the partners are coming up inconsistently. But in increasing that reach with partners and presence with partners has been a focus. And I think on all our internal data, it's manifesting itself prevalently. So we're very excited about that. Eric Kelleher: Yeah. I would add to that, Gray, and thanks for the question. I think another area to consider with customers and as far as consolidating all these use cases with Okta, as their identity partner, is enterprises as they get more and more mindful of the importance of securing identity across human, nonhuman, and agentic, they're realizing that the legacy architectures they've built with multiple products or multiple vendors and multiple stacks are fragile. And with that fragility comes insecurity. It's harder for them to have confidence they're managing securely all their identity use cases in a way that they're confident in their ability to protect against identity-based cyber attacks. And so they see value in consolidating on one partner with Okta so that they have confidence they've got a single pane of glass to manage all of that. So by removing complex vendor distribution, consolidating on Okta's platform, they're able to better manage and be more confident in their security posture against threat actors. Gray Powell: Understood. That's helpful. Thank you. Dave Gennarelli: Let's go to Itay Kidron at Oppenheimer. Itay Kidron: Thanks, guys. Solid quarter. I guess, Todd, a very interesting commentary, needless to say, about AI and the 100 customers who are trialing it. Can you give us a little bit of color on, a, do I have to be an Okta customer to specifically deploy your AI capabilities? Or those could be applied to any company even if they don't use you for core access management, number one. Number two, when you think about the full deployment of this, how do I think about the dollar potential here when you have customers that are spending $100k with you? By how much can AI truly elevate that total bill for them? Todd McKinnon: Yeah. I've been personally, and the entire company is blown away by how interested our customers and prospects are in this capability. I haven't seen anything like this in my experience at Okta. A new capability or new product set. So it's very, very exciting. And if you step back and think why, everyone, no surprise, big shock, they're trying to take advantage of AI and build AI workflows into their enterprise workflows. And a lot of them are stuck. And I think it's why you see some of the adoption rates of some of these platforms like Salesforce or ServiceNow or others is, you know, below what people want. And they're stuck because right now, they have a couple of choices. They can either deliver agentic apps that look very much like they don't have any access to the company's data. They look very much like public Gemini or public ChatGPT, generic chat bot, and they can't get any insight from the company's data. That's one choice. Or the other choice is you take the company's data and you shove it in a big data warehouse like or Databricks or Palantir, and then the agents have way too much access. They can just see everything, and they do unintended things. So people are stuck in their pause, and they're saying, wait a minute. Not gonna roll these things out. And there's a huge, huge number of companies that are trying to do something there, and they're stuck. And then they come to us because what we can do is what we're very good at is figure out who can access what. Not only for people, but now for AI agents and help them filter who has access to what, how you deploy these applications in a way that gives the right information to the agent in the right security level, lets them observe the behavior and build the right use cases for the business without over-permissioning at all. It is early days. Like, we announced and released these products, you know, just in the last couple of months after our conference in September. So it's early days. But we do have several deals that have been transacted for these products. We gave the example of the financial company that is rolling out these agents and purchased the product. It's early days, but it's incredibly exciting. And I think it's because longer term, you look at our market, we have a $50 billion TAM for workforce identity, a $30 billion TAM for customer identity, owning and governing the agentic identity layer, and securing AI can be a bigger TAM than both of those. I mean, it's several years out, and it's gonna be a lot in change and growth there, which, by the way, I think one of the reasons why companies are coming to us is because it's a dynamic environment. You have a new model release coming out every couple of months, and Gemini is better now. OpenAI is better, and then Anthropic is better. And technology is all shifting around it. And customers don't wanna get locked in. They're hesitant to commit to the Microsoft stack or the Google stack. They want flexibility. And by doing this access layer in an independent neutral third party, they feel like they're gonna have choice as this amazing platform of agentic enterprise unfolds. So it's very exciting that we've the company's number one priority now is to take advantage of this opportunity. So we're very clear in our R&D and our go-to-market. We're gonna focus on this opportunity. That's how big we think it is. So it's incredibly exciting. Itay Kidron: Todd, do you think that the go-to-market around this can change? Meaning, instead of you selling it to the enterprise, actually talk to the agent companies and have them bundle already ahead of time your identity security with their agents such that the customer needs to do this? Todd McKinnon: Absolutely. And we're already doing this with trying to set the industry standards around access. We've mentioned before cross-app access, which is an industry standard around how you actually give access to these agents across multiple agent platforms connecting to multiple end repositories of information, whether it's a database, a warehouse, an application. And we're really excited that the MCP standard now recognizes cross-app access as an extension of MCP. So think about that now if you're using MCP protocol to standardize some of these interactions between agents and resources, cross-app access fits right into that now. So it's a very insightful question, and we're working hard on that as well. Eric Kelleher: And just as an example for our customers, customers that are using Auth0 for AI agents to build agents will get support for cross-app access out of the box, meaning any agents that they build with Auth0 for AI agents will be discoverable by an IDP that also supports the model context protocol. And Okta's IDP, so it's Okta's IDP also supports cross-app access to model context protocol. So customers developing agents with our technology will be producing agents that any company can secure more precisely. And the Okta platform will help customers discover agents that have been deployed and then manage those agents as well. So we're already well on the path to ensuring that we're productizing this opportunity using our existing capabilities. Itay Kidron: Thank you. Dave Gennarelli: Let's go to John DiFucci at Guggenheim. John DiFucci: Thanks, Dave, and listen. Guys, in the past, I'm gonna ask the question that I think we're all gonna have to answer. But in the past, you've given an early look to next year. And you didn't do that this year, which I think is the right call given how much next year depends on the fourth quarter, like Brett said. I also realized that there are other reasons to give that early look because there are other things happening at the company in prior years. But even if no new numbers, you don't give any numbers, can you give just some subjective commentary about how the world looks for Okta over the next year just generally even? Because this quarter, this quarter looks good. The stock's down a little bit after hours because I think what I'm saying of you didn't give that guide and people are used to it, but, you know, they'll get over that. This quarter does look good. It sounds like there's a lot of even more traction. Behind the numbers happening. So just a little commentary on that would be helpful. Brett Tighe: Todd, do you wanna take it? I can talk to the guidance I was just gonna say well, then I was gonna say about the fourth quarter is it is it is our big seasonally, it's our biggest quarter of the year. And the opportunity is tremendous for us in Q4, and we're very focused on executing that well across all of the product lines and all the regions and all the ways we execute in the course for the fourth quarter, and we're set up to deliver success there. And so that's very optimistic. Brett, maybe you can talk about the just a little bit of guidance philosophy. Brett Tighe: Well, I was actually gonna touch John on just the business momentum. Before I get into the guidance because I think that's more of your question than I'm happy to give it to you, which is, you know, look, Q3 was another really solid quarter for us. You heard Todd talk about it. You heard Todd me talk about it. Sure Eric will touch on it throughout this call, but we're pleased with the traction that specialization is getting. We're seeing that a productivity number, the number you've heard me talk about for years now, get into a region that we're quite pleased with. Yes. It's not perfect everywhere. But it is exciting to see it from an overall because that means the specialization is working. We're excited about that. And what that's doing is that giving us that's giving us confidence to be able to start to add more reps into the system. So, you know, for a while, that's something you and I have talked about. I know a bunch of us on this call have talked about is do we have the right amount of capacity out in the field to be able to address the demand? And so we started adding capacity last quarter. We've added more in Q3. We expect to add more in FY '27. So that tells you we have we're gonna add more in Q4. Confidence in the opportunity for a whole host of reasons. Right? It could be what Todd has talked about earlier, you know, Okta securing AI is a massive opportunity for us. You can talk about the other new products like governance, PAM, highly regulated identities on the Auth0 side, feel like the organization is headed in the right direction, and that's why you see us growing sales and marketing expense the last two quarters. Year over year. That's something you haven't seen in a while. Because we're having that confidence in the organization to be able to go out and address this opportunity. And so we're excited about what we're seeing in the business. And so, hopefully, that gives you more of the context. I'm happy to talk about the guidance. I mean, I can get into that for a second just so we're all on the same page. Todd touched on it a second ago. Because Q4 is so large, it creates a need for us to be able to embed an amount of conservatism in there that makes a guidance five quarters out not that helpful. And, frankly, the whole point of guidance is to be helpful. If it's not helpful, we shouldn't do it. We're not gonna do it this time, and we will update all of you after we get past our seasonally largest quarter of the year at the '4. And so then we can give you a much cleaner look at the world and not have to embed some conservatism associated with our largest quarter. Now with that said, John, I gotta bring up current RPO because I know we've gotta talk about it. And if you look at if you want a number for FY '27, or if you want to approximate a number for FY '27, I would take a look at the Q4 guided current RPO and apply a coverage ratio to it. That annualized coverage ratio you guys have all heard me talk about for the last few years. Go ahead and take current RPO divided by the coverage ratio and then add some professional services on the top. And that's going to get you to a rough approximation from a revenue perspective. Now, obviously, the formula the piece of the formula I haven't given you is the coverage ratio. That coverage ratio, I probably would use something in the region of FY '26. So, hopefully, that gives you a little bit of John, on how the business is doing and why we're excited and optimistic and also a little bit why we decided to hold off on giving a guidance about Q4 and, frankly, beyond Q4 for FY '27 because we didn't feel like it was being helpful to all of you anymore. John DiFucci: That all makes I really appreciate all that. Thank you. Eric Kelleher: Just a little added color commentary to Brett's comments as well. We've talked throughout this year on the changes we made in February to go to market to specialize in the platforms. And we've talked about one of the key reasons for that strategy is we had decided that specializing in the buyer persona was important, but also that our pace of product innovation on both the Okta platform and Auth0 platform had accelerated to the point where it was just really hard for one seller to keep pace with all the capabilities coming out in the platform. And we talked in Q1 about how we were on track for our plan for this year to implement that change and absorb the cost of change management. We talked about having a solid Q2. You've heard us here talk about a solid Q3. One indicator that we've shared of how successful we're being executing that strategy is what Brett talked about earlier that our AE attrition right now is near a multi-year low. And our AE tenure is near a multiyear high. And AE productivity is sequentially increasing. And so when we think about how we're doing implementing that significant shift in territory assignments and account assignments and then go-to-motion overall, we've got a lot of indicators that this strategy is the right strategy for us. And it's also created space in our sellers to be able to take on new initiatives. Like, we're talking today about Okta Secure's AI, and how just how impressed we've been with how much that story is resonating for our customers right now is a hugely strategically important need. We can attack that need now because we've got more focus on that particular use case for that particular buying persona. So we're very optimistic on the strategy playing out. John DiFucci: That all makes sense, Eric. Thank you. And it's showing. It's showing. Thanks. Dave Gennarelli: Next up, we'll go to Fatima Boolani at Citi. Fatima Boolani: Hey. Good afternoon. Thank you for taking my question. Can you hear me okay? Todd McKinnon: Loud and clear, Fatima. Fatima Boolani: Great. Todd, this one's for you. We've been really fascinated with the broader themes around agentic commerce. So I wanted to get your pulse on where the portfolio is most relevant to capitalizing on that opportunity? And where do you see effectively your customer identity business playing a very meaningful role in that? And I guess, Eric, just to even loop you into the conversation, how are conversations with customers trending with respect to building a stack behind some of these really interesting opportunities that are gonna unfurl in the next couple of years? Thank you. Todd McKinnon: I think it's a big deal. I think AgenTek Commerce if you have a website, and you're or that's doing customer support or ecommerce, you're gonna have some version of agents on there very quickly if you don't already. And if you're building those agents, Auth0 for AI agents is the right solution. It shortcuts the ability to have those agents connect to multiple systems on the back end. It helps you put fine-grain authorization inside of your agentic flow, so it's purpose-built and we're, I think it's a big trend we're talking about here. It's the same trend we're talking about here. You know, whether you're managing agents for internal deployment to help get work done in their enterprise workflows or your on your B2C use cases moving toward a more agentic interface versus the person interface in the past. It's a big trend we're talking about. Eric Kelleher: Yeah. And I'll add to that. We talked about at our in the quarter at our user conference talk team, we talked about the customer conversation around this challenge, and we shared a survey that we had run of a few hundred enterprise customers reporting that 91% of them had agents in production, and only 10% of them were confident they had them secured. The need is very acute and it's very urgent and it's a key reason why this is elevated in such a prominent conversation. Todd talked about one example of where our customers are struggling with this, and he and fine-grained authors. So for builders of agents, they need to solve for at least two distinct challenges. One is ensuring their agents can be discovered, and the second is ensuring that agents are only authorized to do specific things, that they have access to specific corporate assets and not others. And Auth0 provides the capabilities to solve both of that with support for cross-app access and model context protocol. Agents built through Auth0 can be discovered and managed properly. And Auth0's fine-grained authorization allows agents to be built in a way that their privileges can be very finely tuned, which is hugely important to our customers in that space. But the second part of that challenge that our customers have is they don't know. They tell us they don't know what agents are deployed in their environment. They don't know what their users have turned on and what their users' agents don't have access to. And this is the challenge of discoverability and being able to discover agents. So on the Okta platform side, identity security posture management product scans corporate networks to find service accounts and the privileges of those service accounts, but it will also now help discover agents that are implemented and deployed as long as they support the cross-app access protocol, the extension to MCP. So the problem of discoverability is something they need help with, and we're well positioned to help them with that. And the other related challenge is not only knowing that they exist, but then protecting the identity of those agents to ensure the agents can't themselves be impersonated by a threat actor, and to ensure that those agents are properly authorized to take the actions that they're attempting to access. So the Auth0 platform on the build side is hugely important for our customers. And the Okta platform on the discover and manage side is important for them as well. That also includes things like privileged access, allowing the agents to have tokens that are appropriately vaulted, and governance, having them provisioned and deprovisioned based on just-in-time requirements. So they don't agents live with standing privileges when they don't need to be standing. Fatima Boolani: Yeah. Commercial impact in both your businesses as opposed to what intuitively I would think would just be on the customer identity side. Todd McKinnon: Yeah. I think, Fatima, I could think of a meeting I just had a couple of weeks ago and this was how it all comes together. So there's this company is a large mortgage company online mortgage company. And they think about it as when people come to their website and they start browsing for mortgages, and they answer the customer's question in an agentic workflow, and then it actually flows all the way through their origination business on the back end, which is very much workflows where people have to use human in the loop system to make approvals for mortgages that are over a certain amount. They have to maybe automate the entirety of the mortgage process so they can fulfill it without anyone, any person. So it's like, external facing on their website in a B2C, it also goes all the way back into the enterprise. And they want that all together, and the business value for them is very simple. It's their conversion rates on the mortgage is up, you know, 5x if it's there's no delay. There's no delay in the approval, or they don't have to go for some other thing. So it's a very clear ROI. And before they were talking to us, they're really stuck on these questions we're talking about. Like, how do we make sure that the web-facing agent has the right access to the back end systems? How do we make sure that the enterprise-facing agents have the right permissions? We automate some of those workflows and don't over give overly permissive access to these agents in the enterprise. So it all comes together in that very concrete example. Fatima Boolani: I appreciate that. Thank you. Dave Gennarelli: And next up is Josh Tilton at Wolf. Josh Tilton: Hey, guys. Thanks for sneaking me in. Can you hear me? Todd McKinnon: You can. Josh Tilton: You're good, Josh. Brett, not to put you on the spot here. I do appreciate the color on how to think about next year's revenue. To kind of simplify it without the math, bookings growth year to date is kind of growing where Street is for revenue growth next year. So, like, how do we think about that? You know, what you're doing so far this year, what it implies for next year, are you comfortable with where the street sits, but I'm just trying to understand them. Bookings growth has been good. It's kind of in line with the implied or where the street is for revenue next year. Like, how do you feel about where the street sits today? Brett Tighe: I think in general, if you were to take our comments and boil them into a couple of little simple things, which is one, you can feel the business momentum growing. Right? Eric talked about it a few minutes ago around we had to make some changes at the beginning of this year to further specialize the field. Can feel that business momentum growing as we go into Q4. And we think that that business momentum on the back of us specializing the field is helping in addition to the market seems to be in a good place for us for all these new products, whether it's Okta securing AI, whether it's governance, or all these new products that we've talked about over the last several quarters. So I don't have an exact answer for you in terms of the street is and bookings growth and all that sort of stuff, but the really important thing is you can see the growing confidence in the organization. And you can see the productivity. You can see the optimism. You can see all these things. Headed in the right direction, and that's why you can kind of hear the tone from the three of us and the way we've been talking about it. Throughout this call as being very positive, and we feel like the goal that we've been talking about for a while of accelerating growth in the medium term is something that is on the horizon for us, which is exciting. I'm not saying when it's gonna happen or how it's gonna happen. I'm just saying that we do feel that that business momentum is headed in the right direction, and that's why we're adding capacity, like I said, a few minutes ago to go out and address that demand. Josh Tilton: Super helpful. Thank you. Dave Gennarelli: No problem. Next up is Jonathan Ho at William Blair. Jonathan Ho: Hi. Good afternoon. Wanted to see if you could update us a little bit on your sales realignment efforts earlier this year and how, you know, maybe the product suites have had an effect on that go-to-market. Lastly, how do we think about sort of the pace for net retention over time? It's been sort of sitting at this 106 level for a bit. I know that's from prior periods, but how do we think about maybe the mechanics of that recovery? Thank you. Eric Kelleher: Yeah. Hi, Jonathan. I'll take the first part of that question. I'll let Brett take the second part. The go-to-market specialization for us is as we've said throughout this call, we feel it's been very effective. And there's a few ways that that has played out for us. On the front end, the top of the funnel, we have specialized our demand gen teams for their brand generation work, their pipe generation work, and we are pleased with the pipe that we've been able to generate in the business. We also have had more focus on our distinct personas. So we've had an opportunity in our field to get closer to the very specific granular needs of our CIO and CSO buyers and of our developer. And we've been able to focus our R&D efforts on the Okta platform and the Auth0 platform on those personas. And so we've seen significant innovation improvements tying specifically more specifically to a discrete buying persona. Which has allowed us to continue to capture market. Things like Okta customer identity, which we talked about last quarter, has really come back as part of our refocusing on the Okta platform for the enterprise buyers. So that specialization has been very helpful. One of the questions this group has raised in prior quarters is how the field organization was feeling about specialization, whether they felt this was a positive or something that was a concern, their ability to be successful. And as I mentioned earlier, we're seeing right now our sales is near a multiyear low, and our sales tenure is near a multiyear high. We're feeling very confident in not only in the model's capability to produce financial results, but we're feeling very confident that our own field organization is very engaged and feels that they're being successful in this model, which is what we expected, and we're pleased to see it playing out the way that we expected. Jonathan Ho: Yeah. Brett Tighe: Okay. So I'll talk about NRR in a second, Jonathan. But the thing that Eric was saying made me think of around the specialization. One of the reasons why the new product introduction percentage has remained quite healthy is as a percentage of total bookings, you know, we've talked about it over the last three, four quarters. Because people are starting to really get into the details on the product to be able to sell it directly to a specific economic buyer, and it helps them just be more familiar with anything. Anytime you're more familiar with something, you're probably gonna be better at it. And so that's been the theory behind why we did this, and it seems to be playing out in that regard. Jonathan Ho: And that's a great call out. Brett Tighe: In terms of the NRR, the one thing I would say before we get into NRR is gross retention remains healthy. It's one of those things that we're quite proud of. And we expect to continue over the long run with that given the value that we drive for our customers day in, day out. In terms of where the range is and where it could be, you know, 106 is right in the range we've talked about. You know, you've heard me talk about it every quarter for a while now, and this is where the range we thought it was going to be. So it's traveling in the range that we expect it to be. We probably think it tracks in this range, or we do think it tracks in this range for Q4. I don't have a great answer for you beyond that, Jonathan, because we are still early in our fiscal year planning. But, obviously, if we wanna grow faster, this is something we're gonna focus on. Because it's on the back of that strong gross retention. How can we keep doing these upsells and doing more NPI and more Okta secures AI to be able to help ourselves in that number over the long run. Obviously, there are dynamics that go in there. Like, if we sell more new business, it's, you know, a little bit of a headwind to new NRR. And if we sell more upsells, it's a tailwind. So there's always a balance in that number that we should keep an eye on when we're looking at the overall total business. Jonathan Ho: Right. Thank you. Brett Tighe: No problem, John. Dave Gennarelli: Next, we'll go to Alec Balman at Jefferies. Alec Balman: Hi, guys. I'm on for Joe Gallo today. Thanks for taking our question. Brett, you've been very candid in the level of prudence and guidance the last couple of quarters. But you've also seen larger beats historically in 4Q over the past couple of years. So can you comment on the puts and takes to guide in 4Q? Talked about conservatism there, but just suppose to take us to it. And then also, is the guidance framework still in line with what we've seen historically? Brett Tighe: Yeah. I mean, just in general, just to answer your second question first, we're still trying to get closer to the pin. Now we had a nice beat this quarter on current RPO because the team just flat out outperformed. They did a really nice job. And so, you know, I'm happy to be wrong in that situation. But, you know, we wanna get closer to the pin. That's been our stated goal now for several quarters. And if you look at Q4, we've removed any specific line items. Right now, it's just down to market conditions and our own internal expectations. So it's real simple. And we're looking forward to executing in Q4 as best we can because you've heard us talk about it. It is our seasonally largest quarter, and we wanna finish a strong FY '26 with a bang. Dave Gennarelli: Great. Next up, we'll go to Shrenik Kothari at Baird. Shrenik Kothari: Yeah. Thanks for taking my question. There was a question on consolidation and then a lot on agent. Try to combine the two. Like, I believe as you guys head into '26, planning cycles, and, Todd, you did mention there's a desire for a single control plane to manage a GenTech as well. Are you seeing signs that buyers are also thinking about consolidating AI IT governance around a vendor? And just based on whatever you saw so far in terms of those 100 plus engaged customers, can you walk us through, like, the typical conversion timeline from interest towards the ACV booking ARR? Thanks. Todd McKinnon: Yeah. You're right. The two trends are very related. This thinking about the agentic future for these customers and then thinking about what that means for their identity stacks in the short term. We're working with one of the largest Fortune 50 customers of ours on a wholesale replacement of Ping Identity, SailPoint, CyberArk, and several other identity vendors across our whole stack to standardize on Okta products. And the driver there is two things. It's cost. They wanted to have less cost in their environment, and they wanted to have more better functioning integrated products. That's part of the driver, but the bigger driver was something very simple, which is this company has 5,500 applications. And only all these years these legacy vendors, they only had 500 of them hooked up to their central identity system. So they're thinking about an agentic future where they wanna give their agents and their agent infrastructure access to every application that they have. And they only had a paved path for 1,500 of them because they only were able to get that many on their identity platform with the old technology. So when they think about standardizing, they think about moving all 5,500 applications to Okta. And then that cuts cost. It makes the system work better because governance is integrated to access management, is integrated privilege. But more importantly for them, I think it enables this agentic future where they can give access in a controlled, governed, managed way to all these agents doing all these workflows. That's behind the standard IDP. So they're all kind of interrelated, but I think they all point north for which is a very good position to be in. Dave Gennarelli: Next up, we'll go to Brad Zelnick at Deutsche Bank. Brad Zelnick: Great. Thanks a lot, David. Nice to see everybody. Guys, in Q3, I think you've added more headcount this quarter than you have in three years, which I take as an expression of confidence. Especially knowing how devout followers you guys are about rule of 40. That's in addition to a lot of other constructive commentary tonight. But just to follow on to Fuji's question and Josh Tilton's question as well, if I take, Brett, your comments on CRPO coverage ratios, quick back of the envelope gets me to, like, nine and a half percent revenue growth for next year. And I just wanna make sure that I heard you correctly and I'm interpreting that right. Brett Tighe: Yeah. The simple math is just current RPO. Right? And you take the coverage ratio and the coverage ratio just to make sure everyone is clear on what that is. We could let's say we can let's calculate the FY '26. Coverage ratio together. All you do is you take Q4 FY '25 current RPO, and you divide it by next year's use the guide or the no. I'm saying for the coverage ratio that you're gonna apply to current RPO. Right? Because it's current RPO guidance, times the coverage ratio, plus professional services. Brad Zelnick: Yep. Brett Tighe: K. So you've got Q4 current RPO guidance. We just gave it to you. Right? $2,450,000,000. Yep. The coverage ratio is the most important factor in the math that you don't we don't have an exact number for, but I'm trying to give you a rough approximation. And if you wanted to use have to use FY '26, but it's the closest in years, so might make sense or somewhere in that ZIP code. So the FY '26 version, all it is is Q4 FY '25 current RPO, which was $2,250,000,000 and you divide that by the FY '26 subscription revenue and that's gonna get you a number. We haven't given you a guide for a subscription revenue, but you can figure it out, Brad. It's I got pretty easy. That number is probably about seventy-nine percent or thereabouts. Brad Zelnick: Understood. And then you just put that in the formula. And then professional services, I think, guys can come up with a rough estimate. And then that's all you do. So Q4 FY '26, 2.45 divided by point seven nine plus whatever you're gonna put in for professional service. I'm giving you advice to use FY '26 as a rough approximation. I'm not saying that's what you have to use. Just seems logical given it's the closest year to what we're about to do in FY '27. That's all. Brad Zelnick: Totally get it, and I appreciate you making it very clear. Maybe just on the other part of my question. When I see you guys hire like this, it really, to me, makes a statement, and I wanna make sure I'm interpreting that signal the right way. Am I to assume that the bulk or strong mix of those headcount adds are go-to-market? Is there anything else to know about the composition of all those heads that you're you've added in Q3? Brett Tighe: Yeah. It's a mix of both go-to-market because of what we've talked about already today and then also continuing to add into some of the lower-cost regions. Be able to bulk up the capacity in places like R&D. Or other areas that can help us be able to build product faster or in G&A, be able to become more efficient and be able to get through things faster. So it's really a variety of areas for us, but it's really go-to-market and then lower-cost regions are really the two places that we're adding in. You're on mute there, Brad. Brad Zelnick: Thanks very much. Brett Tighe: No problem. My first ever algebra lesson on an earnings call. Thank you, Brett. Brett Tighe: Brad wanted to dive in, so I felt like it was necessary. Dave Gennarelli: Alright. Next up, we have Yoon Kim at Loop Capital. Yoon Kim: Alright. Thanks, David. Hey, Todd. So for some of the early adopters of AI agents that you're working with, are these agents from software vendors like Salesforce and ServiceNow or are they custom-developed AI agents? And is your approach to securing AI agents different for these two types of agents given that Auth0 for AI agents is really targeted at developers? Todd McKinnon: It's a really good question, and it's every customer we talk to, they're worried about all of the above. I would say that the actual most concrete implementations are agents they've built themselves. I think that the deployment from some of the package application vendors you talked about are maybe a little bit more behind. Of deployments. But the ones the companies that are building their own, that's their first and foremost concern. But everyone's concerned about they know it's gonna be a multi-platform world in this. There's so much value to be delivered. There's so many frameworks. There's so much innovation. There's so many models. They understand that it's gonna be a multiplatform world, which is why our message is really resonating, which is, like, hey. If you get identity security and a GenTech security is absolutely critical, you can't just give agents access to everything. You have to govern and control and monitor the access. Now if you choose to do that in one security platform or one cloud platform, everyone understands that you're gonna be it's gonna be strong lock-in. You're gonna be stuck with those models, those frameworks. And have gravity in that environment. And people are leery of that because they know that it's a fast-moving environment, and they you know, it'd be kinda like when I talk to customers, it'd be kinda like you had to choose one streaming platform. You just won and you couldn't switch. What would you choose? Right? You'd be careful because all the good stuff is on the other one. Like, you choose Netflix, you'd wanna go over to Prime. If you Prime. You'd wanna go over to Paramount, and they don't wanna choose one platform. They want flexibility. They wanna be able to use different platforms and pick the best content off of different platforms. So that's really resonating with customers, which is what's driving this interest, which is why we're working so hard to capitalize on. Yoon Kim: Okay. Great. Thank you. Dave Gennarelli: Next, we'll go to Mike Cikos at Needham. Mike Cikos: Great. Thanks for taking the question here, guys. I just wanted to come back to the net retention comment. Understood on you guys are in that ZIP code around the 106. But I think historically, the company has not incentivized or split up the team between hunters or farmers and allowed sales reps to choose how they wanna retire quota. Could you just provide an update for where we are in thinking about the sales capacity you're hiring? Are we thinking about setting up a specific team focused on new logo acquisition or first orders, or is it still and I guess, let the reps choose, are we putting in place any sweeteners of any kind? I just wanted to get an update on that front. Eric Kelleher: Yeah. Thanks, Mike. We have in fact started looking at and carving territories for new logo acquisition. We announced a year ago that we were bringing a hunter-farmer assignment into, at that time, our US commercial business. And we talked last quarter, then six quarters into that change, how that was progressing. We're very pleased with the productivity of how that's been carved off. That was in the US commercial business. We have not extended that into our enterprise business yet. We're seeing rather the focus of platform specialization on the buyer is allowing our reps to balance both new logo acquisition and getting deep within their existing accounts. But that's always something that we look at. And as we look for opportunities to expand new logo acquisition, thinking about adding hunter capacity as part of our planning process every year. Mike Cikos: Excellent. I'll keep it to one. Thank you. Todd McKinnon: Yeah. I think a lot of the growth and a lot of the focus and planning is on larger deals. You saw the cohort of million-dollar deals this past Q3 grew 17%. Very excited about that. And in general, a lot of our growth and focus is gonna be on larger deals. Sometimes with our products now, that can be in a segment of smaller customers, but most of the time, it's in a larger enterprise or strategic account patch. And so just in general, that's where the business is going. That's where the growth is, and that's where we're investing. Dave Gennarelli: Let's go to Tomer Zuberman at BofA. Tomer Zuberman: Hey, guys. Yeah. I think you've previously spoken about the opportunity to price AgenTeq as an extension of a per-seat license. But we've been hearing in the market some concern around seat count reductions at customers. So one, as you think about your opportunity next year and you're doing your planning, are you seeing any concern around that with your customers? And two, how do you think about the offset of any potential reduction of headcount versus the opportunity to upsell AgenTeq? Todd McKinnon: The AgenTeq products are priced similarly to our current products. Our current products are priced per user. The AgenTeq products are priced per agent. So sometimes that can be a one-to-many relationship. You might have a few agents for a person. Sometimes they might be agents on their own. So I think we're set up in a way that gives us flexibility as these things evolve in terms of how companies wanna deploy agency to augment headcount, what they wanna how they wanna deploy agents. At the front end of processes before it ever gets to a person. This is one of the advantages we have with all these customers and all this interest. We can figure this out quickly, and we can iterate on this quickly, and that's how we've gotten to this pricing model. Because this is a new thing. You know, it's exciting because a lot of the traditional vendors you know, it's like being locked in or being owning a certain market, it's not it's not owned yet. We have the opportunity to win this massive new market, and we're well positioned with the customers and with the products and with what people expect us to do. And we're gonna go out and define it and win it, and it's gonna be really exciting to do that. Eric Kelleher: And the other comment I'd add to that, Tomer, is we feel very well diversified from a use case and product perspective. So to the immediate question, we are not, you know, like everyone, we're looking at what changes will happen in the global workforce at companies as they lean more on AI and technology to run their businesses. We're not yet feeling a material headwind from some you mentioned seat reductions in the business, but were we just to see that we're confident in our customer identity business offsetting that. We're confident in our agentic identity business offsetting that. So in the aggregate, we view this shift in the industry as net upside for Okta. And everything you've heard us talk about in our product strategy today and our focus of innovation the conversations we're having with customers is embracing the in to help them solve an emerging, very acute urgent customer need for securing AgenTeq identity. We see that as upside to the overall business, not as just for replacing the existing business. Tomer Zuberman: Got it. Thank you. Dave Gennarelli: Next, we'll go to Joe Vandrich at Scotia. Joe Vandrich: Yep. You got Joe Vandrich on for Patrick Colville here. Todd, you mentioned a surge in inbound interest for managing agents. So can you talk about what's getting more traction? Is it the Auth0 solution? Or the workforce side? And then what do you think represents the larger opportunity and why? Todd McKinnon: I think they're both getting about the same amount of traction. I think it's a little bit different. I think a lot of the interest in the AI agents, it's more online. You know, developers. Right? So they find out about it on the website. They do self-service, upgrade to enterprise, a little bit of a different motion. The Okta for agents, which is for IT and security, it's very much you know, have an enterprise architecture with a CSO or security influence buyer or an IT influence buyer. So they're both getting interest, but all it's pretty early on both of them. We resist the urge to draw too many patterns on the couple of months. It's really been out there in the market. And we're really on ourselves on being able to iterate quickly and adjust as we define this market and make sure we not only deliver something incredibly valuable for customers, but something that'll take advantage of both of these personas, which is IT on one side and then developers on the other. Joe Vandrich: Thank you. Dave Gennarelli: Got about four minutes left. Let's try to get the last three questions. Next up, we have Rudy at DADCO. Rudy Kessinger: Hey. Great. Thanks for taking my questions, guys. Brett, I wanna go back to a comment in the script on sales productivity. You said you are continuing to see improvements there. Is that you know, was it improved quarter over quarter? Was it improved year over year? I'm curious on that. And then secondly, on the sales hiring front, certainly, we've seen that. Your sales job openings up over 100% year over year the last couple of months, and our data. What is the level of sales capacity additions you're planning to add? You know, I'm not sure what time frame you wanna use last quarter through Q1 or you know, just what's the level of sales capacity addition you're looking to add as you think about the FY '27 plan? Thank you. Brett Tighe: Yeah. Absolutely. And I'll let Eric step in a little bit here too on productivity. But to answer your question, it is up quarter over quarter and is up year over year. And so it's all of the above, Rudy, which is a good sign for us. And also, at the same time, like I said, we added capacity in Q3, and we started to add capacity in Q2. In terms of the exact numbers of how much we're gonna add, we're gonna be methodical about that. We wanna make sure that we are maintaining high productivity and not overdoing it. In terms of adding in capacity. Because as Eric told you a second ago or whatever, twenty minutes ago, you know, our AE attrition is quite good right now. Our tenure is quite good. We don't wanna disrupt that, and so we wanna be methodical in our approach to add the capacity into the system. Make sure it works, and then move on. Evaluate the success, and then step onto the next level of what we think is possible because we do have a great field right now. We are very confident. Great. Actually, I should've said this at the beginning of the call, great job at a sales team. And all the go-to-market teams in Q3, and we look forward to having them execute in Q4. So yeah, I think that pretty much covers it, Rudy. I don't know if Eric, you'd have anything else to add. Eric Kelleher: You hit the key points. I would say in addition to productivity being up, it's implied with your comments, Brett, but attrition is down. And so from a field engagement standpoint, we feel quite positive with our team's ability to be successful and their belief that they can be successful. So as we add capacity, we wanna make sure we add it in a metered fashion to ensure that we're confident our field continues to have the opportunity to be very successful with Okta. So that is an important part of our philosophy because we don't want to see a return to where attrition starts to creep back up. We wanna keep our tenured reps because they're much more productive. Rudy Kessinger: Super helpful, guys. Thanks, and congrats on the quarter. Brett Tighe: Thanks, Rudy. Dave Gennarelli: Next, we'll go to Taz at Roth. Taz: Taz, you there? Dave Gennarelli: Now let's quickly go to Gabriela at Goldman. Gabriela Borges: I'm here. Can you guys hear me? Dave Gennarelli: Oh, here we go. K. Let's go to Gabriela, and then we go finish off with Taz. Gabriela Borges: Todd, I wanted to ask on this topic of agents that are bespoke versus from the package software vendors. And when we start to see adoption from the package software vendors, how do you think about the identity functionality that may be embedded in the application? And this is in the context of ServiceNow announcing their plans to acquire VEZ this morning. Thanks. Todd McKinnon: Yeah. One of the interesting things about being the clear leader in identity security is we kinda have a right of first refusal on all the acquisitions. So we looked at Vesa. It's interesting. It's a pretty narrow use case in terms of identity management. And the big picture idea is what's gonna be, like, the system of record for access. And to do that, you really have to have an IDP sitting in the middle of the transaction to really get the governance and control. So I think you're gonna see what's played out a lot of times over the last ten years, Gabriela, is every platform company is gonna try to take their own identity from their own platform. And make it generalizable. Sometimes they'll buy something. Sometimes they'll try to build it themselves. But it's really hard to cover all the use cases and cover all the integrations to all the different systems and environments. If you're not totally focused on it. And I think you'll continue to see that benefit us for a long time. Gabriela Borges: Thanks very much. Dave Gennarelli: Okay. We'll take the last question from Taz at Roth. Taz: Thanks, guys. Thanks for squeezing me in. I got two questions. Todd, first one for you. You mentioned the customer example with the large AI deal. And my question is can you talk about the, you spoke about one-to-many relationship between humans and agents. Can you talk about what that was in that scenario? And maybe kind of bake off a competitive landscape? Like, who are the other players involved in that deal? For AI security? Todd McKinnon: Yeah. I think we just it's pretty simple. I think a lot of companies think about agents as, you know, like, software engineering is a great example. As a software engineer, you're gonna have these agents working for you all the time. They're gonna be reviewing code. They're gonna be doing security reviews. They're gonna be checking code in. They're gonna be running tests. And all those agents are gonna be working on your behalf in some cases and have their own identity in others, and it's just having the flexibility to support all those different use cases in addition to agents that would just run on their own. Customer support agents or your agents sitting on your website, accepting commerce are gonna be on their own. Gonna need access control, but they're not bound to a user until maybe it gets lower down in the workflow. So all those. Taz: What's that relationship been? So, like, in the example that you've seen so far, what's it, like, one to ten, one to 20? And if you compare the human agents that you have or the human entities that you have, versus the agent that you secure, is that number is there a ballpark number that you have seen so far in the companies that you've sold to? Todd McKinnon: I think it's, like, five to ten per person. Taz: Cool. Got it. Brad, just one for you. Even as growth has slowed down in the last few years, margins have gone up quite a bit. And if you look at your, you know, margins plus revenue growth, you've always been above that rule of 40. Should we expect that to continue going forward in fiscal twenty-seven? Do you expect that rule of 40 to sustain? I know you didn't give us a revenue guide. You gave us some ballpark guide, but combining that with what to expect for free cash flow, multiple margin next year, should we expect that rule of 40 to sustain going forward? Brett Tighe: Yeah. I mean, from an overall perspective, we are gonna continue to employ the rule of 40 frameworks when we manage the business, something we've been quite consistent with, I guess, is probably the right way to put it. And as you said, we have a tremendous amount of margin increase over the last three years. Thank you for saying that, Taz. I really appreciate it. When we look at the overall formula, I'm not gonna be able to comment on what we're gonna do next year for FY '27. Let's get through the plan, and let's get through Q4 and see how everything goes. I'll give you an update then. But, ultimately, when you think about it, we wanna lean into the growth side of the equation more. You've heard us talk about that. That's been our goal is to accelerate growth. For quite some time. You can hear the optimism from the call today about that desire and confidence. And so we're still gonna manage through that rule of 40, but we really wanna lean more into that growth acceleration side of the house. And once we have our finalized plans for FY '27, I'll be able to give you some more succinct detail at the next earnings call. Taz: Very helpful. Thank you. Thanks, guys. Dave Gennarelli: Well, thanks, everybody. But before you go, just wanna let you know that Okta will be hosting several on-site and virtual bus tours in December and January. And we'll also be attending the virtual Needham Growth Conference on January 8. So we hope to see you at one of those events. Thanks, everyone.
Operator: Hello, and welcome to CrowdStrike Holdings, Inc.'s Fiscal Third Quarter 2026 Financial Results Conference Call. At this time, participants are in a listen-only mode. After the speakers' presentation, we will conduct a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the call over to Andy Nowinski, Vice President of Investor Relations and Strategic Finance. Andy, please go ahead. Andy Nowinski: Good afternoon, and thank you for your participation today. With me on the call are George Kurtz, Chief Executive Officer and founder of CrowdStrike Holdings, Inc., and Burt Podbere, Chief Financial Officer. Before we get started, I would like to note that certain statements made during this conference call that are not historical facts, including those regarding our future plans, objectives, growth, including projections, and expected performance, including our outlook for the fourth quarter and fiscal year 2026 and any assumptions for fiscal periods beyond that, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements represent our outlook only as of the date of this call. While we believe any forward-looking statements we make are reasonable, actual results could differ materially because the statements are based on current expectations and are subject to risks and uncertainties. We do not undertake and expressly disclaim any obligation to update or alter our forward-looking statements whether as a result of new information, future events, or otherwise. Further information on these and other factors that could affect the company's financial results is included in the filings we make with the SEC from time to time, including the section titled Risk Factors in the company's quarterly and annual reports. Additionally, unless otherwise stated, excluding revenue, all financial measures disclosed in this call will be non-GAAP. A discussion of why we use non-GAAP financial measures and a reconciliation schedule showing GAAP versus non-GAAP results is currently available in our earnings release, which may be found on our Investor Relations website at ir.crowdstrike.com or on our Form 8-K filed with the SEC today. With that, I will now turn the call over to George. Thank you, Andy. And a warm welcome to the CrowdStrike Holdings, Inc. team. George Kurtz: Andy is no stranger to many on this call, and I'm glad to have him with us to lead investor relations. I'm excited to share CrowdStrike Holdings, Inc.'s fantastic Q3. It was a record quarter as the business continued accelerating. On the back of record attendance at Falcon Global and Falcon Europe, the momentum we're seeing with customers, prospects, and partners drives my conviction in our near-term and long-term growth. Last quarter, Q2, we delivered our forecasted reacceleration a quarter early. This quarter, we furthered the trend with relentless execution. Across the entire CrowdStrike Holdings, Inc. team, I'm extremely proud of our Q3 with highlights including one, record Q3 net new ARR of $265 million, which grew 73% year over year, beating our expectations by more than 10%. Two, ending ARR of $4.92 billion, which accelerated to 23% growth year over year. Three, record Q3 free cash flow of $296 million or 24% of revenue. Four, all-time record operating income of $265 million or 21% of revenue. This is the second consecutive quarter of record operating income. Five, broad-based ending ARR acceleration across cloud, next-gen identity, and next-gen SIEM collectively, as well as acceleration in our endpoint business. And six, more than $1.35 billion in ending ARR from accounts that have adopted the Falcon Flex subscription model, growing more than 200% year over year. Underpinning these financial highlights is the CISO, CIO, and board feedback I regularly hear. CrowdStrike Holdings, Inc. is mission-critical in today's agentic society. No matter how the market swings, geopolitical tensions evolve, or what technologies are in vogue, our digital society mandates cybersecurity as a necessity. And now more than ever, synonymous with that, CrowdStrike Holdings, Inc. is a necessity. Our growth is driven by pervasive, durable, and thematic market forces. Organizations of all sizes are in the midst of AI transformations, investing in the future of workforce productivity in the name of speed, scale, and cost benefits. In the midst of this societal shift, what I've shared over the past few years and quarters is unfolding before our very eyes. One, AI is rapidly expanding the attack surface. Businesses are onboarding a whole new type of workforce today, the agentic workforce. Humans, using agents to do more, and agents working by themselves, each with access to data, applications, compute, and sometimes even other agents. While the benefits of this newfound workforce are exciting and increasingly vital for market competitiveness, the rapidly expanding risk profile of this realm cannot be ignored. Every single agent expands the attack surface, necessitating protection. CrowdStrike Holdings, Inc. is both the armor and intelligence layer that keeps each agentic identity secure. The intelligence layer provides visibility and context to organizations from agentic threats and risks. And the armor protects agents from attacks, influence, exfiltration, and data manipulation. In addition, CrowdStrike Holdings, Inc. is also present as the foundational protector of the underlying technologies powering the AI revolution. Providing security by design, for the world's clouds and token factories. Two, the democratization of destruction wasn't just a bold prediction. It's already today's reality. Businesses every day are having jarring, light bulb moments witnessing AI-powered adversarial tradecraft firsthand. Just a few weeks ago, a major AI company shared that China's state-sponsored adversaries were using their LLM to create and operationalize active cyber intrusion agents. This is just one of the many AI-enabled attacks we've seen. The AI cyber battleground is no longer theoretical; it's now real. Now just as anyone can use AI to vibe code and become a software engineer, anyone can now also vibe hack, becoming a sophisticated adversary with AI. Three, cybersecurity in the agentic era demands a single platform. The criticality in being able to operate with agility, efficacy, and speed to stop breaches is having the data, the controls, and the actions in a single platform, not multiple platforms. Because when you have multiple platforms, by definition, you don't have a platform. Tab switching and context switching cost time, data stitching doesn't scale. These are the seams and cracks where adversaries thrive. The leaky lifeboat of PowerPoint platforms and point product fragments simply cannot offer the protection, scalability, and cost benefits or the ease of use of a single platform solution. CrowdStrike Holdings, Inc. wins as the market's broadest and only single platform solution. Taking my three points together, one, we've built the right architecture, a single console, single data back end, single sensor, AgenTeq Hyperscale platform, that is frictionless, and one of a kind in cybersecurity. Two, it's the right time with the rapid growth of AI agents raising the threat risk profile and driving a holistic technology shift. And three, we're in the right position. CrowdStrike Holdings, Inc.'s technology innovation engine and ecosystem position us as the operating system of cybersecurity for the Agentic era. Market demand is high because the need is real. We have the right architecture. We have the right products. And we're in the right market position to continue taking share. Successful AI adoption requires cybersecurity transformation, necessitating a new operating system to create a structure around the next chapter of enterprise security programs. Falcon NextGen SIEM is the foundation of our platform, turning CrowdStrike Holdings, Inc. into our customer's operating system for cybersecurity. NextGen SIEM has become a scale disruptor in a market that has historically been slow to evolve as customers embrace the speed and efficiency advantages versus legacy competitors. And with the acquisition of Onum, we're making it even easier to build on CrowdStrike Holdings, Inc. with a hyper-scalable telemetry detection pipeline that brings CrowdStrike Holdings, Inc. even closer to all our customers' critical data. FalconXion SIM had a record net new ARR quarter. A clear outcome of the deliberate strategic choices we've made over the past several years. We know that the value of the technology is only as good as the platform on which it's delivered. So we invested heavily in integrating next-gen SIEM to create a unified single platform. This isn't just a single console. It's a truly integrated and unified data back end that brings together all of CrowdStrike Holdings, Inc. in one place. Delivering not just economies of scale, but far superior outcomes. And with Charlotte as the agentic sock orchestrator, now FedRAMP High approved, we're delivering the AI SOC of the future today. Furthering our position as the operating system of cybersecurity, we recently announced our expanded partnership with AWS. Through this announcement, all of AWS's millions of customers will have access to Falcon NextGen SIM, natively within their AWS security console. Enabling them to immediately access, interact with, and analyze AWS telemetry directly in NextGen SIEM. Going a step further, we've also enabled federated search so that AWS customers can query their data from a single console. We're incredibly excited about what the future holds, and thank AWS for both our amazing partnership and for the validation of FalconXion SIM as the best choice for their customers. A large European bank renewed their more than 500,000 workload EDR deployment, adding next-gen SIM, ONEM, and Charlotte in a large 8-figure expansion deal. With our acquisition of Ownham, this financial institution was able to eliminate their existing streaming pipeline point product as well as migrate off Splunk. Competing against hyperscalers and firewall vendor SIEMs, Falcon NextGen SIEM won the hearts and minds of the security and IT team as the easiest solution, fastest to see value, and best agentic SOC transformation platform. Our identity business continues to perform exceptionally well. While the demand for our ITDR offering has increased, it's the launch of both our PAM and Falcon Shield offerings that has our customers increasingly excited. FalconShield had a record net new ARR quarter, growing nearly 50% sequentially as market demand for SaaS application security has become a mainstream necessity. Securing SaaS app misuse from human and nonhuman identities has never been more important or challenging. Nefarious agentic behavior is targeting data-rich SaaS applications that have quickly become a feeding ground for breaches. From on-prem apps to cloud apps, we stop these breaches. A Fortune 500 logistics company used Falcon Shield to uncover exfiltrated CRM data in less than thirty minutes from deployment resulting in a 7-figure deal. A leading customer experience platform saw a Shield demo and activated the module via Flex within an hour. And lastly, a Global 500 personal care leader conducted a shield assessment uncovering 25 unknown shadow instances of their CRM. This customer quickly transacted a 7-figure expansion bringing their SaaS environment under control. As these examples illustrate, today's elevated third-party SaaS risk environment demands visibility and protection. Falcon Shield delivers near-immediate time to value and is a product that we can land new logo accounts with even without endpoint deployments. Turning to the cloud where we delivered Q3 record net new ARR. While CrowdStrike Holdings, Inc. continues to benefit from M&A-related market disruptions, it is our customers' embrace of best-in-class runtime protection that continues to push us forward. As the cloud security market matures, customers are realizing that posture doesn't equate to prevention. Security teams now understand that they need active defense within their cloud environments and this can only be delivered in runtime. CrowdStrike Holdings, Inc. is the cloud runtime security leader as validated by the most recent Frost and Sullivan CWP report. And with our recent acquisition of Pangea, we're now positioned to protect the entirety of our customer's AI infrastructure. At our recent analyst day at our Falcon conference, we discussed how protecting AI is akin to protecting a building. Security teams don't want a non-integrated, fragmented series of solutions to protect their critical AI infrastructure because they know this complexity creates gaps that are increasingly exploitable by AI-enabled adversaries. CrowdStrike Holdings, Inc. Falcon cloud security offers customers a unified, integrated, end-to-end solution that enables secure adoption of transformative technology without slowing the end user down. A Fortune 500 consumer packaged goods company grew their Falcon deployment with Falcon Cloud Security and a 7-figure expansion deal. This customer took the opportunity to displace Wizz bringing their cloud security program to Falcon for the benefit of our consolidated CSPM, ASPM, CIEM, and CDR approach. The outcome delivered is single platform management, better visibility, and the ability to stop cloud breaches versus simply alerting on them. This was just one of multiple Wizz replacements. In addition, Falcon cloud security was selected to protect a leading Neo cloud in an 8-figure transaction. This token factory decided it was time to secure AI from the source so that enterprises of all sizes would trust and build with confidence on them. Cybersecurity became a differentiator and business enabler, not a cost. And finally, I wanted to touch on our endpoint business. Our endpoint business accelerated in the quarter, on the heels of AI-driven demand. In the world of AI, so much is being pushed to the edge. Employees are now deploying new applications such as Claw Desktop and ChatGPT directly onto their machines driving both rapidly improved productivity and also significant new risks. This is further exacerbated by the rapid adoption of new AI browsers such as Common at Atlas, which bring new opportunities and concurrently new vulnerabilities and threats. AI adoption is supercharging renewed interest in the endpoint as the endpoint is the epicenter of human and nonhuman interaction with AI. In this new agentic world, the endpoint has quickly become the risk point, the productivity point, and the opportunity point. A large government agency took the opportunity to modernize, replacing more than 75,000 endpoints of legacy AV with Falcon, as well as deploying us in their AWS environment for cloud protection in what was a strong federal quarter for CrowdStrike Holdings, Inc. In addition, brought us into a Fortune 500 health care account where in just a few months we were able to modernize the endpoint, cloud, and sim environments, an 8-figure end-to-end flex expansion deal, where we displace two sims, Defender for Endpoint, and a Point Cloud security product. Frequently imitated but never duplicated, Falcon Flex makes it easier than ever for our customers to experience the full power of the Falcon platform without procurement friction. The flex model cultivates more platform utilization, accelerating module adoption. Falcon Flex is an unlock, not an ELA. Flex customer ending account ARR more than tripled year over year. But what has us even more excited is the momentum we're seeing in Reflex activity. The number of Reflex accounts more than doubled quarter over quarter to more than 200 with 10 customers reflexing more than two times their initial flex subscription. This demonstrates that flex customers can and do increase their ARR and TCV spend with CrowdStrike Holdings, Inc., which is contrary to the ELA model. Where all the economic value is realized once upfront. When we launched Flex, we believed that it would allow customers to more quickly benefit from the full value of our platform, and that's exactly what's happening. As customers and partners alike continue to embrace Flex, as the best way to adopt Falcon, we expect it to become our licensing standard. Our community, or crowd, powers our technology, and that's who we build for. Our ecosystem partners continue leading us to new heights, affirming CrowdStrike Holdings, Inc.'s market and category leadership. Our alliance team delivered a record quarter in terms of deal value closed with partners. CrowdStrike Holdings, Inc.'s market position comes to light in mission-critical times. F5 asked us to partner with them to further secure their BIG IP hardware and virtual appliances. We rapidly deployed our sensor on BIG IP, which they certified, and F5 took the opportunity to purchase Falcon and Overwatch licensing for their install base in a large flex transaction. We are pleased to be taking our industry-leading protection capabilities to new insertion points designed to enhance network perimeter protection. Today, hundreds of F5 customers are now securing their F5 appliances with CrowdStrike Holdings, Inc. Many of whom weren't CrowdStrike Holdings, Inc. customers prior. Partners take us into new account environments implementing Falcon as part of their broader AgenTic enterprise architecture vision. Experiencing the success of next-gen SIEM in the market, took a bold step to standardize their SIEM practice on Falcon in a large 7-figure transaction. Is migrating accounts for which they own and operate multiple legacy SIEM technologies. Consolidating on CrowdStrike Holdings, Inc. Additionally, is a leading global partner of ours for next-gen SIEM implementations taking numerous Fortune 500 accounts through the journey from legacy SIEM to next-gen SIEM migration. Deloitte announced next-gen SIEM in their MXDR practice, replacing their legacy SIEM provider. And Wipro, too, has standardized security delivery and incident response on Falcon. The GSI community is quickly seizing the SIEM and SOC transformation opportunity that only our single platform provides. The ecosystem embrace of partner-led services on Falcon is correlated to the opportunity we represent. A recent Canalys report showed that our ecosystem creates up to $7 in services opportunities for every dollar of Falcon product sales, illustrating the large ecosystem opportunity surrounding the Falcon platform. I want to return to yesterday's announcement that we made with AWS. AWS selected Falcon NextGen SIEM as the default SIEM for all their customers. Offered in their Security Hub console. This brings Falcon NextGen SIEM with pre-populated AWS data to millions of AWS customers in a product-led growth motion. Our intent is to convert next-gen SIEM usage into flex subscriptions as more accounts experience the power, speed, and actionability of their AWS data, CrowdStrike Holdings, Inc. data, and other third-party data in NextGen SIEM. Our next-gen SIEM helps AWS fill a critical market gap now competing with other hyperscaler SIEMs and doing so with Falcon. Our next-gen sim delivers value for AWS customers, even those who don't yet use Falcon. Because we've become a federated, pre-populated, and affordable security data lake, for observability, triage, threat hunting. And Charlotte is there to help operate the whole system on a customer's behalf. In addition, Accenture is our launch partner with AWS helping AWS customers leave their legacy SIEM for Falcon NextGen SIEM on AWS. Our partnership with AWS continues from strength to strength, with CrowdStrike Holdings, Inc. announced as AWS's global security partner of the year and AWS's global marketplace partner of the year yesterday at re:Invent. We're excited about the opportunity to engage AWS accounts onboarding them to Falcon, and serving as their operating system for cybersecurity. Lastly, I want to share a noteworthy MSSP partnership which we've announced today with Kroll, a leading mid-market professional services firm. Kroll's cybersecurity division performs thousands of incident response engagements yearly for mid-market firms around the world. Largely from their cyber insurance panel inclusion. Had been using a point product DVR in their incident response and managed detection response business. Now Kroll exclusively uses Falcon, and in an almost 8-figure rip and replace transaction, Kroll is migrating nearly half a million endpoints to Falcon, which were previously running on a point product SMB EDR, and up leveling their own MDR service with Falcon Complete for service providers. With our Falcon Complete team becoming the SOC for Kroll. This partnership announcement illustrates the value that only CrowdStrike Holdings, Inc. can deliver. The best technology platform with numerous expansion opportunities to help customers and partners alike consolidate the services opportunities partners need to see value, whether that be an incident response, proactive assessments, managed detection response, or SOC transformation, and our skilled and agentic MDR teams to up level partners so they can focus on selling, and client services while we focus on stopping breaches as the world's SOC. We've improved Kroll's technology stack, displaced an inferior point product, improved their margins with Falcon Complete, and they migrated their entire practice to us. This transaction highlights the power of Falcon to be a business creator for our ecosystem. We're not selling products. We're delivering outcomes. Introducing the world to a whole new way of performing cybersecurity and risk management. In closing, this was one of our very best quarters in company history. Acceleration is back. We're winning and we're living the company's mission of stopping breaches. AI represents our largest opportunity and demand driver yet. We're using AI to revolutionize cybersecurity. And even larger, we're securing the world's use of AI, so businesses of all sizes can adopt more AI faster, securely, and with confidence. The takeaway is this, AI adoption necessitates the right cybersecurity. It necessitates CrowdStrike Holdings, Inc. Jensen Huang summed up our market position best saying, quote, I can't imagine a better defender than CrowdStrike Holdings, Inc. End quote, on the stage at NVIDIA GTC in Washington DC. The transformative work we're doing with NVIDIA is representative of how we're securing AI at its very source all the way down to its human and nonhuman users, and its outcomes. I see this as a generational opportunity for the company. AI is but one of many tailwinds continuing to propel CrowdStrike Holdings, Inc. to new heights. One thing is certain, whenever our customers engage in technology change and transformation, cybersecurity has been a constant necessity, and that constant is CrowdStrike Holdings, Inc. With that, we have a big Q4 opportunity in front of us. A robust demand environment, and no shortage of breaches to stop. Cybersecurity doesn't slow down for the holidays, and neither do we. Stay safe, happy holidays, and I'll pass the call over to Bert Podbere, CrowdStrike Holdings, Inc.'s CFO. Burt Podbere: Thank you, George, and good afternoon, everyone. As a quick reminder, unless otherwise noted, all numbers except revenue mentioned during my remarks today are non-GAAP. Additionally, the results we are reporting today include the acquisitions of Oum and Pangaea, which closed during the quarter and were de minimis to revenue and ARR. We delivered an exceptional third quarter driven by organic growth, exceeding expectations across all guided metrics. We achieved record Q3 net new ARR of $265 million, exceeding our expectations by double-digit millions and more than 10 percentage points. Net new ARR growth accelerated to 73% year over year, and ending ARR reached $4.92 billion, accelerating to 23% growth over last year. As George highlighted, our performance reflects the success of our single platform strategy as organizations prioritize cybersecurity in the agentic era and customers consolidate on Falcon, as the operating system of the SOC. We delivered acceleration across the platform, with cloud, next-gen SIEM, and next-gen identity all delivering strong results. Momentum was broad-based across customers of all sizes. From enterprise to down market and MSSPs achieving record results in our corporate business and strong performance in the public sector, particularly in US federal and higher education. Falcon Flex continues to be a powerful driver of platform consolidation with over $1.35 billion in ending ARR from accounts that have adopted the flex subscription model. Falcon Flex is quickly becoming the standard licensing model as it makes it easier for customers to adopt more of the Falcon platform faster. Customers continue to leverage Falcon to consolidate their security needs and lower their total cost of ownership resulting in higher retention rates, over the prior quarter and increased module adoption rates. As of Q3, 49% of subscription customers are now using six or more modules, 34% are using seven or more, and 24% are using eight or more modules. With our business momentum increasing and our all-time record pipeline entering Q4, we have strong conviction in our ability to deliver profitable growth as we finish FY '26 and look into FY '27 and beyond. Moving to the P&L, total revenue exceeded our guidance range and grew 22% over Q3 of last year to reach $1.23 billion. Subscription revenue grew 21% over Q3 of last year to reach $1.17 billion, and professional services revenue was $65.5 million. The geographic mix of third-quarter revenue consisted of approximately 67% from the US and 33% from international geographies, with both US and APAC year-over-year revenue growth accelerating compared to Q2. Total non-GAAP gross margin was 78% and non-GAAP subscription gross margin increased to 81% of revenue. Total non-GAAP operating expenses in the third quarter were $703.2 million or 57% of revenue. In Q3, we saw a typical step-up in sales and marketing expenses from our annual Falcon conference we hosted in September, which was our biggest selling event of the year and set multiple records with over 8,000 attendees joining us. Non-GAAP operating income was a record $264.6 million, and operating margin was 21%, exceeding our guidance. The outperformance was driven by our strong top-line performance, gross margin improvement, and sales execution underscoring our commitment to profitable growth as we balance accelerating net new ARR growth with operational excellence. GAAP net loss attributable to CrowdStrike Holdings, Inc. was $34 million, which included $26.2 million of costs associated with the July 19 incident and related matters, and $5.6 million of acquisition-related expenses. Non-GAAP net income attributable to CrowdStrike Holdings, Inc. was a record $245.4 million or 96¢ on a diluted per share basis, exceeding our guidance. Moving to cash, our cash and cash equivalents were $4.8 billion. We generated record cash flow from operations of $397.5 million and record Q3 free cash flow of $295.9 million or 24% of revenue. Payments for incident-related and strategic plan costs impacted Q3 free cash flow by approximately $53 million. Moving to our outlook and modeling notes. The AI-driven demand environment combined with our record pipeline and the continued momentum in customer platform consolidation on Falcon gives us strong conviction as we finish Q4 and look toward FY '27. While we do not guide to ending ARR or net new ARR, our revenue guidance includes the following assumptions. Low to mid-teen sequential net new ARR growth Q3 to Q4 bringing ending ARR growth for FY '26 to 23% year over year. At the midpoint of our net new ARR assumptions, we expect second-half net new ARR growth of at least 50% year over year well above our previously provided assumptions of at least 40% year over year driven by our strong Q3 outperformance and record pipeline. Additionally, we continue to expect FY '27 year-over-year net new ARR growth of at least 20% from our now increased FY '26 net new ARR assumptions. As we discussed during our September investor briefing, as a result of our successful CCP and related partner programs, our ARR to subscription revenue assumptions include a separation of $13 million to $15 million in Q4, consistent with what we noted at Falcon, this gets you to the midpoint of our FY '26 revenue guidance. Which we have raised by $24.1 million at the midpoint to reflect our strong Q3 outperformance and record pipeline. We ask that you please be mindful of these dynamics when updating your models. Moving to cash, we expect Q4 free cash flow margin to be 27% and include cash payments of approximately $33 million in connection with incident-related costs. This brings our full-year FY '26 free cash flow margin expectation to 25%. Finally, we remain confident in our previously provided assumptions for FY '27 partner rebates, non-GAAP operating margin, and free cash flow margin, which are detailed in the modeling assumptions slide of our Q3 FY '26 earnings presentation. Available at ir.crowdstrike.com following our prepared remarks today. Moving to our outlook. For the '26, we expect total revenue to be in the range of $1.29 to $1.3 billion, reflecting our year-over-year growth rate of 22 to 23%. We expect non-GAAP income from operations to be in the range of $315 to $319 million and non-GAAP net income attributable to CrowdStrike Holdings, Inc. to be in the range of $282 to $287 million. We expect diluted non-GAAP net income per share attributable to CrowdStrike Holdings, Inc. to be approximately $1.09 to $1.11. Utilizing a 21% tax rate and weighted average share count of approximately 258 million shares on a diluted basis. For the full fiscal year of 2026, we currently expect total revenue to be in the range of $4.797 to $4.807 billion reflecting a growth rate of 21 to 22% over the prior fiscal year. Non-GAAP income from operations is expected to be between $1.036 and $1.04 billion. We expect fiscal 2026 non-GAAP net income attributable to CrowdStrike Holdings, Inc. to be between $950 and $954 million. Utilizing a 21% tax rate and approximately 256 million weighted average shares on a diluted basis, we expect non-GAAP net income per share attributable to CrowdStrike Holdings, Inc. to be in the range of $3.70 to $3.72. George and I will now take your questions. George Kurtz: Thank you. Operator: If you would like to ask a question, please click on the raise hand button that can be found on the bar at the bottom of your Zoom window. You may remove yourself from the queue at any time by lowering your hand. When it is your turn, you will hear your name called and receive a message on your screen notifying you that you may unmute yourself. In the interest of time, participants will be limited to one question. Our first question will come from Brian Essex with JPMorgan. Please unmute and ask your question. Brian Essex: Great. Thank you for taking the question and nice results. And, Andy, congratulations on the new role. Maybe for George, great to hear the acceleration in the endpoint segment of the business. And I know you guys aren't giving any update until year-end on the emerging segments of the business. But could you offer a little bit of color on how those segments are behaving as you kind of lap the initial CCP initiatives of last year? And then maybe for Bert, I know you're not offering any kind of impact from Pangea on ARR, but any sense of the seasonality organic seasonality for net new ARR? Thank you. George Kurtz: Hey, Brian. Thanks. Yeah. When we look at, obviously, the emerging products, which was the heart of your question, they performed fantastic. If you look at NextGen SIM, it's been an all-star standout for us. We've seen just incredible results from a perspective and what they're able to do and driving down the cost to get better outcomes. Identity as well. That's key to securing the AI in an enterprise. And then, obviously, cloud, we talked about some of the big wins throughout the quarter. So when we look at those and as you mentioned, we'll be reporting out on those next quarter, we're very, very pleased with the results. And customers are embracing the technology and the consolidation the single platform delivers. So from that standpoint, I think we're very happy. And then as we lap the CCP, CCP was designed to do exactly what we delivered. Right? We helped customers through a situation. And, also, we provided a way to accelerate flex adoption, and we've seen that with our flex license adoptions throughout the quarter, which we called out. And then, obviously, we had a fantastic endpoint quarter, which continues to help drive all the other modules. So overall, I couldn't be happier with the quarter that we just put up. Burt Podbere: Yeah. And on your question with respect to, you know, Pangea, you know, I think that I called out that you know, we had got a de minimis impact both the revenue standpoint and the new ARR. And we're excited that, you know, those are gonna roll into the platform in Q4. So that's how we think about it. Andy Nowinski: Thanks for the question, Brian. Operator, next question. Operator: Your next question will come from Saket Kalia with Barclays. Saket Kalia: Hey, great. Hey, guys. Thanks for taking my great quarter and congrats, Andy. George Kurtz: George, maybe for you. I just wanna pick up on your comment earlier on SIM. It feels like the SIM market is starting to see more velocity of displacements. You just maybe talk about what sort of value you're able to capture in those opportunities compared to what customers were maybe spending before? And then maybe relatedly, how do you kinda think about the timetable for legacy SIM renewals in the coming quarters, years, which, of course, I imagine you'd be targeting. Thanks. George Kurtz: Yeah. So I'm I'll try to wrap this up into, you know, one answer here. But, Saket, let me just kinda lay this out. If you look at the journey that we've been on and how we've been able to replace legacy AV, it feels a lot like that market in the early days when we think about replacing legacy SIM. Customers are looking for better outcomes. They're looking for faster results, and they're looking for lower cost. And because we already have the EDR data in the platform, we can offer disruptive pricing versus our competitors. The stickiest data that's out there is the EDR data. We already have it. And, really, what it becomes is a journey to activate NextGen SIM for our customers. So when we think about the opportunity to work with customers and how we get in and, you know, the opportunity going forward. Keep in mind all of our customers are next-gen SIEM enabled. All of our customers are next-gen SIEM enabled. It's a huge difference between us and everyone else in the marketplace, and all we need to do is go through the licensing, exercise, and Flex is helping to accelerate that. So we can offer competitive disruptive pricing and then overall grow our total wallet share with the customer over time. So it's a multiyear long tail journey that feels very similar to the displacement of legacy AV. Andy Nowinski: Very helpful. Thanks, doc. Andy Nowinski: Thanks, Saket. Operator, next question. Operator: Your next question will come from Matt Hedberg with RBC. Matt Hedberg: Great. Thanks for taking my question. Congrats from me as well in the quarter, Andy, to you as well. George, building on your next-gen SIEM success and ONAM, and a little bit related to Saket's question, do you see a further push into observability? Obviously, there's been some movement with some of your cyber competitors to go deeper into observability. Just curious on kind of how you view that market? And is that consolidation opportunity for you as well? George Kurtz: Well, we do view it as a consolidation opportunity, and I'll remind everyone on the call that when we acquired Shumio, which became LogScale, 50% of their business was actually in observability. So we have all of the technology. And in fact, because the platform is collecting so much data and so much telemetry, we have customers today that are using it for observability use cases. You combine that with our agent technology, which does deep inspection within its platform, and we have data that goes well beyond security data that is already being consumed by customers. Then you combine that with ONEM, the pipelining technology, the data fabric which, again, has the ability to take IT data, and we have a fantastic in front of us to consolidate in those areas, which, you know, again, this is nothing new to us. We've actually been doing this. And this has been, you know, part of our selling motion as well as what customers are embracing. So it's already there, and there's certainly more that we can do and certainly more we will do. Andy Nowinski: Great. Thanks, Matt. Operator, next question. Operator: Next question will come from Gabriela Borges with Goldman Sachs. Gabriela Borges: Hi. Good afternoon. Thank you. Question for Bert. So CrowdStrike Holdings, Inc. has years and years of data on customer cohorts and how your customer cohorts typically expand with you over time. You've now got several quarters of data on Flex and how the Flex customers expand with you over time. There's a piece of this which is structural, which is, you know, making it easier for customers to consolidate with you. But I'm wondering if there's also a dynamic where you see an elevated tailwind to NRR for a period of time because of Flex, and Flex starting with your best and most excited customers and then perhaps normalizes lower. So my question for you is how do you think about that dynamic? How do you think about the tailwind that Flex is driving in the model and how sustainable that is? Thank you. Burt Podbere: Thanks, Gabriela. So the way I think about this is our flex license, it's continuous. Net ARR will be continuous throughout time. And the beauty of this whole program is that it's designed for customers to easily buy more. So over time, you know, we're excited about the opportunity as we bring more products to market and offer more availability to our customers easily. And I think that's the biggest piece that everybody on the call should just remember is that that's exactly what Flex was designed to do, make it easier for customers to buy, make it very easier for us to, you know, be able to deploy, and be able to give value and lower TCO. That's how we think about it. And the benefit is that we're seeing bigger deals and longer deals. And that's all good for us, and it's great for the customers. You know? And I think what I think the most important thing is and not get lost in, you know, in things I've just said is consolidation. You know, we started this company talking about consolidation, the ability for customers to do more with us, spend more with us, and lower their total TCO by spending more with us. So I think that's the biggest point. That I wanna drive home. Andy Nowinski: Thanks, Gabriela. Operator, next question. Operator: Your next question will come from Dan Ives with Wedbush. Dan Ives: Yeah. Thanks. And also congrats on the Mercedes deal, George. Can you just talk about AI? Like, as you're starting to see more and more deployment, talk about how that's changing the conversations with customers. Even over the last three, six, nine months relative to where CrowdStrike Holdings, Inc. sits. Can you just maybe just give some, you know, some insight into how those have changed from your perspective? George Kurtz: Yeah. Great. Thanks, Dan. Thanks as always. Yeah. When we think about the conversation of AI, what customers have realized is that CrowdStrike Holdings, Inc. is probably the only company in security that's moved beyond chatbots. And what I mean by that is Charlotte AI and its related agents are deeply embedded into the platform. Our last Falcon in Europe, we talked about 11 AI agents and agent work which allows our customers to actually create their own security agents, which we think is gonna be a massive opportunity for us. So it's moved from chatbots to actual doing work, and this is something that we continually hear differentiates us from our competitors. Our competitors are still stuck on chatbots where we've done the within the platform. We've created models around each of our model. Modules, and we're delivering results, you know, things that would take four days of work, we're delivering in minutes for customers. And at the various events that I was at both, in Las Vegas for Falcon and in Europe for our Falcon In Europe, I had customers talk about just the evolution of Charlotte, the maturation of it, and how it's become a key part of their success in their stock. And it gets back to what I said earlier. You know, CrowdStrike Holdings, Inc. has become the operating system for the SOC. And Charlotte is a big piece of it. Andy Nowinski: Alright. Thanks, Dan. Operator, next question. Operator: Your next question will come from Joseph Gallo with Jefferies. Joseph Gallo: Hey, guys. Thanks for the question, and congrats, Andy, on the new role. It was awesome to see you guys maintain the fiscal twenty-seven net new ARR growth of 20% on higher numbers. You mentioned several key components of business accelerated in 3Q. Is there one or two products that you think have an outsized growth impact for upside next year? And then as a part of that, you know, security for AI feels necessary, but very early. Is that accounted for in your preliminary fiscal twenty-seven guidance, or is that more longer term? Thank you. Andy Nowinski: Yeah. Sure. So George Kurtz: I think when we look at next year, again, seeing the momentum that we talked about with next-gen SIM, again, it's an all-star product. It delivers a lot of value. Which is key in this market when you're talking about consolidation. And it's enabling customers to do things that they haven't been able to do. And I think one of the areas that maybe is really not appreciated is that many organizations of all sizes are making a decision in the past to not collect certain data because of the cost. With CrowdStrike Holdings, Inc., we can actually open the aperture and we can provide value to collect all that data. So in general, we're expanding the wallet share, but we're giving them more value because we're collecting data they didn't have seen, and we're giving them outcomes that weren't available to them previously. So I would look at that as an all-star. I would look at cloud. We'd look at the displacements that we talked about in the call. We looked about the we talked about the runtime protection, which is key. Customers want that protection. And then we look at Falcon Field, which is, you know, again, cloud and identity. But it is a key technology to help protect the SaaS applications. So these are all fantastic opportunities for us, you know, in the coming year, and we'll continue to double down on Andy Nowinski: Alright. Thanks, Joe. Next question, please. Operator: Your next question will come from Fatima Boolani with Citi. Fatima, may unmute and ask your question. Fatima Boolani: Oh, here I go. Thank you for taking my questions. George, wanted to direct this to you. You gave us a lot of information about the strength of your strengthening partnership with AWS. Your proximity to AWS as a customer and a very, very strategic partner has only cemented further. So I wanted to ask you a very high-level strategic question. This proximity that precludes you or influences you or potentially maybe even complicates your relationship with other hyperscalers, and your customers who would, you know, presumably have multi-cloud footprints. Would love for you to sort of dive into some of those dynamics a little bit. Again, just by virtue of the strengthening partnership with AWS and the availability of the full Falcon suite, in a very deep integrated way inside AWS. Thank you. George Kurtz: So first, we couldn't be more excited about this partnership. And really, I think this is something that's gonna be incredible for AWS customers as well as customers at CrowdStrike Holdings, Inc. The fact that now natively, you can actually flow data from AWS into next-gen SIEM, it's right in your console, and it's gonna be a tremendous enabler, new customer acquisition. And it's a needed technology for AWS customers. So, you know, overall, fantastic relationship and we're excited to be deeply integrated. And when we think about the current environment, as you know, there's always an area to cooperate with many different companies that are out there. Just look at the AI space and, you know, how many people work with different companies that are out there. I think if you look at that and you apply it to security, of course, we're gonna work with other players that are out there. They're gonna leverage the best technology in the market, which is CrowdStrike Holdings, Inc. And we're there to support, you know, all of our customers and potential partners. So it doesn't preclude us from doing that, but, again, this reinforces what a great relationship we have with AWS. We've been able to partner with them, not only in the technology side but also in the marketplace. And you've seen the evidence of that by the awards that I called out. So overall, extremely excited about what the future brings. Andy Nowinski: Thanks, Fatima. Operator, next question, please. Operator: Your next question will come from Meta Marshall with Morgan Stanley. Meta Marshall: Great. Thanks. You noted core EDR acceleration in the quarter, and you kind of noted AI as a catalyst for that. But just is that kind of more endpoints getting protected as they become more intelligent or just existing customers looking to modernize as part of general AI adoption? George Kurtz: Sure. When you think about endpoints and the adoption of AI, a lot of it takes place at the endpoint. Think about all of the various technologies that are out there. Where people are running these as a user on their endpoints. I mean, we've seen some big announcements from consulting firms and others that are leveraging AI in their business because they have to, and they have to drive efficiencies. So what that means is that that creates opportunities and exposure for companies. So they're gonna need to monitor what sort of queries go in. They're gonna need to monitor what data comes out. They're gonna need to monitor what other services are connected into those AI desktop technologies. And that becomes another threat factor. So this becomes a catalyst. Again, I think this is underappreciated as a new risk factor that we hadn't had over the last number of years. Now with the adoption of this, this isn't AI creation. It's AI adoption. And that's, I believe, is gonna be a massive market for us. So that's where we see that. And, you know, overall, as I always say, 50% of the market is still legacy AV, and there's still a long runway in the endpoint business to be able to take that legacy market share. Andy Nowinski: Thanks, Meta. Operator, next question, please. Operator: Your next question will come from Patrick Colville with Scotiabank. Patrick Colville: Alright. Thanks, Andy, for having me on. I guess this one's for George. I wanna ask about discounting levels. Because if I think about this time last year, we had the CCP program, but we also had CrowdStrike Holdings, Inc. you know, very correctly being aggressive to cement and extend its position through, you know, through discounting. Know, that was the right strategy, and these results prove that. But as I think about, you know, the quarter we've just had, fiscal 3Q, as we look towards fiscal twenty-seven, I guess, you just talk about how you're thinking about just discounting a normal course of business discounting? Are those levels gonna diminish over time as we have the Falcon outage further and further in the rearview mirror and your position is looking very strong? George Kurtz: Sure. Well, I when you look at this market and you look at, say, enterprise sales, I mean, there's always some level of discounting. That's not unique to us. It's not unique to security, and it's, you know, not unique to software companies. It just happens as a normal course of business. And I think we've been very prudent in how we operate in those areas. And, you know, we've tried to focus on things like CCP, which, again, allow customers to take new technologies in, but protect the price point, and allow us to, basically capture them in a flex opportunity. So gonna use the tools available to us to be competitive. We continue to take share. We continue to drive new customer business. And, you know, we don't see anything out of the normal course of business, but we've got various tools in our toolbox and we tend to use those judiciously. And we're again, where it makes sense, for us and for the customer. And that just drives the growth that you've seen. And I'll also point out, you know, the 81% gross margin. Like, you have to look at the margin as well. And we've been able to be successful, and we've been able to protect the margin. Andy Nowinski: Thanks, Patrick. Operator, next question, please. Operator: Your next question will come from Eric Heath with KeyBanc. Eric Heath: Hey, great. Thanks for taking the question. Nice set of results. George, I wanted to ask about the partnership with F5. I thought that was pretty interesting. But me if I'm wrong, but I believe this part of the infrastructure stack historically was never able to support endpoint agents before. So does this expand the endpoint TAM? How meaningful can this be? And are there other areas of the infrastructure stack you think this is applicable to? George Kurtz: Yeah. This is a great and insightful question. I'm really glad that you asked it because it does. And what we've seen over the years is that customers have been asking for a long time to protect these appliances. And in many cases, the appliances have not been available to us, the underlying operating if you will, to be able to protect, but there's been a huge demand there. So we worked with F5 in great partnership, and very quickly to be able to certify our agent to run on their platform. And we do think that this will create a model, a working model, that will open it up to other appliances. Vendors to be able to have it protected. And I can tell you just some anecdotal stories. You know, there was a story just last week of a noncustomer never used CrowdStrike Holdings, Inc. had the opportunity to actually use our technology because of F5, and was blown away. And within a week, we had him in an EBC and now we're getting into a proof of value. So this play works, and we're going to expand our market and be very forward-leaning in being able to protect other appliances that are out there. Which you probably have seen are the tip of the spear for many of these nation-state breaches. Andy Nowinski: Thanks, Eric. Operator, next question. Operator: Your next question will come from Roger Boyd with UBS. Roger Boyd: Great. Can you hear me okay? George Kurtz: Yes. Roger Boyd: Awesome. Well, congrats, Andy, on the new role. Wanted to double-click on the Kroll partnership. I know MSP has been a growing part of the channel for CrowdStrike Holdings, Inc. for the past couple of quarters. Can you walk us through that longer-term opportunity as you expand with Kroll and other beyond kind of the initial endpoint landing point? Landing spot. Thanks. George Kurtz: Sure. Yeah. We were excited about this opportunity. We took out another EDR vendor that was in there. We're providing a much better solution for them and their customers. And they're in a segment that allows us to bring our technology too. You know? There's a lot of incident response engagements they're doing. They're part of the insurance panels. And it opens up a market opportunity with one customer and just accelerates our ability to penetrate that. So these are the type of models that we like to create. We've been very successful in the MSSP market. This is just another proof point of us working with customers like Kroll and the reach that they have and the trust that they have. So the idea is to create more Kroll opportunities and certainly grow the opportunity that we have with Kroll, which I feel very confident we will. Andy Nowinski: Thanks, Roger. Operator, next question. Operator: Your next question will come from Tal Liani with BofA. Tal Liani: Hi, guys. I'm trying you're a $5 billion revenue company, and you only provide one number. Revenue or ARR. There's no breakdown. So I'm trying to understand a little bit of the kind of any segmentation of your revenues and the question I have is, can you discuss verticals like contribution of SMB and trends in SMB, kind of new market opportunities that were not in your core before and how you are addressing them. And also new customers versus upsell to existing customers, are you the NRR and GRR I know you stopped doing it a few quarters ago. Thanks. Burt Podbere: Actually, let me take the last part of your first. So, basically, we are gonna be giving out about retention and growth generate at the end of the year. So that's what we've that's what we've talked about, and we will do that, Tal. So I think you'll be you know, you'll you'll get that information. At the end of Q4. So and we do it every Q4. Now with respect to breaking out, you know, how we think about our business, you know, whether it's enterprise or SMB or MSSP, the great the great news about our business is that we sell all of it. We're successful with all of it. We're successful at the you know, with small deals. We're successful with large enterprise deals. And and for us, you know, we have that great technology that it's the same. It's the same technology for if you're a five-person shop, you're the largest company in the world. And the beauty of, you know, how we're able to deliver deliver, you know, our technology that it's up and running in seconds. So when you think about, you know, segmentation and you think about you know, who we sell to, it really is everybody. You know, our ability and our success is is agnostic. We are really driving new wins and displaying competitor the competitors, on a daily basis. Right? And for us, you know, to continue to invest in the business, and for us to be able to continue to make sure that we're able to deliver in a very timely manner, these are the successful things that we look at to be able to sell to all of our customers, whether big or small. So we're excited about that. And we're also rare. In in the entire security community to be able to do that successfully. Andy Nowinski: Alright. Thanks, Tal, for the question. Operator, next question. Operator: Your next question will come from Mike Sikos with Needham. Jeff Hopson: Hi. This is Jeff Hopson on for Mike. Thank you for the question. With the increased amount of M&A activity in security we've seen this year, including CrowdStrike Holdings, Inc. recently, how are you guys approaching the buy versus build when it comes to a technology like AI that's developing pretty quickly? Thank you. George Kurtz: When we look at the market, certainly, there's a lot of activity out there, and you know, it's probably isn't a week that goes by that we don't talk to some bankers that are, you know, talking about other companies. The great news is we've got a tremendous balance sheet. We're in a fantastic position. To be able to build or buy or partner. And I think we've been very thoughtful about our act and a big part of our strategy has been the integration. And when you look at Pangaea, we're really starting to sell that in Q4 because we wanted to take the time and effort to integrate it. It's not just kinda stitched together. The single platform, which I talked about, is very important to our customers. So we're gonna continue to be thoughtful. We're gonna continue to buy what we perceive as best of breed in the market, not legacy technologies. We're gonna integrate them, which is part of our customer brand promise. And we're gonna continue to grow them within our sales motion and the channel that we built. So we'll be opportunistic, but we'll also be very strategic in what we buy. Andy Nowinski: Thanks for the question. Operator, last question, please. Operator: Your last question will come from Adam Borg with Stifel. Adam Borg: Awesome. And so much for the question, and, Andy, congrats on the role. Maybe just on the identity business, it's great to hear the stronger quarter there qualitatively. I know we've talked in the past about being almost like a one dot o product. Love to hear more about how you're thinking about that product particular and the maturity in coming quarters. Thanks so much. George Kurtz: Yeah. So identity as as we've mentioned, super important in an AI era. Something that we got into many years ago, and we continue to evolve that. And we've seen some really nice wins specific to our PAM technology. You know, we have to look at what customers are telling us and, and basically, you know, skate to the puck of where where they're going, which is they're looking for more modern identity solutions. They're looking for solutions that can do just in time and you know, some of the kinda legacy vaulting they'd like to to move away from. So those are areas of focus for us. We'll continue to build out our identity stack. It's been very successful for us. But, certainly, there's more to do. There's more to build out, and there's more in front of us. The good news is there's demand from customers, as you've seen lots of market, movement. And as customers think about what they're gonna do next, they wanna make sure they set them themselves up for really in the next era of agentic identity, and that CrowdStrike Holdings, Inc. will be there for them. Operator: This concludes today's question and answer session. I would now like to turn the call back to George Kurtz for closing remarks. George Kurtz: Thanks, everyone, today for your time. We appreciate your continued support. We'll actually be presenting at the UBS Conference tomorrow. And a live webcast and replay of the presentation will be available on our IR website and we look forward to seeing many of you at the conference. So thanks so much. Stay safe, and we'll talk soon.
Operator: Good afternoon and welcome to the Marvell Technology, Inc. Third Quarter Fiscal Year 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. Please note this event is being recorded. I will now turn the conference over to Mr. Ashish Saran, Senior Vice President of Investor Relations. Thank you. You may begin. Ashish Saran: Thank you, and good afternoon, everyone. Welcome to Marvell's Third Quarter Fiscal Year 2026 Earnings Call. Joining me today are Matt Murphy, Marvell's Chairman and CEO; Willem Meintjes, CFO; Chris Koopsmans, President and COO; and Sandeep Bharathi, President, Data Center Group. Let me remind everyone that certain comments made today include forward-looking statements, which are subject to significant risks and uncertainties that could cause our actual results to differ materially from management's current expectations. Please review the cautionary statements and risk factors contained in our earnings press release, which we filed with the SEC today and posted on our website as well as our most recent 8-K, 10-K, 10-Q and other documents filed by us from time to time with the SEC. We do not intend to update our forward-looking statements. During our call today, we will refer to certain non-GAAP financial measures. A reconciliation between our GAAP and non-GAAP financial measures is available in our earnings press release. As we discussed in our second quarter earnings call, going forward, we are consolidating our non-data center end markets into a single new communications and other end market. The composition of our data center end market remains unchanged. Our earnings press release for the third quarter reports revenue by end market in both the prior format as well as the new go-forward format. Please note that today's call will be longer than typical as we will be discussing the acquisition announced today in addition to a number of extensive updates on our business. You may also find additional details on this transaction in the press release and Form 8-K be filed with the SEC today and a presentation posted on our website on the Investor Relations page. Let me now turn the call over to Matt for his comments on the quarter. Matt? Matthew Murphy: Yes. Thanks, Ashish, and good afternoon, everyone. Settle in, okay? We have a lot of good stuff to talk about today. For the third quarter of fiscal 2026, Marvell delivered record revenue of $2.075 billion, reflecting a 3% sequential increase and strong 37% year-over-year growth. Revenue was above the midpoint of guidance, driven by stronger than forecasted demand in our data center end market. As a result, non-GAAP earnings per share of $0.76 exceeded the midpoint of guidance by $0.02. Excluding revenue from the divested Automotive Ethernet business, the implied revenue growth for Marvell's go-forward business was approximately 6% sequentially and 41% year-over-year. Momentum in our data center business remains strong with revenue growing 38% year-over-year, fueled by robust AI demand. We also saw a strong recovery in our communications and other end market, where revenue grew 34% year-over-year as reported and nearly 50% year-over-year, excluding the Automotive Ethernet business. We expect growth to continue in the fourth quarter with total company revenue forecast at $2.2 billion at the midpoint. We expect this momentum to continue throughout next fiscal year and beyond. I will provide more context on our numerous growth drivers later in the call. Strategic Acquisition of Celestial AI Matthew Murphy: Before discussing our end market, I'm excited to share details on the strategic acquisition we announced today of Celestial AI, which brings an entirely new disruptive technology, a photonic fabric platform purpose-built for next-generation scale-up interconnect. This acquisition is the latest in a series of decisive moves to further strengthen our data center portfolio. Since 2019, we have continued to increase our focus on data center, divesting our WiFi business and acquiring Avera, Aquantia, Inphi and Innovium. These transactions have driven significant revenue growth and scale and have each proven to be an absolute home run. This year, following the divestiture of our Automotive Ethernet business, we are continuing to double down on data center with the acquisition of Celestial AI. This positions us to further capitalize on the massive opportunity in accelerated infrastructure. The acquisition is expected to close in the first quarter of next year, subject to customary closing conditions, including regulatory reviews in the United States and will remain a separate independent company through the regulatory process. Matthew Murphy: AI is reshaping data center architecture at an unprecedented speed. Next-generation accelerated systems are no longer confined to single rack, they are evolving into multi-rack scale-up fabrics that connect hundreds of XPUs in a high-bandwidth ultra-low latency any-to-any fashion. These advanced fabrics demand purpose-built switches interconnects, engineered to deliver the performance and efficiency required at scale, creating a new TAM for companies like Marvell. Industry analysts are forecasting the merchant portion of the scale-up switch market to approach $6 billion in revenue in 2030. On the interconnect side, we are seeing the dollar content for optics of the same magnitude as a scale-up switch as the optical interconnect attaches to both the XPU and the switch, the opportunity actually doubles, meaning over $10 billion. These are both very large and exciting incremental opportunities for Marvell. Matthew Murphy: As we first evaluated Celestial AI, it reminded us of our early look at Inphi and the products we saw in their PAM technology to transform the scale-out interconnect market. We see even greater potential for Celestial AI's photonic fabric to transform the scale up interconnect market. Interconnect technology is as critical as switching and scale up networks to enable hundreds of XPUs to be tightly coupled together. This is driving a massive increase in the number of links in the network and overall system bandwidth, therefore, creating the need for a fabric which can span across racks. Copper-based interconnects used in today's scale-up systems are approaching their fundamental limits in reach and bandwidth, creating compelling need for optical solutions. Celestial AI's photonic fabric technology platform was purpose-built for this inflection. It enables large AI clusters that scale both within and across racks using a high bandwidth, low latency, low power and cost-effective optical fabric. This breakthrough enables a true optical solution with greater than 2x the power efficiency of copper interconnects, but with far longer each and significantly higher bandwidth. In addition to exceptionally low power consumption, Celestial AI solution provides nanosecond class latency and excellent thermal stability, which enables deeper levels of optical interconnectivity into XPUs and switch systems. The thermal stability of Celestial AI's photonic fabric technology is a significant competitive differentiator. It enables reliable operation in the extreme thermal environments created by large multi-kilowatt XPUs. This allows the photonics technology to be co-packaged vertically with the high-power XPUs and switches in a 3D package, enabling the photonic connection to be made directly into the XPU rather than from the edge of the die. This stands in sharp contrast to many other CPO implementations for the photonics engine sits adjacent to the XPU and must connect at the die edge. Celestial AI's approach results in a more compact and integrated solution, freeing up highly valuable die edge beachfront which can be repurposed to significantly increase the amount of HBM within the XPU package. Eliminating beachfront I/O constraints also significantly increases the amount of package bandwidth possible for XPUs and switch systems. Matthew Murphy: Celestial AI's first-generation product is a photonic fabric chiplet or PF chiplet, which integrates all the required electrical and optical components, including drivers, TIAs, equalizers, SerDes, microcontrollers, modulators, photodiodes and waveguides, all into a compact form factor. This is the industry's first scale-up optical solution delivering an unprecedented 16 terabits per second of bandwidth in a single chiplet, 10x the capacity of today's state-of-the-art 1.6T ports used in scale-out applications. Its compact form factor allows multiple PF chiplets to be co-packaged with XPUs and the scale-up switches on the other side of the link to further increase total bandwidth. Celestial AI is deeply engaged with multiple hyperscalers and ecosystem partners who recognize the disruptive potential of this technology. Notably, Celestial AI has already secured a major design win with one of the world's largest hyperscalers who plans to use Celestial AI's PF chiplets in its next-generation scale-up architecture. These PF chiplets will be co-packaged into both the hyperscalers custom XPUs and the scale of switches providing connectivity. This is expected to be the industry's first large-scale commercial deployment of optical interconnects for scale-up connectivity. Matthew Murphy: Beyond connecting XPUs and scale-up networks, the photonic fabric technology platform can enable a wide range of transformational applications over time. First is a pooled memory appliance that uses Celestial AI's photonic fabric to optically connect multiple XPUs to large shared external disaggregated memory bank. A second use case for Celestial AI's photonic fabric to replace traditional electrical die-to-die connections in multi-die packages. This is just the beginning of a broad set of new applications which can be enabled from this technology. After close, we expect meaningful revenue contributions from Celestial AI to begin in the second half of fiscal 2028. Our base case forecast show Celestial AI's revenue reaching a $500 million annualized run rate in the fourth quarter of fiscal 2028, doubling to a $1 billion run rate by the fourth quarter of fiscal 2029. Following the close of the transaction, we look forward to welcoming the Celestial AI team to Marvell. Celestial AI brings one of the industry's strongest photonic interconnect engineering groups with deep expertise in optics, advanced packaging and high-speed interconnect architecture and systems. In addition, the CEO, founders and key executives from Celestial AI will assume leadership roles at Marvell, continuing our successful integration blueprint from prior acquisitions. These leaders have been at the forefront of innovation and scale up switching and photonic interconnects and their technical depth and strategic insight will play an important role in shaping Marvell's next phase of growth. Marvell's Strong Fiscal 2027 Outlook Matthew Murphy: Okay. Now let me transition back to Marvell's current business and outlook. As you may recall, on September 24, I hosted a virtual call with investors where I outlined a framework for Marvell's revenue growth for fiscal 2027. At that time, we indexed our data center growth potential to cloud CapEx, which was expected to grow 18% next year. Since then, cloud CapEx growth expectations have increased to over 30%. Additionally, we have seen strong demand increases for our products for next year. As a result, our outlook for next fiscal year is even stronger than the expectations we discussed in September. We expect our Interconnect business, which is roughly half our overall data center revenue to continue growing faster than cloud CapEx next year even with the higher outlook. We expect our custom business, roughly 1/4 of our overall data center revenue to grow by at least 20% next year, also from higher than prior expectations. As a reminder, in the near term, this business remains tied to a few specific sockets. We expect custom growth next fiscal year to be higher in the second half and do not expect any air pockets in custom revenue. Next year's custom revenue forecast comprehends a transition to a next-generation XPU at a large customer. And I would note that we already have purchase orders for the entirety of next fiscal year's current forecast for this next-generation program. Our revenue forecast for this program remained consistent with our prior expectations. As we look beyond fiscal '27, we have several high-volume customer designs in development with meaningful revenue expected from these programs in fiscal 2028, consistent with our prior communications. For the remaining quarter of our data center business which includes storage, switching and other products, we now expect revenue to grow by at least 15% next year, up from our prior expectation of 10% growth, driven in particular from increased demand for our switching products. Adding all of this up, we now expect Marvell's data center revenue to grow year-over-year by more than 25% next fiscal year. Please note that this forecast does not include any revenue from the pending acquisition of Celestial AI. And for our communications and other end market, we continue to expect 10% revenue growth next year. Putting it all together, we are looking forward to a strong fiscal 2027. Detailed Business Trends Matthew Murphy: Let me provide more details for each of our end markets. In our data center end market, we delivered record third quarter revenue of $1.52 billion, representing 2% sequential growth and 38% year-over-year growth. Revenue exceeded our guidance for flat sequential performance driven by increased demand across our networking portfolio. Our industry-leading PAM DSPs, TIAs and drivers continue to see strong demand, with revenue from our optical interconnect businesses growing by double digits sequentially on a percentage basis. Our data center storage and switch businesses also posted double-digit sequential revenue growth on a percentage basis. As expected, this strength was partially offset by a sequential decline in our custom revenue due to lumpiness in demand. Looking ahead to the fourth quarter, we expect revenue growth from our data center end market to accelerate growing sequentially in the high single digits on a percentage basis and approximately 20% year-over-year. This growth is expected to be driven by a rebound in custom and continued growth in interconnect, switching and storage. Matthew Murphy: I'll start with our interconnect business, where we offer the industry's broadest and most comprehensive high-speed connectivity portfolio. As our PAM DSP products enter into their fifth year of 800-gig production, demand for our solutions continues to accelerate underscoring strength of the platform we have built through more than a decade of sustained investment in core technology. Our playbook is simple. First to market, first to ramp with timely follow-up optimized solutions to maintain leadership. We did this at 400 gig, 800 gig and now 1.6T, where we established early leadership with our first 5-nanometer solution, which sampled in February 2024, we then accelerated the launch of our optimized 1.6T solution and sampled our 3-nanometer product just 1 year later in February 2025. As a result, we are enabling volume production of pluggable 1.6T transceivers across the industry. We began shipping our 1.6T products in the second half of this fiscal year and are seeing exceptionally strong demand heading into next year. This consistent execution enables us to secure qualifications at major customers well ahead of competitors, reinforcing market leadership. While 1.6T has a long life cycle ahead, we have already demonstrated at the Optical Fiber Conference this past April, 400 gig per lane technology to drive the next industry transition to 3.2T. The demonstration was on 3-nanometer technology but we expect production deployments which are expected in calendar 2028 to require 2-nanometer solutions to optimize module power. In addition to our PAM portfolio, we are also enabling longer reach connectivity with our Coherent lite solutions to support campus-wide data centers in the era of million GPU AI clusters. We introduced our 1.6T Coherent lite solution last year, expect to start shipping next year, and we are on track to deliver our 3.2T solution the year after. Now complementing our DSPs, our high-performance analog TIAs and drivers remain foundational to our electro optics leadership. Our TIAs have a significant performance lead at 1.6T, and we are seeing strong broad-based demand for our products, which are enabling the entire ecosystem. We have also secured several LPO sockets across multiple hyperscalers and are leading this emerging category as well, although deployments remain relatively small today in the context of a very large transceiver market. Matthew Murphy: Turning to 2 of our newer interconnect growth drivers, AECs and retimers. Both markets are undergoing a shift to high-speed PAM-based solutions, an inflection point that is perfectly aligned to Marvell's strengths. For the past year, we've been collaborating closely with the cable ecosystem to enable 100 and 200 gig per lane AECs and we are now on the cusp of substantial product ramps. We have secured design wins with significant share positions at 2 Tier-1 U.S. hyperscalers, along with multiple wins at emerging hyperscalers. We are seeing strong demand for our AEC DSPs, and we expect our share to continue to grow as PAM-based 100 and 200-gig technology becomes dominant. Our PCIe Gen6 retimers are also gaining broad traction. We are currently engaged with more than 30 customers and partners, including hyperscalers, cable partners and system OEMs and ODMs. We already designed in more than 10 sockets, and we expect to enter production in the second half of next year with full revenue contribution in fiscal 2028. We expect our AEC and retimer revenue in aggregate to more than double from this year to next year. Matthew Murphy: Turning to our data center switching business which continues to gain momentum. We expect revenue to exceed $300 million this fiscal year. We expect strong sustained demand for 12.8T products, reflecting our key customers' plans to rely on 12.8T as a workhorse in their scale-out network for several more years. In parallel, we've begun shipping our next-generation 51.2T products with a strong ramp expected next year. As a result, we now expect our day center switch revenue to surpass $500 million next fiscal year faster than what I had indicated last quarter. We will also introduce our 100T products next year as we continue to execute our long-term road map. We are also accelerating our scale-up switch efforts. These next-generation solutions are complex as 100T scale-out switches with high radix supporting up to 576 ports. We are fast tracking our scale-up switch development by leveraging our in-house high-speed, low-power SerDes and experience in developing extremely large reticle size chips. We are deeply engaged with key customers and partners and are on track to sample our UALink 115T and 57T solutions in the second half of fiscal 2027 with volume production expected in fiscal 2028. In parallel with our UALink development, we are also collaborating closely with key customers under ESUN solutions, completing a scale-up road map to address both standards. Matthew Murphy: Turning to our custom business. We expect accelerated growth over the next several years. fueled by our growing portfolio of design wins. At our custom event in June, we disclosed a total of 18 XPU and XPO attach socket design wins. Several of these are already in volume production with the remainder on track to ramp over the next couple of years. Since that event, our team has secured additional custom sockets, which represent more than 10% of the $75 billion lifetime revenue opportunity funnel we outlined in June. These new wins include multiple XPU attached sockets and XPU, an emerging hyperscaler and most recently, a design win for an electrical I/O chiplet inside an XPU. This is a new trend we see emerging where customers and partners are partnering with Marvell to gain access to our high-performance networking technology to be integrated along with their core compute engines within multi-die packages which are becoming more prevalent in a reticle size constrained world. This provides Marvell another avenue for custom growth and sockets, which were otherwise not available to us as full XPUs. Matthew Murphy: Now let me provide additional perspective on the rapidly developing XPU attach market. These attached devices offload specific functions such as network I/O, memory expansion and security, memory expansion and security from XPUs, GPUs and CPUs, freeing them up to exclusively focused scarce compute resources on the primary AI workload. We now have more than 15 XPU attach wins, and today, let me highlight 2 major use cases emerging across multiple hyperscalers as they architect their next-generation custom accelerated infrastructure. The first use case is for custom foundational and Smart NICs, and Marvell has already secured multiple design wins across several hyperscalers. Our customers plan to attach these NICs, not only to their custom accelerators, but increasingly to their broader AI server fleets, which at large hyperscalers can exceed 1 million units or more annually. The second use case we are seeing emerge in the XPU attached market is for CXL-based products that enable memory expansion and acceleration to overcall the memory wall challenge. We made early strategic investments in CXL several years ago, and we have now secured 5 unique sockets across 2 Tier 1 U.S. hyperscalers and are deeply engaged with the third. The first custom CXL design win started shipping already in the first quarter of this year and is entering volume production now. A second socket focused on near-memory compute is expected to enter production a year from now. The remaining CXL design wins are slated for production in calendar 2027. Our solutions technical advantages include support for both DDR4 and DDR5, larger memory capacity and compression along with deep partnerships with the leading memory and CPU providers. While our initial wins centered on offloading from CPUs, more recent wins attached directly to XPUs, which are deployed in far greater numbers were several upcoming high-volume CXL production ramps, Marvell is leading the transition to next-generation memory architectures. We expect the XPU attached market to continue to evolve at a rapid pace, and we are very encouraged to see the attach rate of our solutions exceeding our initial expectations. Based on designs we have already won just for the NIC and CXL use cases, we have line of sight to revenue exceeding $2 billion by fiscal 2029 and a significantly higher forecast in the following years. This is why we are so excited about our data center business, interconnect switch, XPU, XPU attach, storage, scale up, scale out, we are everywhere in the AI rack. And we are just getting started with what we expect to be a massive TAM ahead of us. Communications and Other Market Matthew Murphy: All right. Let me now move to our communications and other end market, where we delivered $557 million in third quarter revenue, which grew 8% sequentially and 34% year-over-year. Excluding revenue from the divested Automotive Ethernet business, the implied revenue growth for Marvell's communications and other end market for the third quarter would be closer to 20% sequentially and 50% year-over-year. These strong results were driven by normalizing customer inventory levels and strong adoption of our refreshed product portfolio at both our enterprise networking and carrier infrastructure customers. Looking ahead to the fourth quarter, we expect revenue from our communications end market to grow sequentially in the low single digits on a percentage basis with year-over-year growth of approximately 25% as reported and closer to 40% year-over-year, excluding our former Automotive Ethernet business. We expect strong sequential growth from carrier and ongoing growth from enterprise to be partially offset by a steep seasonal declines in our consumer business. We expect the enterprise networking portion of our communications end market to reach an annualized revenue run rate of approximately $1 billion in the fourth quarter which would reflect the complete normalization of customer inventory levels in that business. Going forward from this $1 billion annualized revenue run rate, we expect this business to grow in line with enterprise IT spending. While our carrier business has also been recovering and our fourth quarter guidance implies the business to almost double from the year ago quarter, we see continued recovery until this business also settles into its long-term growth trajectory, which would be in line with carrier CapEx. Summary, Guidance, and Financials Matthew Murphy: So in summary, during the third quarter of fiscal 2026, we continue to expand operating margins, grow earnings per share and set new revenue records. We executed our $1 billion accelerated stock repurchase program in addition to repurchasing $300 million of stock through our ongoing buyback program funded by our growing operating cash flow. Looking ahead, we expect momentum to continue in the fourth quarter with total company revenue forecast at $2.2 billion at the midpoint, representing 6% sequential and 21% year-over-year growth. Excluding revenue from our former Automotive Ethernet business implied year-over-year revenue growth for Marvell's go-forward business would be approximately 24% at the midpoint of our forecast for the fourth quarter. As I noted in my opening remarks, we are seeing robust demand signals and strong bookings across our entire portfolio, positioning us for a strong fiscal 2027 and even faster growth in fiscal 2028. Customers are planning to add substantial AI capacity over the next several years and are partnering closely with us on long-term technology road maps and coordinated capacity planning. In addition to benefiting from rapid market expansion, we have several of our own unique growth drivers. Taken the other, we expect strong market tailwinds and new product cycles to drive significant growth inflections ahead of us. As a result, we see a path for our data center revenue growth in fiscal 2028 to accelerate meaningfully above the 25% growth we expect in fiscal 2027. So look, we covered a lot of ground today. And so before I close, let me just quickly highlight a few key takeaways. First, we have activated Marvell's M&A playbook and expect to close the transformational acquisition of Celestial AI in the first quarter of next fiscal year, enabling us to fully capitalize on the massive scale-up opportunity. Second, our interconnect business is firing on all cylinders. Our electrooptic interconnect platforms continue to lead the market with world-class road maps across the board and accelerating demand. Finally, when you put it all together, we are positioned for several years of exceptional performance, building on this fiscal year's projected revenue growth of more than 40%. And I look forward to updating you on our progress over the coming quarters. And with all of that, I'll turn the call over to Willem for more detail on our recent results and outlook. Willem Meintjes: Thank you, Matt, and good afternoon, everyone. Let me start with a summary of our financial results for the third quarter of fiscal 2026. Revenue in the third quarter was $2.075 billion, growing 37% year-over-year and 3% sequentially. Data center is our largest end market, contributing 73% of total revenue. Our communications and other end market contributed the remaining 27% of revenue. GAAP gross margin was 51.6%. Non-GAAP gross margin was 59.7%, an increase of 30 basis points sequentially. Moving on to operating expenses. GAAP operating expenses were $712 million, including stock-based compensation, amortization of acquired intangible assets, restructuring costs and acquisition-related costs. Non-GAAP operating expenses came in at $485 million, in line with our guidance. Our GAAP operating margin was 17.2%, while our non-GAAP operating margin was 36.3%. I'm pleased that we drove a 150 basis point sequential increase in non-GAAP operating margin. For the third quarter, GAAP earnings per diluted share was $2.20, including the gain from the divestiture of the Automotive Ethernet business. Non-GAAP earnings per diluted share was $0.76, reflecting year-over-year growth of 77% which is more than double the pace of revenue growth demonstrating the significant operating leverage in our model. Non-GAAP earnings per diluted share increased 13% sequentially. Willem Meintjes: Now turning to our cash flow and balance sheet. Cash flow from operations in the third quarter was a record $582 million, growing approximately $121 million from the prior quarter. Our inventory at the end of the third quarter was $1.01 billion, a decrease of $37 million from the prior quarter. During the quarter, we executed our $1 billion accelerated repurchase program. In addition, we repurchased $300 million of our stock through our ongoing capital return program and returned $51 million to shareholders through cash dividends in the quarter. As of the end of the third quarter, our total debt was $4.5 billion, with a gross debt-to-EBITDA ratio of 1.47x and a net debt-to-EBITDA ratio of 0.58x. Our debt ratios have continued to improve as we have driven an increase in our EBITDA. As of the end of the third fiscal quarter, our cash and cash equivalents were $2.7 billion, an increase of $1.5 billion from last quarter reflecting the addition of proceeds from the divestiture of our Automotive Ethernet business and ongoing cash generation from operations, offset by a capital return of $1.35 billion between stock repurchases and dividends. Willem Meintjes: Turning to our guidance for the fourth quarter of fiscal 2026. We're forecasting revenue to be in the range of $2.2 billion, plus or minus 5%. We expect our GAAP gross margin to be between 51.1% and 52.1%. We expect our non-GAAP gross margin to be between 58.5% and 59.5%. Looking forward, we anticipate that the overall level of revenue and product mix will remain key determinants of our gross margin in any given quarter. For the fourth quarter, we project our GAAP operating expenses to be approximately $741 million. We anticipate our non-GAAP operating expenses to be approximately $515 million, growing from the prior quarter as we continue to invest in the business, and anticipate higher employee bonus payouts, reflecting a strong expected finish to the fiscal year. For the fourth quarter, we expect GAAP and non-GAAP other income and expense, including interest on our debt to be approximately $30 million. We expect our non-GAAP tax rate of 10% for the fourth quarter. We expect our basic weighted average shares outstanding to be 850 million, and our diluted weighted average shares outstanding to be 857 million. We anticipate GAAP earnings per diluted share in the range of $0.31 to $0.41. We expect non-GAAP earnings per diluted share in the range of $0.74 to $0.84. Willem Meintjes: Looking ahead to fiscal 2027, Matt already provided an update on our strong revenue growth expectations. We intend to continue to invest in growing our business while driving operating leverage and expect our non-GAAP operating expenses to increase at roughly half the rate of the revenue growth next fiscal year. Keep in mind that we typically see a mid-single-digit sequential increase in OpEx on a percentage basis in the first quarter. This forecast for next year's OpEx does not include any additions from the acquisition we announced today. I will provide that forecast separately. Regarding taxes, we expect our non-GAAP tax rate to move to approximately 12% next fiscal year. Turning to the acquisition we announced today. Post closing, we expect the addition of Celestial AI to add approximately $50 million in annual operating expenses. We expect Celestial AI to start generating meaningful revenue in the second half of fiscal 2028, at which point it is expected to become accretive to our non-GAAP earnings. We plan to fund the acquisition through a combination of stock and cash on hand and do not intend to take on additional debt. We have a strong balance sheet and are generating robust operating cash flow. As a result, in parallel with paying for the acquisition, we plan on continuing to return capital to stockholders through dividends and buybacks. In summary, we're executing on our strategy to drive strong revenue growth while delivering operating leverage. In addition to organic investments, we are actively deploying our strong balance sheet to acquire a transformational asset that we expect to further strengthen our capabilities and increase our addressable market. With that, we are ready to start our Q&A session. Operator, please open the line and announce Q&A instructions. Thank Thank you. Operator: [Operator Instructions] Our first question is from Ross Seymore with Deutsche Bank. Ross Seymore: Matt, I appreciate all the details you gave about how to think about next year. If I run through those numbers, basically, it sounds like you're implying somewhere around $10 billion in revenue for next year. So I guess, first of all, is that in the right ballpark? And then back in June, you gave a longer-term target for fiscal '29 for your business, especially on the AI side of things. How does what you're looking for next year gets you aligned to those long-term targets? Matthew Murphy: Yes. Thanks, Ross. I think that's actually a great way to tee-up the Q&A here. So yes, a couple of things. I think you're absolutely in the ballpark when you add up the numbers I gave you on $10 billion for next year. And I think that's a great target, actually, by the way, that -- motivational for us as a team to go drive. And just as a reminder, this is just based on the Marvell organic plan, no M&A contribution. A couple of things about next year, an then I'll actually give you some commentary on how you think about that slope we're on for next year. Another thing I would note, I didn't say in my prepared remarks but we do expect sequential revenue growth next year, every quarter. So year-over-year, we see a nice growth throughout the year. But I would say the second half of the year stronger than the first and with, I think, a really, really compelling exit rate to fiscal '27. Now it's a little far out to go all the way to '29, let's say, but let me just give you a path sort of on where we're headed and how we think about fiscal '28 and how we build on that strong second half we see next year. So a couple of things maybe to talk about those same businesses. So first on custom. And just as a reminder, I mean, basically, we quadrupled that business from calendar '23 to '24, we doubled it from founder '24 to '25, we're saying it's going to be up about 20% this next year. But then when I look at the year after with all this goodness from XPU attach plus a new meaningful XPU socket ramping and the other programs continuing, we see the custom business action in fiscal '28 doubling off of '27. So we see a reacceleration big time in that year. And that puts us on a nice trajectory towards our growth targets fiscal '29 in custom coming off a strong second half next year and then in fiscal '28. On interconnect, look, it's early, but we do expect that business should continue to outgrow CapEx. It's done that for a long time. Look, if you just said, hey, 20% CapEx growth in fiscal '28 and nobody knows what that number is, but just peg that in there for now, we'll definitely grow above that. I would say our customer forecast support a much higher number than that. But just as a base case, just assume CapEx is 20% that year. And so -- so optics will grow faster. And then for storage switch and the other part of data center just assume 10% growth in fiscal '28 over '27. I think that's a reasonable set of assumptions to use based on what we see. And so when you actually add all that together, you come up with a number, bottoms up, which looks more like 40% growth in data center in fiscal '28. So that's what I was talking about in my lead-in, which was strong data set -- 45% growth basically this year in data center, targeting 25% next year and then 40% the year after. And if you actually look at it over like the cycle where we started back in calendar '23, that's like a 50% kind of compounded growth rate, we'll be growing our data center business. So the '28 numbers I'm laying out for you are not totally crazy. And then just for reference, if you just sort of plug in comms and other growing at GDP for fiscal '28 just to keep it simple. Again, it's too far out you basically get Marvell growing like another 30% in fiscal '28, which would be above where we're looking for '27. So kind of a long answer, but maybe what's been on a lot of investors' mind is how do you get from where we are to where we're going, but certainly, we're very optimistic about our outlook over the next couple of years. And then things like Celestial AI and some of these other big growth drivers, those are going to kick in starting in fiscal '28 but then really in '29 and '30 and beyond. And I think through the end of the decade, it's looking very bright for Marvell. Thanks for the question. Operator: Our next question is from Harlan Sur with JPMorgan. Harlan Sur: Congrats on the Celestial acquisition. Today, Matt, your lead AI customer announced their next-generation 3 nanometer AI XPU product. And I think you just said you have secured purchase orders for this program for the entirety of next year. But your lead customer also preannounced their next-generation 2 nanometer XPU product today as well, which we believe you're also involved with, especially now with the Celestial team. I remember at the June custom AI event that the team talked about concurrent design programs. In other words, at the same time, you're towards the tail end of your customer's 3 nanometer design. You're already starting to work with customers on their next-generation 2 nanometer designs. During our fireside chat in September, you talked about the team being heads down focused on 2 nanometer designs. You even talked about next-generation A16 and A14 technologies. Can you just give us an update on your sub 3 nanometer design win pipeline does include both XPU, XPU attach programs? And what's the time line for these programs to ramp into production? Matthew Murphy: Yes. Thanks, Harlan, for the question. And yes, just in the spirit of customer confidentiality and details, I can't go into too much. But what I would say, which is incorporated into our numbers is that our product transition from where we are today with our lead XPU customer to the next one is baked into all the numbers I gave you, and yes, I got the backlog and I got the orders and we got great visibility there. On the 2 nanometer, very exciting. I mean there's a number of programs that we're working on in this area, and that's going to be a workhorse process technology for us. But same as I said, and I would just say that the design funnel keeps increasing there. And the power benefits you see are compelling. And I think that will continue. I mean that's really where AI has sort of kicked in to keep the Moore's Law train running is really the just the power savings are worth real OpEx dollars when you can save power dissipation from one generation to the other. So nothing really new to report there other than just heads-down execution and do see strong product ramps coming over this time period I gave you, especially in the fiscal '28 where you'll start seeing some of the 2 nanometer products ramp. And my team internally just to give them a shout out is executing extremely well. The whole team you saw that got up there at the AI investor event in June by engineering leadership, executing extremely well across the board on the core IP, the nodes, the packaging, you name it. So we're really firing on all cylinders internally. Thanks, Harlan. Harlan Sur: Great execution. Operator: Our next question is from Tore Svanberg with Stifel. Tore Svanberg: Yes. Congratulations on the acquisition. I had a question on Celestial AI, Matt. So when you gave those $500 million and $1 billion target, would that be for the PF Link products only? Or would that also include some of the potential businesses with memory? Matthew Murphy: Yes. Yes. A couple of things to note, maybe at the highest level. The first is, yes, the revenue targets and also the earnout that we're all going to drive for is all based on Celestial AI in totality. Now the reality is from a lead perspective, the PF chiplet is sort of what's going to go first. But everything is on the table, and there's just tremendous activity that, that team has driven, punching way above the weight in the industry in terms of the engagements they have. So those are all in numbers but clearly going to be driven more from the PF chiplet side in terms of the revenue build in end of fiscal '28 and then the end of fiscal '29. Operator: Our next question is from Chris Caso with Wolfe Research. Christopher Caso: Also a question about Celestial. And with that revenue ramp that you're expecting at the end fiscal '28, beginning of fiscal '29, can you talk about the breadth of that? And obviously, I'm sure you're not willing to name the customers right now. But is it a fairly narrow customer base, what's the -- and going over time, how diversified is that revenue stream? Matthew Murphy: Yes. No, great question, Chris. I think that the engagement is certainly broad but remember, we're -- there's a bold effort across the industry to really bring this product into volume stable production, and it's going to take real big companies and a few of them to do that. And so yes, we have strong engagement across the board, but there will be -- and we're fortunate with this that we have -- as I said on the call, we have one Tier 1 hyperscaler that's -- we're engaged with on this that I think is a great partner and a great teaching customer and a great customer to collaborate with to really go make this happen. So it's very exciting to see Celestial come into Marvell because -- just as a reminder, we have an incredibly strong internal silicon photonics organization. I mean this team that we got from Inphi pioneered this technology. We drove it into high-volume production and market leadership in the 100 and the 400-gig ZR business, now 800 gig. It's all the DCI stuff they enable. That's on the back of very, very innovative silicon photonics technology. So we have a ton of know-how here. So then when we bring in Celestial, we're all going to benefit from that common set of learnings and then having a lead customer pulling us through is very exciting. So I think this is just the first phase here, Chris, that you're going to see. But certainly, the interest is there across the industry. And this is just so evident to us over the last couple of years and really pronounced at the last strategic review. It's a process I run every year where we do our capital allocation review with everybody, and I was a couple of months back, and we're just staring at this just giant transition to photonics inside the data center in that TAM. And we looked at, could we do it ourselves, could we do it with the partner and we just concluded this is a home run to bring them in with our internal team plus really a lead customer to pull us through the first wave. But beyond that, we see very broad adoption beyond that time frame. Operator: Our next question is from Harsh Kumar with Piper Sandler. Harsh Kumar: Congratulations, Matt and the team and a lot of good things happening. Matt I had two. So I'll just ask them both together. The first one is on custom. You specifically mentioned at least 20% growth for next year. Seems like you've got a lot of good things happening, a lot of good stuff ramping. And I was hoping that you could book in that number for us. So at least 20% to me seems like that's what's in the bag. But maybe you could give us a sense of what -- if everything worked out right for you, what could be a normalized 2027 FY growth rate for custom? And then the second question was you gave us a lot of color all the way to FY 2028. And this is kind of not the norm on Wall Street, most companies go out a quarter, as you well know. So my question is, and this we've been getting from a lot of investors already is, what is your comfort level? And what is the visibility on some of this long-term revenue materializing that you're talking about? Matthew Murphy: Yes, sure. A lot in there, but let me unpack it. I think the first is, you should definitely model the 20%, and I think that's -- that is a good number. That's a good safe base case number. And remember, it's a handful of programs today. So I think I would just go for that now. Clearly, we're going to be ready if people want to do more, but I am also mindful of some of the history on this custom business where either people got ahead of themselves or there's a lot of noise in the system and it's just -- look, we've got strong backlog, we got that covered. That's great. If we do better later, we'll definitely update you guys. But we got a very, very good outlook for next year in that business. And then obviously, the year after it really builds. And kind of part of your question is it's not 20% sort of linearly, meaning the second half, especially in custom and the exit rate is much higher than where we are now. And that's simply because we're building all this momentum into fiscal '28. And then yes, on the sort of guide quarter at a time, that's definitely been our MO historically. I think given the multiyear cycles we're looking at now in the AI infrastructure build and also, quite frankly, just being sensitive to investor feedback about looking at some pretty ambitious targets we've set for the company several years out. And then wondering, well, how do you see yourselves getting there? And I just view it as it's incumbent on me to paint the picture for folks and share what I see as kind of base case assumptions, as I mentioned. I mean these are what I view as the base case, not dream the dream, not putting anything in that we -- is sort of a maybe. I think it's very rational how we came up with our fiscal '27 outlook and even our fiscal '28 if you just look at it, bottoms up on the custom, we should definitely be able to do that because we know those programs. I mean if I say CapEx is growing 20%, it certainly may do better, and our optics business is growing way above CapEx, so that has some legs to it. And then look, even in a quarter, that other category in switching and storage and other has also floated up. So there's still a lot of goodness out there. But I think just from a modeling perspective, that's what you should think about. And I would say, finally, it really though is tied to our customer planning. I mean they're realizing to go get all this build to happen. They've got to provide visibility several years out. That's giving us increased confidence in our outlook because we're having to plan around that. Our R&D schedules, our capacity, our ramps, all that stuff has got to go kind of 6 to 8 quarters out now to really be ready. So that's also part of why I felt it was worth sharing this perspective for investors. And again, I think it's timed well as well with Celestial because then that thing just kicks in beyond the time frame I'm talking about fiscal '29 -- I mean some of it in fiscal '28 but then early '29, '30 and beyond. So hopefully, that was helpful. Thank Thank you so much for the question. Operator: Our next question is from Blayne Curtis with Jefferies. Blayne Curtis: I want to ask you, Matt, I know it's always tough to talk about customers, but you did file an 8-K and it says you graded Amazon a warrant for 1 million shares to buy photonic fabric. So I guess, one, very simply, is that your lead customer? And if you can maybe talk about that expanding relationship, obviously, there's been a lot of back and forth your status to the customer, but this seems like a positive in terms of your engagement for the next generation? Matthew Murphy: Yes. And great job checking out the EDGAR website, Blayne, you're always one step ahead. Yes, I think it's great. So first, we did file Form 8-K talking about really an extension, if you think about it to the warrant agreement we have, which is effectively adding a new swim lane. I mean if you can believe it was only 1 year ago that we announced with AWS a warrant and strategic arrangement with them. Back then, a year ago, it was really bucketed between AI, custom products and then networking products. And so think of this as just adding another swim lane of photonic fabric products to the mix. And all in, the potential of each of these is quite significant. So that's a positive on the first one, that's out there. Also pleased to get a very, very strong support in our press release for the acquisition from AWS that was positive. And so when you sort of look at all the things we're saying and all the data that's out there, you can sort of figure out where we're headed with this and who is helping drive this technology forward. We're very, very excited about where we can go with this technology, especially with our lead Tier 1 hyperscaler but then also the rest of the market, which I think will be shortly behind them once we can really put the full force of Marvell behind this. So thanks for catching that and giving me a chance to talk about it. It's pretty exciting to see. Really, if you think about it, we've got the warrant agreement, we got an aggressive earnout that the team is driving, which is a $2 billion number, by the way, through the end of fiscal '29. So all this adds up to just a great sort of set of incentives for everybody to go execute like crazy and bring this into production. Operator: Our next question is from Vivek Arya with Bank of America. Vivek Arya: Matt, I had 2 kind of questions on the data center, one on optics and one on custom. So on optics, why correlated to cloud CapEx? Why not do growth of AI accelerators, which is expected to be much faster than the 30%? And then on the custom side, you mentioned 20% as the baseline growth. Is that because the second customer is supposed to come on board? Or is it because you will grow with that first customer? And I ask about the second customer because they don't have a history of ramping, big ASIC program. So I just wanted to get your overall views on optics and why correlated to CapEx. And then on the custom side, just kind of puts and takes of the second customer that's supposed to come onboard. Matthew Murphy: Yes. Thanks, Vivek. Yes. So on your first question, I mean, just the rationale was just to give just a broad proxy to the investment community about how to think about our business of sort of a very common metric, which is CapEx. I agree with you. The optics business is fundamentally driven by AI and AI acceleration. And that's why it's been growing so far above CapEx each year. And -- but I think this was just in the interest of providing some pretty broad brush strokes but you should certainly assume that the optics piece is tied to AI which is growing faster than CapEx. So that's a fair assumption. But just this was really in the spirit of making this a proxy. And then on the growth next year, yes, that's all still driven by -- the way to think about it is mostly our current business today. So there's a product transition with our lead customer from one generation to another in there. There's some XPU attach that's kicking in, in the second half that's going to lead to the '28 and '29 revenues I was talking about. But the next bigger XPU customer we have, not much of that really you should count on for next year. It's really the year after and that's captured in the doubling from fiscal '27 to '28. But I think we've got a very rational base plan for that, that we think is achievable. And then obviously, if things improve or get better, then we would up those numbers. But I think what we're trying to do right now, Vivek, is just paint a very rational, clear picture for people, and then we'll obviously update along the way more on a granular basis as we go forward. . Operator: Our next question is from Christopher Rolland with Susquehanna. Christopher Rolland: Congrats on the results. So I think your main competitor in ASIC has moved to providing racks, not just silicon. And then with this acquisition and kind of given the increasing complexity we're seeing out there, might you be moving to systems and then perhaps even rack-level solutions as well? And do you have the capabilities to do that? Matthew Murphy: Yes. Thanks, Chris, for the question. And I would sort of answer the second part, which is, we are very much looking at this as a rack-level solution in totality and that is all the various flavors of optical interconnect. I rattled through a bunch of those. We're the one-stop shop, right, from AECs, traditional DSPs, retimers, LPOs, photonic fabrics and then scale up and scale out switching and XPU attach sockets and circuits to make all this work. And then working closely with our customers with that vision on how we enable that entire end-to-end and enable them to do that. That's our current strategy. And most of the people we're working with have that capability themselves today. They're very good at it but we also add quite a bit of value in how to think about how to pull it all together. So we absolutely have a rack scale vision, and this is where Celestial AI really fits in. But we don't have any system-level revenues comprehended in anything I've talked to you about over the next 2 years. But certainly, from a strategic standpoint, it's imperative, right, that we go to market in a very comprehensive way, Chris, and not in a point solution way, but rather be able to provide all the fundamental pieces right from the biggest XPU chip all the way down to a retimer on the board. Operator: This was our final question for the evening. I'd now like to hand the call back over to management for any closing comments. Matthew Murphy: Yes. Fantastic, and thanks for all the great questions, and I appreciate everybody listening. I know it was a lot. I think this was the world record for the longest prepared remarks I've ever done. But like I said at the beginning, settle in, because there's a lot of good stuff. And there really is a lot of great things happening with Marvell. I'm just really pleased with how our team has executed. I want to say thank you to all of them. we have a phenomenal setup for next year, as I indicated, and even through the next year, we just have very good visibility. Programs are on track. We are playing offense in this company, okay? We're out doing strategic acquisitions like Celestial AI, and we're thrilled to welcome them to the Marvell team. And I think our future is very bright where we're headed. So appreciate everybody's interest. I look forward to follow-up conversations and appreciate all the investor interest in following Marvell and our journey. Thank you, everybody. Have a great day. Operator: Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you again for your participation.
Operator: Good afternoon, ladies and gentlemen, and welcome to the Accsys Technologies plc investor presentation. [Operator Instructions] Before we begin, we would like to submit the following poll. And if you could give that your kind attention, I'm sure the company would be most grateful. And I would now like to hand you over to the executive management team from Accsys Technologies plc, Jelena, good afternoon. Jelena Arsic Os: Good afternoon, Jake, and thank you very much for this opportunity. We are here today to present our H1 results of FY '26 and also to give a little bit broader view on what is company doing and how is our transformation journey going forward. We are today going to talk a little bit about us, the introduction from me and Sam, H1 FY '26 overview. We will skip to the financial review, business review and then give finally outlook for the rest of this financial year. My name is Jelena Arsic van Os. I'm CEO of the company that joined the company 2.5 years ago. I spent over more than 25 years operating in the chemical business sectors, running large businesses for international companies, most of my career for the AkzoNobel and later on for the company called Imerys. Sameet Vohra: And I'm Sam Vohra, I'm the CFO of the company. I've been with the company since September 2024. So just over 14 months. I'm a U.K. trained chartered accountant, but I spent over 20 years working for U.K. listed companies and over half of that time was working for engineering and manufacturing companies. Jelena Arsic Os: So a little bit about Accsys Technologies plc. Company has a very strong purpose of changing wood to change the world. What does this mean? We see ourselves as disruptors in this industry space, in the space of building materials. We are taking fast-growing, sustainably harvested wood and passing it through our proprietary process that is protected with more than 300 patents across 45 countries. We give that wood superpowers, superpowers in terms of durability, in terms of dimensional stability, in terms of resistance to rot. Company today is producing 3 main products: Accoya, Accoya Color and Tricoya. Accoya is acetylated wood. Accoya Color has additional step of coloring impregnation of acetylated wood, so coloring impregnation of Accoya that is the first step. And then Tricoya starts with Accoya wood that is being shredded in a small pieces and then mixed with a little bit of resin, and we are producing the panels that are going to sustain a very, very long time exposed to the environment. All of our products are having warranty of 50 years above the ground and exposed to the environment in the outside applications and then 25 years in the ground or in the water. Today, most of our applications, most of our wood is used in the windows -- making windows and doors, cladding, decking, fencing, outside furniture or submerged in the water, protecting the canals in the Netherlands or even siding the canals along the dams in the U.K. We have all the sustainability credentials. We are very, very passionate about sustainability. And if you are looking at as a carbon capturing product, every single person that is working for Accsys is actually here because of that fantastic product that we make. Today, we have 3 production sites, 2 acetylation plants, one in Arnhem in the Netherlands that has 4 reactors and 80,000 cubic meters in the production capacity. That is operational since 2007. We have a second acetylation plant in Kingsport, Tennessee, which is a joint venture with the Eastman Chemicals Company. Accsys is holding 60% in this joint venture and Eastman is holding remaining 40%. It is operational since September last year, and it has a capacity. It has 2 reactors installed, so the capacity of 43,000 cubic meters today. Barry in Wales is our coloring facility. So wood from Arnhem, acetylated wood from Arnhem or Kingsport will come to Wales to be colored impregnated by -- through the core to produce Accoya Color. The Arnhem plant is actually supplying, strategically positioned to supply Europe and the rest of the world and our Kingsport facility is supplying local U.S. market, including Canada and Mexico. So why the company has a unique value proposition for our investors. We have genuinely very unique product, really innovative product in our portfolio with this unrevealed warranty of 50 years that we are offering, and there is no industry match that can compete with the durability and performance of Accoya. So there is a very clear product differentiation. Product and technology is protected by patents. We have 27 patent families, so more than 300 patents across 45 countries that are protecting the product and the technology. We have a unique and very known brand among the wood products in the market for all Accoya, Accoya Color and Tricoya. And last but not least, certainly not least, the company has established manufacturing footprint. And if you know that building Accoya plant of acetylation plant, you need an investment that is around EUR 150 million. Having established 2 manufacturing sites in the 2 largest and the most profitable wood markets in the world, the premium wood markets in the world, does create a significant barrier to entry to any newcomers and giving us a very good position for growth in this -- in the building materials industry. Now Accoya Color and Tricoya have a significant market share opportunity in our core markets that are driven by the trends of population growth in the need of more housing being built everywhere. It doesn't matter in which country in the world you look, there is a general housing shortage everywhere. But there is also the sustainability trend materials that are looking on a carbon footprint in the building industry as being one of the most impactful for the carbon emissions are very much needed and also our products are having quite a nice natural look so that biophilic design is very much wanted at the moment, is very trendy at the moment. But looking besides the trends, if you look what are the addressable markets for our products today, we operate in 2 large ones. Our oldest home market, I would say, is Europe, including U.K. And there, we are talking about 1.9 million cubic meters of addressable market for Accoya in the application we are playing today. If we look at the available capacity that we have in Europe and even with the plants completely full, it is very obvious that the market share for Accoya is in the low single digits. In the U.K., we have a market share of circa 4%. So there is still significant opportunity for us to grow and develop in Europe and U.K. On the other hand, looking at U.S., cladding, decking, windows and doors market, it is by far the largest premium market for Accoya. It is almost 4x, if not more -- higher, bigger than the one in Europe. And looking at our available capacity, even if we have things called completely full, the market share in the U.S. is going to be less than 1%. So there is enough space for Accoya to establish itself and to grow and still not reach even a very single digit of the available market we have in those 2 important geographical regions for us. Now when we look at Accoya, how does it compete with other products, we certainly focus on a premium market segment. When we are talking about premium, we are also having a pricing premium that is reflecting the value that our products are adding. So here, you can see all the other available products that you can find in cladding, siding, decking or windows and doors. Depending on the current cost and the performance, you see that Accoya with this green dot is always on the completely right side with critical performance attributes that are far above any other competitive material, but that also comes with a premium values. So we are very proud that our critical performance attributes are certainly stability -- dimensional stability of our products that remains -- would remain stable over -- even in the very extreme conditions. That means that if you -- that your maintenance cycles are quite lower. So value in use is getting a benefit over time. In the decking market, for instance, our products have a significant decay resistance. So that means that they are going to outlast any other wood option in the 10-year test. So people who are looking for durability are certainly counting on Accoya in that segment. And for windows and doors, again, low maintenance for coatings because our material is very stable when you put a coating over it because wood below is not moving, that coating can stay significant time longer. So on our windows that we have on the test field, we have a window just sitting there 15 years with no maintenance. So we are very proud that Accoya is certainly a flagship product, if you like, in this space of wood building materials. Coming now to the H1 and how the company performed for the first half of the financial year '26. We have delivered excellent first half with significant improvement in profitability. Accoya sales volume increased 22% across different regions with 61% of growth in U.S., where we, since September last year have our new production plant. Group revenue delivered was EUR 76.1 million, which is a 23% increase in group revenue on a like-for-like basis versus the first half of last year when we are talking about like-for-like basis in the first half last year and this half last year -- in the first half last year, we have transferred 13% of group volume and 14% of the group revenue to be produced and supplied from our new production site in the U.S. So if you take that volume out of equation, then you look that underlying Accoya and underlying group revenue grew 23% because we were able to replace all of this transferred volume with the new business in our Arnhem plant. This is a significant positive news and significant success. And why is that? Because underlying building material market didn't really grow in this period of time. So because our growth is double digit and high double digit, if you look on what is happening in the U.S., but also in the rest of the Europe, that means that Accoya is gaining market share compared to all the other building materials. At the same time, we are continuing our pricing and our cost discipline. So we were able to contain EUR 2.3 million of savings from our transformation program, which is helping us, of course, now in improving that profitability line that significantly changed since last year. Just to remind you that for the full financial year last year, company made EUR 10.8 million EBITDA -- adjusted EBITDA. And for this first half of the year, we have delivered EUR 10.4 million adjusted EBITDA going from EUR 4 million last year. So this is a significant improvement, and Sam is going to tell you a little bit more later on when we dive deeper into the financials. Company is above gross margin target of 30%. And very -- we are very, very pleased to show progress on deleveraging our balance sheet with the refinancing that was completed just in the first week of October. Our leverage ratio end of September was 2.1% compared to 2.5% at the end of March, so at the end of the financial year last year. And if we look on where we are on all the targets that company actually put forward in our Capital Market Day, we are tracking quite spot on, on each one of the KPIs that we said that we are going to measure ourselves on. So we are very, very happy with where first half of the year is, and I'm going to take you later on, on the -- where we are going to after Sam explain a little bit more details on the financial, how do we see the rest of the year progressing with this. Okay. Sorry, we are continuing to build a strong and sustainable platform for growth. In January last year, we had a Capital Market Day. In the Capital Market Day, we said that we want to build Accsys to become fundamentally strong, operationally efficient, customer-centric and preferred with the United team safe and sustainable company going forward. If we look how do we track on those pillars, fundamentally strong, we are showing much stronger financial performance than what we have in the past. Business is considerably de-risked with now 2 fully operational manufacturing sites that are operating in the 2 largest and most profitable markets in the world. And we are strongly positioned to grow from that position of strength. We also have a refinancing completed. So we have now funds in place to basically fund the growth for the next -- until October of 2029. So that is for the Phase 1 and Phase 2 of our strategy. Operationally efficient, our like-for-like gross margin increased 1.1%. So this is at the same time when we are growing the top line and the bottom line. As I mentioned on the previous slide, EUR 2.3 million of benefits of business transformation are still kept. And we are also finalizing now the investment in our acetyl storage in Arnhem, which is one of the significant CapEx that we did this year. We spent EUR 2.5 million for this project, and Sam is going to walk you a little bit later on to more details around it. Everything what we do, we are doing because of our customers. They are core on every single activity company is performing. We are seeing good significant market share growth of Accoya in every single region. We are adding new distributor partners. In this first half of the year, 3 new distribution partners are added to our customer portfolio. We rebranded Accoya, and we are continuing to be specified for the high-profile projects around the world. At the same time, following a very strong demand for our Accoya Color, we are seeing doubling of capacity in Barry. We invested in operation adding the second shift. So now we can produce double than what we did last year. We are strengthening our talent across the sites. We are investing in revenue-generating headcount and also the headcount that is in the operational sites, our finance teams and key management functions on our locations. And last but not least, we have launched our sustainability strategy just a couple of weeks ago and invested in a new stacker hall safety improvement and environmental improvement in Arnhem. So it was quite a busy and quite a successful first half of the year. So with this, now I'm giving it to Sam to walk us through the financials. Sameet Vohra: Great. Thank you very much, Jelena. So over the next couple of slides, I'm going to go through a lot more detail on the financial performance and talk about a number of the key financial metrics and show how they progressed during the period in terms of waterfall graphs. So really, what we're seeing here is a summary of the financial performance that we saw for the first half of the year. And as Jelena mentioned, it really was a very strong performance and an excellent first half of the year for us. Whilst sales volumes by the group, which excludes the joint venture, were up 1% on a like-for-like basis, when you do exclude the volumes that were transferred to the joint venture in the previous year, the group sales volumes did increase 15%, which is very, very strong, and it shows the strong growth that we've had in all of our key regions that we operate in. Total sales volumes for Accoya, which is a much stronger indicator of global demand for Accoya were up 22% to 38,618 cubic meters, a really, really strong performance. So then when we think about revenue, revenue growth, as Jelena mentioned, like-for-like revenue growth was 23% which is really demonstrating that volume growth plus the focus on strong pricing that we have and aggregated revenue, which includes our share of the joint venture was up 21% to EUR 89.9 million. When you start to think about this joint venture in Kingsport in America, only commenced operations in September 2024, it's done EUR 23 million of revenue just in H1 itself. So with that EUR 23 million and the EUR 76 million, Accsys and the JV's gross revenue is effectively the best part of EUR 100 million first 6 months of the year. When you think -- it was only a few years back in 2021 that the business only used to do EUR 100 million revenue for the whole financial year. It shows how we've successfully scaled up the capacity, produced it, sold it and at the same time, increased our pricing to gain market share, which is a very, very strong performance for the group. Our gross profit margin increased over 110 basis points on a like-for-like basis and remains above our 30% strategic target number, and I'll talk more about that slightly later on. Underlying EBITDA was up 29% and the margin was up 260 basis points, which is a very, very strong performance. And that is excluding the joint venture, so EUR 10.7 million underlying EBITDA for the first half of the year. Really, really strong point for us for this year was the joint venture. So the North American operation only commenced operations, as I mentioned, in September 2024. And we've always said that for the first 12 months of operations, it would be loss-making, because it's a start-up. There's always those initial costs that you incur as the business ramps up. We then said at our Capital Markets Day that we expect this business to be profitable at an EBITDA level for its first full financial year. So for the first half of the year, the business was close to breakeven. The share of the loss of the JV was only EUR 0.3 million loss, which is a very, very remarkable progress that has been made there. And that was really off the back of particularly strong growth in North America with 61%, but also a really good manufacturing environment that's been created with very tight controls over costs and a really strong operational base there. So overall, our -- adjusted EBITDA, which is our main profitability performance measure, was up 160% year-on-year from EUR 4 million to EUR 10.4 million. And when you think in our last full financial year, say, the year ending March 2025, the group, including the joint venture delivered EUR 10.8 million of adjusted EBITDA profit. Well, we nearly achieved that just in H1 of this year, which is very good. The adjusted margin was 11.6%. At our Investor Strategy Day, we said we would like to be at 12% adjusted margin at the end of FY '27, while we're nearly there now some 18 months in advance. And then really from an overall debt position, our net debt stood at EUR 39.8 million, which was a leverage ratio of 2.1x, and that was an improvement from the 2.5x that we saw 6 months before at March 2025. And now I'll go into more detail about revenue, profitability, margin and also our cash flow growth over the first half of the year. So from a revenue perspective, you only mentioned earlier that when you start factoring in the volumes that were transferred to the joint venture in the first half of the previous year, it was just over 3,800 cubic meters. That represented 13% of volume, but it was 14% of revenue. So when we exclude that, then like-for-like revenue growth was up 23% to EUR 76.1 million. And that's really off the back of very strong growth, and Jelena will talk about our regional end markets later in the business review. But the other key thing is around the pricing discipline. We operate a premium product in a niche market, and we don't have to discount to gain market share. So as a result, during the year, we were actually able to increase our average selling price by 1.7%, which is a really, really strong performance in a broader market that is flat. License fee and royalties represents the return that we get from our joint venture. We get an ongoing percentage royalty on every dollar of sale they make and the license fee actually relates to the construction and establishment of the plant. So license fee was effective in 3 phases. One when the JV agreement was signed, one when the plant was completed, and the final license fee payment, which was made in September of this year was really when the plant passed its final performance test. That showed that the plant was operating exactly to the same specifications and tolerances as the Arnhem facility, and that gave rise to that final license fee income. Our return now from the joint venture is effectively a percentage royalty on all of the sales. So overall, very strong growth in revenue. Total aggregated revenue, including the joint venture was GBP 89.9 million, and that was after a translational FX gain of another 1% or so. So aggregated like-for-like revenue was also up 23% as well as like-for-like revenue. So from a gross margin perspective, very strong improvement. On the face of it, it looks like the gross margin, while still being over our strategic target of 30%, looked like it dropped by 20 basis points. But when we factor in the volume that was transferred to North America in the previous year, it was 13% of volume, 14% of revenue, but 18% of gross margin and 23% of EBITDA, primarily because sales to North America command a far higher average sales price than the rest of the world. Then we saw 110 basis points increase in our gross margin through volume growth, favorable sales mix where we were able to increase our proportion of Accoya Color sold in the first half of the year. We added a second shift to the Barry facility in June. It wasn't a CapEx investment. We've added 4 heads to the operation. So the facility operation is now producing over 2 shifts, and that with a combination of external drying of the Color resulted in a more than doubling of capacity from 6,000 to 14,000 cubic meters per year. That took place in June. So we had a couple of months benefits of higher Color production, but we're continuing to see strong Color demand over the year. The license fees and royalties I mentioned earlier. From a production cost perspective, about 62% of our cost base relates to our raw materials, so wood and net acetyls, which is used in the acetylation process. So wood we buy from New Zealand from about 15 sawmills that we work with, and really over H1 -- compared to H1 of the previous year, the wood cost was pretty flat year-on-year. Even though we saw a slight increase in the cost of appearance grade wood, that was more than offset by a reduction in wood chip grade wood, which we effectively use for the Accoya, Tricoya product. From a net acetyls perspective, we actually saw a favorable benefit here in terms of our gross margin. And that was really because of an improvement in the usage of anhydride that we use in the production process. So we can still access the same quantity of wood using a slightly lower amount of anhydride, which leads to a reduction in the unit cost of production, which hence improves your gross margin. We also benefited from a change in our supplier mix, but also given one of our suppliers for anhydride is a U.S.-based company, which invoices us in U.S. dollars, we saw a favorable FX benefit because of the weakness of the dollar against the euro in the first half of the year. So overall, GBP 23.2 million gross margin with a 30.5% gross margin percentage, which remains above our strategic target level. From an overall perspective in terms of looking at profitability, we more than doubled our adjusted profitability from EUR 4 million to EUR 10.4 million, that was a 160% increase year-on-year or a 620 basis points improvement in the margin, a very, very strong performance. That was driven by the gross margin improvement that I mentioned before, but also keeping those operating costs, so SG&A costs below gross profit really under tight control. We only grew our OpEx cost by EUR 0.2 million year-on-year. And as Jelena mentioned, we've retained EUR 2.3 million of the benefit from the business transformation program undertaken in FY '24, that's retained even after we've made additional investments in terms of adding sales and marketing staff, but also upgrading the talent we have in the operations in health and safety and finance and other key functional areas. Any costs to do with the Hull business or Tricoya U.K. have all completely gone. That business was put into liquidation in December 2024. So you've got a EUR 1.6 million swing in profitability H1 on H1 because the Hull is no longer part of our group. And then you can see the big benefit from the performance of the joint venture, which last year was a EUR 4.3 million loss, and now we're pretty close to breakeven. So a big EUR 4 million swing in the profitability of the joint venture over that time period. So what does this mean from an overall segmental perspective? So the first bar here shows the operating assets of the Accsys Group. So it excludes the joint venture and really focuses just on Arnhem and Barry. And that showed a significant improvement in profitability to EUR 12.7 million and an improvement in the margin to 16.7%, which is really, really strong performance. Corporate costs, which really represent the cost of the listing. So it's the corporate functions in head office, the cost of the listing fees, the Board of Directors, anything to do with our listing on AIM and also Euronext reduced by EUR 0.4 million to EUR 2 million in the year. And that was really, again, because of the tight cost control we have, but also there were a couple of one-off costs in the previous year. So the overall -- the middle bar, which is the light green bar shows Accsys Group, and that's excluding the JV. So that shows the underlying profitability of EUR 10.7 million, which is up from EUR 8.3 million in the previous year, but really that big improvement in the margin, which is up 260 basis points to EUR 14.1 million -- 14.1%, sorry. The JV, as I mentioned earlier, was close to breakeven with our share of the loss of EUR 0.3 million, which took our adjusted EBITDA profitability up to EUR 10.4 million or 11.6%. And as I mentioned before, that 11.6% is very close to the 12% target that we set ourselves to be at March 2027. So nearly there, but some 18 months in advance. So net debt overall. This chart shows the progression of net debt. And we ended the year at EUR 39.8 million of net debt with a 2.1x leverage ratio. Our working capital increased during the first half of the year by EUR 4.2 million, but that's really all to do with wood. Our target is to hold 3.5 months of raw wood in stock. This is basically wood that we buy from our sawmills primarily from New Zealand. And we keep 3.5 months in stock because of really that long lead time. We then keep about 1.5 months' worth of stock as finished goods to meet customer demand and to provide availability of SKUs to our end customers. So given the substantial growth that we've seen in H1 with 23% growth and the forecast growth that we're seeing in H2 compared to the previous year, it's necessary for the business to carry higher levels of working capital or to meet that demand. There's also a feature of timing here because the cutoff point is effectively 30th of September, the end of our first half of the year. But effectively on the 1st of October, the Arnhem business undertakes this annual maintenance stop. So the plant closes of 3 weeks while we maintain and clean the plant and eventually make sure that all the parts are in working order and any maintenance CapEx is undertaken. So really ahead of that maintenance stock, you build up inventory levels and then during the month of October, when the plant isn't producing anything, you're selling out of finished goods. So there is a slight feature there in terms of working capital as well. Net interest went up by GBP 2.3 million, of which about half of that relates to our convertible loan notes. CapEx investment in H1 was EUR 2.9 million, and that comes from a couple of projects. So the largest project was a project we internally call Project Elm Tree 2, and this was really about increasing our acetyls storage capacity in the plant in Arnhem. So we can now store about 7 days of acetic acid and anhydride in the plant. Previously, we were reliant on tanker deliveries. So if there's any scheduling issues with tanker deliveries, it could have a knock-on impact on production. And that's been taken away by the introduction of Project Elm Tree 2. The CapEx involved was front half loaded with the project being effectively connected to the rest of the plant during October, and it will then go live later this month. We also made a good investment in terms of improving the health, safety and environmental conditions of our stacker hall in Arnhem to improve soundproofing, light and ventilation, which makes it a much better working environment for our operators who operate in that hall. Tax received was EUR 0.7 million in respect to previous tax years. And hence, the overall net debt was EUR 39.8 million with 2.1x leverage. And really, the final slide for myself is just summarizing that excellent first half of the year where we saw a significant improvement in profitability. We saw total sales volume growth of 22% with sales accelerating in North America, which grew 61%, which is particularly strong. The JV was close to breakeven, and we saw a big improvement in adjusted EBITDA with that margin very close to our Phase 1 target already. We've continued to deleverage the balance sheet was, again, one of our strategic aims with a good improvement in our leverage ratio. And the refinancing that we've just recently completed in October by introducing a new banking partner to our banking group has really strengthened our capital structure and given us significantly more financial flexibility on improved financing terms. So with that, I'm now going to pass over to Jelena, who's going to talk you through the business review. Jelena Arsic Os: Thank you, Sam. Thank you very much. So my business review, I will start first just mentioning some of the fantastic projects that we realized in this first half of financial year '26. You saw a couple of them passing through the slides as we went through it from the NEMO Museum in the heart of Amsterdam, where we have a new terrace on the rooftop that is now being done in Accoya and also benches and tables that are going to be done in the future. We had a library in Barcelona, where beautiful cladding was chose because of the durability and resistance to harsh environment of the sea air in that area. Here, you see a beautiful hospital cladding in New Zealand that is important market for Accoya as well. Let me remind you first about where do we stand on -- with our focused strategy and the targets that we gave ourselves in January 2025. As we said, strategy is going to be delivered across -- along the 3 phases. And in the first phase, that is focusing on resetting operationally, maximizing returns and cash flow from the existing assets and increasing and reinforcing the fundamentals, including reducing the debt and optimizing our capital structure. Our first half year results demonstrate excellent progress against the Phase 1 targets. We are spot on, if you like, on delivering almost each of the KPIs that we gave ourselves as a target. With our sales volume on a run rate of 77,000 for the full year, we are very good on the target -- of making this target of 100,000 that was at the end of our Phase 1. Significantly improved profitability, moved from 5.4% of adjusted EBITDA margin from last year to 11.6% this year, which is very, very close to the adjusted EBITDA margin target of 12% for the first phase of our strategy. Importantly, we are deleveraging and derisking the business, placing company in a much stronger position for growth. Our successful October refinancing is giving us more favorable payment terms with a reduction in quarterly payment -- capital payments going forward. So if you look at where do we stand on the first phase, I would probably say that with the good efforts of the team, we are ticking basically each one of those boxes. Now going what is happening in our markets. We see quite a strong demand across all the geographies. U.K. and Ireland demonstrated growth of almost 14%, rest of the Europe, 22%; rest of the world, 28%, and fantastic 61% in North America. At the same time, we are keeping our pricing on the pair. So group average sales price was maintained with a 1.7% average increase across of our region. So that means that despite the premium or in addition to the premium parsing, Accoya is gaining market share globally. If you know that underlying market are almost stagnant or growing 1% or 2% in some of the countries. At the same time, we are doubling Accoya Color production capacity and our decking collection is underway to be launched in the second half of this financial year. The confidence of our distributors and our customers in availability of supply of Accoya and also fantastic performance credential are helping us to deliver this growth. We -- as we also said, we are particularly proud on the excellent performance in the JV, 61% growth in the U.S. for the first half of the year, 8,000 cubic meters of Accoya was sold. And as you know, and Sam went into the details of it. So Accoya USA is almost on a breakeven on their EBITDA. We promised to the market that the joint venture is going to be -- show breakeven EBITDA in this financial year and then cash positive in the next financial year. So we are actually on that path, delivering very, very good performance for the reporting period. There was one of the negative impacts or negative potential news in the reporting period, and that were the import tariffs on the softwood coming from New Zealand or any country importing in the U.S., we were able to react and increase our average sales price as from 1st of November. Tariffs were announced in the first weeks of October. So we are passing this without too much troubles to the market. I think everybody in the U.S. is adjusting now and adjusted now to overall inflation and everything. So we are confident that we will be able to manage this impact quite successfully going forward. If -- here, we are going a little bit in depth on what is happening in this U.S. market. Our sales in the U.S. are outpacing overall market growth, allowing us to gain share from competitors. With forecast indicating strong and sustained demand for modified wood overall -- over alternative materials, we are confident that Accoya USA will continue to expand its presence in the growing -- in this growing market. Our main drivers in -- our main application in the U.S. are cladding and decking. And those -- both of these segments are showing very strong growth rates for modified wood. As you can see it from the table, they are showing double-digit growth forecast for the decking. Traditional timbers like hardwoods are seeing sharp declines in demand in a customer who are opting now for the higher-performing modified and engineering solutions. And furthermore, the increased regulation on the import of hardwoods like ipê and cumaru from Brazil had quite a good and positive benefit for Accoya in the U.S. as supply was quite limited for those species. And as you can see from the table, we are expecting them to further contract going forward. Our growth in the U.S. is coming predominantly from our existing distributors, our long-lasting partners who are with Accoya from its start, also investing together with us for many years. But we are also adding some new distributors like hardwood specialty products or GMX Group that is focusing more on a decking and more retail side of the business. And we also add a new -- our first distributor in Mexico, who is having also a milling capacity. So they are capable of not only distributing us on Accoya, but also making more finished product out of it. In Arnhem and Barry, we continue driving operational efficiencies to maximize our returns on our assets. As I said, the underlying gross margin showed an increase of 1.1%. We will continue to work on those efficiencies to drive this margin even higher going forward. And you can also imagine that as we approach the nameplate capacity as we grow our volume, most of that profitability, given that we do not have really a lot of people in our operations, most of that benefit is going to go to the bottom line. We have invested in Arnhem in a new Elm Tree, I think Sam already mentioned a very important capital investment, which is going to give us additional batches, so additional capacity of a couple of thousand in the year and also allow us to be more flexible with the shipments and receiving of our chemical finished goods or raw materials during the week and not doing it in the weekend. In Barry, we see fantastic 56% year-on-year growth for the Accoya Color sales volumes. We invested in a second shift, and we will continue to build the market and also the supply of this very nice product Accsys is having today. Last but not least, we have launched our sustainability strategy where the first time in the company history, we are actually committing to the decarbonization target. Sustainability is in the core of everything what Accsys does. So we are very happy that we are finally at the stage to make the commitments to the market and keep tracking on the progress as we go forward. This will bring me -- this is the last slide that we are talking about existing business, and this is now bringing me to the outlook, and I would like to summarize today's messaging. We have delivered very strong H1, and we are entering the second half of the year from the position of strength. Our trading is remaining robust going into H2, and it is supported by the sustained global demand for our premium differentiated products. We expect to see this continuation of sales acceleration in North America and also noticing the impact of recently announced tariffs, we expect joint venture to be EBITDA positive for the financial year. While we also have to be mindful that the underlying market conditions are relatively soft in the building and building material industry. So there are continuing macroeconomic challenges. The Board is really confident that company will continue to deliver further growth and profitability improvement for the year ahead, which is consistent with the expectations, and we will continue to make further progress towards our strategic targets. With this, I would like just to remind you why Accsys is showing a compelling investment case and sustainable growth opportunity. Company has very unique product that is really backed up with a significant patent portfolio. And we see ourselves as an industry disruptor and generally innovative product that is operating in a growing and sizable addressable market that are underpinned by a very, very strong brand. We have established manufacturing footprint. Even though this technology is known for more than 100 years, nobody in the industry was having a commercial site and available commercialized manufacturing location and be able to actually provide to the customers acetylated wood and knowing that building a plant cost EUR 250 million, then it also creates a sustainable and high barrier to entry for any newcomers. We are improving, and we are showing quite a strong financial performance. And now with the funds in place with the refinancing that we did in October, we do have enough funds to deliver on our focused strategy that we showed in the first half of this calendar year. So we do believe that the company is at an inflection point to deliver significant shareholder value. I don't believe that the markets are recognizing fully with the share price. All of this great work that teams are putting in and this significant improvement in all the results, but nevertheless, if you look where we were in January with the Capital Market Day where the share price was and where is it today, it is almost 60% higher, so significantly higher, and we will continue to work very hard and to -- as we improve and further strengthen the company, this recognition will come, I'm absolutely sure. So with this, I'm going to finalize this presentation, and we are going to open the stage for the Q&A. Operator: Perfect, Jelena, if I may just jump back in there. Thank you very much indeed for your presentation this afternoon. [Operator Instructions] I just like to remind you that a recording of this presentation, along with a copy of the slides and the published Q&A can all be accessed via your investor dashboards. Guys, as you can see that, we have received a number of questions throughout your presentation this afternoon. And thank you to all of those on the call for taking the time to submit their questions. But guys, at this point, if I may just hand back to you to read out those questions and give your responses where it's appropriate to do so. And if I pick up from you at the end, that would be great. Thank you. Jelena Arsic Os: Thank you, Jake. So I will start with the first question from Michael H. Can I ask what you are doing for the share price as you have been CEO now for 2 years, and the share price hasn't given shareholders any returns at all. Why is that? Michael, thank you. This is a very good question. And as I just mentioned at the end of my presentation, I do not believe that share price is giving the justice on all the excellent work and excellent progress that is being done in the last couple of years. Of course, the moment when I joined the company, company was on the -- with some difficult decisions needed to be made. We had 2 unfinished big capital projects, one in the U.S., one in Hull at a time with a company of our size, having 2 large capital projects unfinished means significant risk on the company results. And I do believe that, that's why share price reacted at that time as it was. We have done a lot of improvements. Today, we have -- at that time, we had 1 site. Today, we have 2 acetylation plants and 1 coloring plant, a much, much stronger financial performance, completely derisked with this exposure to the unfinished projects. We have a strategy in place that is really proving that it is working. And again, as I said, as from the Capital Market Day that we had in January this year, our share price increased almost 60%. We are going to -- we are very much committed to continue delivering on this road map. And I'm absolutely sure that with the team that we have in place, with the talent that we have in place, that we are continuing investing, we are going to continue showing progress and as a company, continue to show the progress, share price will come. Sameet Vohra: Great. Next question. Can I ask why you changed brokers from Numis to Liberum? Yes. So, good question. And it was in April this year, we did move from Deutsche Numis to Panmure Liberum. But really, why do we do that? And Deutsche Numis are very, very good, but we felt it was time for a fresh pair of eyes from both a broking and a NOMAD perspective. And it's always good to refresh your advisers periodically to bring fresh ideas and fresh initiatives as well. And really linked to Jelena's last point about driving that share price higher, it's about introducing us to new investors, people who are excited about the strategy just as we are. And really, we felt that by changing brokers that we could get those introductions to potentially new shareholders who could help drive that share price higher. Jelena Arsic Os: We have a question from Nigel. Given that Phase 1 of the focus strategy targets improved utilization of existing assets, what is your current planned utilization rate? And how much further headroom remains before requiring new capital investment? We are today at around 70% of utilization rate. We will not need any new investment at least through the first 2 phases of our strategy. So no expansions at least in the next couple of years. Sameet Vohra: Great. Next question. As utilization of your existing capacity increases, do you see opportunities through efficiency gains, product mix improvements or pricing to move gross margins above the 30% target? What indicators should investors watch to assess this? So I think really, we have said we want to maintain a gross margin of 30%, but we want to improve that each year. And it is through a combination of all of those above things. So it is operational efficiency. How do we get more through -- coming through the plants, looking at cycle times, looking at our costs. I mean just over 60% of our costs are wood or net acetyls. So through procurement activities, looking at overall efficiency about how the plant operates, how we engage with our suppliers and partners and also pricing, which remains a firm part of what we do. But you can't just rely on pricing to drive your -- to drive revenue forward and drive the gross margin forward. It has to be accompanied with operational efficiency. So what indicators should investors look for? Well, I think every 6 months as we're reporting, you're seeing volume growth and revenue growth. And you can see that in terms of how that is benefiting gross margin. So next question, which is probably one for me. What are the terms of the new bank loan? So yes, so we undertook a refinancing of our banking activities that concluded in October of this year. So just in the second half of the year. And really, it was important for us to diversify our banking partner base. So I mean, ABN AMRO have been very, very supportive to the business for a number of years and continue to do so. But we wanted to introduce a further bank. So as we get to the end of Phase 2 of our strategy, as we start looking at expansionary growth for Phase 3, you don't want to just put all your eggs in one basket and be reliant on one banking partner to effectively provide the debt funding to do that. Having a second bank gives you greater optionality and ability to fund growth through debt, and we couldn't be more delighted than getting a partner of the strength and caliber of HSBC. So I mean the key terms, I mean, I'm not going to go into terms of the commercial terms, but it is at least 1 percentage point better on pricing and the pricing is now linked in terms of the margin pricing to our level of leverage. And also, we get to keep more of our cash in the business. So the capital repayments on the loan are significantly improved on the -- compared to the previous facility. So you could think that overall, the business will be approximately after FY '26, EUR 2 million a year better in cash terms than under the previous facility. Jelena Arsic Os: We have a question from Michael. Is it worth it having 2 share price quotes on Euronext and AIM? It's an excellent question, Michael. And it was worth it having 2 share price quotes because if you know the -- all of our investors, 60% of our investors are family office from the Netherlands listed on Euronext, and then 40% of the investors is listed on AIM. At the time when company needed the funds for the big capital expenditure, all of those listings were quite logical. It is a little -- it is complicated for us as a company of our size to be listed on 2 markets. But at this moment in time, we are really focusing more to deliver operationally and listing is not in our priority in this moment of time. Then we have a next question from Johan. Johan, AU backed research presented through the life Tricoya results indicates promising long-term potential for Tricoya. What role do you see Tricoya playing in Accsys future? Thank you, Johan. This is an excellent question. Tricoya -- company still has patents and technology as important assets for us. At this moment in time, we are focusing on getting returns from our existing assets of Accoya and focusing on Accoya as a product range. But nevertheless, I could imagine that in 1 or 2 years, as we are -- if -- when Accoya USA is fully cash positive when the growth is there, when the factories are full, that we are going to very, very actively look at Tricoya again. Sameet Vohra: Next question from David S. What financial measures do you utilize to approve CapEx? What are the hurdle rates? How do the current CapEx projects compared to those hurdles? So the key thing is, you know, we have a very disciplined governance approach to evaluating CapEx. We look at a number of metrics, NPV, cash payback, IRR. And the key thing is the CapEx for expansionary growth projects has to be in excess of our overall cost of capital from an NPV and an IRR perspective. But there are effectively 3 categories of CapEx we look at. One is expansionary growth where we can then effectively apply that hurdle rate evaluation and the projects like Elm Tree 2 absolutely beat that hurdle significantly. But then we have 2 other types. One is regulatory, where we just have to do it because there are compliance -- legislative compliance reasons why we have to do it. And the other is health and safety. So I mentioned before the improvements we made to the stack in Arnhem. Well, that is to improve the working conditions for our staff in there in terms of lighting, ventilation, sound proofing. You don't apply hurdle rates to CapEx like that. It's really important from a health and safety perspective as to why we do that. Jelena Arsic Os: And since this is our last question, I would like to -- just to summarize the presentation for today. So looking ahead, we remain confident in the long-term potential of our technology and our strategy. We have a clear road map. We have a market-leading product in attractive growth markets and a fully funded manufacturing base that position us to deliver significant shareholder value. I continue -- we continue to be very excited by the prospects of our business. We are transforming, we are delivering and we are growing. Thank you very much for your attention and interest in Accsys. Sameet Vohra: Thank you. Operator: Perfect, Jelena, Sam, if I may just jump back in there. Thank you very much indeed for updating investors this afternoon. Could I please ask investors not to close this session as you will now be automatically redirected for the opportunity to provide your feedback in order that the management team can better understand your views and expectations. This will only take a few moments to complete, but I'm sure it will be greatly valued by the company. On behalf of the management team of Accsys Technologies plc, we would like to thank you for attending today's presentation. That now concludes today's session. So good afternoon.
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