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Operator: Thank you for standing by. My name is Rebecca, and I will be your conference operator today. At this time, I would like to welcome everyone to the DigitalOcean Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I would like to turn the call over to Melanie Strate, Head of Investor Relations. Please go ahead. Melanie Strate: Thank you, Rebecca, and good morning. Thank you all for joining us today to review DigitalOcean's Third Quarter 2025 Financial Results. Joining me on the call today are Paddy Srinivasan, our Chief Executive Officer; and Matt Steinfort, our Chief Financial Officer. Before we begin, let me remind you that certain statements made on the call today may be considered forward-looking statements, which reflect management's best judgment based on currently available information. Our actual results may differ materially from those projected in these forward-looking statements, including our financial outlook. I direct your attention to the risk factors contained in our filings with the SEC as well as those referenced in today's press release, that is posted on our website. DigitalOcean expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements made today. Additionally, non-GAAP financial measures will be discussed on this conference call and reconciliations to the most directly comparable GAAP financial measures can be found in today's earnings press release as well as in our investor presentation that outlines the financial discussion on today's call. A webcast of today's call is also available in the IR section of our website. And with that, I will turn the call over to Paddy. Padmanabhan Srinivasan: Thank you, Melanie. Good morning, everyone, and thank you for joining us today as we review our third quarter results. I'm very excited to share our results for the quarter and to give you an update on the progress that we are making against the goals that we articulated earlier this year during our April Investor Day. Our performance this quarter was very strong. We exceeded our Q3 guidance on both revenue and profitability metrics, delivering 16% revenue growth and the highest incremental organic ARR in the company's history, while generating 21% trailing 12-month adjusted free cash flow margins. We continued innovation in our comprehensive agentic cloud to support the needs of scaling AI and digital native enterprise customers, making sure there is no reason our highest spending customers ever need to leave our platform. We augmented our industry-leading product-led growth engine with a focused direct sales motion, driving customers to migrate workloads from the hyperscalers to our platform and building traction with direct AI native customers. This progress is evident in the rapid growth of our largest customers and their increasing willingness to sign committed contracts with us, with customers having more than $1 million in annualized run rate reaching $110 million in ARR, growing 72% year-over-year and with multiple customers signing 8-figure committed contracts after the quarter closed. The demand for our agentic cloud has exceeded our supply. Our performance and the visibility we have into demand gives us the confidence both to increase our 2025 and 2026 revenue and adjusted free cash flow outlook and to also increase our investments in data centers and GPU capacity to further accelerate growth while maintaining attractive margins. I will now dive deeper into all of this, starting with our third-quarter financial results as highlighted on Slide 10 of our earnings deck. Q3 revenue hit $230 million, up 16% year-over-year, marking the highest growth since Q3 2023. We delivered our highest organic incremental ARR in company's history at $44 million. This growth was driven by a balanced performance across our comprehensive agentic cloud platform as Direct AI revenue more than doubled year-over-year for the fifth consecutive quarter, and our general-purpose cloud products saw the highest incremental organic ARR since Q2 of 2022. We delivered this accelerating revenue growth in Q3 while exceeding our profitability guidance and materially strengthening our balance sheet. Adjusted EBITDA and non-GAAP earnings per share were both well above guidance on the back of strong execution, and we delivered a strong 21% trailing 12-month adjusted free cash flow margin as we introduced equipment leasing into our financial toolkit in Q3 to better align the timing of our investments with our revenue. To give us further flexibility to invest in growth, we also repurchased the majority of our 2026 convert in the quarter, strengthening our balance sheet. The primary drivers behind our accelerating top-line growth are threefold: number one, the increasing momentum we are seeing with AI-native customers; next, the material traction we continue to generate with our highest spend digital native enterprise customers; and finally, the continued strength we are seeing in revenue from new customers. Our unified Gradient AI agentic cloud, which is outlined on Slide 7 of our investor presentation, is getting increasing traction with larger, well-funded AI native companies that are in inference mode. These scaling companies increasingly leverage our unified agentic cloud with many of our top customers already leveraging both AI and general-purpose cloud capabilities and with many more having at least starting to test and experiment with AI on our platform. Evidence of this traction is in the growth rates of our highest spending customers. Revenue from these customers who are at $100,000-plus annual run rate grew 41% year-over-year, increasing to 26% of total revenue. Growth is even higher for our largest digital native enterprise customers as the more -- our customers are spending the faster they're growing on DO. The charts on Slide 11 show that our customers with greater than $500,000 and greater than $1 million in annualized run rate grew revenue 55% and 72%, respectively, providing clear evidence that our increasing ability to not just attract but also retain and grow our largest customers, demonstrating that customers can keep scaling on our platform and never have a reason to leave. Let me now dive deeper into this traction using Slide 12 as the backdrop to illustrate just how much progress we have made since the last earnings call. I will start with our AI infrastructure on the bottom right, which is a full-stack inference platform targeting AI native customers that have their own models that they want to tune, optimize and run in inference mode. These customers select our platform for our full set of capabilities, where we combine a powerful lineup of GPUs that are available in both bare metal and droplet configurations, including inference optimized droplets with advanced inference performance optimization like page retention, flash attention, FP8 quantization, speculative decoding, model operations management, reduced time for first token and compelling TCO economics. Our AI infrastructure provides comprehensive hardware plus software infrastructure for AI-native companies that are scaling up real-world inference workloads globally on DO. FAL.ai or Fal, a generative media model platform that provides text-to-image and text-to-video models for major customers such as Canva, Shopify, Perplexity and more is a great example of a customer that is taking advantage of our unified agentic cloud. They leverage a range of our AI infrastructure solutions, including GPU droplets, both to host their media models in production, serving their end customers and to do research and fine-tuning. Fal is more than just an important customer as we have come together in a strategic partnership to accelerate generative AI content creation by making image and audio generation more accessible to start-ups and enterprises. Through this partnership, Fal will host and run hundreds of its models on DigitalOcean's infrastructure, powering applications across creative and enterprise use cases. This means customers can create agents that understand and generate not only text but also images, data and other forms of input, significantly expanding the range of real-world problems our customers can solve. NewsBreak is another example of an AI native customer leveraging our unified agentic cloud. Driving the next generation of digital media, NewsBreak delivers timely and relevant local news and information to 40 million monthly active users. Newsbreak's AI-powered infrastructure makes sophisticated personalization accessible to mainstream users nationwide. They utilize our AI infrastructure to train and deploy complex recommender systems and natural language processing models that are foundational to their products. Our AI infrastructure, high throughput and memory capacity are critical for running inference at scale, which allows them to perform real-time content ranking and ad placement for millions of concurrent users. Gradient AI agentic cloud unifies our integrated AI capabilities with our full-stack general-purpose cloud, which we've been optimizing for over a decade, enabling NewsBreak to preprocess their work on our CPU droplets and run their vector search service in advance of running their AI workloads, optimizing both cost and performance. Network file storage, or NFS, which delivers high throughput performance for both GPU and non-GPU droplets, is an example of a unified agentic cloud capability. Customers can now attach and provision storage in just minutes, accelerating time to value by eliminating idle time. With seamless integration into our Kubernetes engine, NFS makes it easier than ever to scale applications and workloads while maintaining speed, reliability and efficiency across environments. Moving up the stack outlined in Slide 7. The AI platform layer on the middle right is typically leveraged by companies that are users or consumers of AI that are looking to build agentic applications without having to directly manage the infrastructure. As we know, the future of AI is an agent and agentic workflows, which is a natural evolutionary step for all SaaS and other applications. We continue to evolve our AI platform as the foundation for building and deploying these intelligent agents and powering complex enterprise agentic workflows. It now supports serverless inferencing across the most popular models, including OpenAI, Anthropic, Mistral, Llama, DeepSeek and others, including new generative media models from Fal. We have added a powerful knowledge-based service that lets customers bring their own data and improve accuracy, along with built-in Guardrails for safety, visual agent orchestration and enterprise-grade features like observability, git integration and auto-scaling. Together, these capabilities make our Gradient AI agentic cloud platform one of the most intuitive and complete platforms for taking AI agents from prototype to production. These key capabilities help companies develop and operate AI agent fleets and manage their full life cycle of these agents seamlessly from a single platform while leveraging the best-of-breed AI models from various providers. We are particularly excited about a major customer we signed for our AI platform after the Q3 quarter closed. This customer is a global digital systems integrator who signed an 8-figure per year multiyear contract to leverage our agentic cloud to drive AI transformation for its digital native enterprise customer base with a specific focus on identifying the full software engineering life cycle, including planning, backlog and road map management, release planning, release execution and customer support. We'll provide more information on this exciting customer after we formally announce the partnership in the upcoming days. The AI platform layer continues to also gain broader momentum with over 19,000 agents created so far of which more than 7,000 are already in production. One specific customer, Shakazamba, an Italian leader in GDPR compliant, ethical and secure AI solutions across Europe, chose to leverage the Gradient AI agentic cloud over the hyperscalers. By using our platform, they're now able to create and roll out agents to automate customer support, knowledge management and content creation while reducing development time and costs associated with the agent life cycle. This quarter, we also expanded our AI ecosystem with the launch of the DigitalOcean AI Partner program with several of our partners outlined on Slide 13. This is a major step in empowering AI and digital native enterprises that are building and scaling their businesses leveraging AI. These companies don't have time for a fragmented infrastructure. They instead want a unified cloud and an AI platform that lets them seamlessly build and scale intelligent applications using agents. This new partner program brings together AI-native companies, integrators and the venture ecosystem to help these builders reach more customers, accelerate innovation and amplify their global reach. Combined with our AI platform and infrastructure, this ecosystem makes DigitalOcean the go-to destination for these AI-native businesses who want simplicity, scalability and reach without the hyperscale complexity. In Q3, we continued to deliver product innovation in our core cloud stack to support our highest spending customers by meeting their needs as they scale their business on DO. One such example of a digital native enterprise customer scaling rapidly on DO is Bright Data a leading provider of web data sets to global frontier LLM labs for training AI models. Bright Data leverages various components of our agentic cloud to scale high-volume global workloads on our platform. VPN Super, who develops trusted VPN and security solutions is the most downloaded VPN app in the world is another digital native enterprise growing on our platform. VPN Super empowers millions of users across the globe to browse securely and privately regardless of their location. They signed a 7-figure deal to migrate multiple workloads to DigitalOcean, and they selected DO for our ability to handle large traffic spikes, platform reliability and our global scale. These growing customers require general-purpose cloud capabilities that grow with their business, and we delivered a number of these new features during the quarter, as you can see highlighted on Slide 12 of our earnings presentation. For example, we recently introduced Spaces Cold Storage, an enterprise-grade object storage solution designed for customers managing data at massive scale. With support for hundreds of petabytes and billions of objects per bucket, it offers free retrieval, predictable low cost and immediate access to data, eliminating the trade-off between affordability and performance. This cold storage is secure, reliable and resilient, providing our customers with the confidence to store and access mission-critical data sets seamlessly as their needs grow. During the quarter, we also enhanced our managed databases offering with automated storage auto scaling, enabling customers to scale seamlessly as their data needs grow. When capacity thresholds are reached, storage automatically scales in 10-gigabyte increments or higher with 0 downtime and no disruption to workloads. This feature is available across all major database engines, including MongoDB, PostgreSQL, MySQL and is fully customizable, allowing customers to set thresholds starting at 20% utilization. With a simple pay-as-you-go model, auto scaling eliminates the burden of manual intervention, ensuring that applications scale reliably and cost-effectively. The steady stream of new features is resonating with our AI and digital native enterprise customers. Over 35% of our customers with more than $100,000 in ARR have adopted at least one of our new features released over the past year, and those customers having adopted at least one of these new products have seen a several hundred basis points increase in their growth rate after adopting the new product. Our strong performance, our growing momentum through the first 3 quarters and the visibility that we now have into demand gives us the confidence to raise our near-and medium-term growth outlook. We are raising our full-year 2025 guidance on both revenue and margin and we now expect to achieve our 18% to 20% 2027 revenue growth target in 2026, a full year earlier than we had projected. It has also given us the confidence to accelerate our investments to drive growth in 2026 and beyond. When we outlined our 2027 growth objectives this past April, we indicated that we would increase our investment as we saw opportunities to accelerate our growth. We are now seeing more demand than we can support with our existing capacity, which is evident by us having signed multiple 8-figure committed contracts after the quarter ended that will materially increase our RPO in Q4. With this increased conviction, we began to put the foundational elements in place in Q3 to even further accelerate our growth. We started ordering more GPU capacity to meet the growing inference demands we are seeing from our AI native customers. We also secured around 30 megawatts of incremental data center capacity to support growth in 2026 and beyond. We added equipment financing to better align our investments with revenue. We ramped engineering resources to accelerate our unified agentic cloud road map and continued our targeted investment in new sales and marketing initiatives to complement our industry-leading product-led growth engine. These investments will build on the success we have seen to date and will set us up for a strong 2026 and 2027. Our Q4 and 2025 full-year guidance implies a 16% exit 2025 growth rate. And while we won't provide 2026 guidance until our February earnings call, we expect to comfortably deliver 18% to 20% growth in 2026, achieving our 2027 growth target a full year earlier than previously projected. We will deliver this growth while maintaining strong adjusted free cash flow margins in the mid- to high teens. Matt will provide further color on these investments and the projected impact on our growth and profitability in his remarks. As I said in my opening, we delivered a strong performance in Q3, beating our guidance on both revenue and profitability. We are seeing momentum with our unified agentic cloud. And this momentum is evident in the rapid growth of our highest spending customers and demand is exceeding our current capacity. All of this gives us the conviction both to raise our 2025 and 2026 revenue and adjusted free cash flow outlook and to increase our investments to take advantage of the opportunity in front of us. We look forward to sharing more on our progress and our outlook for 2026 over the upcoming months. Thank you, and I'll now turn it over to Matt. Matt Steinfort: Thanks, Paddy. Good morning, everyone, and thanks for joining us today. As Paddy discussed, we are excited about our strong Q3 2025 performance. We are gaining traction with our unified agentic cloud, which is resulting in strong revenue growth from our highest spending customers, and we are seeing more demand and satisfied with our current capacity. This momentum and visibility give us conviction both to increase our 2025 and 2026 revenue and adjusted free cash flow outlook and to put in place the foundations to further accelerate growth in 2026 and beyond. In my comments, I'll walk through our Q3 results in detail, share our fourth quarter and updated full year financial outlook and also provide an update on our 2026 expectations. Starting with the top line. Revenue in the third quarter was $230 million, up 16% year-over-year, the highest revenue growth since Q3 of 2023. This growth was balanced across our unified agentic cloud and was primarily driven by increasing traction with our higher spending AI and digital native enterprise customers with steady contributions from our product-led growth engine. We continue to see strong AI/ML revenue growth in Q3 with AI revenue more than doubling year-over-year, which it has done every quarter since we launched our AI platform. We also delivered the highest incremental organic ARR in company history at $44 million, bringing ARR to $919 million. With rapid product innovation across our unified agentic cloud platform and with the strategic go-to-market investments we made earlier this year proving to be effective, we are having increasing success attracting and growing larger, well-funded AI and digital native enterprise customers. This is evident in the revenue from our customers whose annualized run rate revenue in the quarter was greater than $100,000, which now represents 26% of overall revenue, growing 41% year-over-year, 200 basis points higher than the growth we saw from that cohort in the prior year. Adding to this growth, revenue from general-purpose cloud customers in their first 12 months on our platform continues to be strong, and we have stabilized NDR as net dollar retention remained at 99% in the quarter, up 200 basis points from 97% in the third quarter of 2024. Turning to the P&L. While we accelerated revenue, we also delivered strong performance on all of our key profitability metrics. Gross profit was $137 million, up 17% year-over-year, with a 60% gross margin for the third quarter, 100 basis points higher than the prior year. Adjusted EBITDA was $100 million, a 15% increase year-over-year and an adjusted EBITDA margin of 43%. Non-GAAP diluted net income per share was $0.54, a 4% increase year-over-year. This result was impacted by the $625 million convertible note we issued in August, the repurchase of $1.19 billion of our 2026 notes and the interest expense from the $380 million drawn on the Term Loan A component of our existing credit facility. The net impact on non-GAAP net income per share of these balance sheet activities was a reduction of $0.05 in Q3. And excluding these charges, non-GAAP diluted net income per share would have been $0.59. GAAP diluted net income per share was $1.51, a 358% increase year-over-year. This increase is primarily driven by the onetime reversal of our tax valuation allowance and gain on debt extinguishment, which is slightly offset by the impact of our new debt structure. Q3 adjusted free cash flow was $85 million or 37% of revenue, which is up significantly from the prior year's $19 million or 10% of revenue and on a trailing 12-month basis was 21% of revenue. This increase was driven in part by the equipment financing in Q3. During the quarter, we entered into an equipment financing arrangement with a third-party financial institution for $28 million to better align our investments with the future revenue that they will generate. Absent the leasing of this equipment, our adjusted free cash flow would have been 25% of revenue in Q3. Turning to the balance sheet. We strengthened our balance sheet by repurchasing approximately 80% of our 2026 convertible notes through a combination of the issuance of a new $625 million 2030 convertible note offering, a $380 million drawdown on the Term Loan A component of our existing credit facility and approximately $230 million of cash. Following these actions, our cash and cash equivalents balance remained healthy at $237 million and the combination of cash on hand, remaining Term Loan A capacity and projected cash flow generation is collectively more than the remaining balance of our outstanding 2026 convertible notes. We repurchased $2.9 million of shares in Q3, buying back approximately 101,000 shares, bringing our cumulative share repurchase since IPO to $1.6 billion and 34.9 million shares through September 30, 2025. These Q3 repurchases completed our 2024 buyback program, and we will operate our repurchase program through July 31, 2027, under the new $100 million authorization we announced during the quarter. During the quarter, we repurchased a portion of our 0% coupon 2026 convertible notes in part with an interest-bearing Term Loan A that is initially at SOFR plus 175 basis points or roughly 6.1%. As a result, we now project to have moderate interest expense in the near to medium term, where interest expense was previously immaterial. Given this, we have added a new disclosure metric for unlevered adjusted free cash flow, which we will provide in addition to the current adjusted free cash flow metric, which is a levered adjusted free cash flow. We believe that unlevered adjusted free cash flow is an important metric as it provides a clear view of our cash generation before the impact of financing decisions, and many investors and analysts use this unlevered adjusted free cash flow as the basis for their enterprise value calculation. Our Q3 unlevered adjusted free cash flow was $85 million or 37% of revenue. The strong demand we've seen across our unified agentic cloud and the traction we are seeing with our higher spending AI and digital native enterprises, coupled with the increased visibility we have from having signed multiple 8-figure committed contracts after Q3 close, gives us the confidence to raise our outlook on both revenue and adjusted free cash flow margin for both 2025 and 2026. For the fourth quarter of 2025, we expect revenue to be in the range of $237 million to $238 million, which is approximately 16% year-over-year growth. For the full year 2025, we project revenue of $896 million to $897 million, representing approximately 15% year-over-year growth, an incremental 100 basis points higher than our prior guidance. For the fourth quarter of 2025, we expect our adjusted EBITDA margins to be in the range of 38.5% to 39.5% with an adjusted EBITDA margin of approximately 41% for the full year. For the fourth quarter of 2025, we expect non-GAAP diluted earnings per share to be $0.35 to $0.40 based on approximately 111 million to 112 million in weighted average fully diluted shares outstanding. For the full year 2025, we expect non-GAAP diluted earnings per share to be $2 to $2.05 based on approximately 106 million to 107 million in weighted average fully diluted shares outstanding. The Q4 and full year non-GAAP diluted earnings per share guidance includes the projected impact of a range of about $0.05 to $0.10 reduction in Q4 and about $0.15 to $0.20 reduction for the full year from the net impact of our Q3 refinancing actions. We project a full-year adjusted free cash flow margin of 18% to 19%. Looking further ahead, I would also like to provide a brief update on our 2026 outlook. While we will provide more fulsome details on 2026 expectations during our earnings call in February, we have already begun to put the foundations in place to further accelerate growth. Given our momentum and the increased visibility into demand on the back of several recent customer wins, we have committed investment in additional data centers and GPU capacity that will come online over the course of 2026 that will accelerate growth ahead of our previously communicated timeline. We have signed leases for approximately 30 megawatts of incremental data center capacity across several new data centers that will commence over the course of 2026. These new data centers and our corresponding investments in incremental GPU capacity will enable us to comfortably deliver 18% to 20% growth in 2026, achieving our 2027 revenue growth targets a full year earlier than we had projected. And while our COGS and operating expenses will increase in early 2026 as we ramp into our new data center capacity, we anticipate delivering high 30s to 40% adjusted EBITDA margins while maintaining mid- to high-teens adjusted free cash flow margin. We also remain committed to maintaining a healthy balance sheet, and we anticipate that our net leverage will end 2026 in the mid-3s range, including the impact on net debt from any incremental lease-up. We look forward to sharing more on the traction we are getting with our unified agentic cloud, the growth we are seeing from our highest spending customers, the investments we are making to further accelerate growth and our outlook for 2026 and beyond when we get together again in February. That concludes our prepared remarks, and we will now open the call to Q&A. Operator: [Operator Instructions] Your first question comes from the line of Gabriela Borges with Goldman Sachs. Gabriela Borges: Congratulations on a -- really exciting 2026 preliminary forecast. Paddy and Matt, I want to ask you about the multiple 8-figure committed contracts that you're talking about. Tell us a little bit about this cohort of customers. To what extent does it overlap with some of the AI revenue that you're talking about? I know you've been working with the private equity community as well. You've talked about migration. So maybe just a little bit about the type of customer that's signing the 8-figure contract and the extent to which I know in the past, the AI cohort has been much more flaky in its ability to ramp up and down. And so I'm trying to understand the intersection between those 2 cohorts. Padmanabhan Srinivasan: Yes. Thank you, Gabriela. Great questions. So the 8-figure commitment contracts that we just talked about come in different forms. Primarily, these are AI native companies that are looking to take advantage of our infrastructure as well as the other customer that I was just talking about for our AI platform, looking to build a series of agentic experiences for software engineering, taking advantage of our Gradient AI platform layer. So it's a combination of all of these. And as I was explaining in my prepared remarks, it is increasingly getting difficult to just separate out where AI starts and stops and where core cloud begins because most of the customers that are starting their experience with DigitalOcean from the AI side are increasingly using our various storage artifacts like network file system or the VPC capabilities or a number of the networking capabilities and things like that. So the crossover is becoming more and more between the AI side of our platform and cloud. So that's why we are now starting to see a more unified cloud platform from us, which we are calling as the agentic cloud. So a lot of these commitments and contracts that we are starting to take on now typically start with AI, but also spill over to our AI cloud side as well. So what is exciting for us is that some of these customers start their journey with DO using a fairly small proof-of-concept type of footprint, and now they're starting to scale. And this is also one of the many reasons why we are expanding our data center footprint so that we can keep scaling with these customers. And the other attribute I want to call out here is that these AI workloads are predominantly inferencing, if not all, on the inferencing side. So it is durable, it is predictable. And we also have a great opportunity to keep scaling with these customers as they find real-world traction and scale globally. So that's why it is really important for us to start looking at our capacity as we place bets on some of these real marquee AI native companies that are finding traction with real end customers, both on the consumer side as well as on the enterprise side. Operator: Your next question comes from the line of Radi Sultan with UBS. Radi Sultan: Good to see the platform traction coming in ahead of schedule. I guess for me, just AWS and Azure both had some pretty high-profile outages recently. I'm just curious, like is that having any near-term impact or catalyzing more migrations from the hyperscalers that driving more traction for Partner Network Connect or some of your other multi-cloud offerings? And then just curious how many of those 8-figure deals are migrations from the hyperscalers? Padmanabhan Srinivasan: Yes. Thank you, Radi, for the question. So we've been seeing a steady increase in migration workloads since we made it into an explicit go-to-market motion. And as you know, migrations of sophisticated workloads is always a combination of factors, right? It tell them, oh, we see a disruption from a cloud provider, and they're just going to move a fairly sophisticated global workload -- but it is a combination of factors. Some are driven by dissatisfaction with an incumbent. But mostly, it is driven by something they find attractive in a new cloud provider like DigitalOcean. So as we have started building out our cloud capabilities, especially the ones that I described in Slide 12 of our deck, like more advanced networking, various flavors of our droplet configurations, our storage, like cold storage is a really, really important capability that many of our large customers with sophisticated workloads have been asking us for. The auto-scaling of our DBaaS. I mean these are all very fundamentally building block type of capabilities for attracting more migration workloads, not to mention some of the stuff we did in the last couple of quarters like virtual private cloud and Direct Connect and things like that. So even though a single incident doesn't necessarily precipitate major shifts in workloads, these are all paper cuts and us having these other digital native enterprise-ready capabilities just makes us all the more attractive to incoming migration. And the AI native workloads typically are new workloads that are starting on our platform, but many of the workloads that we are seeing that I talked about during my prepared remarks on the cloud are migrations coming from various other hyperscaler clouds. Operator: Your next question comes from the line of Josh Breyer with Morgan Stanley. Josh Baer: Congrats on the acceleration. I wanted to follow up on the 8-figure contracts signed after quarter close. I guess I'm wondering, do you have capacity to serve some of those in the coming weeks? Or is that all really what the 30 megawatts of new data center capacity is geared toward? And then hoping to get a little sense of like the ramp in that capacity. Basically, any context for the go-live times for these big contracts and like how to think about the shape of 2026? Padmanabhan Srinivasan: Yes. So I'll get started, Matt, and then you can chime in. So from the ramp-up perspective, some of these customers are already doing business with us. And as we think about the capacity, there's some capacity we are bringing online in our existing data centers. And then, of course, a lot of the visibility that we now have with these customers and their inference scale-up is the reason why we have taken up expanded data center capacity. And these data centers will come online progressively through 2026, right? So we do have a build schedule from these providers, and we work very, very closely with them to make sure that we get the warm shell and then we move in and we start racking our servers, and there's a lot of moving parts in terms of bringing this capacity online, but we don't have to wait for this new capacity to start lighting up these workloads. As I said, we do have some capacity in our existing data centers. So it is a combination of these things. And you're absolutely right that this visibility into the inference adoption of our AI native customers is the reason why we are expanding our data center footprint. Matt Steinfort: Yes. And I'll just add that most of the capacity is going to come online in, call it, the first half of next year. In fact, you'll see in our fourth quarter financials, and this is included in the guidance for the adjusted free cash flow we have for 2025 that we're going to be paying some of the NRCs for some of these build-outs in the fourth quarter. And so we expect that the capacity will become online in the months and quarters following that. So it will be an early ramp of the data center capacity, but then clearly, you have incremental time to deploy the GPUs and for the customers to ramp. So we expect the revenue ramp to be relatively smooth over the course of the year, but we'll be bringing on a fair bit of capacity in the first half. Operator: Your next question comes from the line of Kingsley Crane with Canaccord Genuity. William Kingsley Crane: I want to echo my congrats. I'm sure it's gratifying for the team. Look, a larger peer, Neocloud peer has acquired a handful of PaaS capabilities over the past 6 months, including more recently a Python notebook, I think reinforcement learning for agents. What's your take on that? Does it just give credence to your strategy? And how do you see competition evolving as you continue to cater towards customers upmarket? Padmanabhan Srinivasan: Yes, Kingsley, thank you for the question. So we -- our approach when we laid out our strategy in April, we start our strategy with a deep understanding of who our customers are and what it would take for us to serve them well. And of course, that understanding has deepened over the last 6 months as we have started working very, very closely with these customers. In terms of the Python notebook, this has been a capability that we have had for a couple of years now. And some of the storage enhancements that we are seeing in the market is also something that has been long as part of our very rich and deep software stack. So if you take a step back and think about our strategy, our strategy is now from an AI perspective, targeting AI-native companies that are building real businesses and running models in an inferencing mode. And these are real-world applications that require not just GPU and inferencing capabilities, but they need agentic workflow capabilities. They need storage, databases, authentication, authorization. They need orchestration from a Kubernetes perspective. So essentially, they need a unified agentic cloud stack, which is what we provide. So we have been executing on our strategy. And if you look at Slide 7, you'll see the richness of the stack that we have built all the way from infrastructure on both cloud and AI to middleware with Platform as a Service or the agentic development life cycle. And Slide 12 shows how much we have enhanced that since just the last earnings call. So we have been super busy and every orange box you see on Slide 12 has been a result of feedback that we are getting from customers real time. Some of these features have been lit up in just a matter of days. And that is the power of really co-inventing some of these pieces working hand-in-hand with our customers. And I feel building on our strength, which is software differentiation and leveraging the strength of our 12-year-old full-stack general-purpose cloud really puts us in a very favorable position when it comes to being attractive to these scaling AI native companies. Is hardware a part of it? Absolutely. But we think as companies become more and more sophisticated and they start serving real-world enterprise needs, the center of gravity is going to shift from hardware and networking and move more and more towards the software stack as we have seen in every wave that we have encountered over the last 2 or 3 decades. So we feel really good about where we are, and we'll be aggressive in adding new functionality into our platform as we start seeing opportunities for those from our customers and in the market. Operator: Your next question comes from the line of Patrick Walravens with Citizens. Unknown Analyst: Congrats on the quarter. This is Nick on for Pat. Paddy, one for you. You kind of answered this already, but -- are there any other factors that you guys take into account when deciding what to build next? Like you mentioned that it's primarily customer-driven, but are there like competitive positioning? Or how do you balance the idea of what a customer wants with competitive positioning and long-term revenue opportunity, especially in something that could be seen as more experimental? Padmanabhan Srinivasan: Yes. Nick, thank you for the question. So just for the avoidance of doubt, we are competitor aware but customer obsessed. So we -- and that strategy has really worked for us, especially in the fast-evolving AI landscape, where we have been very, very disciplined in not chasing the bright shiny training workloads and trying to be somebody that we are not. But we've been patient, and now we see an opportunity to decisively move to take a full position in the world of inferencing and offer a software platform that combines the raw power of having the best-of-breed flexible AI infrastructure and combine it with where the puck is going, which is there's a whole generation like 20 years of app developed applications that have been developed over the last 20 years will need to be replaced and modernized with agents and agentic workflows. So managing that whole life cycle is starting to already create a tremendous amount of problems for companies to build, operate and manage. So we think there's a phenomenal opportunity for us to be one of the first movers into the world of agent development life cycle, and that is exactly what we are focused on. So while it is important to be aware of what our competition is doing, especially the Neoclouds, I feel very confident that we have unmatched software expertise and depth of our platform, as you can see from Slide 7 and 12. So if we keep doing what we are doing, our strategy is resonating with the AI natives, and these are customers that are doubling and tripling their footprint on a month-by-month basis. So if we can keep pace with them and keep shipping at their speed, I think everything else is going to take care of itself. Operator: Your next question comes from the line of James Fish with Piper Sandler. James Fish: Nice quarter. Just on the 2026 starting point, kudos on bringing that forward, understanding what's driving the confidence and visibility at this point. But how should we think about the parts underneath between core managed service and AI? And do we still expect that AI business to continue to double given you've done it for 5 straight quarters now? Matt Steinfort: Thanks, Fish. We think that if you look at the success that we're having, it's coming from a combination of things. It's coming from our success with our largest customers, regardless of whether they're AI or core cloud, growing very, very rapidly with the $1 million-plus customers growing 72%. We think that continues. And a lot of the migration workloads that we've been working on and some of these longer-term committed contracts are also on the core cloud side. So growth of our biggest customers is kind of the lever #1. Lever number two, as you said, is AI growth. It has been doubling every quarter since we launched it, and we're expecting that to continue. So we're going to get a big chunk of growth from AI. That will become a more material part of our business. It will get into the mid-teens, maybe even high teens as a percent of revenue. And then we're still generating very good incremental revenue from our product-led growth engine. our customers in M1 to M12 are still at very high levels relative to historical. And it's really those 3 levers that give us confidence. And as you said, we have better visibility now than we've ever had. If you said how many 8-figure committed contracts have we ever had in the company, it's -- I don't know how many, it's not that many. It's maybe 1 or 2. And now we've got multiple that we've signed just in the last month or so. So we're very confident in the 18% to 20% revenue for 2026 and are excited to be able to pull that in a whole year. Operator: Your next question comes from the line of Mike Cikos with Needham & Company. Matthew Calitri: This is Matt Calitri on for Mike Cikos over at Needham. Great to see the strength of large deals. I know AI is not included in net dollar retention. But are you thinking about starting to include it as it becomes a larger part of the business and more predictable? And what other puts and takes are you considering as you look to drive NDR back over 100%? Matt Steinfort: Yes, it's a great question. We are looking very hard at how to incorporate the resilient growth of inferencing into our metrics. NDR is one metric, and it captures -- it's used a lot in a SaaS environment. It captures the ongoing growth of a customer. To date, we haven't included it in NDR because a lot of the early traction that we were getting and I think a lot of folks were getting in the industry was more project-based and more experimental. As we're seeing customers like some of the ones that Paddy mentioned like Fal and others, they're bringing scaled workloads to us where they have more predictability in their demand and growth. We believe it's appropriate to start to figure out how to include that. We'll likely revisit this once we get into the beginning of next year, and we have a better sense for the '26 outlook. I mean we're providing more specific guidance. But what I'd say the key takeaway is the AI revenue that we're seeing now, that we're getting committed contracts for is behaving more like the traditional cloud where customers come in with scaled production workloads and then they have more visibility into the growth of that workload over time, hence, a metric like NDR becomes more relevant. And we're confident that in doing that, that would be additive to our communications of the resilience of the growth that we're seeing. Operator: Your next question comes from the line of Mark Zhang with Citigroup. Mark Zhang: Maybe just on NDRs, obviously still at the 99%, but we're seeing good expansion momentum and portfolio momentum. So can you maybe just walk through some of the key puts and takes there? And traditionally, I think expansion activity has been in that metric. So can you maybe speak to some of the behaviors there? And any discernible changes in customer behavior versus last quarter or 12 months ago, whether it's on pace of expansion or how they're expanding? Matt Steinfort: Thanks, Mark. It's a great question. The expansion is definitely the driver of the growth. If you look at the big customers, the customers that spend $100,000 or more in ARR and as we showed, it gets better even as you get bigger spenders. They're driving a lot of our growth. And as you would expect, the NDR is better. The thing that people lose sight of, I think, when they think about the DigitalOcean business is they forget that we have 640,000 plus customers and 450 or so or more 1,000 of those are effectively a paid premium. They're small customers, they spend $10, $15 a month, and many of them stay on for long periods of time. The average age of that cohort is something like 4.5 years. But you also have a lot of customers come and go. They experiment. I mean so the NDR of that paid premium segment of our customers is below 100. And so that weighs down the overall NDR of the company and it masks the fact that with our largest customers, we're actually seeing very, very strong growth driven by increased expansion. And that's another follow-up to the question prior to this, that's another metric that we're thinking about is because we're blending this -- where the real growth engine is for the company, we're blending that NDR with the NDR of a giant cohort, which is fantastic for us because it gives us access to a lot of developers. But it's just by its nature, it's going to have like slightly below 100 NDR. We think that's masking a lot of the underlying performance that we're seeing. Operator: Your next question comes from the line of Wamsi Mohan with Bank of America. Wamsi Mohan: Nice results here. Just given the strong growth trajectory and the confidence, can you just talk about where you think the net of both sort of explicit CapEx plus your equipment leasing, what the sum total of that could be as you look over the next couple of years in dollar terms? And how large could you see that delta growing between adjusted free cash flow and your adjusted unlevered free cash flow margins over the next few years? Matt Steinfort: Wamsi, it's a great question. I think, as we said, we're trying to give preliminary guidance for '26 to give the directional kind of growth rates. And we feel very confident that we can deliver that 18% to 20% revenue growth while still delivering the kind of the mid-to-high teens in adjusted free cash flow. And when I say that number, that's the levered number that I'm referring to. And I think at this point, the market is evolving so fast that it's hard to say what the CapEx would be or what the impact on adjusted free cash flow margin would be even in the second half of next year, much less '27 or beyond. What I can tell you is we -- and you've seen us in terms of our behavior, we didn't chase the training opportunity. We didn't pursue what we viewed as revenue that we weren't sure how durable that was going to be for us, and we didn't know if we had a competitive differentiation there. But what we said is where we see opportunities to deliver durable revenue growth with a differentiated product that has good returns, that we'll make investments to pursue that. And you've seen that with our willingness to take down additional data center capacity and secure new GPUs. So I'd say what you can expect is continued disciplined behavior where we're trying to drive durable revenue growth while maintaining an attractive free cash flow margin. Operator: Your final question comes from the line of Robert Galvin with Stifel. Robert Galvin: I wanted to ask about the transition to leveraging leasing and how the gross margins of data centers and equipment you own and operate compare to gross margins from leased capacity. Matt Steinfort: Great. So just to clarify there, we don't -- we lease all of our data centers. We're a colocation tenant in each of our data centers. We don't own any. So the taking down of additional data center capacity that we've just referred to will behave the same way that it did when we took down the Atlanta data center earlier this year and when we took down the Sydney data center several years ago. And what that does is our costs, if you think about our cost of goods, are variable with revenue over the long term. But in the very short term, they're somewhat lumpy. You take down an incremental data center, you have -- not only do you have incremental upfront costs and NRC that happens before you're generating revenue. But the day you turn on the data center, you start paying for the space and some of the power, then you build it out and kit it out with gear and you fill it up, and it takes some period of time to generate the fully utilized revenue in that facility. So there's always a lump of higher expenses in the beginning when you turn on data center capacity and you grow into it. And you grow into it over a series of even just a couple of quarters and your gross margin gets back to what's more of a steady-state gross margin. So we expect that to happen in the beginning of next year of 2026. But we've factored that in and incorporated that into our guidance for the year in terms of the free cash flow margins that we expect to generate. So it's just normal course for us. It's nothing different than what we had done previously with respect to the data. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Hello, everybody, and welcome to the Mayville Engineering Company Third Quarter 2025 Earnings Conference Call. My name is Elliot, and I'll be coordinating your call today. [Operator Instructions] I would now like to hand over to Stefan Neely, at Vallum Advisors. Please go ahead. Stefan Neely: Thank you, operator. On behalf of our entire team, I'd like to welcome you to our third quarter 2025 results conference call. Leading the call today is MEC's President and CEO, Jag Reddy; and Rachele Lehr, Chief Financial Officer. Today's discussion contains forward-looking statements about future business and financial expectations. Actual results may differ significantly from those projected in today's forward-looking statements due to various risks and uncertainties, including the risks described in our periodic reports filed with the Securities and Exchange Commission. Except as required by law, we undertake no obligation to update our forward-looking statements. Further, this call will contain a discussion of certain non-GAAP financial measures. Reconciliation of these measures to the closest GAAP financial measure is included in our quarterly earnings press release, which is available at mecinc.com. Following our prepared remarks, we will open the line for questions. With that, I would like to turn the call over to Jag. Jagadeesh Reddy: Thank you, Stefan, and good morning, everyone. Our third quarter results reflect the discipline and focus of our team as we navigated persistent demand challenges across our legacy end markets. Despite continued softness from our OEM customers, results were in line with our expectations, and we are reaffirming our full year 2025 financial guidance. We have also made significant progress integrating the Accu-Fab acquisition, which closed at the beginning of the third quarter. Our sales team has already engaged Accu-Fab's customer base and is leveraging MEC's domestic manufacturing footprint to position us as a preferred partner for leading data center and critical power OEMs. These customers are actively seeking reliable domestic supply chains to support accelerating demand from data center and critical power investments. The integration of Accu-Fab into MEC now offers a scalable solution that simply was not available 6 months ago. Our pipeline of qualified opportunities within this market has grown substantially well above initial expectations and continues to expand as we demonstrate our ability to deliver rapidly and at scale. Today, we are bidding on more than $100 million in qualified opportunities, many of which extend across our broader MEC footprint. Unlike our traditional markets, where projects typically take over a year or longer to reach production, data center and critical power programs can move from bid to revenue in as little as 8 to 12 weeks. To support this momentum, we are repositioning capacity and resources. This is a clear demonstration of the flexibility and strength of our vertically integrated operating model. Looking ahead, this opportunity represents a meaningful shift for MEC. Our revenue synergy expectations from Accu-Fab have now increased to between $20 million and $30 million in 2026. We also expect this business to yield gross margins of approximately 10 percentage points above our historical average of 15% to 20%. While our legacy end markets remain in a cyclical trough, the emerging opportunity in the data center and critical power market represents an important inflection point as we seek to diversify our revenue base and strengthen our long-term growth profile. Driven by the underlying market growth, significant capital investments in data center and critical power and our opportunity pipeline, we see a path for this end market to represent 20% to 25% of our total revenues in the coming years. At that level, it has the potential to become one of our largest end markets, representing a meaningful step in our strategic diversification of our business toward faster-growing and higher-margin end markets. Importantly, growth in this end market is expected to be incremental to our legacy market. We fully expect to continue to meet the needs of our long-standing legacy OEM customers as end market demand recovers. Taken together, we believe this positions MEC for greater resilience and profitability through end market cycles. Now turning to a review of our legacy market. Commercial vehicle demand has continued to soften in the third quarter with net sales to this end market declining 24% versus the prior year period. ACT now projects a 28% decline in Class 8 production in 2025 followed by an additional 14% decline in 2026 as tariffs and regulatory uncertainty delayed fleet replacement. In contrast, our Construction & Access market revenues increased 10.1% year-over-year during the quarter. This is supported by the Accu-Fab acquisition and strong nonresidential activity. Organic net sales growth in this market was 6.2% in the quarter. We are expecting to see this level of growth continue through the fourth quarter and into 2026. In the powersports market, net sales grew 6.4% year-over-year, driven by transient aluminum-related demand. Agriculture net sales declined 21.8% amid elevated interest rates and lower farm income. Across all our end markets, customer engagement remains strong. During the third quarter, we secured $30 million in new project awards with the data center and critical power customers. Year-to-date, total award across our legacy markets reached $90 million, nearing our full year target of $100 million as we entered the fourth quarter. Within our legacy end markets, we have continued to expand our share with our commercial vehicle customers as they prepare to launch their next-generation models ahead of upcoming EPA regulatory changes. Many of these products support future growth and are scheduled to begin production in 2026 and 2027. In addition to the future expansion in commercial vehicle revenues, we secured a significant award for a next-generation product in our aluminum extrusion business, along with additional tube components for a major power generation customer. Lastly, the $30 million within the data center and critical power market secured during the third quarter includes $25 million in cross-selling wins. We achieved significant awards with 2 major Accu-Fab customers covering battery backup cabinets and panels, static transfer switch components and busway components. Operationally, our teams have been working diligently to respond to shifting demand within our legacy end markets while positioning to meet demand from the developing data center and critical power project pipeline. We are working closely with legacy customers to manage production schedules and capacity commitments. In select cases, we are adjusting pricing and requesting additional volumes to secure capacity availability for future demand. These actions will help mitigate near-term underutilization, though we anticipate certain legacy market demand to remain a headwind through mid next year even as new data center and critical power programs ramp. During this transitional period, we expect additional margin pressure as we balance the resources needed for accelerating near-term demand. Turning to capital allocation. Third quarter free cash flow was impacted by $3.5 million in nonrecurring items. However, we expect strong cash flow in the fourth quarter and have reaffirmed our full year free cash flow guidance. Consistent with our strategic framework, our top priority remains reducing debt and lowering leverage. In summary, I am encouraged by the progress our team has made by executing our strategy. While legacy markets remain soft, our agile operating model is enabling us to capitalize on high-growth opportunities, all while maintaining financial discipline and operational focus. I am confident that our continued execution will drive improved profitability, enhanced diversification and sustainable value creation for our shareholders. With that, I would like to turn the call over to Rachele. Rachele Lehr: Thank you, Jag, and good morning, everyone. Total sales for the third quarter increased 6.6% on a year-over-year basis to $144.3 million. Excluding the impact of the Accu-Fab acquisition, organic net sales declined by 9.1% compared to the prior year period. Our manufacturing margin rate was 11% for the third quarter of 2025 compared to 12.6% for the prior year period. The decrease in our manufacturing margin rate was due to $1.2 million of nonrecurring restructuring costs and inventory step-up expense associated with the Accu-Fab acquisition and lower customer demand in the legacy commercial vehicle and agricultural end markets. This was partially offset by higher margin net sales contribution from the Accu-Fab acquisition. Excluding the costs, our manufacturing margin rate would have been approximately 12% during the quarter. Other selling, general and administrative expenses were $10.5 million or 7.3% of net sales for the third quarter of 2025 as compared to $7.6 million or 5.6% of net sales for the same prior year period. The increase in these expenses primarily reflects $0.9 million of nonrecurring costs and $1.6 million in incremental SG&A expense, each associated with the Accu-Fab acquisition. Long term, we continue to anticipate SG&A to remain at a normalized range of between 4.5% to 5.5% of net sales as end market demand recovers. Interest expense was $3.4 million for the third quarter of 2025 as compared to $2.7 million in the prior year period. The increase was driven by higher borrowings resulting from the Accu-Fab acquisition, partially offset by a lower interest rate relative to the prior year period. Adjusted EBITDA margin was 9.8% in the current quarter as compared to 12.6% for the same prior year period. The decrease in adjusted EBITDA margin was attributable to lower legacy customer demand, partially offset by the impact of the Accu-Fab acquisition. Turning now to our statement of cash flows and balance sheet. Free cash flow during the third quarter of 2025 was a negative $1.1 million as compared to a positive $15.1 million in the prior year period. As Jag mentioned, free cash flow for the third quarter reflects $3.5 million of nonrecurring costs. As of the end of the third quarter of 2025, our net debt, which includes bank debt, financing agreements, finance lease obligations, net of cash and cash equivalents was $214.9 million, up from $114.1 million at the end of the third quarter of 2024. Our increased debt resulted in a net leverage ratio of 3.5x as of September 30. Now turning to a review of our 2025 financial guidance. We are reaffirming our 2025 financial guidance supported by growth in select legacy end markets and stronger-than-expected demand from the data center and critical power end market. We expect net sales for the full year of 2025 to be between $528 million and $562 million. Adjusted EBITDA of between $49 million to $55 million and free cash flow of between $25 million to $31 million. We expect the fourth quarter to reflect normal seasonality and continued softness in certain legacy markets, most notably commercial vehicle. As a reminder, we have reduced manufacturing days during the fourth quarter due to the holidays. Combined with the ongoing reduction in commercial vehicle production schedules and retaining resources to support the ramp of new data center and critical power programs, we anticipate some margin pressure during the quarter. Despite this, we expect to generate positive free cash flow in the fourth quarter. Consistent with our capital allocation priorities, we plan to use that cash to reduce debt. Looking ahead, we anticipate that softness across certain legacy markets will moderate the pace of debt repayment in 2026. To be clear, we do not expect sustained negative free cash flow. However, as we ramp data center and critical power production, working capital will temporarily increase, and we may make selective capital investments in equipment to support these programs. Together with fixed cost under absorption from subdued commercial vehicle demand through the first half of next year, we now expect to achieve a net leverage ratio of 3x or lower by the end of 2026. Importantly, we view this as a transitional period. As cash generation strengthens, with the recovery in the commercial vehicle market and continued growth in our high-margin, high-velocity markets, we expect to accelerate debt repayment and return to a net leverage profile consistent with our stated long-term target of below 2.5x. With that, operator, that concludes our prepared remarks. Please open the line for questions as we begin our question-and-answer session. Operator: [Operator Instructions] First question comes from Ross Sparenblek with William Blair. Ross Sparenblek: Jag, we started this year and you guys pulled forward your productivity initiatives and realize that's a delicate process, especially when demand cycles are volatile. But how do you feel with the rollout thus far? And do you feel that the organization is well positioned for when demand does begin to turn? Jagadeesh Reddy: Absolutely, Ross. The team has been relentless in driving MBX programs across our plant network throughout the year. Every single plant has had increased number of lean activities throughout the year as we reconfigured our capacity to position data center products into existing footprint. We have done a lot of adjustments to resources, a lot of adjustments to our equipment, a lot of adjustments to how we think about shift schedules. So all of these actions are not only helping us in the short-term to navigate the soft end market demand, but absolutely will position the company for a significant margin expansion, significant productivity once the volumes return, right? So I'm really excited about all the things that we have done this year, though it may not be reflected in our actual financial results. But as we start putting in volumes back into the plant, even with the data center products, right, we should see going into Q1 and beyond a good uptick in our productivity. Ross Sparenblek: Okay. And if I was to put that into a spreadsheet here and just thinking through margins, decrementals were down over 30% in the quarter. What is kind of your time line for closing that gap to keeping a sustained decremental under 20% through cycle looking forward? Jagadeesh Reddy: I would say -- yes, obviously, we're not providing any guidance for 2026. Having said that, I would say by midyear, we should see a decent readout coming out of all the actions that we have taken. Let me address a big elephant in the room. We are taking a conservative approach to our 2026 CV forecast. You could look at our 2 large OEMs, they're public and they know what they have said publicly for 2026 guidance in terms of volumes, and you can look at ACT. ACT is around 205. And if you average what the customers have said, that's probably somewhere in the 245 to 250 range. So the difference is what is going to be, I guess, really make a difference next year for us. We have taken the conservative approach of using the ACT for planning purposes. So if the volume turns about the ACT number next year, that's an upside for us, not only in terms of productivity and margin expansion, but also significant revenue increase next year. Operator: We now turn to Greg Palm with Craig-Hallum. Greg Palm: Can you just give us some sense on what's occurred in the last 4 months since Accu-Fab? I mean it just sounds like overall activity, it's been a lot higher. It's occurred much faster than initially thought. And what types of internal changes or investments do you have to make? Are you making to capitalize on this opportunity within data centers? Jagadeesh Reddy: Really good question, Greg. We have been extremely busy and active in not only bringing our new customers to Accu-Fab, but also a lot of new customers to legacy MEC locations. We have hosted every top customer in data center and critical power segment in many of our plants, and they continue to be impressed with the level of capacity and automation and the skill sets that MEC can bring to this end market. So as we came out of Q3, we continue to build on that pipeline. We said in our prepared remarks, our pipeline exceeds $100 million. This is qualified active pipeline. We have won $30 million out of the $30 million, it's really $25 million is the cross-selling synergies that we're actively putting into existing plants. A lot of the programs are going into our defense plant, which is primarily a CV plant. A lot of programs are going into Mayville that is a primarily agriculture and power sports plant. We're putting products into other locations as well where we see immediate benefit as soon as we ramp these data center products, immediate benefit in terms of volume and productivity in those plants that are lacking in volume today. At the same time, we continue to host new customers in the space. We continue to navigate some of the accelerated product launch time lines. If you recall, our legacy programs take between 12 and 24 months once we win them to start up and see revenue. Data center products are 8 to 12 weeks. Once they make a decision and award that purchase order to us, within 8 to 12 weeks, where we're making product and shipping this product, right? That means we are repositioning resources. We're repositioning capital. We're repositioning machinery. We're moving machines from plant to plant to fully be prepared for this increase in volumes that we're expecting out of the data center end market. Greg Palm: Okay. Appreciate that color. And I guess maybe can you help us understand like what constitutes a pipeline just versus nonqualified opportunities? And I'm curious, if you look at, you have a slide that's talking about actual orders. I'm curious in terms of the customer characterization, how many of those are from new customers? What would these orders have looked like under Accu-Fab as a stand-alone if they were existing customers? And just thinking about the future potential for follow-on orders if some of these are sort of initial orders from new customers. I'm curious just to get your thoughts there, too. Jagadeesh Reddy: Yes, that's a really good question. Accu-Fab Raleigh location, which was primarily the data center and critical power location, they were sold out. So pretty much everything that you're seeing on this slide, the $25 million of cross-selling synergies, most of that, they would not have had capacity to actually produce, right? So that is the exciting part here is that battery backup cabinet, they might have been able to handle $1 million to $2 million at best in that plant, right? Now we're able to completely take over that program. And we expect that program to continue on, even though we have a purchase order for $10 million, we expect that to increase as the year goes along next year. So that's the same case with power distribution units. Extrusion panels and busway components. Busway components are really around aluminum extrusions, which data -- sorry, Accu-Fab did not have any capacity for. We're going to produce these out of our Fond du Lac facility, right? So this is the exciting part about this acquisition is that we're capturing everything Accu-Fab could capture. And then all of this is really icing on the cake because we're able to then now put all of these programs into MEC legacy plants. Also, some of these products here in the pipeline, as an example, products that Accu-Fab has never made. So those products, we are able to manufacture because of either size limitations, capability limitations, machinery limitations that Accu-Fab would not have even bid on in the past. So now MEC is able to bid and win in the future, some of these larger programs and larger physically in size and complexity. Greg Palm: And are you able to sort of tell us like what types of customers are they? How big are they? Like how much data center stuff are they doing themselves? And just to be clear, what we're talking about here, how many is new versus legacy customers to Accu-Fab? Jagadeesh Reddy: I would say that a significant number of maybe 3 quarters of what we have won here or more are legacy Accu-Fab customers. And in the opportunity pipeline, I would say at least 1/3, if not higher, are new logos to Accu-Fab and MEC. So we're not stopping at just capturing incremental share of wallet from existing Accu-Fab customers. We're actually expanding our logo list, if you will, and going after new customers in that space. So as an example, this data center customer on this slide, you're looking at, right, the one customer, that's a $20-plus billion in sales customer. The extrusions, the 2 customers, they're each of them, one is probably a couple of billion in size. The other one is $20-plus billion in revenue. Critical power, the 6 customers, these are multibillion-dollar revenue customers, right? So these are large customers significantly expanding their presence in the data center and critical power space and looking for additional capacity to continue to grow. Greg Palm: Okay. Perfect. Last one for me because you provided some good color by segment for fiscal '26, but there's a lot moving along around in this data center critical power segment. So just given the organic growth, Accu-Fab, synergies, I mean, you're at an annualized $90 million rate in Q3. What is your expectation for revenue in this segment in fiscal '26? Jagadeesh Reddy: In data centers? Greg Palm: Yes. Jagadeesh Reddy: Okay. We don't -- obviously, we're not providing any guidance for '26. And I'm not trying to be flippant about it, Greg. Every single day, a new program is -- every single week, right, a new program is being added to that qualified pipeline. It has been so dynamic. We did not expect to win $30 million of new business in Q3, right? And here we are, right? We already won some more in October, right? We expect to win some more in Q4. So at a -- I would say, if I were to take a rough guess, we expect the data center and critical power end market to be at least 20% of our overall sales in 2026, right? Obviously, the caveat there is what is the CV market is going to do because that's a significantly large end market. If CV stays around 205 number, we expect data center to be a 20% end market for us next year. Operator: We now turn to Mike Shlisky with D.A. Davidson. Michael Shlisky: I want to follow up on a couple of the comments you made so far, Jag, on the CV market for 2026. The ACT Research forecast, the 2 OEMs you mentioned. I want to throw out there that all the end users of trucks that I've heard from, not one has mentioned buying less trucks in 2026. That's mostly vocational. But even on the freight side, a lot of folks just set out 2025 and there was bought 0 trucks. So any one truck next year would be an increase for a lot of those players. I guess I wanted to figure out, have you talked to any of the OEMs? And could you maybe share at a very high level what their actual comments have been directly to you about what to make sure you're ready for in 2026? Jagadeesh Reddy: Good question, Mike. We have been burned by this end market in the last 12 months significantly burned by this end market, right? So if we're being a little gun shy, if we're being a little conservative, right, hopefully, you guys can give us some grace on that. Because if I were to listen to everything the OEM has said to us over the last 9 months, right, we would have been in much worse situation than we ended up in 2025. I know that we called as we saw it coming out of Q2 and many of you, right, picked on us a little bit that we were being too conservative. In the end, MEC was right about this end market. Because we get to see daily, weekly EDIs. We get to see the build rates on a daily, weekly basis and what the OEMs are actually doing, right? So I mean, your numbers that you referenced, what they have publicly commented, all 3 of them, 3 public OEMs, do I trust those numbers? I don't because I don't see that in the current forecast. I don't see that in the current EDI. I don't see that in their build rates. I don't see that in their production rates, right? So look, if I'm wrong about 205 and if the market ends up being 240 or 260, one of those numbers, great. That's an upside for MEC, right? So -- but what this has done for us is to -- over the last 3 months, right, since our last earnings call, we were able to go in and take out cost out of our factories, 6 CV-focused plants that we have. We were able to take costs out. We were able to take shifts out. We were able to take other resources out and redirect resources and capacity to data center end market, right? So as I mentioned, a couple of plants that we're putting data center products in, those are CV plants, right? So this has given the opportunity for MEC to reconfigure our production capacity, reconfigure our resources. And if the volumes come back next year, great, right? That's just an upside for us. So I still feel the call we made at the end of Q2 and the call we're making on ACT number today might be conservative, but it has really helped MEC to look at our cost structure, look at our capacity and reorganize us as a company. Michael Shlisky: Got it. That's great color. I really appreciate that. And perhaps a very similar question on the ag sector as well. Your comments on it being a back half 2026. Just any comments you heard. I guess the EDI isn't suggesting a good start to the year, at least what you've learned so far. Is that true? And again, heard anything from the OEMs directly as to what you should be preparing for and being ready for? Jagadeesh Reddy: Right. At least the good news on the ag side is, if there is any, the OEMs are at least being honest and the OEMs are at least being transparent with us on what they see, and they don't see a recovery in 2026, perhaps maybe a little bit of flattening out in second half. But still, right, we're calling a low single-digit decline in ag next year, and that is consistent with the information that we have received from our ag OEMs. Michael Shlisky: Okay. You've also commented over the last few quarters about sort of getting market share, tariff-related contract pick ups or opportunities across CV and construction ag and elsewhere. [ indiscernible ] on do you think you could outperform the broader end markets next year with some new projects stuff in the pipeline beyond data center that maybe you can discuss that might come to the floor in 2026? Jagadeesh Reddy: Yes. If you look at the slide we have on the deck, right, on the market slide, we have consistently outperformed our end markets, right? Yes, the negative bars are not great to look at. I recognize that. But if you look at the market downturn, any of these end markets, we have outperformed the end markets, right? So that's because we continue to win new programs in CV and ag and construction and military and every other end market. So I expect whatever the end market is going to do next year, we're going to outperform that because we have programs that are starting up in 2026 and 2027 that we're already working on. As I mentioned earlier, these are 12- to 18-month start-ups, right? So we're in the middle of a significant new program start-ups. So 2026 and 2027 will be, again, another outperformance year for MEC in some of these end markets. So '26 will be a transition year as we navigate putting in a lot of the data center work into some of our legacy plants and reconfigure resources, we can't lay off a whole bunch of people in Q4 and then expect them to be there in Q1 when the data center projects ramp-up, right? So there's a bit of a transition here in the next 1 to 2 quarters, but we do expect to outperform all of our end markets next year. Operator: We now turn to Ted Jackson with Northland Securities. Edward Jackson: Most of my questions have been asked, but a couple of smaller ones. And it sounds like this acquisition is going to be a winner, just going to say it. Question-wise, first of all, with regards to the CapEx spend and working capital needs to bring this data center vision to fruition. Can you talk a bit about what are the things that you need to put in place in terms of equipment and capabilities, maybe some kind of rough understanding in terms of what that means for capital spend next year and then the time line for it? I think my first question [ indiscernible ]. Jagadeesh Reddy: Sure. We don't anticipate significant CapEx increase, Ted, next year to accommodate some of these programs. I say that with the existing -- what the existing pipeline is informing us. We might -- on the margin, we might go spend on a handful of machines that will help us produce these products faster or more efficiently. We have 90-plus percent of the assets required to produce these programs internally today. So that is the great news about the synergies with this acquisition is that we have the footprint, we have the manpower, and we have the majority of the assets required. Having said that, even though we're not providing any guidance right now, I think we do have it on one of our slides, CapEx slides. We expect to be in the $15 million to $20 million range for our CapEx next year. So that is a bit of an increase from 2025. And we have -- as we have indicated, we're going to be at the low end of the 2025 range for this year. And right now, we do anticipate a slight increase to that CapEx spend next year. Edward Jackson: Okay. Shifting over to Construction & Access. You had a nice quarter with it. I know you have a fair amount of exposure within access, mainly aerials and stuff, which is a market that looks like it's kind of bottomed out at this point. So my question is, when I look into -- or you look into that business, I mean, is what you're seeing in there like a bottoming out of the access side of things? Or is it more an improvement outside of access? Maybe some color on that and then maybe some kind of perspective in terms of what you're thinking about that with regards to relatively fourth quarter and into '26? Because I listen to a lot of these OEMs, and it sounds like there's been a lessening of pricing pressure, at least within the larger construction equipment market and the inventories are lined up reasonably well with demand. So kind of just maybe some soft color with regards to your outlook there beyond the fiscal year [ indiscernible ]. Jagadeesh Reddy: Yes. In Construction & Access, we're roughly 50-50, 45-55, right? In access, in particular, I think some of the demand is being driven by nonresidential construction and data center construction. Some -- if you listen to the rental companies, I think out of the 3 rental companies, one of them is on a heavy capital spend. I believe that is one of the reasons why we saw a demand increase from our OEM. At the same time, 2 other rental companies, right, they're going through some transition, one trying to come to the U.S. with an IPO. And so other acquisition transition, inventory cleanup. So we have to wait and see what the other 2 rental companies are going to do. But certainly, right, one of the rental companies that is doing well and spending money right now, mostly driven by data center construction. That's what's been helpful. Certainly in our Q3, we will wait and see how that transitions going into next year. Construction, again, hopefully, with interest rate cuts in the coming quarters would help residential and other type of construction for the regular earthmovers, the yellows that you can think of in the near-term. Edward Jackson: Okay. And then my last is just on powersports. You put growth up there, but you caveated that it sounds like there was some onetime revenue that pushed the quarter. If you took that revenue out, how would powersports have performed? I mean it seems to me from listening to a lot of the guys that play around there that not that the business is bottoming, but the big declines and it seem to pass and you're starting to see kind of the RV, the side-by-side, the marine markets all sort of hit their bottoms [ indiscernible ]. So I guess the question is, removing your kind of onetime revenue, how did it perform? And am I correct in feeling that, that business or that market is at least finding it's, you know what I'm saying, it's foundation? Jagadeesh Reddy: Yes. Yes. I would say that, again, listening to the public comments from some of the OEMs and what we're observing is that right now, their production schedules are reasonably aligned with end-user demand. That's what we wanted to see, and I think they're finally there. So we do expect flat to up low single digits in 2026 for powersports end market. As you recall, we also brought on some new customers this year. So that's also helping us outperform the market. So if we take out a onetime transitionary order we got, so if we take that out, we still see flat to slightly up next year. Operator: [Operator Instructions] We now turn to Natalia Bak with Citi. Natalia Bak: Maybe I know that there was a few questions on your data center and critical power vertical, but just maybe a few more follow-ups. You highlighted $20 million to $30 million synergy opportunities for 2026 from Accu-Fab. What are some of the key milestones to realize that? And can you also just frame the run rate EBITDA margin profile for this vertical once these synergies are captured? Jagadeesh Reddy: Sure. What I think that we have on our slide -- let's go back. Yes, when we listed our wins, the $25 million of revenue synergies, Natalya, you can see that the battery backup cabinet starts to ramp -- actually starting to ramp in Q4 and power distribution unit and transfer switches will ramp up starting in first quarter, late January, early February. And then extrusions and busway components. So that is starting to ramp already through first quarter of 2026. So majority of these cross-selling synergies will see an impact starting in Q1 and a full ramp by Q2. Sorry, what was the second part of your question? Margin growth... Natalia Bak: I think it's -- yes. Jagadeesh Reddy: Yes. So all of these are 30-plus percent gross margin programs that we just won. I would say that next year, approximately 20% is what I said will be data center end market. Out of the 20%, approximately 3%, I would say, would be legacy MEC products that are in the data centers, i.e., power generation, et cetera. So those are slightly lower margin. And then the remaining here, obviously, is the higher margin. Natalia Bak: Got it. That's helpful color. And one more question for me. I'm just curious like how are you positioning production capacity between your legacy MEC end markets like commercial vehicle, agriculture versus high-growth data center exposure? I mean there's an expectation for some of your end markets, you're saying for like recovery next year. So just curious how you balance the production capacity. Jagadeesh Reddy: Right. We're having a lot of conversation with our legacy customers. Since we closed, we have started and shared our growth objectives with them and started by requesting additional volumes because when their markets come back up, right, they need capacity today, if we reallocate that capacity to data center customers, they're not going to have access to that capacity. So next steps to that conversation, if volumes don't materialize, will involve commercial pricing. So many of these discussions are just starting and are in early stages, and we'll continue to have those conversations with these customers. Operator: We have no further questions. So I'll now hand back to Jag Reddy for any final remarks. Jagadeesh Reddy: Before we conclude, I want to thank again our employees for their continued strong focus and execution and our shareholders for their ongoing support. While we recognize the near-term challenges in several of our legacy markets, we are confident in the progress we're making to position MEC for durable, high-margin growth in the years ahead. We look forward to sharing our continued progress with you. Thank you for joining us today. Operator: Ladies and gentlemen, today's call has now concluded. We'd like to thank you for your participation. You may now disconnect your lines.
Operator: Hello, and welcome to the Q3 2025 Teva Pharmaceutical Industries Limited Earnings Conference Call. My name is Alex, and I'll be coordinating today's call. [Operator Instructions] I'll now hand over to Chris Stevo, SVP, Investor Relations. Please go ahead. Christopher Stevo: Thank you, Alex. Good morning and good afternoon, everyone. In a moment, I'll hand the call over to my CEO, Richard Francis. But before I do that, it is my duty and my honor to remind you of our forward-looking statements. Today on this call, we'll be making forward-looking statements, and we undertake no obligation to update those statements after today's call. If you have any questions regarding forward-looking statements, please feel free to see our SEC filings under Forms 10-Q and 10-K in the relevant sections. And with that, Richard Francis. Richard Francis: Thanks, Chris, and good morning, good afternoon, everybody. Thank you for joining the call today. On the call today, I will be joined by Dr. Eric Hughes, Head of R&D and Chief Medical Officer; and Eli Kalif, the CFO of Teva Pharmaceuticals. So starting with, as I always do, the pivot to growth strategy. This is a strategy that have guided Teva for the last 3 years, a strategy based on the 4 pillars: deliver on our growth engines, which is all about driving AUSTEDO, UZEDY and AJOVY, our innovative portfolio, stepping up innovation, which Eric will talk to you about, with the great progress we're making across our innovative pipeline, sustained generics powerhouse and the work we've done to stabilize our generics business and then focus the business, and I'll give you an update on where we are with our transformation of Teva, our $700 million cost savings programs as well as an update on TAPI. Now moving on to the actual results. Pleased to say this is our 11th quarter of consecutive growth, up 3% in revenue to $.5 billion, and adjusted EBITDA up 6% and our non-GAAP EPS up 14%. These all compared to Q3 2024. And our free cash flow is just above $0.5 billion. I'm really pleased to say that our net debt to EBITDA is now below 3x for the first time since 2016. Now moving on to the next slide, one of my favorite slides, I have to admit. This is our 11th quarter of consecutive growth after many years of sales decline. And it's worth noting that Q3 '24 was a particularly difficult comparison year where we had growth of 15%. And so to grow 3% over that comp, I think, is a testament to the work we've done on our portfolio and a testament to the teams. Now this puts us on track for our growth targets we set for 2027 to have mid-single-digit growth. So congratulations to the whole team that have made this happen over the last 11 quarters. Now going down a bit more detail, what's behind this $4.5 billion revenue and 3% growth. This growth was spearheaded by our innovative products, and I'm really pleased to say that they are now worth over $800 million for the quarter, and the growth is 33% year-on-year. AUSTEDO grew an impressive 38%, reaching $618 million. UZEDY performed strongly, up 24%, reaching $43 million and AJOVY performed well, up 19% to $168 million. Global generics revenues was up 2% and TAPI was down 4%, reflecting some seasonal volatility. So now I'm going to double-click and go into a bit more detail on all of these areas, starting with AUSTEDO. Now as you know, AUSTEDO was selected earlier this year for CMS for the 2027 price negotiation. And I'm pleased to say that agreement that we've concluded is consistent with our midterm expectations for AUSTEDO that we first laid out back in May 2023. And this means that we can confirm with confidence our 2027 revenue target of $2.5 billion and our peak sales target of over $3 billion. Now let's talk a bit more about AUSTEDO in Q3. It was another strong quarter for AUSTEDO, where the team continues to perform incredibly well. The U.S. reached $601 million in Q3 '25, growing at 38% year-over-year. And this is the first time we have passed $600 million. So congratulations to the team for all their hard work in making this happen, and it really reflects the understanding this team has of the market. We grew TRx 11%, and we continue to see the increasing penetration of AUSTEDO XR. And it's worth reminding everybody again that AUSTEDO XR requires fewer scripts compared to the original AUSTEDO, and that's why it's equally important to look at the milligrams dispensed. And as you can see, these were up 25%. Now as you see on this slide, we've highlighted that with 2026 approaching, we have a good sense of AUSTEDO's 2026 formulary position, and we continue to reflect the balance between preserving value and maintaining access. So based on these strong results in Q3, we can increase our revenue outlook for AUSTEDO to $2.05 billion to $2.15 billion for the year. Now moving on to UZEDY, another exciting member of our innovative family. UZEDY continues to perform well. Momentum remains strong as we continue to address the needs of the mild-to-moderate patients and those beyond who take risperidone. Revenues were up 24% year-over-year, and TRx was up a strong 119%. It is worth noting that revenue growth was partially impacted by a onetime Medicaid gross to net adjustment. Now this does not impact our long-term LAI franchise expectations, and we reiterate our peak sales target of $1.5 billion to $2 billion for the franchise. Now this confidence is rooted in the data. UZEDY's NBRx is significantly above the TRx. As you know, in Q3, we also had an expanded indication for bipolar I disorder. Now to give you more guidance on how to forecast UZEDY going forward, the Q4 implied guidance of $55 million to $65 million provides a cleaner run rate for forecasting going forward due to that gross to net adjustment in Q3. But I want to take a couple of slides just to talk about the excitement we have around our LAI, our long-acting franchise in schizophrenia. And why do we think this $1.5 billion and $2 billion is achievable? Well, it really comes down to the great work that's been done with UZEDY already. The team here has created great traction, as you can see, with 119% TRx growth. We have a great product profile with UZEDY, and we anticipate having a similar strong product profile with olanzapine. But more importantly, the capabilities and the knowledge that has been built here, we have the same people in front of key payers, the same people in front of these key physicians, these key nurse practitioners, health care providers, patient associations, the people who look after the formulary committees. That puts us in a very strong position. And we know and believe there's a significant unmet need in the olanzapine for long-acting treatment. And if you put those 2 together on this slide, we have the ability with UZEDY and our long-acting olanzapine to treat up to 80% of patients who suffer from schizophrenia, whether that's mild to moderate with UZEDY or moderate to severe with long-acting olanzapine. And just to highlight, unfortunately, 4.7 million people suffer from schizophrenia in the U.S. and Europe. So the opportunity for both brands is significant. That's hence the reason why our confidence in the $1.52 billion remains strong. Now moving on to AJOVY. I do love AJOVY. It continues to grow strongly across all regions in what is still a very competitive market. And there's some nice data points here. We are the #1 preventative CGRP injectable in new prescriptions among the top U.S. headache centers, and we are the #1 preventative CGRP injectable in 30 countries across Europe and international. And so we confirm our guidance of $630 million to $640 million. Now staying on innovation. I'm going to touch briefly upon the innovative pipeline, as I know Eric will talk to you about this later, but I'm super excited about this. Why? Because it's near term. These are late-stage assets. Olanzapine, I'll talk to you about the filing of that this year. DARI, the good recruitment that we're seeing to bring that to the market in '27. Duvakitug, starting our Phase III study. Emrusolmin, great recruitment there. But then I look across the right-hand side of the slide, and I see the potential of peak sales, and it's over $11 billion. And I'll remind you, that's just for the indications on this slide. We know that duvakitug and anti-IL-15 will be pursued in multiple indications. So we really have strong growth drivers for the future for Teva. Now moving on to our generics business. Our generics business grew 2% over 2024, and this is fueled by launches as well as the growth of our biosimilar and our OTC business. Now as I reminded you before, we tend to look at this business over a 2-year CAGR just because of the inherent timing of new launches that we have in this business. Now looking at the regions, we had a very strong quarter for the U.S. It grew 7% in Q3, and that was driven by several launches and particularly strong performance of biosimilars as well as some phasing patterns for our generic Revlimid, which I would like to point out, these will not be repeated to the same magnitude in Q4. Europe declined 5%, mainly due to some tough comparisons to the prior year where we had a number of launches and a number of tender wins, which are for 2-year periods. So it's a 1% CAGR for the 2 years. International markets grew at 3% or 12% on a 2-year CAGR. But now I'd like to talk to you a bit about our biosimilars because we're entering an exciting period for our biosimilars portfolio. We have -- now have 10 in-line assets globally and the potential to launch 6 more through 2027. So we're well on track to add another $400 million by 2027 as we forecasted back at the start of the year. And I want to remind you that today, we're growing strongly in biosimilars without substantial launches or revenues in Europe, which is the largest region in the biosimilar market. And our European pipeline will start to convert into launches and revenues and biosimilars will be a more significant driver for Teva overall after 2027. Now moving on to the fourth pillar, focus our business. We made significant progress with the Teva transformation program, and this is something we started at the start of this year. And we made a commitment to realize 2/3 of the $700 million by the end of 2026. And I can tell you we're on track to do that. The reason why I can tell you that is because we're on schedule to hit our 2025 goals, and that sets us up well for the start of next year. But I'll leave Eli to go into a bit more detail later on in this presentation. Now before I hand it over to Eric, I wanted to give you an update on how we're tracking for the 2027 targets, which we are reiterating today. So from a revenue point of view, with the IRA negotiations now finalized, our upcoming launches and the stabilization of our generic business, we estimate that 2025 will end the year with a 3% to 4% growth range, consistent with our '23 to '27 mid-single-digit average growth. On OP, because of the work we've done of driving our innovative portfolio, I remind you, up 33% as well as the progress we made on organizational effectiveness, we are on track to our 30% margin. And this year, we will end around the 27% margin overall. And the net debt-to-EBITDA dropped below 3x, as I mentioned earlier. By the end of this year, we should be around 2.8x, well on track to hit the 2x by 2027. And with that, I will hand over to my colleague, Eric Hughes. Eric Hughes: Thank you, Richard. Now as Richard said, we have a healthy late-stage development programs in our innovative medicines. And we're doubling down on our efforts to execute these studies on time and efficiently. Now beginning with olanzapine LAI, we're on track for our FDA submission later in this quarter. Our DARI program for both adults and pediatric patients is on target for enrollment by the end of this year. Our duvakitug program in partnership with Sanofi has now initiated both our ulcerative colitis and Crohn's disease Phase III studies. Our emrusolmin program has now enrolled the 100 patients that we'll need for our futility analysis by the end of next year, and then enrollment continues to do very well. And finally, our anti-IL-15 program, very exciting program with multiple potential indications in the future, where be reading out our celiac and our vitiligo studies, proof of concepts in the first half of next year. So exciting late-stage programs. But before I go on to those in more specific detail, I do want to have a celebration for the UZEDY team for bipolar I disorder. We had an approval and an expansion of our label, which we're very proud of. This is an innovative approach by the team using the known and well-characterized pharmacology of UZEDY plus the safety database that we have in conjunction with efficacy using a modeling and simulation approach to expand that label for patients suffering from bipolar I disorder. So a great innovative approach, very efficient execution and a great opportunity for patients to get treatment for their bipolar disease. Now on to olanzapine LAI. As we've mentioned, we've actually presented the data, both the safety and efficacy of the full program in Phase III at the 2025 Psych Congress Annual Meeting. It was very well received. Both the safety and efficacy was right where we expected it. And most importantly, we had no cases of PDSS. And that submission is planned for the late half of this quarter. So on track and exciting opportunity for patients in the future. Moving on to our dual action rescue inhaler program for asthma, our ICS/SABA Phase III program. This is the largest study we've run at Teva to date. Right now, we're on track for full enrollment of our adults and our pediatric patients at the end of this year. And remember, the real value here is the fact that in our label, we anticipate to get the pediatrics included, which is 25% of the market. And also, we'll have a dry powder inhaler, which is a simple device to use, simply open, inhale and close. This makes it much more convenient for both adults and particularly the pediatric patients. So a great program right on track. And as I mentioned before, we're very excited to announce that we have now initiated both the ulcerative colitis and Crohn's disease Phase III programs with our partner, Sanofi, for our duvakitug program. This is a very exciting program, very large effort by many people. The ulcerative colitis study is called SUNSCAPE and the Crohn's disease program is called STARSCAPE. And what we're really excited about with this program is the way we've designed Phase III. It includes an open label feeder arm that will enroll patients very rapidly since it's open label and they know they get treatment, but that gets to our safety numbers very rapidly in the maintenance. We have a favorable randomization ratio for the patients to active. We have a rerandomization design, which is really a more feasible or favorable design for multiple doses and is more reflective of clinical practice. And finally, but possibly most important of all, the entire program is based on subcutaneous injections. That's loading dose, induction rate and then maintenance throughout the entire program. So it's a really patient-friendly program, and it's designed to execute quickly. I would add, we were the fastest to transition this MOA from Phase II to Phase III. So it's all about execution now with a great program. So kudos to the team. And on to emrusolmin. I always like to start by saying emrusolmin is enrolling a patient population that is a real unmet medical need. This is multiple system atrophy. And our differentiated molecule is targeting the very beginning of the alpha-synuclein aggregates. We have a very efficient design. Here, you can see it's a 48-week design against placebo. And I mentioned enrollment is going very well, and we've already got the first 100 that will be involved in the futility analysis at the end of next year. So we're right on track, and it's going quickly. We're proud that this has received fast track designation, and we've already got the orphan designation. So more to come. And finally, I just want to touch base on the anti-IL-15 program. This is another great homegrown antibody and program from the Teva laboratories. Right now, we've got it in proof-of-concept studies in celiac disease and importantly, also in vitiligo, which will read out in the first half of next year. But the upside possibility here is multiple different indications. Remember, IL-15 is a key cytokine in the activation and proliferation of NK cells and T cells that's believed to be involved in many different indications that you can see here. So a lot to go with IL-15, but very exciting program, and that also received fast track designation. And with that, I'm going to pass it off to my colleague, Eli Kalif. Eliyahu Kalif: Thank you, Eric, and good morning and good afternoon to everyone. I would like to start today with the following key messages that demonstrate our consistent execution over the last few quarters, including in Q3. First, Q3 results were above solid, driven once again by our fast-growing innovative portfolio. As Richard said earlier, this was our 11th consecutive quarter of revenue growth. Second, we continue to strengthen our balance sheet and specifically reduced our net debt to below $15 billion and expanded our EBITDA, leading to the net debt-to-EBITDA of below 3x for the first time since Q3 2016. Third, we have made significant progress in our transformation programs with approximately half of our planned savings of $70 million for 2025 already achieved by Q3. We are on track to deliver approximately $700 million of net savings by 2027 and achieve our 30% operating margin targets. And lastly, the outcome of the IRA negotiation for AUSTEDO is largely in line with our model expectation and further emphasize our conviction in achieving our revenue target of $2.5 billion in 2027 and more than $3 billion at peak for AUSTEDO. Now moving to Slide 30 to review our Q3 2025 financial results, starting with our GAAP performance. Please note that throughout my remarks, I will refer to revenue growth in local currency terms unless otherwise specified. Similar to the last quarter, I will also refer to certain results from Q3 2024 that exclude any contribution from the Japan business venture, which we divested on March 31, 2025, to help you with the like-to-like comparison of our financial results. Our Q3 revenue were approximately $4.5 billion, growing 5% in U.S. dollars or 3% in local currency. Revenue growth was mainly driven by continued strong momentum in our key innovative products, AUSTEDO, AJOVY, and UZEDY as well as our generics products in the U.S., including biosimilars. This was partially offset by some softness in European generics as well as lower proceeds from the sale of certain product rights compared to Q3 2024. GAAP net income and EPS were $433 million and $0.37, respectively. FX movement during the quarter, including hedging effects positively impacted revenue by $106 million and operating income by $21 million compared to the third quarter of 2024. Now looking at our non-GAAP performance. Our non-GAAP gross margin increased by 120 basis points year-over-year to 55.3%. This increase was slightly higher than our expectation, driven mainly by strong growth in AUSTEDO leading to an ongoing positive shift in our portfolio mix. Gross margin also benefited, although to a lesser extent from a shift in ordering patterns for generics Revlimid in our U.S. generics business, leading to some volume shift from the second quarter to the third quarter as well favorable FX. This strong performance in non-GAAP gross margin largely carried through the non-GAAP operating margin, which increased by approximately 70 basis points year-over-year to 28.9%. This was partially offset by higher planned investment in OpEx and impact from foreign exchange movements. Overall, we ended the quarter with a non-GAAP earnings per share of $0.78, an increase of $0.10 or 14% year-over-year. Total non-GAAP adjustment in the third quarter of 2025 were $478 million. Our free cash flow in Q3 was $515 million compared to $922 million in Q3 2024. This decrease was mainly due to timing of sales and collection as well as higher legal settlement payments, which we have planned for this year and is reflected in our full year free cash flow guidance. Moving to Slide 31. We are making significant progress in our Teva transformation programs through a well-defined and targeted efforts to deliver sustainable margin improvements without compromising our ability to innovate and invest in our long-term growth. These programs are expected to deliver approximately $700 million of net savings between 2025 and 2027, with roughly 2/3 of these savings to be realized between 2025 and 2026. We are well on track to achieve approximately $70 million of initial savings in 2025 with half of it already achieved by end of Q3, demonstrating solid momentum and execution. It's important to remember that the transformation we are driving is not just about reducing the spend. It's part of the journey to transform and modernize Teva into an innovative biopharma company and prioritizing resources towards areas that drive growth and innovation. These transformation efforts, along with the ongoing portfolio shift towards high-growth and high-margin innovative products provide a clear and credible path to achieving our 30% operating margin target by 2027, even as we continue to invest in the business. In relation to these programs, we have recorded approximately $190 million year-to-date in restructuring costs and expected an overall cash outflow of $70 million to $100 million in 2025. Our guidance for 2025 already incorporated the impact of both expected savings and this cash outflow. Now moving to the next slide for an update regarding our strategic intent and the progress and the process to divest TAPI. As we have consistently and transparently shared with you all, we have been in exclusive discussions with a selected buyer for the sale of TAPI. At this time, we have decided not to move forward with those discussions as we were unable to reach an agreement aligned with Teva long-term priorities and interest of our shareholders. While this process did not result in a sale with this initial buyer, recent shift in the geopolitical environment and market conditions reinforce TAPI attractiveness for potential buyers. We continue to view TAPI as a valuable asset, but it's nonstrategic to our pivot to growth priorities. We are now initiating a renewed sale process to explore alternative options and maximize potential value creation. We will provide further updates pending a transaction or other determination. Moving on to our 2025 non-GAAP outlook in Slide 33. Our performance year-to-date reflects consistent execution across our pivot to growth priorities with a solid revenue growth, margin expansion and cash flow generation despite the tough prior year comparables in our generics business. Based on our year-to-date results and with the 2 months left in the year, we are tightening our 2025 outlook range for revenue, operating profit, adjusted EBITDA and EPS. Starting with revenue. Consistent with the direction we shared last quarter, we are tightening the full year guidance range to be between $16.8 billion and $17 billion. Our innovative portfolio continues to perform very well, specifically AUSTEDO, driven by strong demand and our commercial execution. With the strong year-to-date performance, we are increasing our full year outlook for AUSTEDO by $50 million to $100 million to a new range of $2.05 billion to $2.15 billion, reflecting a full year growth of 21% to 27% year-over-year. However, as we discussed last quarter, we expect our global generics revenue for the full year to be flat in local currency compared to 2024. This is mainly due to the tough year comparison deals in the timing of certain launches as well softness in certain markets. Moving to the other elements of our financial outlook. With a strong year-to-date performance, we now expect our non-GAAP gross margin to be at the higher end of our guidance range of 53% to 54%. This implies a slightly lower margin in Q4 compared to Q3, mainly due to generic Revlimid seasonality as the majority of our volume allocation was sold by the end of Q3. We're also increasing the lower end of our non-GAAP outlook range for adjusted EBITDA, operating income and EPS, consistent with our year-to-date results and expected ongoing strength in our innovation portfolio, along with the savings from our transformation programs. While we continue to wait for clarity around potential U.S. tariffs on pharmaceuticals, including the outcome of the ongoing 232 investigation, we are encouraged by the statement so far from the administration regarding possible generics exemptions. Our 2025 guidance continue to already reflect confirmed tariffs that are in place. We continue to expect our operating expenses to be between 27% and 28% of revenue. Our free cash flow guidance range remains the same between $1.6 billion to $1.9 billion. I would like to reiterate that our full year guidance does not include the development milestone related to the Phase III initiation of duvakitug UC and Crohn's indications. That said, to assist you with your modeling, we want to highlight that the expected contribution from this development milestone is dependent on the timing of each of these 2 studies. Based on the current time lines, we expect to earn one development milestone in Q4 2025, with the remainder expected in Q1 2026. For Q4 2025, we expect the first development milestone to contribute $250 million to revenue and approximately $200 million to EBITDA and free cash flow, net of certain transaction-related costs. This first development milestone is expected to contribute approximately $0.14 to the EPS. Now turning to the next slide on capital allocation. Our capital allocation approach remains disciplined and focused on supporting our pivot to growth strategy and strengthening our balance sheet. As I mentioned in the beginning, we are consistently reducing our debt while investing in our go-to-market capabilities and innovation. With the ongoing improvement in our free cash flow, we are on track to reach our net debt-to-EBITDA target of 2x by 2027 and then to sustain around that level thereafter. In addition to our ongoing deleveraging and progress towards an investment-grade ratings, our disciplined execution also position us well thoughtfully evaluate additional ways of returning capital to our shareholders. Finally, before I conclude my review of our third quarter performance, I would like to reaffirm our 2027 financial targets. The outcome of the IRA negotiation for AUSTEDO further emphasize our conviction and provides additional clarity to deliver on these midterm goals. With that, I will now hand it back to Richard for his closing remarks. Richard Francis: Thank you, Eli. Before I conclude, let me remind you of some of the growth drivers that we have here at Teva. As you -- as we expect our innovative portfolio to continue to drive growth beyond 2027, you can see that we have a significant amount of opportunity to do this. Currently anchored on AUSTEDO, which we reiterated our target of reaching more than $2.5 billion in '27 and greater than $3 billion in peak sales based on the conclusion of our IRA negotiations with CMS. Along with the innovative products UZEDY, AJOVY, we will continue to drive our product mix and profitability. But also to build on Eric's remarks, we are preparing for exciting innovative product launches in the next few years, which should set a foundation for growth in years to come. If you move on to my final slide, just some final thoughts. In Q3, in '25, we continue to deliver on our pivot to growth strategy with the 11th consecutive quarter of growth, growing our innovative franchise at 33%. We have a clear path towards our 30% operating margin and our other 2027 targets. We're advancing our innovative pipeline with near-term and long-term catalysts and Teva transformation is well on track to deliver the $700 million in savings we committed to. And with that, I would like to open the floor for the Q&A. Thank you. Christopher Stevo: Thank you, Richard. Alex, if you could -- sorry, Alex, if you could please go ahead with question queue and we ask if you could limit yourself to one question and one brief follow-up, and of course if there's additional time, we're happy to let you back in the queue for more questions. Go ahead, Alex. Thanks. Operator: [Operator Instructions] Our first question for today comes from Dennis Ding of Jefferies. Yuchen Ding: Maybe one on AUSTEDO and IRA. Thanks for the comment and glad to see that you're reiterating the long-term AUSTEDO guidance. I'm curious what additional color you can give in terms of your own internal expectations going into the negotiations and how the negotiated price relates to the current Medicare net price. Richard Francis: Dennis, thanks for the question. Well, as I mentioned on the call, how it met with our expectations, it was in line with what we had forecast when we set the forecast back in May 2023. So we had anticipated that we would be in the list, and we would be negotiating with CMS. And so because of that, that's why we remain very confident about hitting our $2.5 billion revenue. With regard to the latter part of your question about, I think it was net price, we're not going to comment on that, obviously, for competitive reasons. But I'll just reiterate the fact that we believe that we have the ability to hit our $2.5 billion in revenue, one because it's in line with what we forecasted, but I would also like to remind everybody that tardive dyskinesia remains a highly underdiagnosed and undertreated condition. 85% of patients who suffer from this condition are not on therapy. And so we see a great opportunity to help those patients and continue to keep growing AUSTEDO in '26 and beyond, hence, reiterating the $3 billion -- greater than $3 billion peak sales for AUSTEDO. And so I think those are the things I keep in mind as you think about the future for AUSTEDO. Thank you. Operator: Our next question comes from David Amsellem of Piper Sandler. David Amsellem: I had a question on AUSTEDO as well. So your competitor talked on its call about this dosing creep, if you will. In other words, the per milligram pricing structure and higher doses mean more revenue per patient. And what they've said is that health plans are essentially catching on to that and that there is a potential migration over to the competitor product. So I was just wondering if you can give us some color on the pricing structure of AUSTEDO XR and if that's having ramifications in terms of access to AUSTEDO XR. That's number one. And then secondly, how is that going to inform how you're thinking about commercial contracting for '26 and the extent to which you might make more concessions on price just to get into a better access position vis-a-vis your competitor? Richard Francis: Thanks, David. Thanks for the question. I'm not going to talk about what the competitors are saying. I'll focus on what we do here at Teva. And just to highlight, AUSTEDO's growth is much more about treating this underserved market, as I've said in the past, and our ability as a team to constantly execute. And I'll remind everybody, when we started this journey back in 2023, peak sales of AUSTEDO were forecast to be $1.4 billion. And as you see, we're going to exceed $2 billion this year. And that is down to what we've done as a company and the capability we have built. But when it goes to talking about the milligrams per dose, we've been very clear about the benefits of patients taking AUSTEDO XR and how that helps them with compliance and adherence. And this is very much in line with also what was put in our Phase III trial to allow physicians to have the flexibility to get to the patients on the optimal dose. So what we're seeing is just a natural progression from moving from BID to AUSTEDO XR and the physicians having that flexibility to get patients on the right dose. The final part of your question, I think, was about access. And I think I highlighted in my presentation the fact that we're always very thoughtful about how we manage access with value. We've continued to do that with AUSTEDO. We've done that very successfully, by the way, with our other brands in UZEDY and AJOVY. And I think we have a really strong capability for doing that. But I'll go back to what is driving our confidence in AUSTEDO is 2 things. The capability that we have within this team within Teva and the underserved market, 85% of patients who could be on therapy are not on therapy. And those are the 2 things that we focus on. But thank you for the question, David. Operator: Our next question comes from Jason Gerberry of Bank of America. Jason Gerberry: So my question is just on OpEx in 2026. And it looks like the consensus has combined R&D and SG&A kind of at around $4.8 billion, so pretty much flat on a year-on-year basis. Is that consistent with how you see the cost optimizations flowing through the P&L to navigate the Revlimid roll-off? And then my brief follow-up is just, can you comment at all if AUSTEDO XR was included or excluded in IRA? I know that there was a litigation tied to that. And so I'm just wondering if you can offer any clarity there. Richard Francis: So I'll hand the OpEx question -- so thank you, Jason, for the question. I'll hand that to Eli to answer. Eliyahu Kalif: Thanks, Jason, for the question. So the way to think about the development of the OpEx for '26, we always mentioned that from now onwards, as part of the $700 million savings, part of them will go into COGS and -- but the majority will go into the OpEx. And as much as we actually keep growing and able to fuel our profit, you will see us in the range between 27% to 28%. That will not change. But we will actually be able to expand our OP as well our EBITDA. So the way to think about it is that around 2/3 of the $700 million on savings we'll be able to accomplish by end of '26 already, but we will start to see also part of it impacting our COGS. But the main element that will move with the COGS will be actually in '27. But I can tell you that most of the savings we'll be able to accomplish by end of '26 and most of them related with OpEx. And therefore, you should think about the 27% to 28% as a run rate. Richard Francis: Thanks, Eli. And to answer your second question with regard to AUSTEDO XR being included in the IRA negotiations, the answer is yes. Operator: Our next question comes from Chris Schott of JPMorgan. Christopher Schott: Just to shift gears a little bit. Can you talk a little bit about your EU generic dynamics? I know you're facing some tougher comps there this year. But I was wondering if anything has changed in those underlying markets we should be thinking about as we think about kind of the growth going forward? And just a quick follow-up. I know the TAPI process. Just a little bit more color in terms of why restart the process here versus just deciding to keep the asset. Just maybe talk a little bit about just kind of the broader appetite for these API assets in the market right now. Richard Francis: Thanks, Chris. Thanks for the questions. So going to the EU Generics business. If I can take you back to when we started talking about Teva and our generics business back in '23, I can remember explain to everybody, this is a market leader of scale in Europe. And so the ability to grow this business, we should think of it growing around a 2% CAGR rate just because of its scale and size. Now obviously, I was proved wrong in the last 2 years as the business grew higher than that. But that was down to a couple of factors. One is we had more launches over those years as well as we had competitors struggling to supply and because of our manufacturing capability, we could step in. And so those 2 things happen. And I think what you're seeing versus this quarter versus the last year is sort of a similar theme. What we have is more launches that we had in 2023 -- sorry, in Q3 2024. We also had some tender wins, which are 2-year tender periods. And we also had supply issues from competitors. Those were no longer the case. So that's how I think about it. And that's why I go back to think about our generics business over a CAGR -- 2-year CAGR because if you think about a 2-year CAGR, these things smooth out, and that's how we think about it. And as we've had conversations, I always remind people that we think about our generics business going forward in that 2% CAGR period, one, because just of the scale we have. Now that said, one thing I do want to reiterate is our biosimilar business, while getting traction in the U.S., we will start now to launch and we have launched some products and biosimilars in the EU, and that will start to build momentum, more so post 2027, but we have a good pipeline coming through in Europe. And we know that's a mature biosimilar market. And so those are things that are going to start to maybe add to that growth in Europe going forward. But I hope that answers your question. With regard to TAPI, I'll give that question to Eli to talk about why restart it and not keep it. So over to you, Eli. Eliyahu Kalif: Yes. Chris, thanks for the question. So look, we were -- during all the process, we were very transparent, and as we mentioned, we actually decided not to progress with exclusive discussion that we had with a certain buyer. And the reason for that is that we see TAPI as a strategic going forward for Teva in terms of our ability to keep sourcing API when it's actually moving as a stand-alone. You need to remember, it's not just kind of a business that we have on the shelf and you divest it and you move forward, this is strategic for us going forward and our ability to make sure that we are providing additional value on short term and long term to our future progress and growth. It's super important. Turn out that certain elements in terms of the discussion didn't went according to the terms that we view how the deal should move on. And therefore, we made that decision. And also, we need to remember that the market condition now changed. Since we launched this sales process. Recent geopolitical development, as I mentioned, and some trade policies highlight some continued attractiveness for TAPI in terms of the landscape. So therefore, we decided to initiate revised strategic review and review the sales process. And as I mentioned, we'll keep all updated and provide further updates pending the transaction or any other determination around this process. Christopher Stevo: Maybe if I can add, just so Eli is not misunderstood there. When he says it's strategic, what he means is they're one of our largest API suppliers, and we need to ensure that any contract we have has the right terms, not just for the purchaser, but also for Teva going forward, both for our in-line products and our pipeline. Operator: Our next question comes from Ashwani of UBS. Ashwani Verma: Congratulations for the strong update. Maybe just like quickly on the 2026 revenue EBITDA, I wanted to understand like if you can continue to deliver growth on both these metrics just as a part of your long-term goals. We have Revlimid phasing out, but you have pretty meaningful cost savings outlined and also talked favorably about AUSTEDO formulary. And then just as a quick follow-up. So the 3Q AUSTEDO looks pretty strong. Is this primarily like regular way underlying demand? Or is there any type of a onetime benefit in this? Normally, you have like a pretty strong 4Q, but with this reiterated guide, it seems like it's indicating a down quarter in 4Q. Richard Francis: Ash, thanks for your question. So starting on the EBITDA, just to sort of remind you, and I think Eli touched upon this in his remarks, the EBITDA is driven by a couple of things next year. And I think it's important to understand this. One is our innovative portfolio has real momentum. As I said, it was up 33% in Q3. And these are products were all growing. So we continue to see great growth rates in those. And by the way, we've spoken about this in the past. These are very high gross margin products. So that really does help impact the EBITDA. So that's one. And then on the -- one of the slides that Eli and I both showed is on the transformation of Teva and the organizational effectiveness. We are on track to do exactly what we set out to do in '25, and that means that our guide to 2/3 of the $700 million net savings for 2026, we feel highly confident about. So if you just put those 2 things together, that really gives us confidence about our EBITDA. But I would probably take this opportunity to then talk about, well, we have some other things around our generics business where now we've lost generic Revlimid. There are 3 components which help us drive our generics business going forward, and that is our generics, our complex and our OTC. And as we've mentioned in the past, we have the ability to compensate for that generic Revlimid by the end of 2027 because we have those 3 different growth drivers and the scale we have in those 3 different businesses. So I think that answers that part of the question. With regard to the one on AUSTEDO, and I think you talked about the strong Q3 and how does that impact Q4? And was there anything behind that? I think there's just a couple of dynamics in that. Firstly, the fundamentals of AUSTEDO are really strong. It's really important to understand. So as you see with regard to our TRx, our milligrams, our growth rates, I think the team has continued to execute at a high level consistently. And I think we've seen that for quarter on quarter on quarter. Now one of the things I just would mention, and I think I mentioned on the last call, in Q3 2024 and Q2 2024, there was some channel stocking with regard to AUSTEDO XR. So that created a slightly different comparison as well as we had some slight gross to net adjustments in AUSTEDO, which are favorable in Q3 of this year. But if you take those out, it doesn't really change the directory much of AUSTEDO. And so I always think about looking at AUSTEDO over a yearly period, a multi-quarter period because I think we've been consistent in hitting our numbers and hitting our targets, and we're very accurate about that. So that's the way I think about it. So I don't anticipate anything very significant in quarter 4. The one thing that we always manage as well as we can, but it's not completely down to us is the channel. And we've been very disciplined in making sure the channel has the right stock, but obviously, that's something which we don't have complete control over, but we've shown good discipline there. So I hope that answers your questions, Ash, and thanks for the questions. Operator: Our next question comes from Les Sulewski of Truist Securities. Leszek Sulewski: So we saw the FDA propose new guidance around biosimilars to reduce comparative efficacy study and potentially speed up the approval process. So 3 questions on this for you. One, how will this updated guidance impact your long-term biosimilar strategy? And then two, on the opposing side, do you see a scenario of additional competition where we'll ultimately see biosimilar price erosion curves resemble traditional generics? And then third, what further investments do you think are needed to give you a more competitive edge? And I guess, ultimately, do you see a scenario where the U.S. reaches a point where the BLA process and the patient access becomes just as favorable versus the EU? Richard Francis: Okay. Yes, that was a multidimensional question. So thank you for that, Les. I think I'll start it off, but I'll also lead into my colleague, Eric here, who obviously is close to that because of the pipeline we have. So firstly, we're pleased with the FDA and that initiation of removing Phase III studies. I think that's the right thing to do. I think that helps. And that's based on data. We have a substantial amount of data now in the development of these biosimilars across many, many products as an industry, and I think this is the right thing to do. Does it change our strategy? Absolutely not. I think it reinforces the quality of the strategy we set out for biosimilars in 2023. And to remind you what that strategy was, our strategy was to have the largest -- one of the largest portfolios of biosimilars going forward, and we're going to do that through partnerships. We do that through partnerships because it allowed us to have the largest portfolio because it allowed an efficient allocation of capital. We also believe at the time that there was going to be uncertainty around what the future regulation was going to be. And so we didn't want to be initiating and allocating capital to things that may no longer be needed. An example is starting Phase IIIs, which are -- they're no longer needed going forward. So I think we sort of thought about where the puck was going. We made a strategy to where the puck was going, and I'm pleased to say I think we've been proven right on that. But ultimately, our strategy is about having a large portfolio. As I've just highlighted, we have 10 in the market. We have 6 we're going to launch by '27, and then we're going to have more going forward. With regard to price erosion, I think a good analog is to look at Europe. And Europe is a very mature biosimilar market and, one, I know particularly well. And what you see there is good penetration. You see that there is some price erosion, but it hits a steady state at a certain time, which allows a high level of profitability still within this category. What I'd also highlight in that market because you did talk a bit about whether the U.S. will replicate it, is you also see an expansion of these molecules and these biologics used in patient population because they are less expensive, they're used earlier in the treatment of these diseases. So you get an increase in volume and obviously offset some of the decrease in price. So those are just some of the dynamics. And I do believe the U.S. will catch up to that. But when you have a broad portfolio and we're launching more in Europe, we're not necessarily beholden to exactly when that happens because of the scale and the size. But maybe, Eric, you could give a bit more detail on your views on this. Eric Hughes: Yes, I can just give a few points to support what you just said. We work closely with the FDA and have frequent communications with regards to a pretty large biosimilars portfolio. We really anticipated the fact that they were going to be removing Phase III from the requirement for most programs and agree with this decision. The technical assessment really has been proven to be the most important thing when it comes to biosimilars, something we do very well. And this is going to decrease the cost of production and approval of biosimilars. It fits perfectly and facilitates the pivot to growth strategy that we put together in the past and really, it supports a lot of the good decisions we've made over the years about how we will do biosimilars at Teva. So it was a welcome decision. It was something we were looking forward to and really fits perfectly into the plan. Richard Francis: Thanks, Eric. And maybe one thing I'd just like to add on, and I forgot it obviously, removing the Phase III need reduces cost significantly. But I would also like to highlight the cost for developing a biosimilar are still high, a lot higher than any other generic, any other complex generic. So I just think that the capital allocation doesn't disappear and the cost of it doesn't disappear. So hence, the number of people coming into the market will I still think be restricted based on that. And the ultimate is not just can you develop it and manufacture it, do you have an efficient go-to-market capability. And I think what we're starting to show in the U.S. and we'll show in Europe is we do have that. And that front end is very important when maintaining a growth and profitability in your biosimilar portfolio. So thanks for the question, Les. Operator: Our next question comes from Umer Raffat of Evercore ISI. Umer Raffat: You said CMS agreement is in line with your modeling expectations. Is it reasonable to assume that's about 50% or so in the ballpark? And then secondly, to get to your 2027 $2.5 billion in sales, are you assuming volume gains because of this IRA cut versus Ingrezza to get to that number or not? And then finally, obviously, olanzapine, I feel like it's taking a bit longer than we all anticipated. But at this point, is there any possibility that you could get a commissioner voucher to accelerate that? Or should we not be thinking about that? Richard Francis: Umer, thanks for your questions. So with regard to CMS, it was in line with our expectations that we set out in 2023. You threw out a number there, which I'm not going to comment on because I think that was maybe trying to tease me out to give you a number, and I'm not going to do that. I'll just say it's in line, and that's why we remain very confident about our $2.5 billion in '27. And I remind people, greater than $3 billion peak sales. You did touch a bit about do we see volume gains within this. And this is not something we've -- without going into the detail of our forecasting model, we go back to capturing more patients, making patients more adherent and compliant and all of those fundamentals. I think what though you have touched upon is something that we're going to understand a bit more in January as the first wave of drugs that were negotiated and CMS start to come through and play out. And we'll see what are the dynamics that happen there, and we'll use that to adjust our modeling as we go forward. And I hope, you, as others will agree, we're very thoughtful about how we model and how we forecast. And at least over the last few years, I think we've been pretty accurate in what has been quite a dynamic environment. Now with regard to olanzapine, I'll hand that one to Eric to comment on whether we could get a Commissioner's voucher. Eric Hughes: Yes. Thank you for the question, Umer. And to start off with, we're right on track with what we plan for the submission of the olanzapine LAI in this quarter. With regard to your question on the Commissioner voucher, that's one of the things we've been reviewing within Teva. One of the great things about Teva is we have biosimilars, a whole portfolio of generics and innovative medicines. So the potential for where we could see a Commissioner voucher is broad. So we're reviewing that now and looking to see what the most optimal -- optimally timed and valuable program is that we seek one of those out for, but more to come on that in the future. Richard Francis: Thanks, Eric. Operator: Our next question comes from Matt Dellatorre of Goldman Sachs. Matthew Dellatorre: Congrats on the quarter and the AUSTEDO agreement. Maybe first on duvakitug, now that the Phase III IBD studies are up and running, how are you thinking about enrollment time lines and potential data readouts there? And then could you comment on any progress on the indication expansion strategy beyond IBD? For instance, could we see proof-of-concept studies announced over the near term? And then maybe just as my follow-up on capital allocation, could you talk about the key priorities in 2026? And as we think about the free cash flow inflection, what are the key points of focus to achieve that full year '27 guide? Richard Francis: Matt, thanks for the questions. I'll hand the first one straight over to Eric on the Phase III and the potential Phase IIs. Eric Hughes: Yes. So thank you for the question. This is one of the things I'm most excited about the design that we've put together with Sanofi. It's all about execution now. As I said it earlier in my comments, this has been the fastest transition from Phase II to Phase III with regards to this MOA of all the programs out there, which we're very proud of. So it speaks to our executional abilities in this partnership. The design itself is really designed to make sure that we maximize the enrollment with the feeder arm that it will get to our maintenance and increase our safety numbers in the program. It's a very convenient and patient-centric design with regards to subcutaneous treatment and the rerandomization. These are all things that will make it ideally suited for patients. And we're also putting a lot of effort in on how we execute the program with regards to the logistics and our vendors that we use. So it's been a really great collaboration with Sanofi. I think we're building upon a lot of momentum and success that we have going into a Phase III program with a Phase II program that was probably had the highest numbers with regards to its efficacy and it's the data set that we produce, these are all good signals of starting a Phase III program. So when it comes to execution, that's what we're going to focus on right now. And I think that we're set up very well to be in the horse race, if not in the middle of it, but hopefully coming up very close to the beginning of it. So that's very well suited. Now with regards to your question about other indications, it's great to see the excitement around this MOA. I mean one of the things about it is the fact that it could touch so many different pathway cytokine signaling pathways in multiple indications. You can see many different Phase II programs initiating now. We have a plan with Sanofi, and we'll let you know when those studies start. For now, we're going to keep it close to the chest. But that, in addition to the excitement around different combinations in the future is also something we've been thinking about heavily. But right now, to begin this discussion is all about the execution of the study, enrolling the study and making sure that we show the value in ulcerative colitis and Crohn's disease now. Richard Francis: Thank you, Eric. And now on the next 2 questions on capital allocation and free cash flow inflection. I'm going to hand those to Eli. Before I do, I do like the fact that you've highlighted our free cash flow inflection because that is something which we are starting to communicate and people are starting to see with the growth of the company, the growth of the innovative, the decrease of the debt, the growth of the EBITDA that this ultimately changes our free cash flow position. So thanks for highlighting the Matt and seeing that. But I'll hand on to -- hand over to Eli to talk about our capital allocation going forward. Eliyahu Kalif: Yes. Matt, thank you for the question. So first of all, I'll start with the free cash flow. You mentioned about how we should think about that trend that we mentioned beyond '27. There are 3 main dynamics there. First of all, it's the mix, right? If you look on the top line and how we're progressing with the top line and how it's going to flow through and convert both profit into free cash flow with the innovative, I would say, portfolio that we have, and we are keeping on investing in our growth driver. The fact that the $700 million of savings is going to actually enable us to drive more efficient COGS with high gross margin as well, I would say, to optimize our OpEx. Those 2 elements are already in progress. There are another 2 that we need to remember. One, we paid for our debt this quarter. From now until October 26, like 13 months, we don't have any maturities, there's $1.8 billion in October, and there is a $2.8 billion in March, May in '27, early '27. If you think about $4.5 billion, $4.6 billion with our current weighted cost of capital of our outstanding debt of 4.8% you get $200 million to $250 million that we're going to take out from a run rate, both from financial expenses going forward and pure free cash flow impact. And then on top of it, our progress on our working capital, you can actually see ourselves running below 4% going from '27 onwards on our revenue. All these actually enable us to convert high free cash flow. As far as related to next year capital allocation, we're actually looking on more, I would say, ability to be able to compete on certain opportunities related to business development that align strategically to our portfolio and to make sure that we are able to provide value to our shareholders. And as we move forward to make synergetic activities around that piece, we'll keep looking on, of course, reducing our debt. And as we move forward, we might also look on some -- certain other elements related to capital and shareholder returns. And we will, for sure, during '26, and we hope also in our next earnings calls, provide some more colors around that kind of capital returns to shareholders. Richard Francis: Thanks, Eli. Thanks, Matt, thanks for your question. Operator: At this time, we currently have no further questions. So I'll hand it back to Richard Francis for any further remarks. Richard Francis: So thank you, everybody, for participating in the call. We do appreciate your interest in Teva, and we look forward to giving you update on our full year results early next year. Thank you. Operator: Thank you all for joining today's call. You may now disconnect your lines.
Operator: " Curtis Frank: " David Smales: " Omar Javed: " Etienne Ricard: " BMO Capital Markets Equity Research Irene Nattel: " RBC Capital Markets, Research Division John Zamparo: " Scotiabank Global Banking and Markets, Research Division Mark Petrie: " CIBC Capital Markets, Research Division Martin Landry: " Stifel Nicolaus Canada Inc., Research Division Michael Van Aelst: " TD Cowen, Research Division Vishal Shreedhar: " National Bank Financial, Inc., Research Division Operator: Good morning, everyone. Welcome to Maple Leaf Foods Third Quarter 2025 Financial Results Conference Call. As a reminder, this conference call is being webcast and recorded. [Operator Instructions] I would now like to turn the conference call over to Omar Javed, Vice President of Investor Relations at Maple Leaf Foods. Please go ahead, Mr. Javed. Omar Javed: Thank you, and good morning, everyone. Before we begin, I would like to remind you that some statements made on today's call may constitute forward-looking information, and our future results may differ materially from what we discuss. Please refer to our third quarter 2025 MD&A and financial statements and other information on our website for a broader description of operations and risk factors that could affect the company's performance. We've also updated our third quarter investor presentation to our website. As always, the Investor Relations team will be available after the call for any follow-up questions you may have. With that, I'll turn the call over to our President and CEO, Curtis Frank. Curtis Frank: Thank you, Omar, and good morning, everyone. It's great to be with you today to share our third quarter 2025 results. Joining me on today's call is David Smales, our Chief Financial Officer. I'll first speak about the business developments from a strategic and operational standpoint, then Dave will provide a more detailed summary of our financial results, and I'll return with a short summary to close out our call here this morning. This quarter marks a historic moment for Maple Leaf Foods. On October 1, we completed the spin-off of our pork operations into Canada Packers, one of the most significant portfolio transformations in our company's history. Canada Packers is now an independent public company focused on delivering premium, responsibly produced pork to the world. Maple Leaf Foods now operates as a purpose-driven, protein-focused and brand-led consumer packaged goods company with a bold vision to be the most sustainable protein company on earth. We will maintain a strategic relationship with Canada Packers through a 16% ownership stake and an evergreen supply agreement will ensure long-term security of high-quality, sustainably raised pork supply. Before diving into our business commentary, I want to take a moment to acknowledge and to thank the entire Maple Leaf and Canada Packers teams who have executed with focus and resilience during this period of intense business transformation. I'm incredibly proud and grateful for their dedication, passion and living expression of our Maple Leaf values. We also wish the Canada Packers team continued success as they prepare to host their first earnings call as an independent public company a little later this morning at 9:30 a.m. A transaction such as this naturally introduces some additional complexity to our financial reporting for this particular quarter. The third quarter represents the final period in which Maple Leaf Foods will report total company results for our pre-spin-off combined business that are inclusive of the pork operations. Accordingly, David and I will speak to the total company results, which include Canada Packers as well as to the continuing operations of the CPG business, which exclude Canada Packers. Additionally, we have provided pro forma financials for Maple Leaf Foods going back 8 quarters to support comparability and transparency as we transition to our new reporting structure. Now given the increase in financial reporting materials, our goal is to keep the key messages clear, simple and focused on what matters the most. To that effect, 4 headlines serve as our key takeaways from our quarter. First, we delivered another very strong quarter of results for the total company, highlighted by exceptional top line growth and significantly improved profitability year-over-year. Second, our year-to-date total company performance through the end of Q3 was firmly on a run rate to deliver in line with our previously announced full year 2025 adjusted EBITDA guidance of $680 million to $700 million. Third, the composition of these results inside the quarter played out a little differently than we had anticipated given a rapid and sustained increase in raw material markets. This dynamic benefited profitability in our pork operations while driving input cost inflation and short-term margin pressure in our CPG business. And finally, we remain on strategy, and we are tracking well against our priorities for the year. Underscoring the strength of the quarter was total company sales growth of 8% and adjusted EBITDA increasing 22% to $171 million. Our adjusted EBITDA margin improved by 140 basis points to 12.6% as compared to 11.2% last year. Our continuing operations also delivered solid results with 8% sales growth and 110 basis points of adjusted EBITDA margin expansion to 11.1%. We continue to view our 8% revenue growth, more than 2x the CPG market growth rate in Canada and 3x the CPG market growth rate in the U.S. as an exceptional outcome that underscores the resiliency and the durability of our proven growth strategies. This momentum also drove market share gains in prepared meats, plant protein and poultry, led by double-digit growth in our prime poultry sustainable meats brand. That said, while we delivered year-over-year margin expansion from an EBITDA perspective in our continuing operations, we also experienced short-term margin pressure on a sequential basis driven by the rapid and sustained increase in raw material markets that I noted earlier. During the quarter, when compared to Q2, key inputs such as pork trims increased by over 70% in a very short period of time. It is quite normal in these periods of rapid inflation to experience temporary margin compression due to the lag time in flowing through price increases to recover costs. These situations are common in CPG, and we know how to respond effectively. In response, we are taking decisive actions to mitigate these effects and to improve profitability looking forward. But firstly, to address the input cost inflation, we have initiated pass-through price increases in the CPG business. Given the timing of these inflationary impacts and the extended lead times required by retailer policies for all CPG companies during the holiday season, these price increases will fully materialize in the first quarter of 2026. Second, with the spin-off now complete, we are advancing the next phase of our Fuel for Growth initiative. Last week, we announced a second wave of SG&A reductions designed to streamline operations, enhance cost discipline and align resources with our strategic blueprint. These changes are now being implemented across several areas of the business, including manufacturing and will result in a leaner organizational structure and further cost efficiencies in 2026. And third, with the separation of Canada Packers, our previous natural hedge against rapid fluctuations in pork markets is no longer available. As you know, all CPG food companies experienced some degree of quarter-to-quarter margin movement, the driver of which is simply normal lag times in executing pricing action, which can vary at certain times of the year and in certain market segments. Going forward, we believe we will have to modify the tools we use in an effort to reduce that quarter-to-quarter movement as much as possible. Our continued success as a purpose-driven protein-focused and brand-led CPG company will depend on the disciplined execution of our proven growth strategies. These include investing in our portfolio of leading brands such as Maple Leaf, Schneider's, Greenfield and Maple Leaf Prime to grow the core business; leveraging our leadership in sustainable meats, expanding our geographic reach into the U.S. market, plugging what makes Maple Leaf unique into our customer strategies and accelerating the pace of impactful innovation. On the innovation front, this was an especially exciting quarter as we once again demonstrated our capability to shape the next generation of Maple Leaf brands and products. We were very pleased to announce the launch of 2 meaningful new brands, Mighty Protein and Musafir. Mighty Protein positions Maple Leaf to leverage the growing protein moment that is upon us, offering healthy, high-protein fuel on the go. Consumers are seeking lean, nutrient-dense complete protein in convenient formats, and that is exactly what Mighty Protein delivers. It is a poultry-based high-protein meat stick, providing 12 grams of complete protein per serving with only 110 calories. It is gluten-free, sugar-free and made with poultry that is raised without antibiotics or added warmines. Mighty Protein will be available in 3 distinct flavors across major mass retail, online and convenience channels. Musafir, which means Traveler, expands our presence in the frozen food section of the grocery store with South Asian-inspired protein-forward dishes designed for today's busy households. South Asians represent Canada's largest and fastest-growing demographic and millennials and Gen Z are driving escalating demand for global flavors and convenient meal options. Musafir offers a variety of globally inspired flavors in familiar formats and ready-to-eat meals, including vegetarian and poultry-based options such as burgers, nuggets and savory bites, all prepared with traditional ingredients. Together, Mighty Protein and Musafir demonstrate the strength of our innovation engine and the momentum behind our CPG growth strategy. As we said last quarter, we are not only brand builders, we are brand creators. Greenfield and MENA have proven this approach and Mighty Protein and Musafir represent the next step in that journey. These new brands alongside over 50 products that we have launched this year, exemplify our commitment to translating consumer insights, disciplined execution and our unique capabilities into compelling growth platforms for the future. With the historic transaction complete and a strong financial and strategic foundation in place, our focus now turns fully to the future. While our previous consolidated 2025 guidance no longer applies following the completion of the spin-off, our 2025 priorities are clear and remain unchanged. We are focused on delivering strong revenue and adjusted EBITDA growth, generating healthy free cash flow and using it to strengthen the balance sheet. We are not providing updated guidance for the remainder of the year as that would imply quarterly guidance. However, we do plan to update our long-term guidance framework in the months ahead. As a diversified protein CPG company, armed with a bold vision to be the most sustainable protein company on earth and supported by thousands of passionate Maple Leaf people, we have never been better positioned to take on the future. Leading in protein, one of the most attractive segments of the global food market, which continues to grow at approximately 2x the rate of population growth provides us with tremendous strategic opportunity. As we look ahead, we are ready to capitalize on this growing consumer demand for protein. We operate in a large and expanding total addressable market, and our strong portfolio of leading protein brands is our advantage. We've established proven revenue growth platforms. Our margin expansion program is well underway, and we remain differentiated by our bold vision and our clear focus on shareholder value creation. It's an exciting time at Maple Leaf Foods. With that, I will now pass the call over to Dave to walk you through the financials. David Smales: Thank you, Curtis, and good morning, everyone. I'll begin with a brief overview of our total company results before turning to a discussion of continuing operations, cash flow and balance sheet. On a total company basis, sales were $1.36 billion, an increase of 8% compared to last year, while adjusted EBITDA increased by 22% to $171 million and adjusted EBITDA margin improved by 140 basis points to 12.6% compared to 11.2% in the third quarter last year. Our strong top and bottom line performance for the total company was driven by robust profitable growth in both our CPG business and pork operations compared to a year ago. As Curtis noted, the overriding factor in the quarter for total company results sequentially was the benefit to pork operations from strong market conditions, while the CPG business experienced the opposite side of this through higher raw material input costs in Prepared Foods. Turning to continuing operations. Sales were $1 billion, an increase of 8% compared to last year. Prepared Foods sales increased by 5.3%, driven by the impact of inflationary pricing taken earlier in the year, along with improved product mix in the quarter. In poultry, sales were up 15.7% due to improved channel mix with growth in both retail and foodservice volume as well as pricing impacts. Adjusted EBITDA for continuing operations increased by 19% to $112 million in the quarter versus the third quarter of last year, with adjusted EBITDA margin improving 110 basis points to 11.1% compared to 10%. Profitability improved in both Prepared Foods and Poultry, supported by favorable mix, efficiency gains and the benefits from the investments in our London poultry and Bacon Center of Excellence facilities. These gains were partially offset by input cost inflation in Prepared Foods, including a 40% increase in pork belly prices and a 50% increase in average poult trim prices versus the same quarter last year. This resulted in a timing impact on margins in the quarter due to the standard lag required to execute appropriate pricing actions. To address this, we have initiated price increases with benefits expected during the first quarter of 2026. SG&A for continuing operations increased by $4.7 million in the third quarter compared to last year, driven by higher variable compensation costs, partially offset by a higher level of consulting fees incurred in the third quarter last year. Earnings from continuing operations for the quarter were $23.3 million or $0.19 per basic share compared to a loss of $1.8 million or $0.01 per basic share last year. After removing the impact of the noncash fair value changes in derivative contracts, start-up and restructuring costs and items included in other expense that are not representative of ongoing operations, adjusted earnings for continuing operations represented $0.21 per share for the quarter compared to a loss of $0.01 per share in the third quarter of 2024. On a total company basis, capital expenditures totaled $27.8 million for the quarter compared to $25.8 million in the third quarter of last year and $77.7 million year-to-date compared to $65.6 million last year. Total company free cash flow was $46 million in the quarter and $378 million over the last 12 months, reflecting the robust performance of the business and disciplined capital spending and following on from the $385 million generated in full year 2024. This strong free cash flow momentum was reflected on the balance sheet with total company net debt ending the quarter down by $242 million versus a year ago to approximately $1.35 billion and down from a peak level of $1.8 billion during our large capital project investment phase. In line with our stated priorities, our leverage ratio remains well within an investment-grade range with a total company net debt to trailing 12-month adjusted EBITDA ratio of 2x at the end of the quarter compared to 2.1x at the end of the second quarter of 2025 and 3.1x a year ago. Upon closing the spin-off on October 1, Maple Leaf repaid $389 million of debt. We also remain focused on disciplined capital allocation, executing on our NCIB in August to repurchase approximately 250,000 shares. And yesterday, Maple Leaf declared its fourth quarter dividend. When combined with the dividend announced by Canada Packers yesterday, the total exceeds the pre-spin quarterly dividend paid by Maple Leaf Foods and reflects our prior commitment that the first post-spin dividends for Maple Leaf and Canada Packers combined would be at least equal to the dividend level immediately prior to the spin-off. I'll now turn the call back to Curtis. Curtis Frank: Okay. Thank you, Dave. Before we move to questions, I want to take a moment to bring it all together. This was truly a historic quarter for Maple Leaf Foods. We successfully launched Canada Packers as an independent public company and at the same time, delivered another very strong quarter of results. Our combined third quarter performance for the total company, 8% revenue growth and over 20% increase in adjusted EBITDA reflects the continued strength and the resilience of our business. In our continuing operations, we have achieved 8% year-to-date sales growth, a 26% increase in adjusted EBITDA to $358 million year-to-date and a 180 basis point improvement in adjusted EBITDA margin to 12.3% year-to-date. That's an outcome we are all proud of, especially given that our sales growth is materially outpacing the North American CPG market, and our margins continue to show strength relative to our protein industry peers. We're also fully aware that we have work to do to recover the sequential margin pressure we experienced this quarter, and we are taking decisive and proactive actions to restore that momentum. Now stepping back, the big picture is clear. We are on strategy. We are executing against our priorities, and we are building momentum for the future. Lastly, I want to thank the entire Maple Leaf team for their dedication, resilience and hard work, delivering a major spin-off, strong financial results and 2 new brand launches all in 1 quarter is an extraordinary accomplishment, and I couldn't be more proud of what we've accomplished together. With that, operator, please open the line for questions. Operator: [Operator Instructions] Your first question comes from Mark Petrie of CIBC. Mark Petrie: Maybe first, just on the top line strength. We saw some sequential deceleration in prepared meats, but acceleration in poultry. Could you just give some color on that? How much of that is pricing? And then maybe just some detail on sort of the volume and mix components? Curtis Frank: Yes, for sure. Mark, thanks for the question. We were -- as I noted in my comments, especially pleased this quarter with the sustained top line growth that we experienced relative to our CPG peers in North America, relative to our pure protein peers continue to see a very, very solid outcome. At an aggregate level, it was a function predominantly of positive mix benefits and price that recall that we took some level of pricing in Q2, turned out that wasn't adequate. We have to take some steps forward, obviously. And also the volumes were relatively flat, but important to note inside of that, that our branded volumes were quite positive. You noted in Prepared Foods that the prepared meats component has slowed. And there's a couple of important nuances inside of that. Prepared Foods includes our Prepared meats and our Plant Protein business combined now that we've consolidated plant protein. And we actually saw what I would -- what we view as pretty strong growth in the Prepared Meats business on the top line. I grew at almost 6%, which implies double-digit declines in plant protein in line with the category, and that's kind of exactly what happened. So very strong growth on the prepared meat side as well at nearly 6%. In poultry, -- you would have noted in our supporting materials that the revenue growth was in and around 16-ish percent. And that's really a function of the positive benefits of the London poultry investment really starting to shine through in a material way. Operationally, everything is obviously on track. It's been an incredible startup. We're through that phase. And the ability now to get more product into a value-added tray with a brand on it is really showing through in better mix. We did have increasing allocations as poultry demand continues to be strong in the Canadian market and allocations are growing alongside of that. So that drove some positive volume impact. And then we also saw the benefits of our sustainable meats business, our Prime RWA brand, in particular, was quite strong in the quarter. We saw double-digit growth in the sustainable meats component of poultry, which was also positive. And you could view 16% maybe structurally as a little on the high side, but there's no question that poultry continues to be a growth category for us and one that's very positive. So all in all, it was a really great outcome on the top line. Mark Petrie: Yes. Okay. I appreciate that color. And then just to follow up, you obviously highlighted the pressure from the higher input costs. Could you just give some more detail on the price actions you've taken, some context on how you expect Q4 to be impacted versus what you felt in Q3? And then will those be fully implemented for Q1? Or will there also be some spillover effect to Q1? And obviously, this is pending how the cutout trends from here. Curtis Frank: Yes. I mean there's some moving parts inside of that, as you're well aware. But I think the headlines would be, first and foremost, we don't offer quarterly guidance. So we didn't provide an outlook for Q4 specifically. But I do feel as though adding some color is important. In Q3, the headline would be pleased with the progress year-over-year from a margin point of view, added more than 100 basis points of margin. So that was, again, very positive, very constructive and shouldn't get lost in the overall narrative. We did see sequentially, as we noted, I think, with full transparency that there was a sequential headwind mostly due to raw material input costs, and that impacted us on a sequential basis. As we look to Q4, I think the headline would be expecting kind of more of the same would be similar market conditions overall would probably be the best headline I could give you for Q4, a similar market conditions overall. We have taken steps to proactively restore the margin on a sequential basis. That includes but isn't limited to, includes taking price increases effective Q1. Those take effect, Mark, in and around the very first week of February. So think about that as impacting Q1 in most of Q1, I think, would be the headline, and we fully expect to get back right on track after that. Operator: Your next question comes from Martin Landry of Stifel. Martin Landry: I just want to go back to the comments on Q4. You take a lot of effort to highlight the fact that raw materials are rising have risen fast. But I'm not too sure what will be the impact on your margins for Q4. You -- the previous answer was not too clear for me anyways. Just do you expect margins to be under pressure on a year-over-year basis in Q4? Curtis Frank: Martin, as I noted, -- we expect similar conditions in Q4 than Q3, which would imply similar types of margin pressure in the fourth quarter as we experienced in Q3. The remedy for that is advancing our pricing forward. And we're doing that now. We've communicated that to our retail customers and our retail partners now, and that will be in place for February. There's a normal period of time that all CPG companies face over the holiday season that's upcoming where the retailers implement what's essentially a blackout policy to protect and preserve the holiday season. So you won't see price changes for all consumer packaged goods companies, all consumer packaged goods, food companies through that time period. That window reopens on February 1, and we're taking steps to improve our pricing in February. Martin Landry: Okay. It's not easy to read between the lines, but you're saying that you expect similar market conditions. Your gross -- your profit margins expanded on a year-over-year basis in Q3. So is -- when you say similar market conditions, is that what you imply? Curtis Frank: When I say similar market conditions, I'm implying we'll have sustained margin pressures in the fourth quarter like we did in the third quarter. Martin Landry: Okay. Okay. And then just to talk about your new brands that you've launched. I understand these are available right now in Canada. Can you talk a little bit about the distribution you have currently and then how that may expand on a go-forward basis? Curtis Frank: On the 2 new brand launches? Martin Landry: Yes. Curtis Frank: Yes, I can. Actually, Martin, the one thing I would add on the margin side that you might want to consider as a follow-up and our team can help as well is to explore the relative margins that we have in the business even under sustained raw material pressures as compared to our protein peers. And our team would be happy to follow up with you and kind of walk you through our view of that because I think it might be helpful and informative. On the 2 new brand launches, we're really excited about Mighty Protein and Musafir for very different reasons. I kind of dug into that in my opening comments. Both are being incredibly well received in terms of -- they're both being launched into the market in real time right now to start this fourth quarter. So they'll start to show up on grocery stores in the short next couple of weeks. And the distribution support has been very, very strong. They'll be broadly distributed -- we tend to have really great coverage across all of our brands in the Canadian retail market. These are Canadian brand launches, and they will be incredibly well distributed throughout the Canadian market. Mighty Protein actually being a shelf-stable product also gets us access to some alternative channels where we traditionally haven't had as much penetration, things like convenience, could be gyms, convenience locations, areas where shelf-stable products are more prevalent. So it actually expands our distribution reach. And that's another reason why we're so excited about that product, both incredibly on trend, taking full advantage of the protein moment, which we don't view as a fad, we view as foundational to the human diet and 2 brand launches that we're really, really excited about. And we have a history of being able to scale up brands in the Canadian market. Last quarter, we highlighted 2 very important ones, I think, in Mina and in our Greenfield Natural Meat Company offering. And these are just the next 2 brands that we're launching in our large portfolio, and we're probably equally, if not more excited about. Operator: Your next question comes from Michael Van Aelst of TD Cowen. Michael Van Aelst: So I just wanted to follow up one more time on the Q4 pressures, margin pressures. I mean I fully understand the timing delay in passing on higher costs. The one thing I wanted to ask you about, though, is we obviously came into the quarter with much higher pork costs. But we've seen a big drop off -- a big seasonal drop-off in the hog price over the course of November. So can you explain like how early you lock in prices for the quarter, your cost for the quarter, sorry? And if the hog prices and therefore, the pork cutout were to stay at the current levels for the rest of the quarter, would that create a reasonable amount of relief to the pressures that you saw to start the quarter? Curtis Frank: There's a few things that matter inside that question, Mike, first. There is a lag effect in terms of when those cost benefits flow through. So the effects of early -- of late Q3 spill into Q4, the benefits that we'll see in Q4, hopefully, as markets come off, hopefully, we'll experience in the first quarter and so on. There's a combination of risk management programs, the pricing lags that naturally take effect and the time it takes for those meat costs to flow through into the P&L. So that's one component that I think is important. The other thing is the composition of the cutout in technical terms matters. But really what that means is the cuts of meat that carry the increases are really important. And the cuts that go into the prepared meats business, things like trims and bellies have been particularly impacted. So you have to look beyond the cutout to the individual cuts that are affected from an inflationary point of view. and that's important. And then the last thing I would note is it's not just pork inflation that's impacting the business. And I know we've talked about that a lot, particularly given the communication importance of this quarter with the separation of Canada Packers and the moving parts between the two companies. But beyond pork inflation, we're seeing a situation, I think, as you're well aware, where beef inputs are at all-time highs. Turkey in real time is being impacted by the avian influenza implications in the North American markets. Poultry demand is strong and markets continue to be strong. So all competing proteins have relative strength all at the same time. And it's really the combination of those inflationary effects that impacted the third quarter, and I think will continue to impact Q4. And as I said, is normal in CPG, you feel inflation there's a normal amount of lead time to flow increase pricing through against that inflation, and we'll do that in the first quarter. Other than that, I'll resist the temptation, as I always say, to give you quarterly guidance because I think that would be inappropriate at this time. But that just gives you some further context for why we're saying we expect similar market conditions to persist into the fourth quarter. Michael Van Aelst: Okay. Great. That's helpful, Curtis. And then you also touched on or teased us with some comments about how that you plan to modify some tools and use them to minimize the volatility quarter-to-quarter. Can you provide some examples of how you may do that going forward and I guess, why you weren't doing it previously? Curtis Frank: Yes. Well, we have -- great question. Thank you, Mike, an important reminder for me to talk about. We have been doing them previously. So the -- there are 3 things we're doing in response to the inflationary impacts we're feeling. We've talked about the pricing changes, and that's one that's important. Always important in these inflationary environments to manage our costs to the best of our ability. And you would have heard me comment in my remarks earlier that we've taken the next step in our Fuel for Growth playbook around cost reduction, and we're completing another SG&A reorganization actually in real time here in the last week or 2, and it's continuing on. So that's -- number two is managing our costs in an effective way. The third question, which is the one you asked is what steps can we take that we're not taking today. to improve the stability of our margins kind of quarter-to-quarter. I would start by noting, and this is a very important context that all consumer packaged goods companies in food, virtually all of them in food have some level of quarter-to-quarter margin movements embedded in their business. All food CPGs have that. We do too. This just happens to be a quarter where that was clearly evident. There are 3 things, Mike, that we're exploring given the separation. And we did have a bit of a natural hedge between the pork business and the Prepared Foods business. I think it's important to be transparent about that. We knew that was obviously going to be disrupted. That's not necessarily new news, but this quarter just happened to illuminate the significance of that. The 3 things that were studying only to see if there's something we can do different beyond what we're doing today are, number one, our pricing mechanisms. How much is on formula relative to list price, how we manage our deal and future pricing inside of any particular quarter. And I think it's just good hygiene to explore those pricing rhythms and pricing mechanisms. So we're just stepping back in that area. The second is the role of physical hedges, meaning using physical inventory as a natural hedge in the procurement function. And there are implications to storage and things like that, that we're evaluating and studying. And then the third is the efficiency and the efficacy of our derivative hedges, our financial hedges. And of course, in pork, you hedge hogs, not individual cuts of meat. So there isn't always a straight line to perfect efficiency, and we're stepping back to study our effectiveness in that area. It doesn't mean we don't deploy all 3 of these mechanisms today. It does mean that we're taking prudent steps to evaluate whether there are further opportunities to kind of manage the quarter-to-quarter movements in margin. There will always be some. There is in all CPGs. These steps won't be perfect, but we do believe there's potential that they could be helpful. Operator: Your next question comes from Vishal Shreedhar of National Bank. Vishal Shreedhar: With respect to the pricing, it seems like Q3 got -- had margin impact related to commodity inflation. You anticipate Q4 will as well and then part of Q1 will. So it just seems like a very long lag. And I'm wondering if there's something about Christmas that's causing you to not be able to take pricing quicker than you otherwise would have? Or should we anticipate in an inflationary environment, it could be upwards of a 6-month lag? Curtis Frank: That's an excellent question. I appreciate that, and I appreciate you asking and giving me the opportunity to clarify. Normal lead times in consumer packaged goods are about 12 weeks, about, depending on the channel, maybe even 8 to 12 weeks. Christmas, the holiday season is a unique time. And it's a unique time because it has abnormally longer lead times. And all CPGs face those abnormally longer lead times over the holiday season, all CPGs, and we are one of them. And that's because retailers have policies where they don't accept price changes over the holiday season. And the first date they allow after the holidays is February 1, and that's when we're moving forward. So it's an abnormally long period of time. We acknowledge that. And we're simply operating within the normative rules that apply equally to the industry. Vishal Shreedhar: Okay. With respect to the product launches and the 50 new product products that you referenced earlier in the call. Given that this is a new spinout, I'm having difficulty understanding the magnitude of this. Is this a regular year? Is this something strong? And what should we expect from that growth initiative in terms of numerical quantification to help us quantify how meaningful this is? Curtis Frank: On the 2 brand launches, Vishal? Vishal Shreedhar: On the 2 brand launches... Yeah... Just in total of your innovation pipeline and how significant I anticipate that to be as I look forward? Curtis Frank: It's -- we included a couple of slides in our deck, and that might be the materials that you're referencing. The first slide was just demonstrating the fact that we put out more than 50 items into the market this year. And then the next 2, obviously, highlighting the 2 new brand launches. And those are there for a reason. And I would start by saying if you took a little bit longer lead time, and we were backed up to a certain extent given the implications of the pandemic and the fact that not a lot of innovation went out the door in the pandemic in the early parts of the post-pandemic economy, and we're now getting back into, I would say, above-average rhythm of launching products into the market. I mean, keep in mind, Maple Leaf is a company that has 8% revenue growth. And when you compare that to the broader consumer packaged goods market to our peers, it's very, very strong. And our desire and goal and commitment is to keep that level of growth sustainable well into the future. So when you're looking to quantify the impact of these -- this is what great CPG companies do. They launch items, they launch items that have the potential to be impactful. Some of them simply are aid in the sustainment of the current trajectory of growth. Some of them tend to be more incremental where you move outside of core categories and into new adjacent categories. That's why we're excited about the meat snacks opportunity, in particular, because it's an adjacency. But I would think about these more as this is a business that's growing above mid-single-digit levels at or above mid-single-digit levels of growth. We want to sustain that. These are the types of activities that we're taking to sustain that level of growth. This, combined with our leadership position in sustainable meats our U.S. growth platform that we continue to be excited about. The brands we launched last quarter that we highlighted like Mena and Greenfield, the core brands that we have in our portfolio that are #1 and 2 brands in the category, Maple Leaf, Schneider's, Maple Leaf Prime. When you pull all that together, that's the very reason that we're experiencing the outsized growth rates that we are in the market today. And these brand launches are intended for us to continue that level of success. Vishal Shreedhar: Okay. With respect to SG&A, the SG&A initiatives that you have coming in Fuel for Growth, is there an ability for you to give us some sort of magnitude of the benefits I should anticipate in 2026? Is it... Curtis Frank: Yes, we will at some stage. I think that would tie into our 2026 outlook, which is which we understand there's a desire to understand and will come after this particular call. What's important to note is even in the last quarter, Vishal, we did pick up 50 basis points of leverage in our SG&A rate as a percentage of sales. So you're starting to see the benefits of some of the reorganization work that we've done shine through, and there's more work coming, obviously. But that will all be embedded in terms of the 2026 benefits of things like our SG&A work, the procurement work that we've already completed, the work we're doing from a manufacturing point of view, that will have a multiyear benefit. You can expect to see that when we provide more clarity on our 2026 outlook. Vishal Shreedhar: Okay. And sorry, just to jump back to the pricing comment and the pricing coming in, in Q1. So is that pricing that's coming in for Q1 reflects the situation today? If the commodities continue to escalate, at what point is there a cutoff such that Q1, you won't be able to pass on the entirety of the price subsequent to that date, that February date that you mentioned. And this commodity impact may linger into Q2 or Q3. Obviously, we don't have the history to gauge MFI's RemainCo vulnerability to these commodity swings. So I want to be able to triangulate that in future quarters should commodity prices continue to run. Curtis Frank: We're pricing for all the known inflation we have today. That's essentially what the market kind of allows for. It's very difficult to move forward and price for what we don't know. So we'll continue to adjust our pricing as required moving forward if it's required. But at this stage, we're very confident that we've included all the known inflation that we have in the business. Very uncommon that, that would linger Vishal for several quarters, very uncommon. What we don't know is the consumer response to new pricing in the market and the volume impacts that come with that, and that will certainly play itself out over time. Very important to have the #1 and #2 brands in the category and the type of marketing and innovation support that we do have in inflationary environments like this. Vishal Shreedhar: If -- so to ask my question another way, if the inflationary environment continues to the end of the year, your pricing -- your pricing in December reflect -- in February, sorry, will reflect the commodity price today. Is that -- do I characterize that correctly? -- with that? Curtis Frank: Yes. Operator: Your next question comes from Irene Nattel of RBC Capital Markets. Irene Nattel: I want to come back to consumer behavior. And obviously, we're hearing a lot of discussion about yesterday, Pet Value used the term uneven. We're hearing a lot about value-seeking behavior. And in the release, you noted promotional spending was up. It was a factor in both poultry and prepared foods in Q3. So I was just wondering what you're seeing out there and also what the retailers are kind of demanding or asking for in terms of promotional support. Curtis Frank: I would view the headline for the consumer environment as stable but cautious. And the caution is a result of all the things we know about today, ongoing inflation, some of the geopolitical tension that exists in today's world. And as a result, value seeking continues to be a key theme. And that hasn't changed quarter-over-quarter from our perspective and it is certainly a key theme. Where we're excited is where we're positioned in the market to offer value to value-seeking consumers, I think, is really, really positive. Number one, we're a protein-focused company at a time when protein demand is very strong and growing. Our leading brands allow us to have capabilities across all value segments in the grocery store, whether that's our leading premium brands, our RWA brands or some of our regional value brands, which give us an opportunity to compete in different areas of our categories and across different parts of the grocery store. We have a scalable growth platform in the U.S. that we're obviously excited about that gives us some level of growth support and our leadership in sustainability and sustainable meats continues to kind of differentiate us in a really positive way. You combine those things with the innovation that we're putting out and feel really good about our ability to compete and grow inside of what's clearly a difficult and continues to be challenging consumer environment. That will be tested in the first quarter when we take additional inflationary pricing and continue to be really confident that the volume response will be positive. I mean we did already take pricing in the second quarter from an inflationary point of view. So it's not like we didn't see this inflation coming, just the magnitude and the duration exceeded our original forecast, and now we're coming forward with another wave. And the volume response in the last quarter has actually been pretty positive, like the branded volume growth was up this past quarter, and I view that as a success story. Irene Nattel: That's great. And just on the trade promotion piece of it, would you say that it's sort of normal levels, above normal levels right now? Curtis Frank: No, still more promotional, still above kind of "normal levels" Irene, still above. There's still more promotional support required to get the volume and the market share outcomes that we're seeing. And that's, to a certain degree, one of the reasons why you're seeing strong growth, 8% and margins that are pressured somewhat in the short term. You take the combination of the inflation and the consumer environment, those 2 things combined are really what's putting pressure sequentially on the margin. But again, on a relative basis, really happy. On a year-over-year basis, really happy from the top line perspective, really happy, need to own the fact that we've taken a step back sequentially, and we need to get that back on track. Operator: Next question comes from Etienne Ricard of BMO Capital Markets. Etienne Ricard: As it relates to the U.S. business, what sales performance are you seeing in this geography? And how would the pricing power differ between Canada and the U.S. given I believe the U.S. tends to be more sustainable meats. Curtis Frank: Yes. That's a very important point. I'll answer the second part first. We're obviously a much smaller player, both in terms of our brand presence and our absolute size in the United States market. But what gives us pricing power in the U.S. is our meaningful point of difference in sustainable meats. We've got a leadership position in the sustainable meats segment, while small portion of the United States market growing rapidly. We're growing inside of that. So that gives us pricing confidence. And I don't think given the inflationary support, that's very clear that exists today that we'll have any problem in a material way of passing that through in the U.S. market. So that brand leadership gives us that level of support in sustainable meats, which is a competitive difference and continues to be positive. We did see positive growth in our prepared meats business in the U.S. this past quarter, and we expect that to continue. Operator: Your next call comes from John Zamparo of Scotiabank. John Zamparo: I wanted to follow up on trade promotions and specifically the seasonality. But I think in the past, you've said that Q3 is typically the peak. Is that still the case? And I don't suspect you'll quantify a year-over-year change in Q3, but whatever that number was, do you expect it to remain similar in Q4 on a year-over-year basis? Curtis Frank: Yes. I don't think you'll see a material departure Q4 versus Q3 from the promotional intensity and frequency that exists in the business. It tends to shift. Summer tends to be hot dogs and sausages, winter tends to be ham and bacon so -- and the peak season throughout the holiday season. So the category dynamics change, but the -- from a materiality perspective, it's not significantly different between Q4 and Q3, I think, in the new business. John Zamparo: Okay. And I wanted to ask broadly about price elasticity from consumers at the current time. I know there's a lot of uncertainty here. You don't have a crystal ball, but it doesn't seem like you're seeing trade down based on your comments about branded sales and RWA, but I wonder if just the general context of the consumer environment makes you think differently than you otherwise would. And it's early in Q4, but any signs that you've seen any change there? Curtis Frank: Well, we've seen a margin impacted by higher levels of promotional intensity for certain. That's happened for certain. Otherwise, we think we'd be operating at higher levels of margin than we are today, even higher than we are today. So that's played out. And I don't expect that will change materially in the quarter ahead. John Zamparo: Okay. And lastly, on the Buy Canada theme, it's always tough to measure this, but I wonder what you can say about what you thought the impact was in Q3? And is it fair to say we're seeing a more moderate impact in Q4? Curtis Frank: I think so. I mean it's -- like you said, it's very difficult to quantify the impact. We'd like to think there's positive tailwinds in that area. There's lots of pride in all things Canada these days as I think there should be. Very difficult to quantify, and I would suspect it's moderating. I've been in the camp squarely that from day 1, we should expect that, that will be momentum that's maybe a little shorter lived than we would all like. And at some point in time, it would moderate. And I think we're -- what you're seeing here in terms of our growth is less by Canada and more really solid execution of what our proven growth strategies in the market are proving to be resilient, durable, effective and growth strategies that we think will take us well into the future. John Zamparo: Okay. And sorry, just one more. On the long-term guidance framework that's coming near term, I assume you don't want to steal its thunder, but any sense of what investors can expect? Is it likely to focus on a specific margin target? Or are you leaning more towards an overall growth algo? Anything you're willing to share at this point? Curtis Frank: Not much I'm willing to share. I think it's premature. We're in the process right now, and this is normal in our business that we'd normal at this stage. Our 2026 budget gets presented to our Board in the month of December, along with our forward-looking strategic plan for the future. And the outcome of that dialogue discussion and approval and alignment process will ultimately guide our communications around guidance. So I think it's premature today. And -- but you should expect us to be coming forward with that in the short coming months ahead. Operator: [Operator Instructions] Your next question comes from Michael Van Aelst of TD Cowen. Michael Van Aelst: I just want to follow up actually on the top line growth, which has been impressive this year, even if it is slowing a little bit as we kind of cycle tougher comps as well. But the 2 new brands that you're launching, can you talk about the addressable market for these? And if you don't have a specific number, maybe something what you think relative to the MENA and the RWA, for example? Curtis Frank: Well, the Musafir brand, MENA is probably a good proxy, Mike, in terms of the total addressable market, a very fast demographic opportunity in the Canadian market. But what's interesting, and we commented on Gen Z and millennials having a really interest -- having a real and sustained interest in global food flavors and maybe less of a propensity to cook from scratch. And those 2 things combined, the desire for more diversity in flavor offerings, a more diversity in food offerings but in a prepared meal occasion makes the total addressable market for Musafir maybe even larger than the Halal opportunity. So I would say equal to or greater than what we've seen and experienced in MENA Hal without putting a number around it. have to spend some time doing that. I haven't, but I could. On the meat snacks opportunity, this isn't your normal kind of meat stick. Number one, it's not refrigerated, it's shelf stable. Number two, 12 grams of protein at 110 calories is a really awesome nutritional benefit for people who are looking for healthy protein on the go. And that's a large and very rapidly growing total addressable market. What's exciting about meat sticks is the ability to, number one, have success in our core business, which would be the retail environment, but also extend distribution into alternative channels, health food stores, convenience locations, gas and convenience locations, drugstore offerings, which obviously, as you know, are large and growing gyms, workout facilities, the shelf stable reach makes the distribution opportunities much more material, and we're already having success in gaining distribution in those areas. So I'm excited to -- looking forward to report out a little bit more news around the success. Right now, we're just getting the product into the market. And our supply is selling out quickly, which is always a very positive outcome in a product launch. And I'm sure we'll give some positive updates along the way. Michael Van Aelst: Great. That's helpful. And last question. With leverage down at 2x now, what is your -- what's the plan for free cash flow next 12 months? And should we -- and given the weakness in the share price, is it your intention to be active on your NCIB? Curtis Frank: David, maybe you'd cover this one. David Smales: Mike. Similar to Curtis comments around outlook for 2026, obviously, this view of capital allocation and how that aligns with our view of the next 12 months all kind of wrapped up together. What I can say is -- and consistent with what we say in the outlook, we intend to continue to build on the track record of growth in the annual dividend that is a key focus for us. We are evaluating those future capital allocation opportunities with a desire to return capital to shareholders. And we're just working through the strategy for that, timing for that, the quantum of that, but that will all be wrapped up in the guidance we give going forward as well as our view that the share price is undervalued today. I talked about this last quarter. Nothing has changed in our view today post the spin. And so all those factors will be things that we're considering as we lay that out going forward. But I'm not going to talk to specifics today, but it is a very active conversation. Michael Van Aelst: Is there anything preventing you from buying back stock this quarter? David Smales: Obviously, been in a blackout period up until now this quarter. There's nothing in and of itself presenting any obstacles to implementing share buybacks when we're outside of blackout period. We are mindful of the Butterfly structure, and that has some restrictions around it. But as we demonstrated in August, we have some flexibility to operate within that. And that's all part of the algorithm we're working through right now as we decide on the right strategy going forward. Operator: There are no further questions at this time. I will now turn the call back over to Mr. Frank. Please continue. Curtis Frank: Great. Thank you for joining us today. It was obviously a historic quarter with the completion of the spin-off of Canada Packers. There was lots of complexity required in our reporting this quarter, but we tried our best to simplify the key themes for you that are of most importance and appreciate your patience in taking the time to walk through with us today. On the surface, it was a very successful quarter, 8% growth on the top line, a significant improvement in our adjusted EBITDA. And our focus moving forward is obviously on sustaining the growth momentum we have in the business and continuing to create value in a way that's inspiring and enduring, and we're looking forward to speaking with you next quarter. So thank you, and have a great day. Operator: Ladies and gentlemen, that concludes today's conference call. Please thank you for your participation. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. At this time, I would like to welcome everyone to the OraSure Technologies, Inc. 2025 Third Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Jason Plagman, VP of Investor Relations. You may begin. Jason Plagman: Good afternoon, and welcome to OraSure Technologies Third Quarter 2025 Earnings Call. Participating in the call today for OTI are Carrie Eglinton Manner, our President and Chief Executive Officer; and Ken McGrath, our Chief Financial Officer. As a reminder, today's webcast is being recorded, and the recording can be found on our Investor Relations website. Before we begin, you should know that this call may contain certain forward-looking statements, including statements with respect to revenues, expenses, profitability, earnings or loss per share and other financial performance, product development, shipments and markets, business plans, regulatory filings and approvals, expectations and strategies. Actual results could be significantly different. Factors that could affect results are discussed more fully in OTI's SEC filings its annual report on Form 10-K for the year ended December 31, 2024, its quarterly reports on Form 10-Q and its other SEC filings. Although forward-looking statements help to provide more complete information about future prospects, listeners should keep in mind that forward-looking statements are based solely on information available to management as of today. OTI undertakes no obligation to update any forward-looking statements to reflect events or circumstances after this call. With that, I'm pleased to turn the call over to Carrie. Carrie Eglinton Manner: Thanks, Jason, and thank you to everyone for joining us today. Today, I will discuss some highlights from Q3 and our progress on key priorities for 2025 and beyond. Overall, we continue to significantly advance our strategic transformation and execute with discipline as we position OraSure for a return to growth in 2026. We have delivered meaningful progress and continued strengthening our foundation. We're also elevating our core growth by expanding and diversifying our product portfolio and customer relationships plus we're accelerating profitable growth through investments in internal R&D as well as acquisitions and partnerships that leverage our existing capabilities and to offer an attractive risk-adjusted ROI. Looking at our Q3 results, total revenue was $27.1 million, and core revenue was $27.0 million, which included Diagnostics revenue of $14.5 million and Sample Management revenue of $10.3 million. Broadly speaking, our key end markets remain mixed, and we continue to partner with customers that are navigating an environment with elevated levels of uncertainty related to funding for public health programs and research as well as the government shutdown in the U.S. That said, we view 2025 as a transition year, and we're excited about pipeline opportunities in attractive markets that align with our strengths to drive growth in 2026 and beyond. In our International Diagnostics business, we discussed on our last earnings call that we anticipated a slower pace of orders for our HIV test in the second half of the year as our in-country partners work through their existing inventory and national health programs adapt to changes in the funding environment. That trend played out as expected in Q3 and thus far in Q4. For the full year 2025, we now expect that revenue from our International Diagnostics business will be in the low to mid-$30 million range, representing a decline of approximately 20% compared to 2024, which was a record year for International Diagnostics. Staying with our International business, we are pleased to share that OTI signed a definitive agreement to acquire BioMedomics. This tuck-in acquisition expands OTI's Diagnostic portfolio by adding Sickle SCAN, a rapid point-of-need test for sickle cell disease that is sold outside the U.S. The global sickle cell testing market, particularly in high burden regions in developing markets, is underserved and fragmented. We believe Sickle SCAN addresses this need with a high-quality, affordable rapid point-of-care test and there is support from government agencies and global health organizations to increase access to sickle cell testing at the point of need. We see an opportunity to expand the reach and adoption of Sickle SCAN by leveraging OTI's strength including our international sales channels and our existing relationships with national health programs, particularly in Africa and Latin America. Furthermore, many of our international customers and partners have expressed interest in a reliable, low-cost, rapid diagnostic test for sickle cell disease. Transitioning to our U.S. Diagnostics business. Our public health customers are adapting to significant reductions in staffing at HHS, CDC, SAMHSA and other federal agencies that support public health programs, along with budgetary uncertainty and challenges related to the federal government shutdown. We are continuing, however, to see traction with our syndemic approach that leverages our portfolio of rapid tests across multiple conditions. And we are expanding our customer base in nonpublic health markets such as urgent care, hospital emergency rooms and correctional facilities for rapid hepatitis C testing plus online channels specializing in consumer-initiated testing. Overall, for the full year 2025, we expect our U.S. Diagnostics business to generate revenue in the low to mid-$30 million range representing a low single-digit percentage decline compared to 2024. We also wanted to provide an update on Together Take Me Home, a collaboration funded by the federal government that makes HIV self-test available through the mail in order to advance the President's goal of ending the HIV epidemic. We are pleased to share that this highly effective life-saving program was renewed by the Trump administration with strong bipartisan support in Congress. As a result, Together Take Me Home is continuing for program year 4, which runs from October 2025 to the end of September 2026. We expect to recognize approximately $1.8 million of revenue from Together Take Me Home in Q4 and anticipate a similar pace of quarterly revenue in 2026. Switching gears to our Sample Management business. The overall trend continues to be mixed. SMS revenues increased on a quarter-over-quarter basis in Q3, but we anticipate a sequential decline in Q4, which is consistent with the typical seasonal ordering pattern for this business. For the full year, we expect revenue from Sample Management products in the high $30 million range, which would be approximately flat compared to 2024, if you exclude the impact of the decline in orders from a large consumer genetics customer. Looking ahead, we are confident that the Sample Management business is positioned to return to growth in 2026 and beyond. As genomic end segments gradually return to stronger growth driven by clinical adoption of precision medicine. Our confidence is also supported by continued scientific and technological advancements such as the increasing utilization of short-read and long-read genomic sequencing, the decline in unit costs for sequencing and analysis and advancements in areas such as proteomics. We are also seeing early signs of positive trends in some international markets, such as the Middle East, that are planning to invest in population health studies using novel sample collection devices in order to accelerate precision health and life sciences research in the region. We're also pleased to share that the ENDO 100 projects has selected multiple kits from our OMNIgene and Colli-Pee product lines for the collection and stabilization of a variety of sample types, including saliva, urine, stool and vaginal swab. The ENDO 1000 project is a United Kingdom wide initiative aimed at accelerating discovery and advancing data-driven research into the diagnostics and personalized treatment of endometriosis. By collecting biological samples and lifestyle data from participants over 2 years, the study seeks to uncover patterns that can inform more effective individualized care strategies. The inclusion of our sample collection kits in this landmark study underscores their value in enabling high-quality research and positions us for continued growth in the Precision Health and Clinical Research segment. Now I'll transition to our exciting pipeline of innovation, including an update on several products targeting attractive markets. Midyear, we launched a blood collection tube with stabilization chemistry for research use only, or RUO, markets in the burgeoning field of proteomics. We also anticipate near-term milestones for Colli-Pee urine collection, initially for sexually transmitted infection, or STI, indications and future expansion in the liquid biopsy. And our Sherlock Molecular Diagnostics Rapid Test platform whose first assay is expected to serve the large and growing chlamydia and gonorrhea, or CT/NG, segments of STI. As we discussed last quarter, our HEMAcollect PROTEIN product launched in July 2025 in the RUO market, like I just mentioned. Since this launch, we've received positive and insightful feedback from our customers and early adopters that will help inform our road map as we enhance our proteomics product line and build additional momentum in 2026. Additionally, OTI is presenting at the upcoming Human Proteome Organization World Congress to highlight HEMAcollect PROTEIN's proprietary stabilization capabilities and its performance across a range of proteomics technology platforms. Moving to our Colli-Pee device, which is designed for first-void urine collection. We plan to submit clinical trial data to the FDA for STI indications by late 2025 or early 2026. Receipt of approvals for these applications subject to regulatory review, would be in addition to our existing Colli-Pee RUO product and is expected to further strengthen our competitive position in novel urine collection. Our analytical and clinical studies are demonstrating strong performance and flexibility across multiple target analytes. We're in advanced discussions with leading diagnostics platform providers that are interested in enabling self-collected noninvasive testing across large and growing markets, including STIs, HPV and other disease states. Next in product innovation. Regarding our Sherlock over-the-counter Molecular Diagnostics self-test platform and its first assay for CT/NG, we are making good progress in our clinical trial and our plan for submission to the FDA in late 2025 or early 2026. We anticipate gaining momentum for our product launches for innovation, and it's the work we've done in transforming our enterprise that also allows us to invest in creating a pipeline of earlier-stage opportunities in high-value growth markets that fit well with our strengths and our product platforms where we can compete and win. Examples include categories where we already have a presence like in infectious disease and STIs plus in newer ones like liquid biopsy or say antimicrobial resistance, where rapid tests and differentiated chemistries have outsized potential to create and add value. We look forward to sharing more details as new product opportunities progress through our development process. With that, I'll turn the call over to Ken to discuss our financial results and guidance. Kenneth McGrath: Thanks, Carrie. Total revenue in the third quarter was $27.1 million. Core revenue, which excludes COVID-19 products and the molecular services and the risk assessment testing businesses that we exited was $27 million. Diagnostic products generated $14.5 million of revenue in Q3, and Sample Management Solutions revenue was $10.3 million. Excluding the headwind from the consumer genomic -- genetics customer, Sample Management revenue from the rest of our customer base grew on a year-over-year basis in Q3. Our GAAP gross margin in the third quarter was 43.5% and non-GAAP gross margin was 44.2%, which was slightly better than our expectations due to lower scrap expenses. GAAP operating expenses in the third quarter were $27.9 million, which includes $2.8 million of noncash stock compensation expense and $376,000 of expense related to an increase in the estimated fair value of acquisition-related contingent consideration. Depreciation expense was $2.6 million in the quarter. Our GAAP operating loss in Q3 was $16.1 million, and our non-GAAP operating loss was $12.7 million. Looking at our balance sheet. We ended Q3 with 0 debt and total cash and cash equivalents of $216 million. Operating cash flow in the third quarter was negative $10 million, which was consistent with Q2 and our expectations given our investments in the Sherlock platform, the CT/NG clinical trial as its first assay and other innovation projects. We deployed $5 million during the third quarter to repurchase approximately 1.5 million shares of our common stock. Consistent with our capital deployment strategy, we also continue to evaluate organic and inorganic growth opportunities. As Carrie mentioned, we have signed a definitive agreement to acquire BioMedomics as a tuck-in commercial stage acquisition for $4 million upfront and potential contingent consideration upon achievement of revenue milestones. BioMedomics is currently approaching $1 million of annual revenue, and we believe OTI has the potential to grow back to several million dollars of annual revenue over the next few years. BioMedomics is expected to be cash flow breakeven with a path to a very attractive ROI as revenue grows over the next few years. We anticipate minimal incremental operating expense for OTI given that BioMedomics can be plugged into OTI's international commercial organization and leverage our administrative and regulatory capabilities to expand availability and adoption of the Sickle SCAN rapid test. Turning to guidance. We are guiding to fourth quarter revenue of $25 million to $28 million, which includes less than $100,000 of COVID-19 testing revenues. Our guidance also assumes continued disruption in ordering patterns from our SMS customer in the consumer genetics industry. This customer represents approximately $4 million of revenue in Q4 last year. We expect our gross margin percentage in Q4 to be in the low 40% range, which is slightly lower than third quarter due to typical seasonality and a greater mix of international revenue as a percentage of total revenue in Q4. Moving to operating expenses. In Q4, we expect core operating expenses of approximately $20 million, plus $10 million of investments in innovation, which includes $7 million to $8 million of investments related to Sherlock. With that, I'll turn the call back to Carrie to conclude. Carrie Eglinton Manner: Thanks, Ken. We'll plan to exit the transition year of 2025 and head into 2026 with important near-term catalyst for growth as we advance into the next phase of our multiyear strategy. We've done the work in the last 3 years that gives us the confidence and the capabilities we need to achieve our goals. We have delivered cost productivity at the business level and product level, develop our people and infuse new talent in the organization, leveraged our commercial strength to diversify our customer base and implemented enterprise-wide rigor and built a strategic innovation road map, strengthened our cash flow profile while maintaining a strong balance sheet that has allowed us to invest in attractive innovation pipeline opportunities, including internal product development along with M&A. We've also refreshed our Board with the addition of 3 new independent directors over the last 3 years, including last week's announcement, adding Steven K. Boyd as a Director and appointing Jack Kenny as Chair of the Board. Also, we'd like to thank Mara Aspinall, who has decided to step down after over 8 years of service to pursue new opportunities. We're grateful for her many contributions and wish her the very best. Our foundation is strong, but our work is not done. We recognize that in order to capitalize on the many opportunities ahead of us, we must continue to execute on our priorities and deliver more innovation. Our entire team is working with urgency and is aligned in purpose to decentralize diagnostics and connect people to care that is more accessible, convenient, private and personalized to create long-term value for customers and shareholders. We're confident in the path ahead. With that, I'm pleased to turn the call over to the operator for Q&A. Operator? Operator: [Operator Instructions] Our first question comes from Mac Etoch from Stephens Inc. Steven Etoch: I appreciate you taking my questions. just a few for me, and I'll let others ask some. But maybe could you just discuss this bio -- sorry, apologize if I am pronouncing incorrectly, BioMedomics acquisition and what attracted you to that asset just to start, and I'll follow up on that. Carrie Eglinton Manner: Yes. It's a really nice tuck-in that aligns precisely with our portfolio internationally. So rapid diagnostic testing for underserved markets -- the strength we have in Africa, including -- we don't talk as much about Latin America. But for low-cost tests that identify pressing health care challenges whether it's the infectious disease success we've had in HIV or HCV, sickle cell is one of those opportunities where the populations in those underserved regions are often undiagnosed. So we had heard that need. We've been talking with BioMedomics for many years and working with them. And so the opportunity to bring that -- to tap that into our portfolio, leverage the strength of our relationships, our commercial distribution and reach and just put it right into the portfolio made a ton of sense. So a very promising potential for what we think are smart capital deployment. Kenneth McGrath: And Mac, we also -- we think it has a strong return on invested capital. You noticed in the deal structure, we said it's a small upfront with some contingent considerations if they achieve certain milestones, 3 to 5 years out. We believe that structure allows us to really deliver value. We mentioned also that it will be breakeven cash flow. And what that -- as Kerry mentioned, it's leveraging a lot of our capabilities. So we really don't need to add a lot to deliver this and to put it into our channel. And then as we grow the revenue, we'll be able to leverage and be accretive going forward. Steven Etoch: I appreciate the context there. And then secondly, pretty good cost management on your part, both at the gross margin level and in terms of OpEx. Just given where revenues fell, can you just highlight some of the puts and takes around gross margins and then given the in-sourcing was completed in 2Q, are there any lingering costs that might have fallen into the quarter? Kenneth McGrath: Yes, that's a great question. Yes, for gross margins, we did do a little bit better than guided than expected. A lot of that was driven by our lower scrap than expected, which is really a complement to our operations team and their continued automation and operational efficiencies. As far as OpEx, that was in line with our spend. And really, our core business essentially is breakeven and what we -- where we do choose to spend our dollars beyond that are on innovation. And in this case, innovation focused on delivering our Sherlock CT/NG clinical trial submission as well as internal innovation. And then a little bit other benefits of gross margins, there was a little bit of a mix benefit in Q3. And we did mention we guided in Q4 that will be a little bit below Q3. Part of that is the mix, seasonality and the mix change where we expect to see a little bit more international revenue in Q4 as a mix, which will lower the margins a bit. Operator: [Operator Instructions] There are no further questions at this time. I would now like to turn the call back over to Carrie Eglinton Manner for closing remarks. Carrie Eglinton Manner: Thank you, Mac, for your questions and everybody for participating today. We appreciate your continued interest in OTI. And with that, we'll close the call. Thank you. Operator: This concludes today's conference call. Thank you for joining. You may now disconnect.
Christopher Gibson: " Najat Khan: " Ben Taylor: " Christopher Gibson: Hello, everybody, and welcome to Recursion's Third Quarter 2025 (L)earnings Call. My name is Chris Gibson. I'm the Co-Founder and current CEO of Recursion, and I'm so delighted to have you all joining us today. I want to start off by talking about something that I'm really excited about, which is our executive leadership updates. And it's my pleasure to share with all of you that beginning January 1, the amazing Najat Khan is going to take over the role of CEO, President and Director of Recursion. I've been working with Najat for the past 18 months in an incredible partnership to build our platform to deliver on our pipeline and our partnerships. And everything that I have seen has convinced me that she is absolutely the right leader to take Recursion through its next chapter. And I'm so delighted that she has agreed to take on that role. I'm also incredibly excited that I'm going to continue bringing my passionate unapologetic founder energy to Recursion as the Chairman of the Board and as an Executive Adviser. And finally, I want to say a huge thank you to our entire Board and especially to our Chairman, Rob Hershberg. He's been an amazing Chair and an incredible mentor to myself and Najat, and I am delighted that he's going to continue on with us, I hope, for a very long time as our Vice Chairman and Lead Independent Director. These are really exciting changes that I believe are going to position Recursion to affect our mission to lead the Tech-Bio space, and I am so, so thrilled to get to share them with you today. Najat? Najat Khan: Thank you, Chris. It is such an honor to step into the big role to be CEO and President of Recursion. And I want to thank you. I want to thank the Board and just our incredible team for their trust and partnership. And Chris, first for a few minutes, I want to say, look, your vision and the courage with which you have taken this from 0 to what Recursion is today is unparalleled. And you've not just been instrumental in building the company, of course, but also creating a new sector that never existed before, really truly blending the best of technology and science to make medicines and radically improve patient lives. There's so much to do. So I'm really -- I'm deeply grateful, of course, for your leadership, but even more so for your friendship which I'm looking forward to doubling down on as you work together in all of your many roles. When I -- I just want to say a few other words, too. Look, when I joined Recursion 18 months ago, I was drawn to the bold ambition, but an ambition in action. And what an 18 months it's been. Step 1 was the special combination with [ Excientia ] to really truly build that end-to-end tech stack, as we like to call it, engine and also the data generation. We've talked a lot about models, but proprietary high-quality data is critical and a critical moat to what we do. Building out clin tech platform, we're in the clinic. This is going to be a critical part of what we do and also sharpening our portfolio, advancing multiple programs internally with our partners. Chris will share a little bit more of some of the latest updates there from Roche and doing so with a discipline and urgency that I think patients will be proud of. And this is a pivotal chapter for Recursion, one that will require bold focus. The boldness will never go away, but also navigating the complexity that, quite frankly, is drug discovery and development, having seen that for many years and the relentless sense of urgency and good capital stewardship that's going to be critical for us to fully realize our mission. My focus, and I'll listen more and think more over the coming weeks, but really it's going to be translating these platform insights into repeatable clinical proof, whether it's through our wholly owned programs or with partners, scaling the platform that we have, where we have a clear, clear, clear advantage and building a company that delivers sustainable value. The foundation is strong. The vision is clear. The opportunity ahead is extraordinary, and I couldn't be excited. The work will be hard. I am clear-eyed about that. And there will be bumps in the road, but it should be because it's deeply worth it because we're doing something that there's no blueprint for. It hasn't been done before. It's also deeply meaningful for the patients that we serve and for the future that we're building together. So I'm so excited. I couldn't be prouder of the next phase. Looking forward to partnering with Chris and the rest of the broader team, exceptional team, if I say so, to define that next phase and the next chapter for Recursion. Christopher Gibson: Thanks, Najat. And with that out of the way, I think we should get back to work. And one of the things that I'm extremely excited about is that Recursion has a tremendous amount of potential catalysts coming in the next 18 months. From our pipeline to our partnerships to advancements of our platform, we are going to continue to deliver exciting updates, I hope, on a really regular cadence to all of our shareholders, all of our stakeholders and ultimately, advancements and milestones that I think take us on a path towards really affecting patient lives. And we're going to do all of that with a pro forma cash balance of almost $800 million as of a few weeks ago. And what I'm excited about is that gives us runway through the end of 2027 without any additional financing. This means we're in an incredibly robust position from a balance sheet perspective to deliver across all of these catalysts. Now let me talk a little bit about something that was really exciting that we got to share last week, which is how our platform is fueling all of our partners, but in particular, our Roche and Genentech colleagues. We shared last week that we had earned a $30 million milestone payment. This is our second such milestone from Roche and Genentech for the delivery of a whole genome neuro map. And I want to point out that this brings our total cash inflows from partnerships to more than $0.5 billion. And I think that is a milestone that few pre-commercial biotech companies ever achieved and one that I think is a leading indicator of the kind of value that we are going to continue to deliver here at Recursion. So let's talk a little bit about the Roche and Genentech collaboration. This is a collaboration that's a decade-long focus in neuroscience and GI oncology. We've already been able to deliver 4 whole genome phenom maps in our GI oncology space, generating over 100 billion GI oncology relevant cells. And we already have a program that's been optioned out of that particular set of maps and heading toward lead series, and I hope many more in the future as well. But what we announced last week was that in addition to the whole genome arrayed CRISPR knockout map of iPSC-derived neurons that we delivered last year, where we became, we believe, one of, if not the world's largest producers of these iPSC-derived neuronal cells. We have now delivered a second whole genome map this time in the incredibly challenging microglial cells, the immune cell of our brain. And what we are excited about is the number of incredibly novel potential targets that we have identified in both of these pheno map that we believe have real potential not only to lead to novel target options in the future with our colleagues at Roche and Genentech, but I hope really meaningful medicines for patients in the field of neuroscience where all of us agree, there's a lot, a lot of work to do. So I want to talk a little bit more about this work. And I want to remind everybody what do I mean when I talk about a map of biology. We have knocked out nearly every gene in the genome in these microglial cells. And we have leveraged machine learning and AI techniques to turn images of these cells into functional maps of the relationships between every single gene. And these digital maps allow us to move from this empirical sort of one-in-a-time approach into really a search function where today, our colleagues at Roche and Genentech, our team can just type in any gene in the microglial map or the neuronal -- or the iPSC-derived neuronal map, and they can see the relationships across the rest of the genome. This gives us incredible insight, novel pathways, novel targets. And it's extraordinarily significant, I think, for our teams to now be able to do this not just in the neuron, but in the immune cell of the brain. So really, really excited about this. I know our colleagues at Roche and Genentech are too. And to give you a sense of the road that we've taken to get here, this was something that I think many people did not think would be possible. First, our team had to generate more than 100 billion microglial cells. Then we had to figure out how to get more than 100,000 different sgRNAs into these cells, so we could knock out 17,000-plus genes with multiple guides per gene and we were able to do this generating nearly 50 million microglial cell images. And we used our supercomputer, BioHive-2, still, we believe, the fastest supercomputer wholly owned by any biopharma company, at least for a couple of more weeks or months until [ Lilly ] potentially overtakes us to generate this first-of-its-kind microglial map. And from this map, we've already started mining for novel biological insights, and we have the team and the equipment and the expertise to validate those insights to deliver programs to our colleagues at Roche and Genentech. And our hope is that, that will lead to potential new therapeutic approaches. So I'm so proud of the team for all the work they've done. I'm so proud of this particular map because I think it has extraordinary potential in the field of neuroscience. With that, I'm going to turn it over to Najat to talk a little bit about how our platform is fueling our pipeline. Najat Khan: Thank you, Chris. And just the example that you mentioned in terms of microglia is such a phenomenal example of how our platform and the combination of the wet lab and the depth of the wet lab approaches that we have at Recursion with, of course, our dry lab really creates something of unique value. So if you go to the next slide, we shared this slide before. And I just wanted to spend a little bit of time on it today and double-click on a couple of areas. So first of all, this represents the heart of how Recursion operates. You hear a lot about the Recursion OS. And I love to kind of pull the hood and like really show what are the various components that we're focusing on here. Step one, we're applying AI where it matters, where it can truly change either quality, speed or the impact of our decision-making. There are 3 specific modules here. The first is focused on deep biological understanding that's actually connected to patient outcomes. The second, how do we leverage AI to design better molecules that are more drug-like. And then the third is a ClinTech approach on picking the right patients as well as recruitment -- fast recruitment so we can get through our trials faster. All right. Having said that, I wanted to double-click on a couple of areas that we're really focusing on. Next slide. Scientific agents. So we've heard a lot about agentic agents. One of the most exciting parts of the OS is how we are using scientific agents, AI systems that actively participate in the entirety of the scientific process. And these agents are helping us thinking about the data that Chris just mentioned, genomics, transcriptomics, real-world data with partners like Tempus and others public data sets like PubMed, [ JetMa ] and so much the list goes on and on. And we have early proof-of-concept agents that we're leveraging in order to really not just analyze and interpret the data real time, but to actually select the optimal tools, workflows, generate hypothesis and design new experiment. This is going to supercharge our already extraordinary talent. The other reason I'd like to mention this is also around it captures the decision-making trail. That's really important. The way you get these agents to be highly effective is to actually understand the logic behind the recommendations and iterate in real time with our scientists and our clinicians. And that is something that we're doing. And having that inherent data, this platform helps us do it in action, not just theoretically. I often get the question in terms of how do we drive economies of scale. We are a tech bio company. This is going to be one of the very important levers for us as to how do we do more given a lot of the insights that we're generating with what we have today. So just keep an eye on this, but I wanted to double-click on a really important area of progress for us that is truly applied to what we need to do to create programs that are differentiated. The second area, if we go to the -- one more click, I will do it, is really around automated ADMET. Look, we talked a lot before around [ Bolts 2 ] and other programs that really help you understand binding affinity and so forth. But as we all know, in order to actually design programs, a critical element of it is to ensure that they are drug-like. So this is an area that is critical for us. And what we are doing, this is the automated platform that we have in Salt Lake City, combining high-throughput experimental automation with advanced machine learning. It's a fully automated closed-loop system that integrates ADMET property predictions directly into that middle module that we have, which is our AI-enabled precision design. So it does a couple of things. Number one, we are generating proprietary data around ADMET, not just what's been published, but all of the successes and failures that we see as we are generating our own data. Failures are incredibly important to design better models. Second, the comprehensiveness of the ADMET properties over 50 or so is just a starting point, and that's only going to increase is important in order to ensure the algorithms are actually generalizable. And then the third, you've heard about models such as [ Mole GPS ], and there's new models that are coming up all the time. But these data feed directly into the model, which is actually iterating and helping our models to be retrained real time. So both examples of real-time iteration is critical for us to not just have a platform that's useful, but a platform that stays ahead of the curve and learns from both our successes and our mistakes. So with that, I want to walk to the next part, which is how is the platform being leveraged to actually generate programs. And this actually slide came to my mind during the flight post popular demand from analyst questions and investor questions. Here's what you have. I'll just walk you through it. On rows, the 3 design components that I just mentioned, the biology, the chemistry and the clinical development that you saw on the last slide, everything from phenomics, transcriptomes, et cetera. And as I do the build for the columns, these are the various iterations generations of our platform. So just to give you a clear view on which programs using what component of our platform. So it's important to note, as you'll see, the earliest programs built on our first-generation platform, which I will call V0.1, and we've shared that before, the programs that are now in the clinic, tangible proof that we are generating programs and also learning fast, the flywheel with every turn of the crank, we're learning really, really fast as to how to improve on what we're doing well and what we need to do better. So the first one here, MEK1/2, more data coming in December. I'll share a little bit more of our plan there. This is a proof point around how are we leveraging genomics, an unbiased approach to drug discovery in order to really ascertain which compound, which mechanism, which we do not know going in, could actually help attenuate the hallmark of the disease, which is polyps, hundreds to thousands of polyps. More to come on that in a second. Now often, I get the question that if this is part of platform 0.1 is that it? The story never ends there. As you will see with ClinTech, if you go to the third row, we are actually leveraging recruitment solutions as well as patient selection and stratification. So even programs that are in the early part of the platform, we're leveraging some of our recent components in CinTech to add more value creation. The second iteration of our platform, I’ll call this is V1.0, we're beginning to combine genomics and biology as well as chemistry design as well. So examples such as RBM39, CDK7, et cetera, and of course, components of the CinTech platform. And then one more click. These are programs in discovery, which I hope to be able to -- we hope to be able to talk about soon that, as you can see, is incorporating all of the various components of the platform from discovery, biology, novel insights, chemistry and CinTech and not just for our wholly owned programs, but also for our partner programs. So more to come on that. So where are we making progress? You've seen this slide before. I'd like to update it every time that we meet. So first of all, CDK7 combination cohorts have been initiated. I'll speak a little bit more in a moment in terms of some of the analysis and some of the data that we have from the monotherapy dose escalation. PI3K 1047R, the development candidate has been nominated, which was again one of our milestones for this year. And MEK1/2, we'll have a webinar in December in order to share some of the additional data from our 4 milligram cohort. As you also heard from Chris, the $30 million option milestone received for the microglia map. This is in addition to the 6 Phenomaps and also some of the programs that we're generating and great traction across the other programs and partnerships, including Sanofi. I just want to pause and take a moment to say both of our internal and our partner programs are critical, critical to us delivering tangible proof as well as also learning fast to keep evolving our platform. All right. So I'll take a moment to go through CDK7. So just a quick context, we've talked about this before. CDK7, really important master regulator, transcriptional kinase that has generated significant interest in oncology for some time, but has been plagued with historical challenges. And the main -- one of the main reasons for those challenges is the narrow therapeutic window and just the molecular properties that limited tolerability and efficacy. So what are we doing leveraging our platform that's different? Number one, leveraging our platform, we set out to design a molecule that directly addresses one of these core limitations around therapeutic index, which is optimizing permeability and [ eflux ] so that we reduce the GI-related toxin variability that others have seen before. That's number one. Number two, we are also leveraging preclinical data as well as multimodal real-world data, causal AI, all of those components of our platform in order to hone in on patients that might most benefit, how do we steer a product into the right patients, patient stratification. That's another area of differentiation that we're focused on. And of course, from preclinical models, we've seen tumor regression in both ovarian and breast cancer. We also shared some early data last year, early clinical data from last year that showed manageable safety profile as well as some partial response as well. What is our next focus? So in terms of our next focus, next slide. We have completed our Phase 1 dose escalation. So MTD has been achieved in advanced solid tumors. I'll get to that in a second. In addition to that, concurrently, the team is also looking into alternate dosing schedule just to figure out ways to even further optimize the therapeutic index, especially for long-term dosing. The other areas of near-term focus for us, which is already well underway, is a Phase 2 dose expansion in the cohort that we had mentioned, the platinum-resistant ovarian cancer as well as combination, which is going to be key in this space with a couple of combination standard of care that you can see on the slide. Recruitment ongoing across all of these cohorts. The other thing that's important to note is a lot of the trial design is focused on rapid and efficient go/no-go. And we'll share more in terms of the Phase 1 dose escalation data at a medical congress next year. And then in addition to that, we should have some of the ovarian combination data in 2027, safety, PK/PD, maybe early signs of efficacy, more to come in next year as we see the recruitment shaping up in terms of details on when in 2027. So stay tuned. All right. So let's go into the monotherapy dose escalation. So a couple of things to note. As of September 29, which is the cutoff date, we have 29 heavily pretreated patients with advanced solid tumors that have received 617 across 6 dose levels. Just as context, these patients represent a rather challenging population, most with multiple prior lines of therapy and limited standard options. We have now established a 10-milligram once-daily MTD, maximum tolerated dose with a manageable safety profile, we'll talk about in a second and also preliminary antitumor activity that's consistent with what we shared in the 2024 update. The most common dose-limiting toxicities were nausea, which is to be expected and some thrombocytopenia, which are both on-target effects for this target class. If you go into safety. Look, the safety data is consistent with what we saw last year. First of all, we have about 30% of patients that experienced Grade 3 treatment-related adverse events, and the majority were low grade 1 or 2. There were no grade 4 or 5 treatment-related events and only 2 patients, about 7% discontinued due to an AE. One thing I want to note here, and again, this is early, we're learning more, of course, the GI-related toxicities that we have seen, diarrhea, nausea, vomiting were relatively manageable and in line with class expectations. And to just put that in context a little bit more. Okay. To put that in context a little bit more, in terms of diarrhea, we saw about 69%, nausea 41%, vomiting 28%. Of course, looking at some of our peers also in the space, the numbers for diarrhea are about 82%, 77% for nausea and vomiting for 80%. So it's trending in the right direction, but of course, much more work to be done, but trending to be slightly lower than what we have seen in other prior published data. All right. In terms of efficacy, first of all, on the left-hand side, this highlights the PK profile. highly selective inhibitor potent and also flexibility in terms of how we can dose it given the short half-life -- the relatively short half-life of around 5 hours. One thing that's important to note, so going back to the established MTD, which is 10-milligram once daily dose, the exposures exceed, as you can see, the CDK7 IC80 while remaining below CDK2 IC80, supporting the selective inhibition that we wanted to see. In preclinical models -- what does that mean? In preclinical models, 10-milligram equivalent QD showed robust tumor regressions with about 2 to 4 hours to target coverage. And the early PD data that we have indicates that this is about 80% to 90% of transient [ POLR 2A ] engagement, which is one of the key PD markers that we are tracking in this space, again, consistent with that hypothesis. So from all of the data that we've seen so far, 10-milligram QD is pharmacologically active dose. In addition to that, we're also looking into alternate intermittent schedules such as second day on off to further maximize the dose intensity while maintaining tolerability for long-term dosing. On the right-hand side, you're also seeing some of the early clinical translation. Look at 10 milligram is where we see stable dose and also the patient that had the PR. Of course, in this patient cohort, monotherapy is not an area that we were expecting outcomes and which is consistent with what we've seen with other CDK inhibitors, which is why our combination is going to be incredibly important. So stay tuned, more to come on that. And last thing, speaking about the combination, I've shared this -- we've shared this data before, but ovarian cancer is the current area of focus, which is different from where others have gone, which has been much more primarily in breast cancer or a broad basket of solid tumors. pulling together everything that we have seen in cell lines on the left, in terms of ovarian cancer models, the sensitivity to CDK inhibition, combining that with what we have seen in vivo at 10-milligram dose, we saw complete tumor regression by day 27 as well as on the right, leveraging our patient level data from over 30,000 ovarian cancer samples, integrating DNA, RNA and clinical outcomes to really showcase that CDK7 is a likely driver of poor survival and some of the work we've done with our causal and friends and AI works. So -- but again, the proof is always in the pudding. So much more to be done and expect more on the full data set I just mentioned for the monotherapy dose escalation next year at a medical congress as well as combination data in 2027. We'll give you narrow guidance or more specific guidance as we get full flow into our recruitment. All right. And just wanted to heads up on REC-4881, which is our other program that has an important readout coming out next month. So just as context, high unmet need, 50,000 patients diagnosed across U.S., EU5, rare inherited disorder, APC loss of function. And standard of care is quite challenging. Surgery is a standard of care, [ colectomies ], et cetera, and no approved therapies to date. We also have orphan drug designation for this compound. Just a recap of some of the earlier data that we've seen in May that was shared in DDW, 43% median reduction in total poly burden, that is the hallmark standard of care today, off-label use of celecoxib is usually 20% or so or 25%. But again, there is a range from 30% to almost to actually 83% in the small cohort that we had seen in May. We've seen about 6 patients. We expect that to be double or close to double by the end of this year. And what we're looking for, again, as I mentioned before, is to see if these trends will hold and a significant benefit over the 20% that has been seen so far. In terms of what we're seeing from a treatment-related AEs, 19% grade 3, majority is rash and the prophylactic approach has really made it much more manageable and cardiac tox more grade 2 so far. So again, December, we'll share more information in the coming weeks, exactly when in December. We'll have the Phase 1b/2 update. This is going to be an important update, as I mentioned, and then we'll also discuss some of the next steps for the program. If the trends hold, one of the core next steps will be to actually have discussions with regulators on a pivotal study. And I just want to say this is one of those, as I like to call green shoots in terms of leveraging our platform to see color burden reduction, both in vivo and then also starting to see in patients. But again, small data set, more to come. We're looking forward to the data cut in December. With that, I'm going to hand it over to Ben for our financial update. Ben Taylor: Terrific. Thank you, Najat. Another thing that we are very excited about is going into that FAP data as well as the milestones in 2026 in a really strong financial position. So over the course of the year, you've seen us do a number of things. In May, we laid out a strategic plan that allowed us not only to hit on multiple high-value milestones, but also reduce our expense base by 35% from 2024. This was a really important step in us trying to put that discipline in place that Najat was talking about earlier. And then you started to see us hit those milestones. We've brought in almost $40 million from our partnership inflows over the course of this year so far, and we expect more of that to come in the future. So with today, our announcement of having $785 million of cash in the bank as of October 9 is a really strong step in creating that foundation so we can look forward into the future milestones and say, we don't have that financing need to be able to achieve our near-term milestones and really deliver a lot of value to shareholders. And so when we look forward we've looked at how we can bring that financing together in a way that was going to minimize our dilution to all of the shareholders as well as really continue to allow us to focus on the business and move it forward. We are also reaffirming our guidance for 2025 on an expense base of less than $450 million. That's excluding all of the partnership inflows. In 2026, we're also reaffirming less than $390 million over that time period. One note on that 35% expense reduction, that actually equates to over $200 million in expenses coming off of that 2024 base. And we've done that by really focusing in on what is going to be the aspects of the business that deliver the highest value and efficiently bringing that together. We will continue to look at our expense base. We are completed with all of the restructuring that was associated with the transaction, but we will continue to look at our operations and think about how can we do this better? How can we do this more efficiently? How can we get more out of every dollar that we spend and really focus in on the high-value partnerships -- or high-value projects. From a partnership perspective, the $30 million in milestone from microglia that we achieved with Roche and Genentech was not included in the $785 million in cash. Importantly, we do not give guidance on revenue, but I know a lot of the services track it. So we just want to be really clear. First of all, we don't consider the lumpiness in our revenue to be any indication of our business. But what we do know is the timing of our milestones can impact how we recognize some of that revenue. For example, last year, we had a milestone associated with the neuronal map. And so we had a larger piece of revenue that was recognized in that quarter last year, in the third quarter of last year. The Roche microglia milestone is going to be recognized partially in the fourth quarter, and it is important that's partial, not full. And so you would see some of that lumpiness come into our fourth quarter numbers there as well. Really importantly, the nearly $40 million that we've recognized this year from our partnership inflows actually brings us over $500 million in partnership inflows over the course of the company. That shows just what an important piece of nondilutive capital that part of the business and platform has become to the overall company. We are also maintaining our guidance of over $100 million in partnership inflows by year-end 2026 that we laid out in May of this year. So we're making great progress along that and expect to continue to see a lot of that come through in the next year as well. And with that, I will turn it back over to Najat to talk about some of the upcoming milestones. Najat Khan: Great. Thank you so much, Ben. And we wanted to just capture both looking at this year as well as what's coming up next year. For this year, one big thing that as I look at the slide, which is missing is really the successful integration of the 2 companies coming together. It's been an incredible amount of work. And also the financial discipline that we've gone through internally to really extend our runway so that we can see through a lot of these catalysts. So look, on the internal pipeline highlights, CDK7, I just mentioned the monotherapy update and the combo that's initiated. REC-4881, the Phase 2 initial update, potential first POC for our platform, [ MALS-1 ] monotherapy initiation and the PI3KDC nomination. I will also talk a little bit about our platform and then go to our partnership. On the platform front, a ton of work, like 3 words on a slide, integrated design platform, but actually, I should say integrated our end-to-end platform, the amount of migration work, I have seen this across other companies before with the speed with which that was done and the utility, the fact that we had no slowdown in our productivity of our platform speaks to our fantastic engineering data science teams that exist. And then also the work with MIT and NVIDIA on both 2, but much more that's going on in-house, which I would be a pleasure to share next time, especially with our Frontier team, which is our 0 to 1 cutting-edge AI team, really, really proud of the work that they're doing, Valence and Inception Labs. And then ClinTech, this has been a core focus for us in the last several months to really build out the tech stack end-to-end also into clinical development, crucial pillar as we execute on these programs. And on the partnership highlight, Chris and Ben mentioned, of course, the Roche $30 million from microglia, but the real work that we're doubling down on is both of the maps in neuroscience and the additional maps in GI onc and really turning and Chris showed this really beautifully in his slides, turning those into insights with a deep functional validation with our partners to then become programs. That is the core focus for us translating that value. And of course, progress with Sanofi, 4 out of 4 milestones so far in immunology and oncology and much more work ongoing. We're so honored to be able to work with our partners, Roche and Genentech, Sanofi, Merck KGaA and Bayer. We learned so much from each and every one of them. So thank you for the partnership. And then looking ahead, stay tuned for the REC-4881. We'll share more data in terms of our Phase 2 in December. In addition to that, for next year, RBM39, this is our first-in-class compound from the phenomics platform. It's also leveraging, of course, a lot of our clin tech approaches today. We should have some early safety and PK data from our monotherapy trial. And then in addition to that, ENPP1i, PI3K, both in GLP tox right now and pending that data, Phase 1 initiation, the team is all set up, pending what the data looks like. And from a partnership perspective, as I mentioned, deep focus on turning Maps into insights into programs. That's a huge focus for us in addition to some of the programs that we're already working on and additional Maps as well. So lots to do. There's never a dull moment at Recursion. I assure you, loving the pace, and we'll keep you all posted. With that, thank you so much. I'm going to hand it back to Chris for our Q&A. Christopher Gibson: Thanks, Najat. All right. Let's go. We've got Sean from Morgan Stanley. Ben, this one goes to you. Can you review expectations for cash burn through 2026 and how this works with runway expectations through '27 without additional financing? I know you just hit that, but maybe break it down for everybody. And then also, do you plan to use any additional ATM financing? Ben Taylor: Yes, of course. So I think there's a couple of things that we looked at over the course of the quarter. So one, the most important thing for a growth company is delivering on high-value milestones. And so our role as a management team is to make sure that we have the resources to be able to hit those milestones. So we looked at all of the things that we've talked about before. So how do we do the right expense control, how do we prioritize the right programs? And then how do we make sure that we've got the right cash balance in place to be able to reach those milestones and really focus on them. So what we decided to do was fully utilize the ATM over the course of the quarter, the remaining balance on the ATM. So that is now closed. We have not opened up a new ATM. And what that allows us to do is really go in and put in a cash balance that without any additional financing allows us to get to the year-end 2027 and achieve those milestones that Najat was just talking about as well as many others. Just because I know the financing has been a critical question for a lot of shareholders. We really looked at 2 different aspects for that ATM utilization. One was if we look at the biotech financing market, there's a couple of things that we saw very clearly. One, there is increasing volatility. There are fewer open windows. There's a much shorter period of hold that we've seen from a lot of the investor base. And also the discounts have been increasing as well. And so we looked at the ATM as a very attractive cost of capital that would put us in a position to be able to execute on the plan going forward. The other part was just there was so much focus that was becoming a part of the financing and the cash balance. It was actually starting to overshadow some aspects of the story. And so with such important data like FAP and some of the other milestones that are upcoming, we wanted people to really be able to focus in on the fundamentals of those events rather than needing to worry about are those events just going to lead to another financing or other aspects like that. And so we hope that this allows investors to focus. It also gives us a lot of ability to really focus on delivering those milestones over the coming months. Christopher Gibson: Thanks, Ben. So financing overhang has been struck. Alec from B of A, one question on platform utilization. It looks like older programs use parts of Recursion's capabilities in their development with Platform 2.0 assets, leveraging the full stack. Najat, this one is coming to you. How do you see this feeding into the quality or uniqueness of the newer assets? And anything to be read into for the current pipeline like 481, where it only benefited from phenomics in the version 0.1 of the platform. Najat Khan: Yes. No, thank you, Alec. And by the way, you were one of the voices that inspired us to create that slide. So thank you for always sharing your feedback. So look, 4881 phenomics, our platform today, even if we're making it multimodal, still leverages genomics a lot, right? And we are very, very excited in terms of some of the data we've seen to date and more to come later this year. But in terms of -- with every crank, like some of the clinical stage programs that we have come from the earlier stages of the platform in discovery, later stages of our platform. I think that's just the true iterative nature of drug discovery and development. And the improvement of our compounds doesn't just stop in discovery. It's also in development. So you see some of the innovative approaches that we're also taking in development for FAP, CDK7, et cetera. So we look at it more holistically. But look, with every crank, the platform gets better, and that's just what it is for us, and we're learning fast, and we want to execute and iterate as quickly as possible to get them into the clinic as well. Christopher Gibson: Thanks, Najat. I'm going to bring this next one over to you as well. From Gil at Needham, Sean at MS and Manny from Leerink on the partnership side. Is Recursion looking to maintain current biopharma partnerships or expand to new partnerships in the near to midterm? And what are some of the milestones that we should be focused on? Najat Khan: Great question. Our partnerships that we have are deep, highly collaborative and transformational. We are very, very excited about the partnerships that we have. And I mentioned some of the milestones that are critical for us maps to programs, for instance, in our Roche Genentech partnerships. And for Sanofi, we're really making progress on the various programs that we have in immunology and oncology. We are always having discussions in terms of potential new partnerships. We are being incredibly choiceful. So that is an area that we'll always be open to, but areas we can drive incredible value as well as our partner. It has to be a win-win. So the answer is yes, the door is always open, but we also -- we tend to curate a set of partners that we can really show tangible value with. Christopher Gibson: Thanks, Najat. Next one I'm going to take. This is from Guy and Alec. Would be interested to hear your thoughts on the evolving AI drug development landscape, especially with companies like Lilly throwing their hat in the ring and also partnering with NVIDIA. So look, I think this is extraordinarily exciting. This is a sign that when we said a couple of years ago, we look like what the future of biopharma will look like that we were right. companies are starting to embrace massively scaled compute. They're starting to embrace AI. And so this tech bio sector is really, I think, just a harbinger of what the future of biopharma will become. And so this is super exciting to me. I'm so glad that Lilly is making this visionary investment. I'm so glad to see them partnered with NVIDIA. And I look forward to working alongside many companies in the future that come to the space. We want to move the entire field forward ultimately to bring medicines to patients. So really, really excited by that advance. And then final question, I think, fittingly, over to Najat from Dennis at Jefferies. Congrats on the new role, I mean, effective January 1, we've still got a few weeks. Curious what philosophy you're bringing into the seat as CEO and if there are any near or medium-term priorities that are top of mind. Najat Khan: Thank you, Dennis. Look, my priority is going to be the core priority is going to be how do we translate the data, the compute, our amazing people, our platform, to tangible proof points that matter, whether it's our own pipeline, whether it's with our partners, that is the core element that matters the most. As Chris was saying, look, I've been in big pharma before. Now I'm in tech, bio, biotech, AI inspired, whatever term you want to use. At the end of the day, it's about making differentiated programs and then eventually medicines for patients that matter. That is the core focus for me. It starts with that, it ends with that. We have -- this is a tough journey, 90% failure rate. I am aware, clear eyed of how tough it is across industry. And we're doing something in a way that's never been done before. That's going to be my core focus. The second is going to be really investing where we have a unique ability to win. That's our platform, that's our programs. We're going to make data-driven, and you've seen me do that before, go/no-go decision on our programs. That's why when you say all of the programs we're doing concurrent targeted, efficient approaches so that we can get to a rapid go no-go because unlike a lot of other companies, there are multiple other programs that we're bringing from discovery into the clinic. We need to be choiceful in terms of where we go. And then the third is discipline and execution and good capital stewardship. You heard Ben talk through, we are grateful for the capital that we have. And my intent is to use every single dollar for what will truly create value for our shareholders and our patients. So those are some of my areas of focus. I'm sure I'll think more on it over the holidays. And with Chris' counsel, I am so excited to continue partnering with Chris. It's been such a great journey and so much more to come together. Christopher Gibson: Thanks, Najat. It's been an amazing first 12 years, and I'm looking forward to the next 12. Thank you, everybody, for joining us. I hope you have a great day.
Operator: Good day, everyone, and welcome to the Hudson Technologies Third Quarter 2025 Earnings Call. [Operator Instructions] It is now my pleasure to hand the floor over to your host, Jennifer Belodeau. Ma'am, the floor is yours. Jennifer Belodeau: Thank you. Good evening, and welcome to our conference call to discuss Hudson Technologies financial results for the third quarter of 2025. On the call today are Vincent Abbatecola, Hudson's Lead Independent Director; Brian Bertaux, CFO and Interim CEO; and Kate Houghton, Hudson's Senior Vice President of Sales and Marketing. I'll now take a moment to read the safe harbor statement. During the course of this conference call, we will make certain forward-looking statements. All statements that address expectations, opinions or predictions about the future are forward-looking statements. Although they reflect our current expectations and are based on our best view of the industry and of our businesses as we see them today, they are not guarantees of future performance. Please understand that these statements involve a number of risks and assumptions, and since those elements can change and in certain cases, are not within our control, we would ask that you consider and interpret them in that light. We urge you to review Hudson's most recent Form 10-K and other subsequent SEC filings for a discussion of the principal risks and uncertainties that affect our business and our performance and of the factors that could cause our actual results to differ materially. With that, we will now turn the call over to Vincent Abbatecola from our Board of Directors. Please go ahead, Vincent. Vincent Abbatecola: Thank you, Jennifer. Good evening all, and thank you for joining us. Earlier this week, we announced that Brian Coleman has stepped down as Chairman and Chief Executive Officer of Hudson Technologies. Brian had a long and successful tenure with Hudson. And on behalf of the Board, we thank him for his dedication and contributions to our company. He was particularly instrumental during the difficult time after the passing of our founder, Kevin Zugibe. Brian's leadership and financial acumen allowed Hudson to further strengthen its competitive positioning while also transforming our balance sheet. We sincerely wish Brian Coleman every success in the future. Our company is now centered on advancing our growth strategy to focus on both organic and inorganic opportunities to build upon our strong foundation, a strategy which we believe requires alternative CEO skill sets. Our Board is in the final stage of our search to select a Chief Executive Officer candidate who will lead Hudson in the next phase of its growth, and we expect to announce an appointment in the near term. I'll now turn this call over to Brian Bertaux, Hudson's Chief Financial Officer, who has assumed the CEO responsibilities during this interim period. The Board very much thanks Brian for filling that role. Please go ahead, Brian. Brian Bertaux: Thank you, Vincent, and good evening, everybody. I am humbled to serve as Interim CFO for Hudson Technologies during this transition. I effectively served in a similar role at another point in my career, and I'm fortunate we have a great leadership team and passionate employees at Hudson. Together, we will continue to drive the company forward and increasing shareholder value. We are very pleased with our strong third quarter results to close out our 9-month refrigerant selling season. Key third quarter highlights include 20% revenue growth, 32% gross margin and a 59% increase in net income of $12.4 million. Our third quarter revenue growth was driven by both increased sales volume and a higher average sales price of refrigerants. Additionally, we continue to expand our strategic supply chain of aftermarket refrigerants through outreach and awareness campaigns to encourage the return of used refrigerant by contractors to service cooling systems. We will provide a full overview of our annual growth in refrigerant reclamation during our next call when we report full year 2025 results. HFCs were approximately $8 per pound in the third quarter. When we discuss pricing, we generally focus on 410A, which represents about 70% of the total aftermarket demand for HFCs. Also, I'm extremely pleased to note that we were recently awarded the renewal of the contract to support the U.S. Military as prime contractor with the U.S. Defense Logistics Agency, the DLA. We are energized to have won the Indefinite Delivery and Quantity contract, which is valued at $210 million for the first 5-year base period and includes a 5-year renewal option. Hudson has served as prime contractor to the DLA since 2016, and we believe their selection demonstrates the strength of our partnership and our success in reliably providing critical materials to the nation's many military installations and facilities. There was tremendous effort by our team to win this competitive bid, and I, on behalf of the entire company, want to thank them for their strong execution and track record servicing the contract over the last 9 years. We look forward to continue our relationship as a valued partner to the U.S. military in the supply of refrigerants, industrial gases and equipment. Now we want to turn to 2024 HFC market data as recently reported by the EPA. 2024 refrigerant reclamation activity for the industry grew by 19%. Hudson's reclamation grew at about the same rate. HFC inventory levels declined 18% in 2024. We expected a steeper decline in inventory as 2024 HFC production was curtailed 30% from 2023 levels through the AIM Act. So consistent with 2023, the 2024 update indicates the supply in the channel remains plentiful related to demand. Over time, 410A refrigerant market dominance will be taken over by lower GWP new generation refrigerants. As with other refrigerant phaseouts, 410A demand will continue for another 20-plus years as 410A units remain in service through their useful lives. Therefore, our concern remains that an ideal supply and demand balance in the HSC refrigerant landscape may not occur until 2029, which is when the next production curtailment will occur. Now I'll turn the call over to Kate Houghton, Senior Vice President of Sales and Marketing, to provide some additional detail around Hudson's market opportunity. Kate? Kathleen Houghton: Thank you, Brian, and good evening, everyone. We saw increased sales volume in the third quarter as temperatures warmed up across the country and cooling systems were activated in earnest. With systems turned on and in regular use, service appointments typically tick up as operating issues are identified. Our sales activity in the third quarter largely mitigated what had been a late start to our 9-month season. We executed strongly during this year's selling season, ensuring that our customers had the refrigerants they needed when and where they needed them. And we continue to make excellent progress promoting recovery and reclamation activities to the field technicians who are integral in the recovery and return process. Without field technicians recovering refrigerant from a unit, reclamation does not occur, and our continued outreach to influence technician participation is reflected in the positive growth of our reclaim numbers. The fourth quarter is historically our slowest quarter as a large portion of our customers transition from cooling applications to heating. The 2024 EPA data released in September largely aligned with our expectations and visibility of the market. While we believe the time frame to supply-demand imbalance has lengthened slightly, we remain confident that the current phase down of HFC Refrigerants represents a significant long-term growth opportunity for Hudson. Additionally, the EPA has certain proposals currently under review that would potentially make changes to the technology transition rule of the AIM Act. In a recent proposal, the EPA seeks to extend compliance dates for certain equipment transitions for applications in supermarket systems and industrial process refrigeration, amongst others. The proposal includes extending the compliant dates for the move to lower GWP equipment solutions as far out as to 2032. In addition, the EPA recognizes that there may be the possibility of stranding equipment that had been manufactured prior to January 1, 2025 and is allowing for the sell-through of that manufactured equipment to continue beyond December 31, 2025. The proposed rule should not materially impact Hudson and may provide a slight advantage for our business. It's also important to note that while technology transition time frame is under review, the core elements of the AIM Act, including the allowance system and refrigerant management rule, which mandates phasedown of HFCs remain in place. We are closely monitoring all developments and are in direct and frequent contact with the EPA as well as members of Congress. Federal regulations aside, Hudson is well positioned to capitalize on state-by-state initiatives around the use of lower GWP refrigerants and equipment. Several states have already instituted requirements for the use of reclaim refrigerant in their municipal buildings and for higher GWP HFCs and we expect more to follow. We remain committed to increasing our position as a thought leader and vocal promoter of responsible refrigerant management. And in early September, we sponsored a panel discussion as part of Climate Week NYC entitled Reclaiming the Future Together, Power on the Growth of Refrigerant Reclamation. During this event, we brought together a distinguished group of industry experts, including representatives from HARDI, the District of Columbia Sustainable Energy Utility, from Lennox International and from Rocky Mountain Institute to discuss the economic benefits and the environmental importance of refrigerant reclamation. At this event, we discussed the first of its kind DC SEU refrigerant recovery pilot, which focuses on greenhouse gas emission reduction. We remain committed to developing partnerships such as with the DC SEU to reach all corners of the refrigerant recovery market. In addition to events like Climate Week, we remain active working with refrigeration technicians and contractors to encourage the recovery and return of refrigerants during the processing of servicing a cooling system rather than the practice of venting refrigerant. With the increase in 2024 reclamation activity in the industry as tracked by the EPA as well as the consistent growth we've seen in our company's reclamation business, we believe our efforts are driving meaningful progress. Our extensive long-standing customer network, proprietary technology and national footprint position us well as a source for newly manufactured refrigerants as new lower GWP products are introduced and also as a resource for recovery and reclamation activity. We believe our strength in all aspects of refrigerant supply as well as recovery, reclamation and sophisticated field service is a competitive advantage as we look to expand existing customer relationships and win new customers while also ensuring a smooth transition during the ongoing and future refrigerant phase down. Now I'll turn the call back to Brian to review our third quarter financial results. Go ahead, Brian. Brian Bertaux: Thank you, Kate. I'll now review our third quarter 2025 financial results in a little more detail with a comparison to the 2024 quarter. Hudson recorded $74 million in revenue, an increase of 20%. Revenue growth in the quarter was driven by increased sales volume, coupled with an increase in our average sales price. We posted 32% gross margin, reflecting a 630 basis point increase in 2024 with the improvement related to favorable trends in refrigerant market pricing. Gross profit at $23.7 million improved significantly as compared to $15.9 million in the 2024 quarter. We recorded $8.9 million in SG&A expenses compared to $8.1 million last year. The increase is related to staffing additions. With that, operating income essentially doubled to $14 million. We recognized $1.6 million and $2.3 million of favorable other income in the 2025 and 2024 quarters, respectively. The 2025 other income related to a potential earn-out from last year's acquisition of USA Refrigerant that did not materialize. The 2024 other income was primarily related to a favorable legal settlement. Hudson recorded net income of $12.4 million or $0.27 per share compared to net income of $7.8 million or $0.17 per share last year. Our third quarter revenue performance essentially offset what was a late start to this year's selling season. With that, we finished the 9 months of 2025 with nearly the same revenue as 2024. The company strengthened its unlevered balance sheet, ending the quarter with $90 million in cash. Our capital allocation strategy remains focused on organic and strategic growth as well as opportunistic share repurchases. We repurchased $1.3 million of stock in the third quarter, bringing our total purchases to $5.8 million thus far in 2025. We are pleased to have delivered improved third quarter gross margin. However, as many of you know, our fourth quarter is our seasonally slowest quarter as the majority of our aftermarket customers transition from cooling to heating applications. With that in mind, we are maintaining our expectation of slightly above mid-20% gross margin for full year 2025. In closing, we have built our business and long-standing customer base around our capabilities of getting the right refrigerant, to the right place, at the right time. As our industry continues to move through the lower GWP refrigerant phase downs, we are all well positioned to meet demand for current and next-generation refrigerants, leveraging our industry experience, proprietary technology and proven distribution network to ensure reliable customer service and satisfaction. Operator, we'll now open the call to questions. Operator: [Operator Instructions] Your first question is coming from Gerry Sweeney from ROTH Capital. Gerard Sweeney: This one may be for Vincent. I apologize. I think I got Vincent right. And when you said you're in the final stages of looking for a new CEO, and I think you also mentioned alternative skills. Just curious if you could give us a little bit more details on what alternative skill sets may mean? I'm assuming this is at least someone with some more acquisition experience, but I'm also curious if this infers maybe a different sales strategy or different reclaim strategy as well? Eric Prouty: Jerry, this is Eric. I'll take that question. Really, what we're looking for, and I think you're hitting the nail on the head here is probably someone with a larger company background that both has experience with acquisitions, but also a lot of skills around organic growth of companies that have much larger lines than, say, just refrigerant reclamation and recycling that might have some insight into other complementary areas that we might be able to expand into like expanding our services offerings, et cetera. Gerard Sweeney: Got you. That's fair. I appreciate it. And then this maybe for Brian. We always do a series of channel checks and we have some pretty good ones, I believe. And our indications and talks with our contacts alluded to, maybe HFC pricing seeing a bump because of issues with the HFO rollout, availability of gas, canisters, et cetera, and some of the pricing that we saw -- pricing increases that we saw this summer may be transitory. Our checks indicate that HFC prices are down around $6.50 per pound. Just curious as to what your thoughts are for next year with, we have a stockpile, maybe some of those HFO headwinds abate, where potentially pricing could be? Brian Bertaux: I would say your channel checks seem very accurate. And right now, we would expect that perhaps pricing for next year, just say, on the average for the whole year would be consistent with this year on the average for the whole year. But as we all know, that's just -- it's something that we would expect to happen. But in a volatile market, it's uncertain now. Gerard Sweeney: No, that's fair. And we don't have a crystal ball. So I just want to get your thoughts on that. So got it. And I'll jump back in queue. I may have a question or 2 more, but I don't want to get much of your time. Operator: Your next question is coming from Ryan Sigdahl from Craig-Hallum. Ryan Sigdahl: On the EPA data, similar thoughts as you guys kind of implies slightly lower demand, slightly higher supply. You mentioned potentially not being at an imbalance until 2029 or after. Curious how much that changes potentially the strategy from a core organic Hudson standpoint over the next couple of years and also maybe an M&A standpoint and if that had anything to do with kind of the timing for a change at CEO? Vincent Abbatecola: Ryan, I can take a crack at that. I think you're right. I mean we do see the same things in the market that other people see. I think beyond just us guessing where gas prices are, I think we know as a company, we need to reduce our overall exposure to the ups and downs of the gas market. And we're likely to do that through both organic expansions, but also likely through M&A and acquiring complementary lines that aren't necessarily completely tied to refrigerant gas prices. Ryan Sigdahl: Yes. DLA, congrats on the competitive renewal there. Any change from an assumption standpoint? I get kind of the upper bounds, but it had been running at the $30 million to $35 million of revenue. Is that still the right assumption? And then anything different with this contract? And then kind of last part of this would be government shutdown. Any impact there, I guess, in the near term? Brian Bertaux: Yes. So we are very pleased to have won that. I would tell you that over time, you'd expect it to be consistent with where it has been. Yes, the government shutdown is having some near-term volatility. So we've seen a little bit of an impact of that in the fourth quarter. Hopefully, it's just timing. But overall, when we think about the contract, it's consistent with the current contract. Ryan Sigdahl: Last one for me. Any benefit from selling A2Ls, both either from a volume revenue, but even more so kind of in the pricing commentary? Kathleen Houghton: Yes. So this year saw the rollout of both R-32 and R-454B, and we were well positioned there. We had a good supply chain even through the shortages of the crisis, and we had a lot of activity there. We were able to service our core customers, take care of them and also see that follow through with some of our other HFCs. So we were pleased how we navigated that this year, and we're very well set up for going into 2026 relative to A2Ls. Ryan Sigdahl: And maybe just a follow-up on that. Do you expect the A2Ls to be kind of a core part of the go-forward business? Or was it more of a stop gap given supply chain challenges for others? Kathleen Houghton: So certainly, as you look forward, A2L systems will start to become more of an impact for us and more of a larger part of our business. The HFCs, the 410As, the 134, that installation base is very dominant, and we'll continue to be in that space for a long time as those systems need repair and before they phase out. But you'll see that the A2L start to grow in terms of percentage and importance for us as we move forward. And certainly, again, we expect growth in that part of our business next year. Operator: Your next question is coming from Matthew Maus from B. Riley. Matthew Maus: This is Matthew, on for Josh. I guess just first on the 3Q beat, can you break down what drove that beat? Was it more volume or just better pricing or mix? And also, how did the USA refrigerants kind of track in 3Q? Brian Bertaux: It was more volume driven. So it was about 18% volume and a couple of points higher pricing. And USA refrigerants really had the same contribution as it's had throughout the year. So nothing notable with regards to USA refrigerant. But again, what we've really gained from USA refrigerant is having access to that aftermarket supply of refrigerants. So they're growing our base of lower-cost aftermarket refrigerants as compared to buying virgin refrigerants. Matthew Maus: Got it. And just another quick one for me. I guess when looking at the inventory, I thought it was -- you guys hit a normalized level in the past 2 quarters and then there was a sequential build in 3Q. I'm just wondering what the thought process was there or the reasoning? Brian Bertaux: That's just where -- we want to make sure that we're at a point to adequately serve the market next year. So I would say that last year's cash flow was very much significantly impacted by our inventory reduction. Now you're seeing in 2025, really a normalized working capital structure for us, but we're very pleased that we had $25 million of operating cash flow, and that's at a normalized working capital structure. So we're generating very strong cash flow just mostly through operating income. Operator: [Operator Instructions] Your next question is coming from Andrew Steinhardt from Canaccord. Andrew Steinhardt: Brian, Eric, Kate and the rest of the team, this is Andrew, on for Austin. Congrats on the solid quarter here. I'll jump right into my first question. You guys have almost $90 million in cash with no debt on the balance sheet and have made the interest in growing inorganically pretty clear. Would the intent be to acquire a business that can reduce the seasonal impact to revenues? And I guess, what kind of specific capabilities, markets or businesses in general do you think add the most value to the company with its current footprint? Kathleen Houghton: Yes. So that's a great question. We've talked about areas that we investigate M&A on previous calls. Certainly, large interest in service businesses and thinking about being closer aligned to those end user customers, whether that's aligned with our current field services and expansion of that complementary areas, maybe some areas that we haven't been in. But thinking about all of the things that go into HVAC cooling systems and adjacent spaces is where we're spending a lot of time and really looking at what's available and turning over some rocks to go into that. We have looked at other reclaimers, and so there are some other opportunities there potentially, but we really are focusing on that service area for our interest in acquisition. Andrew Steinhardt: Got it. That's helpful. And if I could just ask a follow-up kind of in a different direction here. volumes were pretty solid through the first 9 months of the year. Are there any plans to utilize a portion of the $90 million to add distribution centers based on current demand considering the satisfactory number of reclamation labs? Brian Bertaux: We're not going to speak to that in detail. But again, we are looking to optimize the $90 million strategic initiatives, acquisitions. So perhaps that may be on the list, but we're not going to go into any detail. Operator: That concludes our Q&A session. I'll now hand the conference back to Brian Bertaux for closing remarks. Please go ahead. Brian Bertaux: Thank you. Our company's success is a result of the collective efforts of our 250 employees with contributions from everybody in this building, in our facilities across the country and those out in the field. Our team has consistently proved that they will always vigorously pursue the best in themselves and their departments for the benefit of our customers, our partners and the company. We remain committed to growing our leadership position in the refrigerant and reclamation industry to drive improved financial results and increase shareholder value. On behalf of Kate, myself and the Board of Directors, we say thank you to all of our employees for your continued support and dedication to our business. And as always, we also thank both our long and short-term shareholders and those that recently joined us for their support. We look forward to speaking with you in March to discuss the fourth quarter and our full year 2025 results. Have a good night, everybody. Operator: Everyone, this concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.
Operator: Good day, ladies and gentlemen, and welcome to Red Violet's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Camilo Ramirez, Senior Vice President, Finance and Investor Relations. Please go ahead. Camilo Ramirez: Good afternoon, and welcome. Thank you for joining us today to discuss our third quarter 2025 financial results. With me today is Derek Dubner, our Chairman and Chief Executive Officer; and Daniel MacLachlan, our Chief Financial Officer. Our call today will begin with comments from Derek and Dan, followed by a question-and-answer session. I would like to remind you that this call is being webcast live and recorded. A replay of the event will be available following the call on our website. To access the webcast, please visit our Investors page on our website, www.redviolet.com. Before we begin, I would like to advise listeners that certain information discussed by management during this conference call are forward-looking statements covered under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those stated or implied by our forward-looking statements due to risks and uncertainties associated with the company's business. The company undertakes no obligation to update the information provided on this call. For a discussion of risks and uncertainties associated with Red Violet's business, I encourage you to review the company's filings with the Securities and Exchange Commission, including the most recent annual report on Form 10-K and subsequent 10-Qs. During the call, we may present certain non-GAAP financial information relating to adjusted gross profit, adjusted gross margin, adjusted EBITDA, adjusted EBITDA margin, adjusted net income, adjusted earnings per share and free cash flow. Reconciliations of these non-GAAP financial measures to their most directly comparable U.S. GAAP financial measure are provided in the earnings press release issued earlier today. In addition, certain supplemental metrics that are not necessarily derived from any underlying financial statement amounts may be discussed, and these metrics and their definitions can also be found in the earnings press release issued earlier today. With that, I am pleased to introduce Red Violet's Chairman and Chief Executive Officer, Derek Dubner. Derek Dubner: Good afternoon, and thank you for joining us today to discuss our third quarter financial results. We are pleased to report another record-breaking quarter, delivering new highs across all key financial metrics. This quarter's results reflect the exceptional effort and focus of our team and the continued confidence our customers place in Red Violet's platform and solutions. We continue to see strong uptake and expanding utilization of our products across a diverse set of industries. Our momentum remains broad-based and durable. The business continues to scale efficiently while delivering record financial results. We've built a virtuous cycle. Our innovation created the industry's leading cloud-native platform and solutions, which are driving record growth and financial performance, which, in turn, fuels continued investment, creating powerful competitive advantages. We continue to invest in areas that define our future, platform capabilities, product introductions and advancements, go-to-market expansion and the continued integration of AI across our operations. Now, let's briefly run through the numbers. Revenue for the quarter came in at a record $23.1 million, up 21%. Our adjusted gross profit was a record $19.4 million, resulting in a record adjusted gross margin of 84%. Adjusted EBITDA for the quarter was a record $9 million, resulting in a record margin of 39%. Adjusted net income for the quarter was a record $5.8 million, producing record adjusted earnings of $0.39 per diluted share. During the quarter, we generated a record $7.3 million in free cash flow. Once again, we added over 300 customers to IDI during the quarter, ending the third quarter at over 9,800 customers. Within FOREWARN, we added over 25,000 users and ended the quarter with over 590 realtor associations now contracted to use FOREWARN. The momentum we've observed throughout the year continued. Volumes across the platform were strong and steady throughout the third quarter. We have historically noted when onetime transactional revenue impacts our results. In this quarter, there were no meaningful onetime transactions. Performance reflects consistent core business activity. Our investigative vertical continues to be strong with our steady focus on law enforcement agency and investigative customers. Our emerging markets vertical was strong as well, driven by retail, legal, repossession, government and health care. In government, with recent wins, including a large state toll authority, state Departments of Revenue, Secretary of State offices and more, we are very encouraged by the path set by our Public Sector division. As well, momentum from collections and financial and corporate risk carried over. Given this traction and the fact that our strong performance is yielding robust cash generation, we have the flexibility to keep investing in our highest impact initiatives without compromising profitability. As we continue to advance opportunities across our enterprise pipeline, which is the strongest we've seen to date, investment in go-to-market capabilities is ongoing, expanding teams in various verticals. The bottom line is that we are firing on all cylinders and finally tuned where we sit today. Our Rule of 40 score notched an impressive 60%. Notwithstanding, we are not content. We are using AI to advance multiple initiatives that enhance the intelligence and efficiency of our platform, further distancing ourselves from the competition. Specifically, automation of internal workflows to reduce cycle times and scale productivity, expansion and enrichment of proprietary data assets, strengthening our competitive moat and application of advanced models to detect and interpret risk signals, improving the speed and precision of our insights. Each of these initiatives reinforces our broader strategy to make our solutions smarter, faster and more valuable with every iteration. Moreover, these endeavors will ultimately drive operational efficiency and translate to an even stronger margin profile in the future. While our larger competitors are burdened by legacy systems and bureaucratic decision-making, our strategic investments in modern platform technology allow us to better serve customers today while building structural advantages that will keep us at the forefront for years to come. Finally, we announced a $15 million increase to our share repurchase program. We had approximately $3.9 million remaining from our previous authorization. And given the healthy balance sheet growth, notwithstanding our continued investment in our business, we believe the share repurchase program is an important element of our broader capital allocation strategy. In the third quarter, we purchased 15,437 shares of common stock at an average price of $42.26. And to date, in totality under the program, we have purchased 553,921 shares at a weighted average price of $20. Now I'll turn it over to Dan to discuss the financials. Daniel MacLachlan: Thanks, Derek, and good afternoon, everyone. We are pleased to report another exceptional quarter, extending the strong momentum established in the first half of the year. We achieved new highs across all key financial metrics, underscoring the scalability, efficiency and durability of our business model. Our sales pipeline continues to expand with an increasing number of larger customer wins across our verticals. With this momentum and disciplined execution, we remain confident in our ability to deliver a strong finish to the year. Turning now to our third quarter results. For clarity, all the comparisons I will discuss today will be against the third quarter of 2024, unless noted otherwise. Total revenue was a record $23.1 million, up 21% over the prior year. We generated a record $19.4 million in adjusted gross profit, delivering a record adjusted gross margin of 84%, up 1 percentage point. Adjusted EBITDA came in at a record $9 million, an increase of 35% over the prior year, producing a record adjusted EBITDA margin of 39%, up 4 percentage points. Adjusted net income increased 75% to a record $5.8 million, resulting in record adjusted earnings of $0.39 per diluted share. Turning to the details of our P&L. As mentioned, revenue for the third quarter was $23.1 million, with balanced growth across verticals. Within IDI, we continue to see strong demand for our solutions and healthy customer expansion, adding 304 billable customers sequentially to end the quarter with 9,853 customers. Our investigative vertical continues to perform exceptionally well, reflecting sustained demand from both new and existing law enforcement agencies and investigative customers. Growth was driven by higher transaction volumes, new customer wins and deeper integration of our solutions into customer workflows. Our emerging markets vertical delivered another strong quarter with the retail, legal, repossession, government and health care industries, all contributing meaningful growth. Demand across these industries underscores the versatility of our platform and its ability to address a diverse range of use cases. Collections delivered another quarter of strong performance, marking its second consecutive period of high teens revenue growth. The steady recovery within collections continues to build momentum, and we believe we are well positioned to capture further growth as a trusted leader in this space. Our Financial and Corporate Risk vertical delivered strong growth this quarter, driven by solid performance across our core financial services customers and continued traction within the background screening industry. Over the past year, we have expanded our presence in this space through targeted product innovation and enhanced go-to-market execution, resulting in several significant new customer wins, including a recent contract with one of the largest payroll processors in the country. The return on these investments is increasing, further strengthening our position in the market and driving continued company-wide growth. Lastly, IDI's real estate vertical, which excludes FOREWARN, experienced a slight year-over-year decline as high home prices and interest rates continued to pressure affordability and weigh on housing activity. Turning now to FOREWARN, which continues to strengthen its position as the leading proactive safety tool for real estate professionals. Revenue grew at a solid double-digit percentage rate, driven by ongoing adoption and engagement across realtor associations. During the quarter, we added more than 25,000 users and now have over 590 associations contracted to use FOREWARN. Contractual revenue accounted for 75% of total revenue in the quarter, down 2 percentage points from the prior year. Gross revenue retention remained strong at 96%, improving by 2 percentage points over prior year. Moving back to the P&L. Our cost of revenue, exclusive of depreciation and amortization increased $0.3 million or 9% to $3.6 million. Adjusted gross profit increased 23% to a record $19.4 million, resulting in a record adjusted gross margin of 84%, up 1 percentage point from the prior year. Our sales and marketing expenses increased $0.6 million or 12% to $5.4 million for the quarter, driven primarily by higher personnel-related expenses. General and administrative expenses increased $0.8 million or 13% to $6.8 million, reflecting higher personnel-related costs. Depreciation and amortization increased $0.3 million or 11% to $2.7 million for the quarter. Net income increased $2.5 million or 145% to $4.2 million for the quarter. Adjusted net income increased $2.5 million or 75% to a record $5.8 million, resulting in record adjusted earnings of $0.39 per diluted share. Moving on to the balance sheet. Cash and cash equivalents were $45.4 million at September 30, 2025, compared to $36.5 million at December 31, 2024. Current assets totaled $58 million compared to $46.2 million at year-end, while current liabilities were $6.9 million, down from $10.3 million. We generated a record $10.2 million in cash from operating activities in the third quarter compared to $7.2 million in the same period last year. Free cash flow for the quarter was a record $7.3 million, a 51% increase from $4.8 million a year ago. We purchased 15,437 shares of company stock at an average price of $42.26 per share under our stock repurchase program during the third quarter. On November 3, 2025, the Board authorized a $15 million increase in the company's stock repurchase program. Currently, we have $18.9 million remaining under the repurchase program. In closing, our third quarter results reflect another period of consistent execution and profitable growth. We continue to extend our leadership across markets, deliver record performance and strengthen our foundation for long-term value creation. We remain confident in our ability to close out 2025 as another record year for Red Violet. With that, our operator will now open the line for Q&A. Operator: [Operator Instructions] Our first question comes from the line of Josh Nichols of B. Riley. Josh Nichols: Great to see another record quarter. A lot of good things to unpack with record EBITDA margins, bumping rate up against 40%. You're hiring, the share buyback clearly indicating that you have some really good confidence about the trajectory the business is on. You mentioned 2 big wins, the toll authority and then the large payroll processor. Maybe if you want to just give us a little bit more detail about some of the traction you're seeing in those larger public and enterprise sector customers and how you see that playing out over the coming months and throughout next year? Derek Dubner: Sure. Thanks, Josh. Derek here. Nice to talk to you. As you know, for the last 18 months or so, we've been investing in our public sector division and our background screening solutions. We've brought a number of new products to market and have built in some really differentiated capabilities in the platform to serve those markets. And we've also invested in our teams. We've surrounded a number of thought leaders with some very terrific individuals to go to market and penetrate those markets. And given that those are a little bit of a longer sales cycle, it's nice to see that in the last 6 months or so, we're really starting to see the green shoots. We did win one of the larger state toll authorities against very significant -- a very large competitor, and they clearly saw the differentiation in our products and our solutions in testing. And so we're very excited about that. As I mentioned, we're also winning at a number of Departments of Revenue and Secretaries of State for a number of very interesting use cases across the public sector. And these are wins that we can sort of model and duplicate across the country. So we're very excited about those opportunities. In payroll processing and in the background screening area, as we mentioned, we did enter into a multiyear contract with one of the largest payroll processors. And we're very excited about that opportunity, and we are also testing with others of the same size in both public sector and background screening. So yes, you can hear our confidence. We are very pleased with the results. We are, as I mentioned, firing on all cylinders and extremely excited about 2026, where those larger opportunities are there for us to win. Josh Nichols: And then just diving in on that, I mean, to win this large toll award, pretty significant here. And you made a point that you think this is replicable. Any kind of color that you could give us on like how many of these large toll authorities or payroll processing background screeners are and the opportunity to win those in terms of the addressable market? Daniel MacLachlan: Yes, Josh, this is Dan. Thanks for the question. So look, when we talk about public sector, and Derek gave some color about being able to potentially leverage that win and replicate it across the number of states, right? I mean, at this point, probably every state in the country has some kind of sized whole authority, whether that's more of a jurisdictional local size or across the whole state. So we think that market is substantial. And we've only just tapped the surface, obviously, announcing one of the larger wins, but there's at least 49 other states to kind of figure out and go after, which is great. When we talk about the background screening industry, that is just an enormous industry. We spent the last 18 to 24 months, as Derek talked about, really building out our product suite, our team, our go-to-market strategy and the opportunity pipeline that has developed over the last 12 months -- and the conversion of that pipeline to win in the last 6 months, including one of the largest payroll processors in the country, is just extremely exciting. As you can imagine, you could probably name off a handful of the large payroll processors, right? There's some really big players in the space. And then there's a broad range of what I would kind of consider kind of the medium range. So we're just getting started in both of those. And today, the revenue from those 2 areas has not been a meaningful contributor to our growth. And that's what makes us so excited going into 2026. As these start to develop, as the contracts come to fruition, the volumes take shape, we're extremely excited about what this will allow us to accomplish in 2026 with landing these and additional over the course of the near and medium term. Operator: Our next question comes from the line of Eric Martinuzzi of Lake Street Capital Markets, LLC. Eric Martinuzzi: Mike, congrats on the strong quarter as well. I wanted to dive into FOREWARN. The -- you had a nice expansion there in the number of realtor associations using FOREWARN. I think you've said in the past that there's roughly 1,100 realtor associations nationwide, and we're now at over 590 of them that are FOREWARN customers. Curious to know if you've had any renewals in that installed base? And then what's been sort of the ability to raise ARPU on that installed base? And if you have a plan to add additional features, functionality where that could be a potential on renewal for that installed base. Daniel MacLachlan: Yes, Eric, thanks. This is Dan, and I appreciate the question. Yes. One of the great things that we've seen in FOREWARN since we brought this to market, call it, 5 or 6 years ago is that the uptake within the associations and the continued renewals and usage and increase in usage in the user base has been amazing. And so yes, we've seen a number of renewals over the last 5 years. Most of the contracts are 1- to 2-year agreements. Some are a little bit longer than that. So we've been through a number of renewal cycles with great retention, obviously, across the board. And we do have some escalations within some of those agreements from year-to-year. But we've been really focused on going out and grabbing market share and haven't spent a tremendous amount of time looking at kind of optimizing the price point. We think we've done a good job. We've feel that we're priced very well in the market. But we do have the ability with renewals and continued expansion to increase prices as we move to newer associations and as we come up for renewals. Derek Dubner: And Eric, this is Derek. You're absolutely right that with an installed base of close to 400,000 users, it's an incredible asset. They are the type of users that interact very frequently. We've priced FOREWARN intentionally to be unlimited searches for the safety of the individual professionals so that they search each and every time they're contacted by a prospect to verify identity. And because of that, because of how much the real estate professional really has expressed to us, they love FOREWARN. We have a number of features that we're looking at developing, and we've been interacting with surveys and other means of communication with these realtors to understand what they'd like to see. And that is definitely informing the product road map around FOREWARN's additional features. And of course, then there comes the opportunity to build in some pricing around some excellent features above and beyond. Eric Martinuzzi: Understood. The growth in the IDI side of the house, I know not all customers are created equal, but it was relatively similar number of customers. You added 308 customers in Q2 and 304 customers in Q3. What does the pipeline look like for Q4? Daniel MacLachlan: So yes, the pipeline for what I would say is the next, call it, 2, 3, 4 quarters is extremely strong. And we're very excited about the larger opportunities within that pipeline. And of course, we've made mention on some of those larger opportunities that just fell in and we've contracted here recently in the third quarter and subsequent to the third quarter. So one thing I will say is, and as you know, fourth quarter, we do have what I would consider a seasonal slower quarter in regards to less business days in November and December. 20% or so of our business is still transactional revenue. So we do see a little bit of seasonality just from less business days when you look at the holidays in November and December. So we're very excited about the continued onboarding and that pipeline of customers. But from a sequential basis, the expectation is you wouldn't necessarily see another 300 in incremental or sequential growth in customers. But compared to fourth quarter of last year, we're confident that you'll see some really strong growth within the customer base. Eric Martinuzzi: Got it. You started to touch a little bit there on my gross margin question. And I was looking back a year ago, you were down sequentially on gross margin, and I think it was tied to the transaction volumes. Is that your expectation here in Q4 of '25 versus Q3 of '25? Daniel MacLachlan: You're saying sequentially on the gross margin number, whether the expectation is we would be a little down or consistent? Eric Martinuzzi: Correct. Daniel MacLachlan: Yes. The expectation for us is that we continue to have incredible leverage at that gross margin level. It's a relatively fixed cost of revenue for us. So we would think that Q4 at this point would be in line with what we've seen in Q3, right around that 83% to 84%, call it, 82%, 83%, 84% gross margin level. Eric Martinuzzi: Got it. I said that was my last, but I got to ask you on the buyback. Your average price of the repurchases in Q3 at $42.26. Looking at the stock today at $54.53, is the current share price attractive to the management team and the Board? Derek Dubner: I would say, yes, it is attractive to the management team and the Board. We're very excited about what we've built. We know that we have differentiated assets in our platform and our solutions that clearly have competitive advantages over the competition. And for us, it's just a matter of the continual customer realization of that in the marketplace. So -- and we haven't even talked about the new product road map and all the things that we're working on. So we're extremely excited for '26, '27 and beyond. And make no mistake, our best use of capital is investing in this business because of the enormous opportunities at our foot right in front of us. But to have the buyback as just one more essential tool in the toolbox of the capital allocation strategy we believe that it has served us very well. We've been very opportunistic. And we believe that should we use any of those dollars and buy back our stock that we'll look back 2 years from now, and we'll feel the same. Operator: This concludes the question-and-answer session. I would now like to turn it back to Derek Dubner for closing remarks. Derek Dubner: To close, Red Violet continues to execute exceptionally well operationally, financially and strategically. We are performing with focus and precision against a strategy designed to sustain growth, expand profitability and deepen our competitive edge. With a talented team, a scalable model and clear strategic direction, we remain confident in our ability to continue creating meaningful value for our customers and shareholders. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Good afternoon, ladies and gentlemen, and welcome to Kemper's Third Quarter 2025 Earnings Conference Call. My name is Constantine, and I will be your conference coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to introduce your host for today's conference call, Michael Marinaccio, Kemper's Vice President of Corporate Development and Investor Relations. Mr. Marinaccio, you may begin. Michael Marinaccio: Good afternoon, everyone, and welcome to Kemper's discussion of our Third Quarter 2025 results. This afternoon, you'll hear from Tom Evans, Kemper's Interim CEO; Brad Camden, Kemper's Executive Vice President and Chief Financial Officer; Matt Hunton, Kemper's Executive Vice President and President of Kemper Auto; and Chris Flint, Kemper's Executive Vice President and President of Kemper Life. We'll make a few opening remarks to provide context around our third quarter results, followed by a Q&A session. During the interactive portion of the call, our presenters will be joined by John Boschelli, Kemper's Executive Vice President and Chief Investment Officer. After the markets closed today, we issued our earnings release, filed our Form 10-Q with the SEC and published our earnings presentation and financial supplement. You can find these documents in the Investors section of our website, kemper.com. Our discussion today may contain forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to, the company's outlook on its future results of operation and financial condition. Actual future results and financial condition may differ materially from these statements. For information on additional risks that may impact these forward-looking statements, please refer to our 2024 Form 10-K and our third quarter earnings release. This afternoon's discussion also includes non-GAAP financial measures we believe are meaningful to investors. In our financial supplement, earnings presentation and earnings release, we've defined and reconciled all non-GAAP financial measures to GAAP where required in accordance with SEC rules. You can find each of these documents in the Investors section of our website, kemper.com. All comparative references will be to the corresponding 2024 period unless otherwise stated. I'll now turn the call over to Tom. Carl Evans: Thank you, Michael, and good afternoon, everyone. First, I'd like to begin by introducing myself. I'm Tom Evans, and as many of you know, 3 weeks ago, the Board of Directors asked me to step in as Kemper's Interim CEO. Over the past 33 years, I've had the privilege of serving in a variety of roles at Kemper, most recently as General Counsel. During this time, I gained a deep understanding of our business and just as importantly, our people. I believe strongly in this organization, its purpose, its potential and the exceptional talent of our team. We are united by a commitment to serving markets that are often overlooked by other carriers, and I'm proud to be part of a company that embraces that responsibility with integrity and focus. As you know, our Board has commenced a search to identify our next CEO, and I'm confident they'll find the right person to lead us through the next chapter of our story. We'll provide an update on the search when we have more information to share. Let's begin the substantive portion of this call with a straightforward comment. Our results this quarter were disappointing. Today, we'll address what happened, why it happened and above all, what we're doing about it. Without question, we continue to believe strongly in both our strategy and our opportunities, but it's clear our execution has fallen short at times. Some of the challenges we faced were driven by external conditions, but others were within our control. We know that we need to be better operators to deliver the consistent results that investors expect and that we know we're capable of. To that end, the Board and leadership team have taken significant steps, including recent changes in leadership and a restructuring initiative to improve execution and accountability and ensure that we deliver on our strategic priorities. This isn't about changing our direction. It's about reinforcing the disciplines that drive performance. If we do those things, we can better leverage our scale and our capabilities to improve efficiency, broaden our reach across markets and deliver more stable, sustainable results. With that, I'll now provide some context around the key drivers of our performance, and then Brad and Matt will provide more detail and commentary on each. We'll also get a quick update from Chris, who leads Kemper Life about what's going on in that business. I'd like to start by discussing the broader specialty auto environment, which in 2025 has rapidly evolved. Historically, it's always been a more sensitive fast-moving segment with shifts often appearing there before becoming visible in the broader auto insurance space. And that dynamic certainly held true this year. One of the most notable developments here has been the sharp increase in competition, particularly over the spring and summer. In several of our key markets, we've seen other carriers aggressively pursue market share through pricing tactics. While we're responding to these pressures, we won't abandon our underwriting standards, and we remain committed to disciplined underwriting and driving profitable growth. In addition to competitive pressure, we're seeing elevated severity trends due to medical cost inflation and higher attorney involvement in claims. The impact of bodily injury severity has been especially pronounced in our largest market, California, where the January 1 changes to minimum financial responsibility limits are showing up in our results more significantly than initially anticipated. We had expected adjustments to be needed once real claims experience began to emerge, and we're actively making those adjustments. Matt will provide further detail later. As for the litigation environment, whether you call it social inflation or legal system abuse, the effect is the same, upward pressure on loss costs and overall claims inflation. Ultimately, this leads to increased customer premiums and prolonged claims resolution processes. As I stated earlier, we believe in our strategy, and we remain committed to it. We know what we have to do. We're taking actions to enhance our competitive advantages, improve profitability and achieve consistent PIF growth. We're in a solid financial position and are confident these actions will help us succeed. With that, I'll turn it over to Brad. Bradley Camden: Thank you, Tom, and good afternoon, everyone. Before diving into the presentation, as Tom mentioned, our financial results this quarter fell short of expectations due to a combination of factors, including intensified competition, elevated severity trends in claims and a handful of infrequent items. In response, we're implementing a targeted restructuring initiative taking segmented pricing actions and making operational improvements. Additionally, we made some changes in our senior management team, including new leadership in claims and information technology, which were designed to accelerate and enable these efforts. Our immediate priority is to enhance execution, improve profitability and position the company for growth. Let's now turn to Slide 5 to discuss our financial results in more detail. For the quarter, we reported a net loss of $21 million or $0.34 per diluted share and adjusted consolidated net operating income was $20.4 million or $0.33 per diluted share. These results generated a negative 3% return on equity and year-over-year book value per share growth of 4.8%. Our trailing 12-month operating cash flow remained strong at $585 million, holding near our all-time high. In our P&C segment, the underlying combined ratio increased 6 percentage points sequentially to 99.6%, reflecting elevated California bodily injury claims severity and competitive pricing pressure. Policies in force and earned premium grew 0.6% and 10.7% year-over-year, respectively. Matt will discuss this in detail later. Our Life business delivered solid results this quarter, supported by favorable mortality trends and disciplined expense management. These fundamentals continue to reinforce the segment's reliability and stable contribution to overall earnings and cash flow. Chris will briefly discuss this later in the call. Additionally, our balance sheet is strong with substantial capital and liquidity positions, providing financial flexibility. This strength enables us to support organic growth, invest in strategic initiatives and distribute capital to shareholders. From the beginning of July to the end of October, we repurchased a total of 5.1 million shares at an average price of $52.65 for a total cost of $266 million. This activity includes the $150 million accelerated share repurchase program announced in August, which was successfully completed in mid-October. Moving to Slide 6. Here, we take a look at the key sources of earnings volatility during the quarter. These include a restructuring charge, the write-off of internally developed software and adverse prior year development. I'll provide some additional color on each. During September, we initiated actions to drive operational efficiencies and reduce costs. These initial actions are expected to generate approximately $30 million in annualized run rate savings. We continue to look across the business to identify additional expense savings opportunities focused on enhancing cost discipline and organizational effectiveness. These savings are intended to do two things: first, improve our combined ratio; and second, to support growth in specialty personal auto business and accelerate geographic diversification. As a result of these actions, we recorded a $16.2 million after-tax restructuring charge in the quarter. In Kemper's Preferred business, which is reported below the line in noncore operations, we lost $21 million, primarily due to a $22 million expense related to the write-off of internally developed software. Approximately 90% of this business has now run off. As a result, an expense was recognized this quarter and all remaining software amortization has been completed. And finally, we strengthened our reserves by $51 million pretax or $41 million after tax in our Specialty Auto segment. The vast majority of the adverse development was concentrated in our commercial auto business, primarily from bodily injury and defense costs related to accident years 2023 and prior. As Tom noted and consistent with broader industry trends, we continue to see elevated bodily injury severity. This is caused by several factors, including rising medical care costs, increased use of innovative treatments and higher attorney involvement rates. In response, we've taken proactive steps to address these challenges, including rate and non-rate actions and further enhancements to our claim management processes. Turning to Slide 7. Our balance sheet remains strong and provides financial flexibility. As of quarter end, we maintained over $1 billion in available liquidity and our insurance subsidiaries remain well capitalized. Our debt-to-capital ratio stands at 24.2%, near our long-term target and reflective of our disciplined capital management. Notably, we generated $585 million in operating cash flow over the past 12 months, remaining near an all-time high for the company, underscoring the resilience of our business model and the consistency of our cash flow generation. Moving to Slide 8. Quarterly net investment income totaled $105 million, up $9 million sequentially, driven by improved performance in our alternative investment portfolio. We maintain a high-quality, well-diversified investment portfolio that demonstrates thoughtful asset allocation and prudent risk management. As the portfolio grows and benefits from favorable new money rates, we anticipate net investment income will continue to trend upward over time, contributing meaningfully to overall earnings. In summary, our disciplined approach to capital deployment, strong balance sheet and resilient cash flow generation position us for success. With [ initiatives ] underway to improve profitable growth and operational discipline, we're well equipped to navigate evolving market conditions and deliver value to our stakeholders. I'll now turn it over to Matt to discuss the Specialty P&C segment Matthew Hunton: Thank you, Brad, and good afternoon, everyone. Turning to Slide 9. The Specialty P&C segment produced an underlying combined ratio of 99.9% this quarter. Personal auto combined ratio increased to 102.1%, while commercial remained relatively stable at 91.1%. The increase in our personal auto underlying combined ratio was driven primarily by bodily injury loss trends. We're observing signs of elevation across all geographies, this was particularly evident in California. As you will recall, on January 1 of this year, the industry-wide mandatory increase in state minimum limits went into effect. This change doubled the BI limit from 15,000, 30,000 to 30,000, 60,000, while also increasing physical damage from 5,000 to 15,000. At the time of our initial rate filings for the new limits, our pricing analysis was based on our California loss experience, complemented by our experience with similar limit increases in non-California markets. Our selected pricing factors were on the higher end of the actuarially supported range. With that said, our early read of actual post-change severity has come in higher than forecasted. BI is a long-tail coverage and at 3 months evaluation is only about 35% developed. Also, more severe higher cost claims, which have a greater propensity to reach policy limits tend to be resolved sooner. Therefore, we move quickly to take rate and non-rate actions to ensure pricing meets lifetime targets. We'll continue to closely monitor severity patterns and adjust accordingly. As earlier noted, the specialty auto market tends to experience emerging patterns earlier than the standard market. With specialty auto customers being higher frequency, loss patterns become visible more rapidly. To that end, an increasingly clear driver of liability cost challenge is higher attorney involvement in legal system abuse. We continue to see attorneys attach to claim files much earlier in the process. The combination of growing medical inflation and the greater use of elective procedures is driving a more expensive treatment mix. This dynamic is not unique to our business. It's an industry-wide trend that will require more proactive and disciplined management. With that said, 95% of our book is at state minimum limits, which places an upper bound on further cost escalation. As Brad discussed, in addition to our underwriting and pricing actions, we've launched a restructuring initiative aimed at creating a more competitive cost structure to further diversify our book. These efficiencies are supporting expansion efforts in Florida, Texas and other noncore states, funding market entry work, improving product competitiveness and expanding distribution partnerships in priority regions where we see strong growth potential. Shifting to production. California moved quickly from a hard market to a more normalized market with competition intensifying. We're taking rate and non-rate actions to address liability costs to ensure pricing economics remain sound. These actions are aligned with our goal of driving profitable growth through the cycle. Our pricing actions to date in Florida and Texas have helped stabilize our in-force book. Ongoing expense, efficiency initiatives and enhancements to our product capabilities are targeted at supporting profitable growth in these markets. In commercial auto, underlying margins remained strong and PIP growth was 14%. The competitive market remains stable with regional nuances. Similar to our personal auto business, we continue to be aggressive on rate actions across all coverages with heightened focus on bodily injury. Our competitive advantages position us well to capitalize on these opportunities. And finally, we're focused on execution, rolling out new product features, improving end-to-end claim handling and driving cost efficiencies, all to enhance price competitiveness. By strengthening operational discipline in these areas, we can grow strategically, diversify our footprint beyond core markets and deliver profitable growth. I'll now turn the call over to Chris to cover the Life business. Christopher Flint: Thank you, Matt. Turning to our Life business on Slide 10. The Life segment delivered solid quarterly results with operating earnings of $19 million, driven by favorable claims experience and expense levels tightly aligned with product economics. Despite a modest decline in premium volume, the business remains well positioned to sustain strong returns on capital and robust cash generation. I'll now turn the call back to Tom to cover closing comments. Carl Evans: Thanks, Chris. In closing, I hope we've described not only what happened this quarter and why, but more importantly, the actions we're taking to improve profitability and growth. We're reinforcing the disciplines that drive performance through management changes, a restructuring initiative and a renewed focus on execution. As I said at the top, I have tremendous confidence in this organization, its purpose, its potential and the talent of our people. I want to thank our entire team for their commitment and hard work to make Kemper a stronger organization. As we navigate this environment, we remain certain of our ability to deliver long-term value to all of our stakeholders. Operator, we may now take questions. Operator: Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions]. Your first question comes from the line of Andrew Kligerman from TD Cowen. Andrew Kligerman: Maybe start with the commercial auto segment. I calculate an unfavorable prior year development of 18.7 points. And that follows the second quarter at 8.4 points of unfavorable. And if I -- and correct me if I'm wrong, but if I recall the management commentary on the last call, like it seemed that it had been nipped like they had really captured it. We talked on the call, I think, about the social inflation environment. So what's happened between 2Q and 3Q on the commercial end? And why should we not expect another unfavorable prior year development there? Bradley Camden: Andrew, this is Brad. Thank you for the question. You are correct in comments from prior quarter. We did have adverse development in the second quarter. And obviously, we've also had adverse development here in the third quarter. In the second quarter, we discussed the adverse development being latent large loss activity, not due to frequency, but higher severity. We've experienced the same thing here in the third quarter on large losses, so continued latent development in accident years 2023 and prior. Additionally, we're also seeing BI severity trends from social inflation and continued attorney attachments in accident and nonlarge losses, which is how we describe it as anything below $250,000. So the BI severity trends that Matt discussed in the call previously, not only in PPA is also prevalent in commercial vehicle, and it has been prevalent across the industry to date. With respect to us capturing this and not being a consistent issue, we've adjusted our expectations on what each of those cases are today and what they're going to expect to develop to. And we've also adjusted our IBNR development factors to capture what we think is probable in the future. We're confident in that. But as the environment remains extremely dynamic, there may be further adverse development, but we're confident with what we have today. Andrew Kligerman: Okay. And my follow-up question, shifting back to private passenger auto come in at an underlying combined of 102.1%. And a lot of your competitors we've seen are coming in around 90%. So I guess you've got geographic differences. So I guess the question is, one, what gives you confidence in your data and analytics? Are you up to speed with that? Are you in line with your peers with your data and analytics in terms of capturing this stuff? And I suspect the part B of it is, I suspect you probably need some rate and California has historically been a very tough state. Do you think they'll give the approvals that you need? Matthew Hunton: Andrew, this is Matt. I'll start with just highlighting the nuance difference between us and some of the Main Street competitors that we're up against. I think primarily one is we're predominantly a minimum limit customer base. We have a different frequency profile and loss profile. It sort of the definition of nonstandard. The other is 60-plus percent of our book is in California. And that's really where the driver of the inflection was in the loss from quarter-over-quarter. Frequency came in line within expectations. It was slightly elevated, but within normal sort of seasonal expectations. The driver was heightened severity, and it was really the BIP dynamic, that's really -- it's not new for the industry. This has been a dynamic in the industry for the last decade or so, but it was heightened due to the FR changes in California earlier this year, right? And so this effectively acts as a onetime step-up in cost. And this isn't normal. The last time California had a limit increase was in 1967. And so with California representing the percentage of the portfolio for us that it does, naturally, it's more pronounced in our results relative to peers. And as our California book converted over to the new limits, and as Brad mentioned, with the latent development or the slow development of BI coverage, we observed the elevated paid patterns in the mid part of the third quarter, and we took immediate action. I don't think we have any concern about our analytics or insights. We have a prospective view in terms of where costs are going, and we're trying to be as aggressive as we can in achieving that. Regarding the rate to be filed -- that is currently filed with the CDI, that is with the CDI, we are having proactive conversations with them. Our goal is to get the rate effective as soon as possible, and the dialogues are moving along as we expect them to. Andrew Kligerman: Got it. And maybe just if I could sneak one last one in. There was a lot of discussion in the investment community about Kemper's willingness to be acquired. I know you can't be specific, but what's your thinking right now on that topic? Is that something that Kemper is open to? Carl Evans: Andrew, this is Tom Evans. That's not really something we can comment on. We're a public company. We're for sale every day. Operator: The next question comes from the line of Mitch Rubin from Raymond James. Mitchell Rubin: I wanted to ask about the restructuring. Could you please elaborate on some of the specific areas where you guys are targeting cost savings from, thanks. Bradley Camden: Thanks, Mitch. This is Brad. Really in 3 areas. One is an organizational design. We've restructured some of the reporting lines and as a result, have had some cost savings. So organizational structure. Second bucket is process efficiencies. So think about with some new product launches, we have lower commissions with improved process, we expect to reduce some print postage, some bad debt, other things. So increased overall efficiency in the organization is key and critical. And lastly, our various one-off things that maybe we've made investments in, in the organization that we're looking to change how we do business and how we operate going forward. So in total, as we mentioned, we took a $16.2 million after-tax charge. That's going to save us on a run rate basis, approximately $30 million annually. Mitchell Rubin: And my follow-up on Page 9 of the presentation, I see that policies in force in Florida and Texas came down about 7% year-over-year. Could you provide some color on what you're seeing in the competitive environment there? Matthew Hunton: Yes. This is Matt again. Look, I'll start with overall, we still are bullish on the markets that we operate in. Obviously, California being our largest. We talked a lot about California being a hard market over the past few quarters as it worked its way through the pandemic. That is normalizing. Competition is increasing on the new business side. With that said, our policy retentions are stable there, but some competitors continue to get increasingly aggressive. And as we are making the changes we're making on the pricing and underwriting side to address the liability trends, we think those are the right changes, and we're remaining disciplined as we work through the cycle. In terms of Florida and Texas, those markets are very competitive marketplaces. I think we've talked about that for the last few quarters. We've done quite a few changes in our products from a segmentation pricing perspective that have stabilized our in-force book of business. And as Brad mentioned in the prepared comments, the restructuring and cost efficiencies that we're driving through the business, along with additional product enhancements are focused on those markets, so to accelerate growth in those markets and help us move towards our strategic end state of being a more diversified geographic portfolio. Mitchell Rubin: Great. That's helpful. If I could just ask one more thing. You mentioned some nonrate actions you guys have been taking. Could you give any insight towards that? . Matthew Hunton: Yes, non-rate actions are effectively tightening some underwriting aperture managing agents in terms of capacity with a bit more aggressiveness, adjusting billing features, among other things that help us manage profile and the expected losses associated with the profile. Operator: [Operator Instructions] The next question comes from the line of Brian Meredith from UBS. Brian Meredith: A couple of questions here for you. The first one, I think it's related to some runoff stuff, but I'm just curious, the software write-off in the quarter, what is that exactly related to? And does that have any effect or a part of your, call it, specialty business? Bradley Camden: Brian, this is Brad. The write-off of the internally developed software is solely related to the Kemper Preferred business, which is reported below the line in noncore operations. As a result of our premium forecast and the acceleration of the runoff of that business, we determined that the premium receiving is no longer enough to support those assets. So as a result, we've written them off this quarter. It has no relation to the specialty auto business. It's solely related to Kemper Preferred. I'd also like to highlight that, that business is now 90% runoff and the remaining policy is predominantly in the state of New York, which we are close to working with the regulator to accelerate the runoff of that business. Brian Meredith: Makes sense. And then my next question is, I mean, I guess the Chief Claims Officer and the Chief Information Officer, CIO, are gone. What changes are you making with -- in the claims in the information technology area as a result of the departures? Carl Evans: Well, we publicly -- Brian, this is Tom Evans. We've announced that Andy Ramamoorthy stepped in as Chief Claims Officer. So that response to that part of your question. With regard to the IT space, we currently have an office of the CIO that's comprised of 3 members of our executive team, Andy, who already mentioned, Matt and Brad are the other 2 members. And we are -- I'm sorry, go ahead. Brian Meredith: Yes, I meant more about process right underlying process or changes that maybe the changes within claims or systems processes, not so much the new people coming in. Matthew Hunton: Brian, this is Matt. We -- on the claims side, there are a few sort of process points of evolution that we're working on. And some of this has been work in process for the last few years. But the biggest one is sort of having an end-to-end orientation around how we manage total cost of ownership and value generation. We worked pretty aggressively on the material damage side the last couple of years, and the efforts are paying off in terms of stemming some of the tariff pressures that I think the industry is seeing. We have been working that on the liability side, and we're accelerating some of that work so we could aggressively manage some of the headwinds from a liability trend perspective. That's one example. Another example is we're taking our data science capabilities that we built on the pricing front, and we're accelerating that into claim to help us process more effectively sort of next best action, drive some automation, leveraging AI and other toolkits to really drive efficiency in the engine. And on the technology side, similarly, connecting that more to the business to drive value in a more expeditious and agile way. Carl Evans: Sorry, Brian, I just going to add one more comment is the other thing that we've done is we've repositioned some of the players in our claims team, particularly to respond to some of the more active things we're seeing in the litigation environment to better respond to those issues. Brian Meredith: Makes sense. And then last question, I guess, more from Brad. So I'm assuming there was some kind of current year catch-up in the underlying kind of loss picks in the quarter. What's the run rate underlying loss ratio right now in the third quarter ex kind of current year development? And maybe you could break that down between personal auto and the commercial. Bradley Camden: Great question, Brian. Well, I'll give you the details. Essentially, underlying loss ratio from Q2 to Q3 increased 6 percentage points, 93.6% to 99.6%. When you think about the current year adjustments, no significant current year adjustments. What we're seeing is favorable development on comp and collision and the metals coverages, and we continue to see some adverse development even in the current accident year on BI. So it's a mix development, but no significant changes either in commercial vehicle or PPA. Operator: Your last question is from the line of Andrew Kligerman from TD Cowen. Andrew Kligerman: On the share repurchases, you did a pretty active -- I think it was what, $266 million through October from July 1, and you still have about $300 million left. So maybe some color on your thoughts around share repurchase going forward. Bradley Camden: Thanks, Andrew. You are correct with the numbers, 5.1 million shares, roughly $266 million. From a share repurchase standpoint, we continue to think the stock is attractive. That said, I will point you to our capital deployment strategy, which is first to fund organic growth. Matt talked about what we're doing there as we invest some of the restructuring savings into Florida and Texas. So we want to make sure we have enough for internal organic growth. Secondly, we want to make sure we have enough capital to have financial flexibility. And then third, if there's anything that's additional, we will distribute that to shareholders. So you are correct. There's still a significant amount remaining in the authorization that was granted last quarter, that $500 million, and we'll continue to be tactical with that as we go forward. Andrew Kligerman: And maybe just as a quick follow-on to that. In terms of policy in-force growth, and you've talked about it, Brad, that PIF would be a little lighter, maybe very low single digit in the back half of 2025. Are you thinking just in light of all these pricing changes that you can kind of maintain that? You came in close at 0.6. And then when you get into 2026, do you feel like you could really target that -- what was it like mid-single-digit growth that you were looking for in PIF next year, maybe upper mid? Bradley Camden: Yes. So you got the numbers correct, Andrew. We came in at 0.6% year-over-year, down sequentially. I'll highlight that we talked about this a lot in the past is going from Q3 to Q4, we typically see lower shopping activity as a result, PIF naturally declines just as a result of seasonality in our business. So I would expect PIF to modestly decline maybe 1% or 2%, maybe 3% from Q3 to Q4. Then I'd expect us back to growing in the first quarter as we get into the buying season. And as a reminder, that buying season typically starts mid-February and goes through late April, early May. As far as PIF growth, what we expect in the first half of next year, I think that depends on the competitive environment. As Matt mentioned, our goal is to grow profitably. And so we're going to protect our margins and be thoughtful around growth, particularly in some key states like California. Operator: There are no further questions at this time. I'll hand the call over back to Tom Evans for closing comments. Sir, please go ahead. Carl Evans: Thank you. I want to thank everybody for taking the time to join us today and to provide the thoughtful questions. We appreciate everyone's continued support as we move through this transition and we look forward to speaking with you again next quarter. In the meantime, the team here at Kemper remains focused on execution and continuing to focus on delivering value for our shareholders. Thanks very much. Take care. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you very much for your participation. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Qualcomm Fourth Quarter and Fiscal 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, November 5, 2025. Playback number for today's call is (877) 660-6853. International callers, please dial (201) 612-7415. The playback reservation number is 137-56092. I would now like to turn the call over to Mauricio Lopez-Hodoyan, Vice President of Investor Relations. Mr. Lopez-Hodoyan, please go ahead. Mauricio Lopez-Hodoyan: Thank you, and good afternoon, everyone. Today's call will include prepared remarks by Cristiano Amon and Akash Palkhiwala. In addition, Alex Rogers will join the question-and-answer session. You can access our earnings release and a slide presentation that accompany this call on our Investor Relations website. In addition, this call is being webcast on qualcomm.com, and a replay will be available on our website later today. During the call today, we will use non-GAAP financial measures as defined in Regulation G, and you can find the related reconciliations to GAAP on our website. We will also make forward-looking statements, including projections and estimates of future events, business or industry trends or business or financial results. Actual events or results could differ materially from those projected in our forward-looking statements. Please refer to our SEC filings, including our most recent 10-K, which contain important factors that could cause actual results to differ materially from the forward-looking statements. And now to comments from Qualcomm's President and Chief Executive Officer, Cristiano Amon. Cristiano Amon: Thank you, Mauricio, and good afternoon, everyone. Thanks for joining us today. In fiscal Q4, we delivered another strong quarter with revenues of $11.3 billion and non-GAAP earnings per share of $3, both of which exceeded the high end of our guidance range. QCT revenues of $9.8 billion, up 9% sequentially were driven by strong end customer demand for Snapdragon-powered premium tier Android handsets, continued traction for automotive Snapdragon Digital Chassis and strength in IoT across industrial, Wi-Fi 7 access point, 5G fixed wireless and smart glasses. In addition, all 3 QCT revenue streams exceeded our expectations including record automotive quarterly revenues in excess of $1 billion. Licensing business revenues were $1.4 billion. Fiscal '25 non-GAAP revenues of $44 billion were up 13% year-over-year, with record QCT annual revenues of $38.4 billion, up 16% year-over-year, including automotive and IoT revenue growth of 36% and 22% year-over-year, respectively. We delivered 18% year-over-year growth in total QCT non-Apple revenues above our prior estimates. We remain on track to achieve our fiscal '29 long-term revenue commitment as outlined at our 2024 Investor Day. I will now share some key highlights from the business. At Snapdragon Summit in September, we introduced our Snapdragon 8 Elite Gen 5 mobile platform for next-generation flagship AI smartphones. This platform is equipped with our custom-built third-generation Oryon CPU, the fastest mobile CPU ever, along with an upgraded NPU and GPU. With the Snapdragon 8 Elite Gen 5, we continue to set the pace of innovation in mobile processors. This year marked our 10th Snapdragon Summit with simultaneous events held in Maui and Beijing, validating the strength of our Snapdragon ecosystem. Leading China OEMs, including Xiaomi, Honor, Vivo and OnePlus announced their flagship phones at our event. More than 1,100 partners, analysts, tech influencers and press attended in person, and our keynotes capture over 26 million unique views across both events. Together with our announcement, Snapdragon Summit generated over 547 million social media impressions. In addition, our Snapdragon Insiders community of tech enthusiasts, developers and fans has grown to more than 20 million members worldwide. Our highly differentiated technology continues to drive increased brand visibility. And during the quarter, Qualcomm debuted at 39 on the Interbrand Top 100 Global Brands list for 2025, reflecting the strength of Snapdragon. And for the first time ever, Kantar's BrandZ most valuable Global Brands list included Snapdragon, where we ranked #38. Also at Summit, we unveiled our newest platforms for premium laptops, the Snapdragon X2 Elite and X2 Elite Extreme. Once again, our industry-leading processors continue to outperform competitors, surpassing Intel and AMD in both speed and power efficiency. Our latest NPU sets a new benchmark as the world's fastest AI engine for laptops, also exceeding Intel and AMD in performance. And with the new Oryon Gen 3, we have the world's first 5-gigahertz CPU for the ultra-mobile laptop category with extended battery life. We now expect approximately 150 designs to be commercialized through 2026 and remain optimistic about the continued momentum for Snapdragon-powered AI PCs. As AI transforms human computer interactions, intelligent wearables and specifically smart glasses are evolving into personal AI devices that can connect the user directly to an AI agent or model. This emerging category is growing at a remarkable pace and has reached an inflection point fueled by very strong demand for smart glasses from Meta. This quarter alone, Meta introduced several new Snapdragon-powered styles, including the Ray-Ban Meta second-generation glasses, the Oakley Meta Vanguard performance glasses and the Meta Ray-Ban display and neural band. In addition to Meta, our leadership in this space is reflected by the 30 designs in production or development with our global partners. They include Samsung, which recently launched Galaxy XR, a truly multimodal AI headset and the first device for Google's new AI native operating system, Android XR. We achieved a significant milestone in automotive with the launch of Snapdragon Ride Pilot, our first full system solution for L2+ automated driving. Developed in close collaboration with BMW, it debuted in the automakers' BMW iX3 EV SUV. Powered by our advanced self-driving software stack, Snapdragon Ride Pilot sets a new standard in automated driving, is designed for universal compatibility and seamless integration with automakers, unlocking L2+ driver assistant features like hands-free highway driving and urban navigation for vehicles worldwide. Snapdragon Ride Pilot is currently validated in 60 countries and extends to 100 in 2026. The broad interest from leading automakers globally is exceeding our expectations. At IAA Mobility, Qualcomm and Google announced an expanded partnership, including the integration of Google Gemini models to our suite of Snapdragon Digital Chassis solutions. Together, we will enable automakers to build and deploy personalized AI agents that act as an in-vehicle assistance, bringing multimodal edge-to-cloud AI to next-generation software-defined vehicles. In industrial IoT, we completed our acquisition of Arduino, a premier opensource hardware and software company with an IoT development ecosystem of more than 30 million users worldwide. This builds on our acquisitions of Edge Impulse and Foundries.io and accelerate our plans to provide a comprehensive edge AI development platform for a broad set of applications. With these new assets, we're expanding our portfolio to a wide range of customers and verticals, further cementing our position as the leader of AI for the edge. Additionally, we recently released the Arduino UNO Q single-board computer, powered by the Dragonwing processor. This full stack edge AI platform enables the rapid development of solutions for applications ranging from smart home automation to industrial robotics, drones and more. AI data center growth is moving from training to dedicated inference workloads, and this trend is expected to accelerate in the coming years. The mass adoption and continuous use of AI applications is driving the industry to look for competitive alternatives that prioritize power-efficient performance and cost. We announced our entry into this market and recently unveiled our AI inference optimized AI200 and AI250 SoCs and associated accelerator cards and racks. We are very pleased to have HUMAIN as our first customer for these solutions with a target deployment of 200 megawatts starting in 2026. Looking ahead, we're executing on a multi-generation road map with an annual cadence. I would like to share that we're looking forward to providing an update in the first half of 2026 on our data center plans, including our roadmap performance and differentiated memory and compute technology. We'll also highlight our progress in other areas, including advanced robotics, next-generation ADAS, industrial edge AI and 6G devices and AI-powered RAN. As we execute on our strategy and expand our IP and capabilities, we believe we are one of the best positioned companies to lead the expansion of AI to the edge, edge-to-cloud hybrid AI and develop a power-efficient cloud inferencing solution. I will now turn the call over to Akash. Akash Palkhiwala: Thank you, Cristiano, and good afternoon, everyone. Let me begin with our fourth fiscal quarter results. We are pleased with our strong non-GAAP performance with revenues of $11.3 billion and EPS of $3, both of which were above the high end of our guidance. QTL revenues of $1.4 billion and EBT margin of 72% were above the midpoint of our guidance, driven by slightly higher handset units. QCT delivered revenues of $9.8 billion and EBT of $2.9 billion with year-over-year growth of 13% and 17%, respectively. QCT EBT margin of 29% was at the high end of our guidance. QCT handset revenues of $7 billion increased 14% on a year-over-year basis, reflecting increased demand for premium Android handsets powered by our Snapdragon Elite Gen 5 platform. QCT IoT revenues of $1.8 billion grew 7% year-over-year, driven by strength across industrial and networking products and increased demand for AI smart glasses powered by our Snapdragon platform. In QCT Automotive, we surpassed $1 billion quarterly revenue milestone, delivering 17% year-over-year revenue growth as the adoption of our Snapdragon Digital Chassis platform continues to accelerate. With the recent enactment of the One Big Beautiful tax bill, we now expect our non-GAAP tax rate to remain in the 13% to 14% range going forward, and we anticipate lower cash tax payments relative to prior expectations. This new legislation resulted in a noncash charge of $5.7 billion in the fourth fiscal quarter to reduce the value of our deferred tax assets. This charge is excluded from non-GAAP metrics but impacts our GAAP results. Before turning to guidance, I'd like to take a moment to highlight our strong performance in fiscal '25. We are incredibly pleased with our execution with non-GAAP revenues of $44 billion and EPS of $12.03, representing year-over-year growth of 13% and 18%, respectively. In QCT, we achieved 16% year-over-year revenue growth, driven by double-digit increases across all revenue streams, with IoT up 22% and automotive growing 36%. We also delivered QCT operating margins of 30%, in line with our long-term target as we have previously outlined. Over the past 5 years, our non-Apple QCT revenues grew at a 15% compounded annual growth rate. Similarly, over the last 2 years, our non-Apple QCT revenues grew by 17% and 18%, respectively. Lastly, we generated record free cash flow of $12.8 billion. And consistent with our commitment, we returned nearly 100% to stockholders through repurchases and dividends through the year. Now turning to guidance. In the first fiscal quarter, we expect to deliver record results with revenues in the range of $11.8 billion to $12.6 billion and non-GAAP EPS of $3.30 to $3.50. In QTL, we estimate revenues of $1.4 billion to $1.6 billion and EBT margins of 74% to 78%. In QCT, we expect record revenues of $10.3 billion to $10.9 billion and EBT margins of 30% to 32%. We anticipate record QCT handset revenues with low teens percentage growth sequentially, primarily driven by new flagship Android handset launches powered by Snapdragon. Following our outperformance for QCT IoT revenues in the fourth quarter, we expect a sequential decline consistent with last year, driven by seasonality in consumer products. In QCT Automotive, following a record fourth quarter, we estimate revenues in the first fiscal quarter to remain flat to slightly up on a sequential basis. Lastly, we forecast non-GAAP operating expenses to be approximately $2.45 billion in the quarter. In closing, as we approach 1 year since outlining our growth strategy at Investor Day, I'd like to provide an update on the progress towards our $22 billion fiscal '29 revenue target across automotive and IoT. In automotive, we've established ourselves as the most strategic silicon partner for OEMs globally. The accelerating adoption of our Snapdragon Digital Chassis platform and 36% year-over-year revenue growth in fiscal '25 puts us on track to achieve our $8 billion revenue target. Across IoT, the increasing importance of artificial intelligence, high-performance, low-power computing and connectivity validated by our 22% year-over-year revenue growth in fiscal '25 reinforces our confidence in achieving our $14 billion revenue target. In Industrial, increasing customer engagement and growth in design win pipeline, combined with our recent acquisitions to unlock access to 30 million users, underlines our confidence in strong revenue growth through the end of the decade. In XR, we're exceeding prior expectations on strong demand for AI smart glasses, and we remain the platform of choice for smart glasses and mixed reality devices across leading global OEMs and ecosystems. In PCs, we extended our technology leadership with the recent launch of Snapdragon X2 Elite and X2 Elite Extreme platforms, which deliver multigenerational performance increases across CPU, GPU and AI. Given our strong pipeline of approximately 150 design wins, we're optimistic about the growth potential for Snapdragon-powered AI PCs as we expand our presence across global consumer and enterprise channels. In networking, our continued innovation and leadership in WiFi, 5G, edge processing and AI, combined with our integrated platform approach positions us to drive content growth and adoption globally. As Cristiano outlined, beyond our revenue target, we're also pursuing incremental opportunities across data center and robotics. Finally, I want to thank our employees for exceptional execution and continuing to deliver industry-leading technologies and products. This concludes our prepared remarks. Back to you, Mauricio. Mauricio Lopez-Hodoyan: Thank you, Akash. Operator, we are now ready for questions. Operator: [Operator Instructions] First question, which will come from the line of Joshua Buchalter with TD Cowen. Joshua Buchalter: Congrats on a stellar set of results in a bumpy backdrop. I wanted to start with the data center business. I realize you're going to provide more details in the first half of 2026, and my questions might get punted as a result. But maybe you could spend a few minutes talking about what you see as Qualcomm's right to win in the data center space? And any details you can provide on the specs of the AI200 and 250 beyond what you were able to offer in the press release when the HUMAIN engagement was announced. And then lastly, on this topic, last quarter, you called out, I believe, a hyperscale engagement. I assume that's distinct from the HUMAIN engagement and any details on timing there? Cristiano Amon: Josh, thanks for your question and thank you. Yes. Look, we're very excited. I think this is the next chapter of, I think, the process we have been in Qualcomm to changing the company, diversifying the company, expanding our IP. I think that's one of the reasons I think we made acquisitions such as Alphawave. We think there are 2 areas that we outlined that we can participate into the data center. We were incredibly excited about the size of the opportunity in the next phase, I think, of data center build-out where there's going to be real competition. We go from training to inference. We have been focused in 2 areas. One is we believe we have one very strategic asset in the industry, which is very competitive, power-efficient CPU. That is both for the head node of AI clusters as well as general purpose compute. And then we also have been building what we think is a new architecture dedicated for inference. I think the focus has been increased computer density and simplify the architecture for the data center in terms of increase, I think, performance per watt. I think it's all going to be about generating the most amount of tokens with the least amount of power, and that's our right to play. We're excited about what we're doing that has been in development. It's something that we're actually doing in a very disciplined manner. We spend a lot of time, I think, with our early experimentation with AI100 to develop the software. And then we're now building AI200, AI250, both the SoC, the card, direct solutions. And I think we're pleased with what we're seeing. We will provide more details on that as you outlined early next year. Specific to your questions, I think we were in discussion with a hyperscaler. We're very pleased with the outcome of that conversation, and that's going to be part of our update when we provide details on the road map, the performance, the KPI, we'll be able to show details of the solution as well as our customer engagement. We are in conversation with a lot of companies. It's clear the market wants competition for this. But in a typical Qualcomm way, we're just going to be focused on executing and show the products performing. Like I said, this is an exciting new chapter of our expansion. And alongside robotics, those are kind of new opportunities for us. Joshua Buchalter: I appreciate all the color there and looking forward to the updates. For my follow-up, I wanted to ask about the handset market. So you highlighted your ongoing momentum in the Android space as driving growth in the fourth quarter -- excuse me, calendar fourth quarter in your prepared remarks. There's been a lot of noise, I think, about your lead Android customer potentially looking to use an internal modem more than they have in recent years. Could you maybe just talk about your visibility into your share at that customer? And any sort of share that you would expect to -- how that you would expect that over the next year or so? Cristiano Amon: Look, thanks for the question. I'm actually -- I want to spend a little bit of time on this because I sense that there's potential for a lot of noise when noise is actually not required. I think, first of all, there is one thing that is happening with our Snapdragon and our premium tier, Snapdragon Android, which has been very consistent, and this is going to happen over the past few years. The premium tier is expanding. I think if you look at the overall market, we have this trend that is very healthy, and the premium tier is expanding and is adding more compute. That is the reason why our Android business, even on a market that is relatively flat, which is the handset market. We continue to grow our content, ASPs and earnings because we see premium tier expanding. A lot of the upside we have in the handsets is primarily driven by the Android premium tier. Second part is our relationship with Samsung. We have said for a number of years -- a number of reasons, and this has been true in the past, I think, several years that what used to be a normal relationship at a 50% share, the new baseline is about 75% share. And that is always going to be our financial assumption. When we out-execute, sometimes we get more than 75%, on Galaxy S25, we got 100%. Our assumption for any new Galaxy is always going to be 75%. That's our assumption for Galaxy S26. Operator: The next question comes from the line of Samik Chatterjee with JPMorgan. Samik Chatterjee: Cristiano, you mentioned the -- on the data center side, starting with that, you mentioned the price performance for the inferencing performance that you're trying to deliver. I mean most of the training clusters that we've sort of seen the other incumbents sort of talk about the ranges of installation cost is somewhere in the sort of $30 billion, $40 billion per gigawatt that we're hearing of. Can you just right size us in terms of when you're thinking about the deployment on a gigawatt basis, what kind of cost performance or price performance are you thinking of relative to these inferencing workloads that you can support on the AI 200 or AI 250? And I'm also trying to get to sort of what revenue implications are for HUMAIN when you sort of deploy 200 megawatts with them? And I have a follow-up, please. Cristiano Amon: Okay. I'm going to try to give as much color as I can without getting ahead of the update we're going to provide next year. So first, let's just have a broader discussion about revenue. What we said before that we expect data center products to start leading to a revenue ramp beginning in fiscal '28. I think as a result of the HUMAIN engagement and our progress on the AI accelerator, I think we're pulling this forward into fiscal '27. So you should expect now from what we said before, I think data center revenue is going to start to become material in fiscal '27. So I think that's the extent of what I can provide at this moment. It's about a 1-year pulling. The second thing is we are getting interest. You should assume that companies, they are having to deploy as much compute as they need in the data center for inference, especially now that you see the constraints that you have on power, the constraints that you have on the amount of computer density. I think we have a lot of folks interested. We were not having conversations if we didn't have a solution that is competitive. But we will show the KPIs of the platform, I think, when we have a road map update early next year. Samik Chatterjee: Okay. Okay. Got it. And maybe the second one, similar to Josh's question. I think, Akash, if I'm interpreting the market's reaction to your strong numbers, there seems to be that concern about what March looks like with the change in share at the primary Android customer. Typically, on the handset side, your quarter-over-quarter decline into March has been sort of this high single-digit pace. Is that still a good run rate with sort of the lower level of share? Or would you sort of guide us otherwise? Because I think that's really what the market seems to be sort of concerned about at this point. Akash Palkhiwala: Yes, Samik, thanks for the question. We're not guiding beyond first quarter at this point. But when you look at our strong business momentum exiting fiscal '25, you see the benefit of that showed up in our results also showing up in the December quarter guidance. And so that carries forward into the rest of the fiscal year. The only additional thing I'd note is just a reminder that we expect to close our Alphawave acquisition in the first calendar quarter of '26. But otherwise, I think the business momentum is strong and just a couple of factors that you outlined. Operator: The next question comes from the line of Timothy Arcuri with UBS. Timothy Arcuri: Akash, when you talked about September, you said that the beat was driven mostly by premium Android, but it seemed like it came a little more from your top customer because before you were saying to take like 30% of units out, and that was like $500 million roughly. But it seems like nowhere near that much came out from that customer. So -- I mean, it was kind of barely down year-over-year. So can you just square that? And then also as part of that, can you speak to how much that customer is as kind of a baseline assumption for December? I think we've seen that the model that has their modem and it's not really selling very well. So I would assume that that's a tailwind for you also in calendar Q4. And then I had a second question. Akash Palkhiwala: Sure, Tim. So as we had said earlier, we expected to be in 3 of the 4 models of the phone that was launched. And so that is exactly what happened. And share, of course, is based on what sell -- how sell-through plays out. Specifically on the September quarter question, we already had kind of demand from the customer that was factored into the guidance we gave. So the upside we saw was not from Apple. It was really driven by Android customers and primarily the premium tier with the launch of our new Snapdragon chip. When you look at the sequential trend as well, as I mentioned, the -- we are forecasting approximately low teens sequential revenue growth in the handset revenue stream for QCT and primarily driven by Android as well. So there is some benefit from Apple, but the primary driver for the growth quarter-over-quarter is actually Android premium tier shipments. Timothy Arcuri: Okay. And then is there any update on the negotiation with Huawei for a license? It seems like it's kind of dragging on a little bit. Can you just talk about that? Alexander Rogers: Yes. This is Alex. Thanks for the question. No, we actually don't have an update now. Discussions are still underway, really nothing substantive to say beyond that. Operator: The next question comes from the line of Stacy Rasgon with Bernstein Research. Stacy Rasgon: So you noted the non-Apple QCT revenue was up 18% year-over-year. And even if I take out the auto and the IoT, it's clear that the Android piece was up like pretty strong double digits year-over-year. So am I right in assuming that's all content or primarily content given I don't think units grew that much. And is that the right sort of pace of like further content increase that we ought to be thinking about as we go forward? Akash Palkhiwala: Yes. So Stacy, you're doing -- obviously doing the math right. There are 2 primary drivers on this. One is just the mix shift of units up. And so this is a trend that we've seen over the last several years, and it's -- sometimes it's thought of as a developed market trend, but that's not true. It's across all developing regions as well. The devices that are purchased continue to move up, and so that shows up in the benefit to our revenue stream. The second trend is within premium tier. Content continues to grow as we deliver more and more capable chips, and more capable handsets are being delivered as a result of it. And those are the 2 primary drivers of kind of the long-term trend of our handset business. Stacy Rasgon: Got it. And if I could have a quick follow-up. Just the Snapdragon Android strength in September and December, is that primarily China? And are there any concerns there? I mean, is that just the timing of the launches? Like any thoughts on pull forward or anything like that. Anything we ought to be thinking about there? Akash Palkhiwala: Yes. No, there's no pull forward there. I think what we've seen is all of our -- most of our China customers, actually, all the major customers have already launched devices and the initial reception to the devices have been very positive. We'll see a lot of our global customers launch devices as well later this quarter going into early next year. And so it's just a reflection of kind of normal purchase patterns around the launch of these devices and the great initial consumer reaction to the launches. Operator: The next question is from the line of Chris Caso with Wolfe Research. Christopher Caso: And a question again on AI data center. And I realize you're going to provide some details coming up, but there's some specs out there, so -- which is why we ask. But from what we've seen what was in the press release was perhaps a different architecture than what we've seen others attack the market with DDR memory, PCI Express in that. Should we interpret that as sort of a first approach by Qualcomm with more to come? Or is this rather a different sort of philosophy for attacking the market? You talked about being more efficient on power consumption. Is this sort of a different -- attacking the market differently than what's in the market today? Cristiano Amon: I think the answer to the question is yes. For us, I think we're approaching this thinking about what the future architecture should look like. We had said before, and I think that's -- we have thought about this for the edge as well, which means when we think about dedicated inferencing clusters and the goal is to actually have the highest possible computer density at the lowest possible cost and energy consumption to generate tokens, we thought that maybe an architecture that is beyond the GPU and what you've traditionally been doing with GPU and HBM is what we should be doing. That's we're developing and we have to execute, and that's the focus on the company right now. Christopher Caso: Got it. With -- just back on handsets. And you talked about a mix shift towards the premium tier. To what extent has the growth that you've seen in handsets been driven by Snapdragon ASPs? And obviously, wafer prices are going up as you go to finer geometries. Maybe talk about the impact of higher ASPs on handset growth, both now and going forward and how the industry absorbs those higher ASPs? Akash Palkhiwala: Yes. So I think there's a long-term trend that we've seen. This is a conversation that we have every year, but we continue to see just very strong demand for more capable chips, more capable processing in these premium tier chips. And so the competition between the OEMs drives it, the demand for consumers doing more activity on the phone drives it. And we know the next couple of chips that we are making, and we're already in discussions, advanced discussions with our customers. So we feel pretty confident that there are legs to this trend over the next several years. The second factor that I outlined is important to keep in mind as well is this very significant mix shift towards more premium devices. And that's not about content growth within the tier, but it's more about more capable devices being purchased by consumer. And that is a multiyear trend as well that we're continuing to see going forward. Operator: The next question is from the line of Tal Liani with Bank of America. Tal Liani: If I look at this quarter, you grew handsets by 14% and it looks like next quarter, you're guiding again 600 basis points of above market growth or above market expectations for QCT. When you look at next quarter, what are the components of this outperformance? Do you -- can you go over kind of IoT, autos and handsets? Where do you think you can perform better than you initially thought last quarter, et cetera? Can you give us a little bit of a color on how next quarter is behaving of the QCT breakdown? Akash Palkhiwala: Tal, just to confirm, your question is about the December quarter, first fiscal quarter? Tal Liani: Yes, first fiscal quarter, sorry. The question is about the guidance for next quarter. Yes. Akash Palkhiwala: Yes, perfect. So in -- specifically in automotive, we had a record quarter in September, so $1.1 billion -- approximately $1.1 billion, and we are guiding flat to slightly up in automotive. We do think that we're in this very strong position as additional cars get launched with our capabilities in them, we will continue to grow revenue through the year. IoT is similarly positioned, right? We saw significant upside relative to our guidance within the September quarter, and we are positioned to continue to grow revenue starting first quarter going into the rest of the fiscal year as well. Within handsets, the upside that you're seeing in the December quarter is really the success of our launch of our new chip. We've seen all the major OEMs launch devices with it. As I said earlier, strong consumer reaction, and that is reflected in our financial forecast. On a sequential basis, as I mentioned earlier, we are forecasting a low teens sequential revenue growth in the handset stream in QCT. Tal Liani: And my follow-up is on a -- like historical perspective, when you launch a product into China and it's into the New Year's -- the Chinese New Year, et cetera, is first fiscal quarter the strongest quarter? What happens from a seasonality point of view, what happens for the next few quarters from a historical perspective? Akash Palkhiwala: I mean, as you've seen in the past, we expect our first fiscal and second fiscal quarters to be the stronger quarters in the year. And usually, the June quarter, the third fiscal quarter is a lower quarter. So that's -- seasonality should be consistent with what you've seen before in the handset business. Operator: The next questions come from the line of C.J. Muse with Cantor Fitzgerald. Christopher Muse: I wanted to kind of focus on QCT EBT margins and revenues grew 5% year-on-year, yet margins were down 100-plus bps. And I'm curious, is that a function of mix? Or is that a function of higher manufacturing costs? Or is it simply R&D investments for future revenue growth? Akash Palkhiwala: Yes. I think when you look at the year-over-year trend, I think you should think of we are investing in the data center area, which over the last several years, we've been kind of just focusing OpEx on moving from mature businesses into growth areas. Data center is incremental to the investment profile that we have. Christopher Muse: Okay. It's very helpful. And then I guess just to hone in on your non-Android handset business. Is there an update in terms of how we should model that for calendar '26? Akash Palkhiwala: No change to what we've said on share within Apple versus what we've said in the past. Operator: The next question comes from the line of Ben Rises with Melius Research. Benjamin Reitzes: Just wanted to touch back on the data center event, you said you're going to be updating us in the next calendar year. Previously, you had an Analyst Day where you've put out these long-term targets for FY '29. I would assume that the smallest opportunity was in XR at $2 billion. I would assume if we're going to have an event and go through something like this, this has the opportunity to be something pretty material, bigger than the smallest opportunity outlined at the last Analyst Day, that was $2 billion for XR by '29 and more like another multibillion opportunity. Can you just -- can you guys clarify that? Akash Palkhiwala: Yes, Ben, that's a great observation. I think we're seeing this market take off very fast, especially AI smart glasses. And so we definitely feel like we're significantly ahead of the guidance that we had provided and very significant upside opportunity. I mean if you kind of step back and think about the broader opportunity around personal AI, and you could think of it as the glasses form factor or the watch form factor or hearables form factor, this could be a very, very large market. And so if that plays out as we suspect it might, it will create significant upside opportunity. Benjamin Reitzes: Yes. Sorry, just to clarify, though, my question, I appreciate that is that if you're going to outline the data center opportunity and have a special event, should we assume that it's a multibillion opportunity, something that you would call out that's at least as big, if not bigger, than anything you laid out at your last Analyst Day, which is the smaller opportunities are $2 billion to $4 billion. Cristiano Amon: Ben, now -- thanks for the question. I understand it now. Yes, it's upside on that number and success in this area, I think, presents to us a potential multibillion-dollar revenue opportunity in a couple of years, and that's how we're thinking about it right now. Operator: That concludes today's question-and-answer session. Mr. Amon, do you have anything further to add before adjourning the call? Cristiano Amon: I just want to thank all of our partners, our employees, and we are continuing to change Qualcomm into a very diversified company. We're probably one of the few companies among all the semiconductor companies that can go from 5 watts to 500 watts with very flexible and very broad technology capabilities. I think one thing that we take pride of in every industry that we enter, we have a platform that is a leading technology platform, and we're excited about the future of the company, and we're just going to keep executing on this strategy. Thank you very much for supporting our call. Operator: Ladies and gentlemen, this concludes today's conference call. You may now disconnect.
Operator: Hello, everybody, and welcome to the Bumble Third Quarter 2025 Financial Results Conference Call. My name is Elliot, and I'll be coordinating your call today. [Operator Instructions] I'd now like to hand over to Will Taveras, Investor Relations. Please go ahead. William Taveras: Thank you for joining us to discuss Bumble's Third Quarter 2025 Financial Results. With me today are Bumble's Founder and CEO, Whitney Wolfe Herd; and CFO, Kevin Cook. Before we begin, I'd like to remind everyone that certain statements made on this call today are forward-looking statements. These forward-looking statements are subject to various risks and uncertainties and reflect our current expectations based on our beliefs, assumptions and information currently available to us. Although we believe these expectations are reasonable, we undertake no obligation to revise any statement to reflect changes that occur after this call. Descriptions of factors and risks that could cause actual results to differ materially from these forward-looking statements are discussed in more detail in today's earnings press release and our periodic filings with the SEC. During the call, we also refer to certain non-GAAP financial measures. These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from our GAAP results. Reconciliations to the most comparable GAAP measures are available in our earnings press release, which is available on the Investor Relations section of our website at ir.bumble.com. With that, I will turn the call over to Whitney. Whitney Herd: Hello, everyone, and thank you for joining us today. Helping people find love has been Bumble's focus since day 1. What made Bumble successful from the start was simple but powerful. We built trust with women. That trust became our moat. It created a healthier, more balanced member base that drove engagement, retention, growth and a global brand. Historically, most dating products skewed male, leading to an uneven experience where women often felt overwhelmed and disengaged. Bumble changed that by putting women in control, creating trust, balance and a higher quality member base that produce better outcomes for everyone. Today, we have the brand long identified with putting women first and a deep understanding of what women want from love and connection. This brand identification is perhaps our biggest strategic asset. That's why we've returned to that core, winning with women because we believe that when women feel safe, respected and confident and when they meet quality matches, everything else improves. Connection becomes more meaningful, engagement more genuine and the business more sustainable. When I returned as CEO in March, the first thing we did was listen deeply and intentionally to women. What we heard across markets was consistent. People want to trust who they're meeting. They want better quality matches, and they want more authenticity. Those insights became the foundation of the quality over quantity reset I've been talking about over the past 2 quarters. Every step we have taken since our product updates, investments in AI and every marketing move ties back to one goal, making Bumble a better experience for women because when women are happy, the entire ecosystem thrives. That is the focus driving our transformation into the love company, expanding beyond dating to build the global platform for meaningful relationships, romantic and platonic. At its heart, what women seek on Bumble is love, and we are building the product, the technology and the brand to deliver it. Since our last call, we've executed this reset with real focus and urgency while also delivering on our financial commitments. For the third quarter, our results are near the high end of our guidance range for both revenue and adjusted EBITDA. We are also seeing the expected short-term effects of prioritizing quality over quantity. Member registrations are lower in the near-term, but we believe that the foundation of the business is getting stronger. Early indicators suggest that retention is improving and ARPPU is growing. The entire team is heads down, laser-focused on executing this plan. The early signs we're seeing just months into our reset reinforce our confidence in our strategy, and we look forward to sharing more details as we progress further and have more data and visibility into trends. We are working aggressively to improve the mix of engaged approved members on our platform, reduce the noise and build a higher quality community. Our Beehive Fit framework is how we are measuring our progress against these goals. We are emphasizing members who are verified, thoughtful and focused on finding love and connection while filtering out low intent profiles and bad actors. This transformation isn't about growth for growth's sake. It's about growing right. We're deliberately trading near-term volume for quality because that's what we believe builds long-term trust, stronger engagement and sustainable growth. Consistent with this goal, in August, we launched a major update to Bumble Date focused on trust and safety. This was more than a feature release. It was a foundational step forward. These updates were built directly from what we heard from members. Men told us they weren't getting enough meaningful interactions. Women told us the profiles they were seeing didn't give them the context that they needed to take action confidently. So we've built tools to close the gap. We introduced richer profiles that let people show more of who they are. We added stronger verification features like phone number verification and selfie video verification to increase confidence. And we launched our new coaching hub filled with content from relationship experts and a help hub to reduce the time it takes to get our members to resolutions for any problems on the app. These are not cosmetic changes. They are designed to create trust to make dating more rewarding because when women feel safe and inspired to show up as their full selves, connection becomes easier for everyone. The problem we're solving for isn't a demand problem. The desire for love and relationships is universal. To deliver on that desire, we have built a product road map that is defined by fixing our members' pain points. Let me spend a moment on exactly how we think about this. It starts with strengthening the foundation. When you ask members what their #1 complaint is with dating apps, it's really wanting more trust, safety and authenticity. The August update landed this first piece. We're building tools that guide members to put their best selves forward and engage with confidence. Between now and the spring, we'll maintain a steady drumbeat of releases, tangible improvements that reflect what we're hearing from our community. Individually, the tools and features we introduced may not sound game-changing, but taken together, they are the critical building blocks for addressing members' pain points. The second largest complaint members have is that they're not seeing who they want to see. This is about the fundamental technology that any dating app has to get right. A major portion of the work we are doing on the UI side is building better signal capturing so that we can supercharge our matching and recommendation engine. Right now is an incredible time in technology to be doing this. AI makes so much more possible. It unlocks the ability to reinforce and enhance our matching engine in ways we could never before. These AI-driven improvements won't necessarily be visible to members, but they will deliver what they want, more quality matches. How does that work? To get good matches, you need great signals. Great signals come from stronger profiles, which is why we are starting at this foundation. More robust dynamic profiles gives both sides of the marketplace more info to react to. This gives our matching engine the high-grade fuel it needs to deliver the best possible experience and outcomes faster. As we get these pieces right, you will see more member-facing innovation. More social tools, for instance, which are coming next year and behind the scenes, better customer service. We've already made a lot of improvements in response times and problem resolution through automation over the past year. We believe there's a lot more to accomplish here. Together, all of these components drive the experience of our members today and those yet to join our platform. We're being really thoughtful about how we're sequencing our work and what we're putting out there and when, which brings me to the final pain point. Members want all of the above, and they want the outcomes faster. Our AI-first cloud-native platform, which we expect to launch in mid-2026 will become the engine of Bumble's future, helping us personalize at scale, enhance safety further and continuously improve the experience for our members. This new platform is expected to give us the innovation speed and flexibility to adapt faster than ever before. It's how we'll turn insights from member behavior into meaningful real-time improvement. We see this new platform as the unlock to restoring long-term product-led growth. In parallel, we're building something entirely new, a stand-alone AI product that will become part of our portfolio. We believe it will be unlike anything else in the market, powered by our deep understanding of human connection and supported by the robust data, brand and infrastructure that already set Bumble apart. We have begun internal testing as well as getting direct feedback on the concept to ensure we get this right. While we continue to enhance Bumble Date, we're also broadening our ecosystem through Bumble BFF, built on our modern Geneva platform, the new BFF app combines friend matching with group management and event planning. It's the next step in transforming Bumble from a dating app into a full platform for connection, and it is already performing well with increased retention compared to the old app. Our primary audience in the near-term is Gen Z and millennial women, the same demographic that powers Bumble Date. In 2026, we will expand this even further, adding group and community discovery so people can more easily find their people and form real friendship offline. BFF is both a growth opportunity and a launch pad for new social experiences that we can apply across our portfolio, further strengthening Bumble's position as the place women choose for friendship, love and belonging. In Q3, we introduced our For the Love of Love campaign, a celebration of real success stories and real connections. It's a reminder of why people come to Bumble in the first place to find love in all of its forms. The reaction has been encouraging with a 4 percentage point improvement in awareness among single women in the U.S. aged 22 to 45. Our goal is simple: to be the most trusted, highest quality women-first platform in the world, the brand people turn to when they're ready for something real. Across Bumble Date, Badoo, BFF, we're more differentiated and AI-driven innovation, we are building a connected portfolio of love. We believe the work we are doing today is strengthening our business and setting the stage for durable, profitable growth. We are proud of the progress we are making, confident in our strategy and focus on execution. We have conviction in where we're headed, and we are so excited for the quarters ahead. Thank you so much for your continued support. And now I will turn it over to our new CFO, Kevin Cook, who I am happy to introduce to you all today. Kevin has already brought fresh perspective and strong operational discipline to the company, and I am so excited to have him here to round out our outstanding new senior leadership team. Kevin Cook: Thank you, Whitney, and good afternoon, everyone. In my first months at Bumble, I've been impressed by the strength of our brand, the capability of our teams and the clarity of our vision. As Whitney mentioned, our third quarter results reflect our quality-first prioritization and ongoing strategic reset. We remain focused on improving member experience, strengthening the foundation of the business and maintaining financial discipline. While some of these actions create near-term headwinds, they are designed to position Bumble for healthier growth and stronger monetization over time. Together with continued product innovation and market expansion, we believe this is the path to durable long-term revenue growth. I will focus my comments on our third quarter performance before sharing guidance for the fourth quarter. Our third quarter results came in ahead of our expectations, but also were heavily impacted by our transformational work. So I think it's useful to start with context on the status of this work and the related puts and takes into what we are reporting today as well as our outlook for Q4. First, with respect to revenue, during Q3, we launched our August product updates focused on trust and safety. As Whitney has explained, we are committed to improving member base quality, and we expected these updates to result in increased attrition of targeted member segments over the near-term. That attrition is reflected in our monthly active user counts with the associated reduction in paying users creating a headwind to revenue this quarter. Since the trust and safety rollout occurred relatively late in the third quarter, results for Q4 will reflect a comparatively larger full quarter impact, both from a paying user count and revenue perspective. The second factor is marketing. We discussed last quarter how we largely paused marketing spend and in particular, stopped most performance marketing as we shifted our marketing posture to align to product launches and highly targeted user acquisition. Overall, this shift drove a significant year-over-year reduction in marketing expense and a corresponding benefit to adjusted EBITDA. This reduction is inclusive of the cost of our For the Love of Love brand campaign launched in August. At the same time, the reduction in marketing substantially contributed to the decline in registrations, active members and payers. The current performance marketing strategy has begun to show encouraging results with targeted audiences, attracting more approved-ready members into the ecosystem. While marketing spend is not expected to return to pre-transformation levels as we are focused on efficiency, we do expect some spend to return moving forward. The third factor to discuss relates to personnel. At the end of the second quarter, we restructured our headcount to align with our product and marketing strategies. We noted at the time that we expected to reinvest much of the savings from headcount reductions, and we are already making selective headcount additions primarily in AI, product and engineering roles that support further innovation. As a result, we saw modest benefits to our Q3 expenses related to headcount. Consistent with the tech and product-led organization, this controlled hiring will continue into Q4 and beyond. Hopefully, this discussion is helpful in shaping everyone's understanding of our performance as we execute on our strategic priorities. I'll now take you through the numbers. Unless stated otherwise, results are presented on a GAAP basis and all comparisons are year-over-year. Total revenue for the third quarter was $246 million, a 10% decline from a year ago. Foreign currency exchange rates contributed $4 million to revenue in the quarter. Bumble App revenue was $199 million, also down 10% year-over-year. Badoo App and Other revenue declined 11% to $47 million. Total expenses for Q3 were $183 million. On a non-GAAP basis, which excludes stock-based compensation and other noncash and nonrecurring items, operating expenses were $163 million, a decline of 15%, driven primarily by a decrease in marketing activity as well as the headcount restructuring previously discussed. Turning quickly to our key expense categories, which we report on a non-GAAP basis. Cost of revenue was $69 million, representing 28% of revenue, down approximately 1 percentage point year-over-year, with incremental improvements due in part to early testing of direct billing initiatives. Product development expense was $25 million, an increase of 14% year-over-year. Sales and marketing expense was $32 million, down 50% year-over-year. G&A was $37 million, an increase of 38% year-over-year, driven primarily by the cumulative adjustments for certain indirect tax obligations related to prior periods. Net income was $52 million. Adjusted EBITDA for the quarter was $83 million, up 1%, representing a margin of 34%, up from 30% in the year ago period. Please note that included within adjusted EBITDA is a negative impact of $12 million related to prior period indirect tax obligations. Nonetheless, adjusted EBITDA margin is temporarily elevated due to the factors I described, including the cadence of both marketing spend and our organizational realignment. We expect our margin to revert closer to historical norms as we complete technical and specialized hiring, reinstitute brand and targeted user acquisition spend and invest in updated product and our new tech platform. Q3 cash flow from operations was $77 million compared to $93 million in the year ago period, and we ended the quarter with $308 million in cash and equivalents. As planned, we repaid $25 million of our term loan in the third quarter. Looking ahead to the fourth quarter, as previously contemplated, our outlook reflects our expectation for continued attrition in active and paying members as we maintain higher quality standards across the platform with a full quarter of impact planned from the initiatives implemented in August. While Q4 will be challenging, we currently anticipate that the rate of sequential paying user declines will improve beginning in early 2026 as we largely complete our trust and authenticity work. As Whitney highlighted, it is early, but these measures are showing signs of improving retention and increasing average revenue per paying user. The thesis continues to be that a better member experience will result in higher retention and drive members' perception of value, leading to increasing revenue. For Q4, we expect total revenue in the range of $216 million to $224 million, representing a year-over-year decline of approximately 17% to 14%. We expect Bumble App revenue in the range of $176 million to $182 million, representing a year-over-year decline of approximately 17% to 14%. Direct billing tests continue to progress and nearly all members in the U.S. now have some form of direct billing available. We expect to continue to refine our direct billing offerings in Q4. We expect adjusted EBITDA in the fourth quarter of $61 million to $65 million, representing a margin of approximately 28% to 29%. Before wrapping up, I want to call your attention to additional information we reported today in our earnings press release and accompanying 8-K pertaining to our tax receivable agreement that was created in connection with our IPO. A special committee of our Board has agreed to a transaction whereby the company will purchase all parties outstanding TRA rights for approximately $186 million. The transaction eliminates the company's TRA liability in full. We believe the transaction is a positive development for Bumble and our shareholders. It removes a large liability from our balance sheet at favorable terms, thus simplifying and creating a more efficient capital structure. By terminating payment obligations under the TRA, the transaction also improves future cash flows. And finally, it greatly improves the company's strategic flexibility moving forward as we work to create shareholder value. I'd also like to note that we are funding the termination agreement with available cash given our solid balance sheet and cash-generative business. As a result of the TRA transaction, which substantially reduces our liabilities and deleverages the business, we no longer plan to pay down $25 million of our term loan as discussed last quarter. In closing, there's a lot of work ahead, but early indicators suggest that we're on the path to reshaping the core business and positioning the company for future revenue growth. From a financial perspective, we're prioritizing disciplined expense management, solid cash flows and the flexibility to invest in our strategic priorities while preserving profitability. We believe we're setting the foundation for a healthier, higher-quality business that will monetize more effectively over time. Operator, we'll now take some questions. Operator: [Operator Instructions] First question comes from Nathan Feather with Morgan Stanley. Nathaniel Feather: Two from me. First, Whitney, now that you've gotten back in the CEO seat and are really starting to make some real product changes, if we zoom forward 2, 3 years, what's your key vision for how Bumble will really work differently from today and be able to drive the successful outcomes? And then a little bit more short-term, but what visibility do you have into the timing and magnitude of when revenue growth might bottom and then hopefully start to improve, especially given the talk of potentially paying user growth bottoming in the first? Whitney Herd: Thank you so much for the questions. I appreciate it. So let's start with the 2- to 3-year outlook. I think there's a slight misconception that exists with folks looking at the dating industry, thinking that it's the swipes that people are dissatisfied with or it's this or it's that functionality. But the reality is, and I just want to put this extremely bluntly, our product road map for the foreseeable future, for the years to come is solving for people's pain points, particularly women's pain points. And frankly, that is how we got here. That is truly what differentiated Bumble from any other dating product that had ever existed. If you think about it quite simply, you don't have a balanced member base or ecosystem or dynamic when we're talking about heteronormative dating if you don't have a place that women want to be. And frankly, that's what Bumble has been synonymous with for all of these years. So when we look to the future, I don't think it's all that complex that you have to reinvent the wheel. The wheel works. And frankly, the demand has not changed through our history. As human beings, we just want love. We want relationships. And frankly, we need it to survive. How we deliver that needs to be modern. It needs to be current, and it has to feel up to par with where people are today with what they expect from technology. So what's so exciting about right now, and I cannot overemphasize this. What AI gives us the ability to do? It gives us the ability to solve our members' pain points to hear women and say, "Oh, this is what you want from a dating product. Oh, you don't want this to ever happen to you again. Oh, you want to meet this type of person and you want more control over that experience." What's phenomenal about our opportunity right now is, when we have this modern tech stack that we are operating on top of we will be able to deliver these changes to our members in a matter of, hopefully, days to weeks versus months. And frankly, even historically, it's taken companies years to build certain things. So we have a superpower because we listen to women. We have women that believe in us globally, and this gives us market expansion opportunity. This gives us a dynamic opportunity to really rescale once we have this quality approach really under our belt, and we're making great headway. So as you know, and I'm so grateful to all of our shareholders, we're very early in this transformation. I stepped back into the seat in March. We actively got to work. We have a brand-new executive team. They are superstars, and we are very bullish on going all in on having the highest quality platform. And that's not just from a member base standpoint. That's from an experience standpoint. You should come to Bumble no matter who you are, and you should be able to be very deliberate in what you're looking for and you should be able to get the great high-quality match as soon as possible. And hopefully, that should lead you to love. So that's the 2- to 3-year plan is really just build for the demand and answer the wishes and the wants and solve the problems of the dating market around the world. AI is going to be a huge part of this. But ultimately, we're here, and we're so excited about it. So as far as when do we see a return to revenue growth. So I know this is a tricky one for people to follow along with in such tight time lines as far as earnings calls go. But we've got to complete this reset. Frankly, we have to complete the trust and safety efforts. You've seen that the Q4 numbers really reflect most of the impact of that. And it's largely what drove the payer decline along with us really pulling back on the performance marketing. But one point I'd like to make quickly, and then I'll wrap this up is, we've actually -- because of all this work we've done around quality and the Beehive Fit framework, we've actually found ways now to go do targeted performance marketing that brings in high-quality, what we call approved or likely to be approved members. So we can go back to that here in a very precise and targeted and measured way. So overall, that is on the horizon. We do see an end in sight if that makes sense, and we're very fully committed. Kevin, is there anything you'd like to add to that? Kevin Cook: Yes. Nathan, it's Kevin. Thanks, Whitney. So as you might expect, we're not forecasting revenue beyond Q4, but I can give you an idea of the arc, right? So just thinking about the Q3 decline in payers, for example, the decline was driven primarily by 2 intentional strategies designed to improve member base quality and, of course, member experience. You're familiar with some of these, but let me just repeat them for clarity. So trust and safety work and a reduction in our marketing spend together contributed approximately 80% of the decline in paying users on a year-over-year basis. So it's important to recognize that we control these reductions to a large extent, and that this strategy is all consistent with the reset that Whitney outlined. In terms of sort of progress in executing that strategy, just looking at some of the things that we know, and as Whitney highlighted already, it's extremely early. We've only been at it for about a quarter, but we are seeing some signs of encouragement. We saw a modest improvement, and you might have observed this in our prepared remarks, but we saw a modest improvement in retention, for example, over the quarter. We saw an 11% improvement in ARPPU in the quarter for Bumble. We, in addition, saw very strong uplift in brand awareness and brand perception among women in the quarter, mostly related to our brand campaign. And we are -- we continue to make progress on this internal framework you've heard us refer to before, the Beehive Fit framework, where we are attempting to lift to members from what we call internally the improved category into the approved category. And there, we are seeing all of the categories moving in the right direction. And so, that incremental progress, it's going to take time, of course, but that incremental progress is encouraging as well. Remember that the approved members show significantly higher engagement and they monetize at more than twice the rate of improved members. So apart from understanding, as Whitney was suggesting that the functioning of the ecosystem, it's essential to have high-quality members as proxy approved members, it also has an obvious impact on business performance. So I'll pause there, Will, and see whatever questions we have or Nathan's got a follow-up. Operator: [Operator Instructions] We now turn to Andrew Marok with Raymond James. Andrew Marok: Maybe digging into that last point that Kevin made there on the improved bucket. I know that was going to be a major initiative in kind of bringing along the improved members to ARPPU. And I understand it's probably a pretty wide spectrum, but is there anything specific that you're seeing out of those improved members that are giving you signs for encouragement or perhaps caution? Or anything else that you'd like to call out within those that you think would be important for us to look for as we go into 4Q and beyond? Whitney Herd: Thanks for the question. So I'll take that. And if Kevin wants to add on, we'll do that after. So I think it's really important to understand that a lot of folks have the capability to be what we would call approved members in just a couple of tweaks. So I'll give you a quick example. You might have a great person who is looking for love, but they have no clue how to write a bio. They only have one photo. So while they could be going out on lots of dates and getting a lot of interaction, because they have limited knowledge on how to set up a dating app or how to show up at their best self, they actually get stuck in what we call this improved category. And so, what we're really seeing is the more profiles photos someone adds going through just a couple of these quick steps with the trust and the safety tooling that we've introduced, they get more matches. They get more right swipes, they get more engagement. An approved member has better outcomes. And as Kevin just stated, they have higher retention rates. They monetize much better. And frankly, it just improves that entire flywheel, and it really gives people more to operate with. And so, when we focus on improving the improved, not to be redundant there, there's huge opportunity here because the vast middle is somewhere stuck in the middle. And so, this is what we're focused on with this road map that we keep talking about. Building an exceptional product experience doesn't have to be some fancy flashy new feature. It's frankly, "Hey, how do we get onboarding tools in the hands of our members so that they can set up a remarkably robust and authentic and great profile in a really short amount of time, and then they're out in the dating pool." And so, these are just a couple of examples of how really just enabling the system to provide easier tooling to get out there and to move into the proved category, it pulls the tide up for everyone, and it really enhances the experience for everyone. So while we're early and while the metrics at math aren't suggesting this huge monumental moment, bearing with us and having some patience is critical here because this is the strategy that wins in dating. And I believe that I can speak to this with a lot of conviction. I've been at the forefront of this industry, frankly, on the front lines of modern dating technology since I was 22 years old. And I have seen this front and center when you have a healthy balance of women on a product, when people fill out their profiles with high-quality information, when they are not flooded with removed profiles and they see who they want to see. They get good matches, they get into great chats, they go on dates, and that's why I meet Bumble babies every day when I go out into the world. This works and this changes lives. We just need to land the strategy with returning to quality, and then we will reaccelerate on all of our growth opportunities in new markets and core markets, and we're here for it. We're very excited. Andrew Marok: Great. Really helpful color. And then maybe one quick one for Kevin. I'm not sure if you've seen the proposed transaction or the -- excuse me, the proposed settlement details between Google and Epic today. But just wondering if you have an opinion on how that kind of contrasts with what you have assumed into your guidance for the cost of revenue line. Kevin Cook: Okay. So no, I haven't seen the details. So I don't have any insight to share there. I can comment briefly on sort of our direct billing initiatives. As you might expect, we -- as soon as permitted, we set up alternative payments, and we've been testing those strategies throughout Q3, and we'll continue to do that in Q4. You saw in our cost of sales a meaningful improvement in Q3. And we would expect to continue to -- while we will refine strategies around alternative billing throughout Q4, we'd still expect that benefit to persist into Q4, and we should have a full quarter effect of cost of revenue benefits. Operator: We now turn to Ygal Arounian with Citi. Ygal Arounian: I wanted to ask specifically about the stand-alone AI product, Whitney and sort of your thoughts and visions around that, but something that will sort of always be stand-alone. What's the sort of AI-first dating app experience like? And how does that impact how you view the core Bumble experience and how that overlaps with that vision and strategy? Whitney Herd: Thanks for the question. So I think before I talk about our upcoming stand-alone AI product, I actually did want to speak about 2 things surrounding AI. So first and foremost, I'm sure you and everybody else tuning in have been reading a lot and hearing a lot about the new AI-focused dating apps. I really want to make an important point here. Throughout my career, I have seen hundreds of dating apps, dating products, dating matchmakers, you name it, hit the market and fizzle and fumble. There's a reason why there's only a couple of us that stand as strong as we do on a global level. And that's because building critical mass and building a trusted double-sided marketplace is incredibly difficult to do. So what really gives us a unique opportunity here and a right to win is, we have extraordinary data. We have unbelievable sets of groups of people around the world that are looking for love that are actively searching for dating and us being able to lean into this moment with AI and provide them a modern experience that doesn't collapse or change the current experience. So you've got to separate these in your mind. You've got Bumble Date today, and we're going to talk about how AI affects that in a moment. But the stand-alone product is something that, in my opinion, has never been done before. It is going to be very unique. I am extremely excited about it, and our team is very excited about it. The way it ultimately -- we can't disclose the details of how it will work. But what I will leave you with is, if dating apps have predominantly been discovery oriented, right? You get on and you kind of just discover people. This is really the first time that there will be precise search involved in this. And so, when you look at a lot of our consumer products we all use on a daily basis, they're powered by great search and great algorithms. So this AI product is going to lean into a new way of thinking about dating. And how it really will flow in our category -- in our portfolio over time is very exciting because, yes, it can be stand-alone. However, we can take a lot of those learnings, and we can take a lot of that modern technology and layer it in to the core products that we already have. You're seeing us do a bit of this already with BFF because BFF, we've migrated on to the Geneva tech stack, and I'll give you a quick example, what would have taken us a few months at Bumble Date to really update. So Date 1.0. That's the tech stack we're on right now at Bumble Date. It might take us months to build a certain feature or product change for our members. We had a piece of feedback from members at BFF, for example, and we had that problem fully changed and involved within a week where that would have taken months on Date 1.0. So we are already integrating some of these AI changes into 1.0 to solve customer needs. But what's very exciting is you'll have this tandem approach to AI in our group because the upcoming 2.0 infrastructure for Bumble Date, which we just said will be mid-'26, that will give us the capability to build tooling and we were speaking earlier about how certain features can be engineered in hours now due to this technology, it's revolutionary. So we're going to be able to move so fast. So the answer is yes, it will be stand-alone this new product. However, it will have overlap crossover function just like we're doing with BFF, where we're learning about how groups behave and how communities behave so that we can build that into the core dating product. So I hope that answered the question. If it didn't, please let me know. Ygal Arounian: It did and very helpful. And I guess maybe a little bit more near-term, just as you get through to the spring product release and you're talking about kind of the, I guess, steady releases through spring and solving pain points. Are there a few things that you see as being sort of the biggest drivers? I know we're doing all the cleanup work and enhancing the user experience on one side, but in terms of like new products that are coming out, are there a few things that are sort of excite you the most? Whitney Herd: Yes, that's a great question. So this might be a slightly unpredicted response that the least exciting features on paper are actually the ones that move the needle the most for us sometimes. So when you go and invest time and energy and optimization, for example, into customer service, that has a meaningful impact on our members' lives. They are feeling heard. They're getting their problems resolved. Now, on paper, that's not some flashy new release. So what we're really focused on right now between the launch of 2.0, and I'm using that as a reference point. 2.0 is the new AI cloud-native tech stack that Bumble will live on in the future, which is the mid-'26 technology. But if you look at everything we're doing between now and then, it's just listening to our members, right? Our product road map is our customer pain points. And as I said, you don't ask members, "Hey, what's not working for you and they say, "Oh, wow, I really wish you had this flashy crazy feature." They just say, I want a better profile. I want to be able to see more information about someone. I want a safer experience. I want the algorithm to be more personalized to me. These are at face value, quite basic asks, but this is what builds an incredible experience. And frankly, this is what got us to being the great company we are. And yes, the technology has been innovating and iterating over time. And obviously, we have to evolve with where the category is. But ultimately, the strategy doesn't change. Just listen to women and give them what they want. It's very simple, and that's exactly what we're doing, and that's how we win with the category. Operator: We have no further questions. So this concludes our Q&A and today's conference call. We'd like to thank you for your participation. You may now disconnect your lines.
Operator: Greetings, and welcome to the American Coastal Insurance Corporation's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, I'd like to let you know that this conference is being recorded. It is now my pleasure to turn the call over to your host, Karin Daly, Vice President at The Equity Group and American Coastal's Investor Relations representative. Please go ahead, Karin. Karin Daly: Thank you, Diego, and good afternoon, everyone. American Coastal Insurance Corporation has also made this broadcast available on its website at www.amcoastal.com. A replay will be available for approximately 30 days following the call. Additionally, you can find copies of the latest earnings release and earnings presentation in the Investors section of the company's website. Speaking today will be President and Chief Executive Officer, Bennett Bradford Martz; and Chief Financial Officer, Svetlana Castle. On behalf of the company, I'd like to note that statements made during this call that are not historical facts are forward-looking statements. The company believes these statements are based on reasonable estimates, assumptions and plans. However, if the estimates, assumptions or plans underlying the forward-looking statements prove inaccurate or if other risks or uncertainties arise, actual results could differ materially from those expressed in or implied by the forward-looking statements. Factors that could cause actual results to differ materially may be found in the company's filings with the U.S. Securities and Exchange Commission in the Risk Factors section of the most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q. Forward-looking statements speak only as of the date on which they are made, and except as required by applicable law, the company undertakes no obligation to update or revise any forward-looking statements. With that, it's my pleasure to turn the call over to Brad Martz. Brad? B. Martz: Thank you, Karin, and welcome, everyone. I'm pleased to report American Coastal continued to deliver exceptional results during the third quarter with over $42 million of earnings before income taxes, representing our best quarter to date. Total revenues grew over 10% and despite general and administrative expenses normalizing in the third quarter without the nonrecurring payroll tax credits realized in the first half of the year, American Coastal was able to grow net income 16% year-over-year due to the muted catastrophe and attritional losses incurred. As previewed last quarter, we intentionally slowed premiums written in the third quarter to limit exposure growth through the peak of hurricane season and to hit our modeled expected average annual loss target, which was ultimately successfully accomplished. As the commercial property market continues to soften, risk selection and underwriting discipline remain paramount as we search for profitable growth opportunities. Looking forward, we believe the opportunity to earn strong returns on capital remains present even if headwinds from the current softening cycle persist. Accordingly, on October 1, American Coastal reverted to normal operations. So we do expect to see a rebound in premiums written during the fourth quarter with that positive momentum likely continuing into 2026. Our wholly owned MGA, Skyway Underwriters, recently introduced a new product and began quoting a new commercial residential property insurance program targeting the assisted and independent living facility market in Florida. American Coastal is only underwriting and retaining property exposure and will not be taking any liability or casualty risk. We believe the assisted living niche represents another attractive avenue for us to leverage our powerful distribution relationships and unique expertise in underwriting commercial residential property insurance by targeting properties that have similar physical risk characteristics to our condo and apartment policies, but are also expected to be diversifying to our risk portfolio. Page 10 of our earnings presentation provides more detail on this exciting new initiative. I'd like to now turn it over to our Chief Financial Officer, Svetlana Castle, for more specifics on our results. Svetlana Castle: Thank you, Brad, and hello. I'll provide the financial update, but encourage everyone to review the company's press release, earnings and investor presentations and Form 10-Q for more information regarding our performance. As reflected on Page 5 of the earnings presentation, American Coastal demonstrated another strong quarter with net income of $32.5 million. Core income was $30.5 million, an increase of $3.6 million year-over-year due to $6.4 million increase in net premiums earned as a product of stepping down our gross catastrophe quota share from 20% to 15% effective June 1, 2025, and the earning of new business premium written in prior quarters. This was partially offset by increased operating costs of $5.6 million, driven by $4.5 million or 21.5% increase in policy acquisition costs. Policy acquisition costs increased due to an increase in commission to MGA and decrease in ceding commission income year-over-year. Our combined ratio was 56.9%, a decrease of 0.8 points from 2024 and lower than our stated target of 65%. Our non-GAAP underlying combined ratio, which excludes current year catastrophe losses and prior year development, was 57.8%, also below our 65% target. We continue to feel our reserve position is strong. Page 6 of our presentation shows our increased operating expenses of $5.6 million, as previously described. These increased costs were in line with expectations and were more than offset by the increase in net premiums earned mentioned earlier, driving additional net earnings shown. Looking at the full year results on Page 7 of the earnings presentation. Net income from continuing operations was $80.2 million, an increase of $9.7 million or 13.8% year-over-year. Revenues have increased $31.7 million or 14.6% year-over-year, driven by increased net premiums earned. Operating expenses increased $23.8 million year-over-year, driven by policy acquisition costs increasing $28.7 million. This increase was in line with expectations and driven by the quota share of step-down and commissions mentioned previously. G&A expenses partially offset this, decreasing $4.9 million, however, this was driven by onetime tax credit refund of $4.5 million previously unrecorded and disclosed as a gain contingency. Page 8 shows balance sheet highlights. Cash and investments grew 28.5% since year-end to $695 million, reflecting the company's strong liquidity position. Stockholders' equity has increased 38.9% since year-end to $327.2 million, driven by strong results. Book value per share is $6.71, a 37.2% increase from year-end 2024. The company continues to be in a strong position to execute its strategic initiatives. I'll now turn it over to Brad for closing remarks. B. Martz: Thanks, Svetlana. I don't have anything to add. So that completes our prepared remarks today, and we're now happy to field any questions. Operator: [Operator Instructions] And your first question comes from Greg Peters with Raymond James. Charles Peters: So I'm going to -- I have 3 questions, one on the gross premium written decline in the third quarter. And related to that, I guess, would be the commentary in your presentation about pricing being down 13% also go to reinsurance. But first, for gross premium written, can you break up for us the part of the decrease that was related to suspending writing new business versus the portion that related to pricing being down, as you said in your press release, 13%, offset by I assume maybe there was some new business or maybe not? B. Martz: Greg, this is Brad. Yes, we didn't suspend new business per se. We were still actively writing new and renewal business. We just had more stringent underwriting controls in place. So we set and manage our book of business by giving AmRisc on the condo side, for example, certain targets for total insured value or PML and/or average annual loss. And in this particular case, for this year, we had set an average annual loss target at 9/30 linked to our reinsurance [ buy ], right? So we have -- we want to always meet the targets for the amount of exposure we're going to have in force during hurricane season relative to what we told our reinsurance partners we would deliver on. So that was super important to us. Obviously, if you go over that target, there's flexibility, just no additional reinsurance premium. We could have continued to grow in the third quarter if we've chosen to do so, but we felt it was prudent to hold the line and continue to meet the targets we laid out for our expected average annual loss. So that's the real reason for the decrease. I think it's, again, something we can easily make up for in the fourth quarter and into the first half of 2026. So I wouldn't read too much into it. Charles Peters: Okay. The other question, just -- in your press release you talked about the reinsurance costs as a percentage of gross earned premium quite down nicely in the third quarter of this year versus the third quarter last year. I know, I guess, the January 1 renewal is right around the corner. That's not the big [ wind ] contract for you. But maybe you could just give us a little sense or some sense of how the 1/1 renewal discussions are going, which I'm sure you're involved with at this point in time? And any early read you have on the wind contract that comes up in June? B. Martz: Sure. We had some very productive conversations in Orlando in early October with about 3/4 of our reinsurance panel. We had, I think, a good dialogue about capacity and desire to grow alongside our reinsurance partners. So there's certainly strong support for American Coastal out there. But interestingly enough, we didn't -- the conversations were not centered or focused around price. We leave that to other metrics and price discovery tools, including utilizing our broker -- reinsurance intermediaries to evaluate the market and try and get a sense for what we can expect on pricing. So I think there's lots of capacity out there. There's certainly not a supply problem. The question is what will be the demand. And I see reinsurance costs moving in step with what's going on with our rates on the front end. So you mentioned our rates are down. That trend continued in the third quarter. So we are obviously looking at those headwinds from the softening cycle, like I said, and trying to understand what that means for returns on capital and the profitability of our business. So -- when I think about average premiums, they're really only down about 9% since year-end. But for the full year, they will be down commensurate with the risk-adjusted cost decrease we've received on our core cat renewal pricing at 6/1 of 2025. So as long as that continues, our outlook will remain positive. But certainly, an absence of major cat events in the second half of 2025 has helped provide some clarity around where pricing, both on the primary and the ceded side are headed. Operator: [Operator Instructions] We have another question coming from Greg Peters with Raymond James. Charles Peters: I'm going to ask one follow-up question just because you featured this in your presentation, which is the assisted living business. Maybe -- you have a lot of information on the slide on it, but maybe you can give us a sense of what you think the addressable market looks like for American Coastal and how that might factor into your growth for next year? B. Martz: Absolutely. Thank you for the question. This is another opportunity for us, brought to us by some of our distribution partners. The initial market research we've done would suggest it's about $100 million market for the types of risk we're looking at, which is limited. It is growing. It could be double that in 10 years, as you can see by the growth projections. But it won't have a material impact on our results for next year. Similar to what we outlined for apartments, where we thought that was about a $200 million market opportunity. We'd write about 10% of that in year 1. I think you can think about ALFs the same way, where today, it's about $100 million addressable market opportunity. And if we can capture 10% of that in year 1, I think that would be a decent result. We're not looking to knock the cover off the ball right out of the gates. We've got a lot of learning curve in front of us, although we do feel very comfortable with this risk. What's interesting about it is that the properties we're targeting are eligible for the Florida Hurricane Catastrophe Fund, that's right in our wheelhouse. So just like apartments and condos, that provides us a cost advantage having that business in the Florida admitted market. So where it's eligible for the cat fund and the guarantee fund. So I think we'll have some success. It's a little early to forecast. So I would -- we'll have more details around our forward-looking projections for 2026 at our next Investor Day. We're currently targeting sometime in the first half of January, probably the second week of January, most likely. I don't have a definitive date yet to host an Investor Day where we'd like to update shareholders on our strategic initiatives for the upcoming year and update our full year guidance for 2026 for both net premiums earned and net income. So stay tuned for that. Operator: And there are no further questions at this time. So with that, we will conclude today's call. All parties may disconnect. Have a good evening. Thank you.
Operator: Good afternoon, everyone, and welcome to Snap Inc.'s Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to David Ometer, Head of Investor Relations. You may proceed. David Ometer: Thank you, and good afternoon, everyone. Welcome to Snap's Third Quarter 2025 Earnings Conference Call. With us today are Evan Spiegel, Chief Executive Officer and Co-Founder; and Derek Andersen, Chief Financial Officer. Please refer to our Investor Relations website at investor.snap.com to find today's press release, earnings slides and investor letter. This conference call includes forward-looking statements, which are based on our assumptions as of today. Actual results may differ materially from those expressed in these forward-looking statements, and we make no obligation to update our disclosures. For more information about factors that may cause actual results to differ materially from these forward-looking statements, please refer to the press release we issued today as well as risks described in our most recent Form 10-K or Form 10-Q, particularly in the section titled Risk Factors. Today's call will include both GAAP and non-GAAP measures. Reconciliations between the 2 can be found in today's press release. Please note that when we discuss all of our expense figures, they will exclude stock-based compensation and related payroll taxes as well as depreciation and amortization and certain other items. Please refer to our filings with the SEC to understand how we calculate any of the metrics discussed on today's call. With that, I'd like to turn the call over to Evan. Evan Spiegel: Hi, everyone, and welcome to our call. In Q3, we made meaningful progress on our long-term strategy to grow our global community, deliver stronger performance for advertisers and invest in the future of augmented reality. At the core of Snapchat is a mission that has endured since our founding to reinvent the camera to strengthen human connection. Snapchat is built around real communication, helping people share moments and build closer relationships every day. This clarity of purpose continues to drive durable growth. Our community reached 477 million daily active users, an increase of 34 million or 8% year-over-year and 943 million monthly active users, an increase of 60 million or 7% year-over-year. With this momentum, we have made further progress toward our goal of reaching 1 billion monthly active users around the world. Revenue increased 10% year-over-year to $1.51 billion, driven by improved advertising demand and the rapid expansion of our direct revenue streams. On the advertising front, continued growth in our small- and medium-sized business customers and improvements in direct response advertising performance drove an acceleration in direct response advertising revenue, which increased 8% year-over-year and 13% quarter-over-quarter. Other revenue, which includes Snapchat+ subscription revenue increased 54% year-over-year to $190 million in Q3, reaching an annualized run rate of more than $750 million. To build on this momentum, we expanded our premium offerings, introducing new storage plans for memories and launched AI-powered experiences in Lens+ and Platinum bundles that we believe will deliver incremental value to our most engaged community members. We remain disciplined in aligning our investments with our core strategic priorities while driving operating leverage over time. In Q3, we delivered $182 million of adjusted EBITDA and generated $93 million of free cash flow while reducing our net loss by more than 30% year-over-year to $104 million, underscoring our progress towards sustained profitability. With approximately $3 billion in cash and marketable securities on hand, we are well positioned to continue investing confidently in innovation and long-term growth. We also continue to scale differentiated ad formats and offerings such as Sponsored Snaps, Promoted Places and the App Power Pack supported by advances in AI for ranking, creative generation and personalization. These investments are expected to compound performance over time, unlocking greater advertiser ROI and long-term revenue growth. At the same time, we are improving key components of our service to make Snapchat more reliable and as fast to launch as the native camera, an essential part of ensuring our service remains simple, accessible and enduring. Snapping between friends and family remains the foundation of Snapchat, driving both daily engagement and long-term retention. In Q3, we shared that Snapchatters created over 1 trillion selfie snaps in 2024 demonstrating how deeply our community uses our camera to communicate and feel closer together. Over the next year, we are prioritizing sharing and conversations through new conversation starters such as status updates, flashbacks and topics, building new ways to play games with friends and making it effortless to share Spotlight videos through stories and chat. Our goal is to spark conversations, strengthen friendships and inspire creativity. This quarter, we rolled out several new features that made communication faster, easier and more expressive. Infinite retention allows users to save chance indefinitely while Homesafe gives friends peace of mind with an automatic check-in after returning home. We also launched the Snapchat keyboard, extending our sticker library to other apps and introduced Custom Moji, enabling users to generate personalized Bitmoji stickers from text prompts. These updates underscore our commitment to enhancing the Snapchat experience through richer visual communication while fostering deeper community connections. Global time spent watching content and the number of content viewers increased year-over-year in Q3, reflecting our multiyear investment in machine learning and the continued strength of Spotlight. Building on this momentum, we launched our largest content recommendation model to date, improving freshness and relevance across the platform. We also upgraded our infrastructure to get a step closer to delivering content in near real time, reducing latency and cutting model training cycles from days to just 2 hours. As a result, the share of total Spotlight views from content posted in the last 24 hours increased more than 300% year-over-year in the U.S. as our models now service more topical and original content. In addition, we launched our first unified user model that combines signals from Spotlight, Discover and the camera while advancing work on a trend detection model that identifies emerging creative trends and amplifies their reach. Snapchat is a platform where any creator can express themselves authentically, grow an audience and build a business. Over the past year, we onboarded thousands of Snap Stars reaching a record level of active creators. We're also seeing established creators and homegrown talent thrives such as Kaylee Rosie, a nursing student and plant enthusiasts who has increased her followers by more than 50 times in the last 6 months by posting Stories and Spotlight content nearly every day. To help creators succeed, we expanded monetization tools and new collaboration formats with brands such as Sponsored First Snaps. This growing ecosystem has made Snapchat more resilient and diverse driving a nearly 180% year-over-year increase in Snap Star Spotlight posts in North America. More creator activity enhances the relevance and quality of our content inventory strengthening the overall engagement of flywheel for both users and advertisers. While we continue to innovate on our core product experience for our community, including efforts to address ongoing engagement headwinds, we are also navigating a number of evolving factors that we expect will influence community growth and engagement in the near-term. Key focus of our current strategy is improving average revenue per user by more directly monetizing our core product. This includes the continued growth of Snapchat+, the introduction of Sponsored Snaps and Promoted Places, the launch of Lens+ and the testing of memory storage plans. These initiatives are designed to strengthen our top line performance, but they do involve trade-offs with engagement so we expect some adverse impact on engagement metrics as these experiences are rolled out globally. At the same time, we are recalibrating our investments in community growth and the cost to serve our community in order to improve financial efficiency. This includes testing changes to our infrastructure that will lower costs in regions with less long-term monetization potential, allowing us to better align our resources with the financial opportunity of each geography, but potentially coming at the cost of adverse trade-offs with engagement in these countries. We are also preparing for the upcoming rollout of platform-level age verification, which will use new signals provided by Apple and soon Google to help us better determine the age of our users and remove those we learn are under 13 or under 16 in certain geographies such as Australia. These actions are an important step in maintaining a safe and compliant platform that we expect they will also adversely affect engagement metrics as implementation progresses. In addition to these internal initiatives, we continue to experience the effects of regulation and government policy actions. Recent examples include Australia's social media minimum age bill, which takes effect in December and government restrictions on access to Internet services in certain countries. We anticipate that similar regulations in other jurisdictions may take effect or be passed in the near future. These policy developments combined with potential platform level age verification are likely to have negative impacts on user engagement metrics that we cannot currently predict. While we remain committed to our goal of serving 1 billion global monthly active users, we expect overall DAU may decline in Q4 given these internal and external factors. And as noted above, we expect particularly negative impacts in certain jurisdictions. We believe these are the right actions to strengthen our business for the long-term by improving monetization efficiency, ensuring compliance with evolving regulations and positioning Snap for sustainable growth. Snap continues to be a global leader in augmented reality, engagement and innovation. Every day, Snapchatters use AR lenses more than 8 billion times and more than 350 million Snapchatters engaged with AR experiences daily. Over 400,000 creators from nearly every country have built more than 4 million lenses using our AR tools, making Snapchat one of the most scaled AR platforms globally. In Q3, we introduced the Imagine lens, our first open prompt image generation lens, allowing Snapchatters to create or reimagine snaps by simply typing a prompt more than 500 million Snapchatters have engaged with Gen AI-powered lenses over 6 billion times, reflecting the growing appeal of AI-driven creativity on our platform. Snapchatters engaged with our AI Face Swap Lens over 1 billion times in Q3, illustrating how generative AI can turn self-expression into shared moments and open up new ways to spark conversations and connections. Our investment in generative AI is designed to make communication more expressive, personal and human. Realistic style gen delivers lifelike fit, texture, lighting and perspective, unlocking cinematic quality transformations and generating nearly 100 million lens views in Q3. Enhanced face gen enables higher fidelity face effects, generating over 700 million lens views while selfie attachments use 3D asset generation to add realistic context-aware elements like hats and hair styles, generating over 145 million lens views. Coming soon, AI Clips will allow creators to generate short shareable videos from simple prompts, turning AI video creation into a social and collaborative experience. Together, these innovations demonstrate why our leadership in generative AI matters. They transform how people express themselves, create content and share moments that strengthen their connections on Snapchat every day. We continue to see strong momentum with games. Over 180 million people now play games on Snapchat every month with sharing up more than 100% year-over-year to make these experiences more social, we introduced the Games Chat Drawer, bringing games directly into chat so friends can play together seamlessly. Developers are using new tools in Lens Studio like the character controller, camera controller, input system and Bitmoji suite which make it easier than ever to build personalized interactive experiences. New features like turn-based game play and enhanced leaderboards are driving innovation across popular titles such as 2-player Mini-Golf and Bitmoji Tower Defense. To support creator monetization, we expanded the Lens Creator Rewards program with Lens+ payouts, enabling developers to earn based on engagement from Lens+ and Snapchat Platinum subscribers. Outside of Snapchat, Camera Kit reached over 68 million monthly active users by the end of Q3 and no longer requires mandatory Snapchat branding, making it a flexible free SDK for brands and developers to deliver immersive AR experiences across apps, the web and AR mirrors. Together, these updates reinforce our commitment to building the most expressive, scalable and monetizable AR ecosystem in the world. Our long-term vision for AR extends far beyond the smartphone. For over a decade, we have been building towards the future where computing feels more natural, contextual and integrated seamlessly into the world around us. After 5 generations of product development, specs will launch publicly next year, representing a major leap forward in human-centric computing. In Q3, we introduced Snap OS 2.0, our largest system update yet. It delivers faster performance and a redesigned browser optimized for streaming and productivity, adds full WebXR support and includes a new UI Kit and Mobile Kit to simplify interface and cross-device development. We also added features like travel mode, which keeps AR content stable while in transit and EyeConnect, which enables instant shared experiences simply by looking at another person to co-locate content. Developers and brands are already building with spectacles, including Enklu and Artglass who are redefining live events with location-based lenses. These projects highlight the vast potential for creativity and commerce on specs. To help developers monetize these experiences, we introduced Commerce Kit, enabling developers to accept payments directly within lenses, unlocking digital goods and premium features in real time. Specs are purpose-built for the age of AR and AI designed to make computing more personal, intuitive and contextually aware. Unlike traditional devices centered around apps and files, specs understand the environment and adapt to user patterns over time. To support this next generation of computing, we introduced Snap Cloud powered by Supabase, a scalable back-end platform that enables richer and more dynamic AR and AI experiences on Snap OS. Snap Cloud is a key step in building the infrastructure that allows developers to create immersive real-time applications and reflects our long-term commitment to advancing the AR ecosystem through specs. We believe Snap is uniquely positioned to win the next wave of AR computing with Snap OS 2.0, Lens Studio, Snap Cloud and our global developer ecosystem, we are at the forefront with an end-to-end AR stack spanning software developer tools and hardware. Together, these investments bring us closer to delivering the world's first fully stand-alone human-centered AR glasses. We made significant progress across our advertising platform by focusing on 3 priorities: advancing our AI-driven outperformance, optimizing high-impact ad formats and strengthening our go-to-market execution across SMBs and mid-market customers. Our investments in AI and machine learning are delivering measurable gains for advertisers. We advanced dynamic product ads with large language models that better understand products, driving over 4x higher conversion rates compared to baseline for certain campaigns. As a result of these and other improvements, purchase-related ad revenue grew 30% year-over-year, reflecting higher attribution accuracy and better campaign performance. For example, Comfrt, a lifestyle and apparel e-commerce brand leverage target cost and Max Bid in their Snap campaign to scale faster and reached an incremental audience that delivered an 85% lift in site visits, a 79% increase in new customers and a more than 3x ROA improvement as measured by WorkMagic since the start of their 2025 campaign. Sponsored Snaps allow brands to join real-time conversations on Snapchat in a way that feels authentic and relevant to users. Early results showed strong performance with up to 22% higher conversions and up to 19% lower cost per action when including Sponsored Snaps in advertiser campaigns. Advertisers across industries are using Sponsored Snaps to reach audiences where they are most active and engaged. For example, to strengthen share voice and drive user preference, ASICS partnered with Zeno Group to promote its latest running shoe collection through Sponsored Snaps, reaching 2 million unique Snapchatters in the chat inbox and driving a 4-point lift in overall brand awareness and a 16-point lift among Snapchatters aged 35 and older along with stronger return on advertising spend compared to existing media. In addition, eBay Sponsored Snaps campaign to drive brand awareness was highly effective, achieving nearly 2x incremental unique reach and positive lift in ad awareness and brand association. Sponsored Snaps are also becoming increasingly direct response focused delivering more personalized and contextually relevant experiences. According to a Kantar study, approximately 85% of U.S. Snapchatters say Sponsored Snaps feel relevant and fit naturally within their habits on the platform. Promoted Places complements this offering by bridging digital engagement with real-world action. The format allows advertisers to highlight nearby store locations directly within the Snapchat map, unlocking new opportunities for performance-driven local marketing. Early testing shows double-digit lifts in visitation, demonstrating its ability to influence real-world outcomes. For example, the fast casual chain Panda Express ran a promoted places campaign that resulted in a 15% incremental lift in visits as measured by our third-party measurement partner in market. In addition, they saw a 10-point increase in brand favorability and a 6-point increase in action as measured by a brand lift study. Together, Sponsored Snaps and Promoted Places demonstrate how Snap's ad platform can influence the full marketing funnel from discovery and engagement to measurable real-world results while creating new opportunities for revenue growth across our global advertiser base. For app-based advertisers, we introduced the App Power Pack, a unified suite designed to improve performance across both scan and non-scan campaigns. Key features include target cost bidding, new App End Cards that automatically incorporate app store images and playables for interactive game previews. Early results show that the App Power Pack is driving over 25% lift in iOS app installs. Early adopters are seeing strong returns, reinforcing Snapchat's role as a scalable performance channel for mobile marketers. For example, mobile gaming app Yotta chose Snapchat to reach Gen Z through culturally relevant fast turnaround ads, leveraging target cost bidding, delivering 35x more iOS installs at 84% lower cost per install 60x more purchases at 90% lower cost per purchase and 6x more first-time purchases at 13% lower cost per add to cart since implementing this new strategy. We continue to advance our automation capabilities to the Snap Smart Campaign Solutions suite, smart targeting, which treats targeting inputs of suggestions and uses machine learning to identify incremental high-performing audiences has launched delivering an average 8.8% increase in conversions for adopted ad sets. Smart budget or automated budgeting solution that optimizes the overall campaign performance has also rolled out across select advertiser objectives and bid strategies. Early results are encouraging with a 5% improvement in median cost per action and a 17% increase in median spend, and we plan to broaden availability early next year. In addition, we have begun testing Smart Ad, which enables advertisers to upload raw creative ad sets and leverage Snap's ML systems to automatically drive performance. SMBs remained our largest contributor to ad revenue growth in Q3, driven by new advertiser onboarding, improved DR tools, streamline go-to-market execution and simplified workflows. We deepened partnerships with commerce platforms such as WooCommerce, making it easier for small and medium-sized businesses to advertise on Snap and reach incremental audiences efficiently. Looking ahead, we see significant potential in the medium customer segment, where penetration remains low despite strong product market fit. We are realigning sales teams and agency partnerships to realize this opportunity, which we expect to become a meaningful growth lever through 2026. Direct revenue remains one of our fastest-growing opportunities. In Q3, we expanded premium tiers such as Lens+ and Platinum bundles, introducing exclusive AR and AI experiences like the Imagine Lens. We are also planning to introduce live streaming and launch new tools to help creators build deeper relationships with their audience. In addition, we announced memory storage plans in Q3 and began rolling out this new offering to our community with more than 1 trillion memories already saved. These changes are designed to both enhance the user experience and sustain the infrastructure that supports long-term growth. We took an important step toward building out our AI platform by partnering with Perplexity AI to integrate its conversational search directly into Snapchat. Starting in early 2026, Perplexity will appear in our chat interface for Snapchatters around the world. Through this integration, Perplexity’s AI-powered answer Engine will let Snapchatters ask questions and get clear conversational answers drawn from verifiable sources, all within Snapchat. Under the agreement, Perplexity will pay Snap $400 million over 1 year through a combination of cash and equity as we achieve global rollout. Revenue from the partnership is expected to begin contributing in 2026. This collaboration makes AI-powered discovery native to Snapchat enhances personalization and position Snap as a leading distribution channel for intelligent agents, laying the groundwork for a broader ecosystem of AI partners to reach our global community. Now I'd like to turn it over to Derek to share more about our financial progress. Derek Andersen: Thank you, Evan. In Q3, total revenue was $1.51 billion, up 10% year-over-year. Advertising revenue reached $1.32 billion in Q3, up 5% year-over-year, driven primarily by growth in DR advertising revenue, which increased 8% year-over-year. The growth in DR advertising revenue was driven by strong demand for our pixel purchase and app purchase optimizations as well as continued strength from the SMB client segment. Other revenue increased 54% year-over-year to $190 million in Q3, with the largest driver being Snapchat+ subscribers, which increased 35% year-over-year to approach 17 million in Q3. With the exception of our large customer business in North America, our advertising growth remains very strong. From a regional perspective, we saw a significant acceleration in advertising revenue growth in both Europe and Rest of World during Q3. In Europe, advertising revenue grew 12% year-over-year, an acceleration of 6 percentage points over the prior quarter. In Rest of World, advertising revenue grew 13% year-over-year, an acceleration of 10 percentage points compared to the prior quarter. In contrast, North America growth continued to lag the global business with advertising revenue growing 1% year-over-year in Q3. Within North America, our SMB advertising business grew at a rate of more than 25% in Q3, while our large client solutions business posted a modest decline in the quarter. The North America LCS business accounted for approximately 43% of total global revenue in Q3, decreasing is the share of total revenue by roughly 10 percentage points over the past 2 years, reflecting meaningful diversification of our revenue base as growth accelerates across other regions and customer segments. While this mix shift demonstrates healthy progress toward a more balanced business, the North America LCS segment remains the primary headwind to our overall revenue growth. Given the strong momentum we are seeing with our ad products and platform and the rapid growth in demand from SMB clients globally, we are redoubling our focus on what we believe is working. At the same time, we are making targeted adjustments to our go-to-market operations in North America to improve performance and reignite growth in our LCS business in this region. Global impression volume grew approximately 22% year-over-year, driven in large part by expanded advertising delivery within Sponsored Snaps and Spotlight. Total eCPMs were down approximately 13% year-over-year due to the strong growth in impression delivery. While the increased inventory from Sponsored Snaps has initially put downward pressure on platform-wide eCPMs, we are encouraged to see our advertising partners experienced strong advertising performance which is bringing increased demand to the platform. This improved performance has contributed in part to a 3 percentage point acceleration in the rate of year-over-year growth in DR advertising revenue in Q3. Adjusted cost of revenue was $671 million in Q3, up 5% year-over-year. Infrastructure costs are the largest component of adjusted cost of revenue and increased 8% year-over-year in Q3 driven by investments in ML and AI compute as well as an 8% year-over-year increase in global DAU to reach 477 million in Q3. Infrastructure costs per DAU was $0.85 in Q3 up from $0.84 in both the prior quarter and prior year. The remaining components of adjusted cost of revenue were $266 million in Q3 or 18% of revenue which is below the prior quarter and our full year cost structure guidance range of 19% to 20% due in part to the benefit of a shift in impression mix towards Sponsored Snaps and Spotlight. With the combination of accelerating top line growth and more efficient scaling of adjusted cost of revenue, adjusted gross margin reached 55% in Q3, up from 52% in Q2 and 54% in Q3 of the prior year. Adjusted operating expenses were $654 million in Q3, up 8% year-over-year. Personnel costs increased 12% year-over-year, driven by an 8% increase in headcount. Our hiring in Q3 was tightly focused on our core strategic priorities of improving advertising performance, enhancing our SMB go-to-market efforts, driving more personalized and fresh content as well as expanding our leadership in AR. Higher legal costs, including litigation and regulatory compliance-related costs were an additional driver of operating expense growth in Q3. The increases in personnel and legal costs were partially offset by lower marketing expenses compared to the prior year due to a combination of cost efficiency initiatives and timing factors on marketing expenses in Q3. Adjusted EBITDA was $182 million in Q3, an improvement of $50 million compared to the prior year. Adjusted EBITDA flow-through or the percentage of year-over-year revenue growth that flowed through to adjusted EBITDA was 37% in Q3 and contributed to adjusted EBITDA margins expanding 2 percentage points to reach 12% in Q3. Net loss was $104 million in Q3 compared to a net loss of $153 million in Q3 of the prior year. The $50 million year-over-year improvement largely reflects the flow-through of a $50 million increase in adjusted EBITDA, a $32 million increase in other income due primarily to repurchasing convertible notes at below par prices, offset by a $29 million increase in interest expense, reflecting high-yield notes issued earlier this year. Stock-based compensation and related payroll expenses were $268 million in Q3 or approximately flat year-over-year as progress towards a flatter and leadership structure largely offset the impact of growth in full-time headcount in Q3. Free cash flow was $93 million in Q3, while operating cash flow was $146 million. Over the trailing 12 months, free cash flow was $414 million and operating cash flow was $617 million, as we continue to balance investments with top line growth to deliver sustained positive cash flow. Dilution or the year-over-year growth in our share count was 3.1% in Q3, as share repurchases completed earlier this year partially offset the impact of SBC on share count growth. We ended Q3 with $3 billion in cash and marketable securities and just $47 million in convertible notes set to mature between now and the end of fiscal 2026. We believe that our robust free cash flow generation and the strength of our balance sheet, ensure that our business has sufficient capital and financial flexibility to invest confidently to drive long-term growth. Our Q4 revenue guidance range is $1.68 billion to $1.71 billion implying year-over-year revenue growth of 8% to 10%. From a cost perspective, we are tracking well against our full year cost structure guidance. For infrastructure, our guidance was for quarterly costs of $0.82 to $0.87 per DAU, and we hit the midpoint of this range in Q3. In Q4, we anticipate that infrastructure cost will post a modest sequential rise to between $420 million and $435 million. For all other cost of revenue, our full year guidance range was 19% to 21% of revenue. A mix shift in delivery of impressions towards Sponsored Snaps and Spotlight helped to reduce this to 18% in Q3, and we anticipate being in the 18% to 19% range in Q4. For adjusted operating expenses, we provided full year guidance of $2.7 billion to $2.75 billion which we reduced to $2.65 billion to $2.7 billion earlier this year. And we currently estimate we will end the full year nearer the low end of this reduced range. For SBC and related expenses, we guided for a range of $1.13 billion to $1.2 billion for the full year. We reduced this to $1.1 billion to $1.13 billion earlier this year, and now estimate we will come within a further reduced range of $1.08 billion to $1.1 billion. Given the revenue range above and the progress we have made to optimize our cost structure, we estimate that adjusted EBITDA will be between $280 million and $310 million in Q4. Given the strength of our balance sheet, our progress towards sustained free cash flow generation and our desire to opportunistically manage our count for the benefit of our long-term shareholders. We have authorized a new share repurchase program in the amount of $500 million. As we look to close out 2025, we are excited by the opportunities ahead of us to accelerate top line growth, further diversify our revenue sources and make meaningful progress towards profitability in the year ahead. Thank you for joining our call today, and we will now take your questions. Operator: [Operator Instructions] The first question comes from Rich Greenfield with LightShed Partners. Richard Greenfield: I've got a couple. On the Perplexity partnership, which is really interesting that you're going to add it on to Snap AI, is the cash stock split already determined Evan? Or could it actually change based on factors that you can help us understand? And you talk about monetization for the partnership starting in 2026. The Snap ad sales, like will your ad sales team be selling ad units that appear in Perplexity or just help us understand what monetization could look like inside this Perplexity bot that's going to live inside a Snap. And then just a question for Derek. On a 2-year stack basis, it looks like cost of revenue really came down. You talked about a shift to Spotlight and Sponsored Snaps should we presume that the reason why we're seeing that leverage in cost of revenue is because you're not paying out to content owners the way you do in Discover for those ad units. Just would love to understand those 2 main things. Evan Spiegel: Rich, thanks so much for the question. We're really excited about the Perplexity partnership. And I think it sort of underscores Snapchat's role as a messaging service and how valuable that is in the age of AI, especially because Snapchat engagement is built around real relationships between friends and family, but also because conversational assistance is very quickly becoming the primary way that people are choosing to interact with information on the Internet. So I think we have a really unique opportunity ahead to help distribute AI agents through our chat interface and launching with Perplexity next year to bring their answer engine to Snapchat really in the default placement in our chat inbox is going to be really valuable to our community and hopefully, very valuable to Perplexity into Snap as well. And I think Perplexity's focus on trusted and verifiable sources really aligns with our values and makes them a good fit for our community. I think to answer your question from a monetization perspective, we don't expect to recognize any of the 400 million until we begin to roll out the integration likely towards the beginning of next year. And Perplexity will control the responses from their chatbot inside a Snapchat. So we won't be selling advertising against the Perplexity responses. But I do believe that the placement will help Perplexity drive additional subscribers, which I think is something that will be valuable to their business. I think just looking ahead, one of the things that's really exciting is the opportunity to expand to more partnerships. And advertisers are very focused on leveraging Sponsored Snaps to distribute conversational commerce experiences with their brands. So that's something we'll be experimenting with as we kick off next year. Derek Andersen: I start thinking I can take the cost element of that question. As Evan noted in his letter earlier this call, we see a lot of opportunity to expand our gross margins, and we're working across a number of different fronts to achieve this including by improving the top line growth as well as becoming more efficient on cost of sales. So on the revenue front, we're broadly taking steps to better monetize our core product value. So we see Sponsored Snaps and Promoted Places were first steps on that journey. The ongoing growth of Snapchat+, the introduction of Lens+ and now the recent announcement and testing of memory storage plans are all examples with the latter being a great example of an area where we can flip a cost structure into a revenue-generating business line, the Perplexity deal is yet another example of a new line of revenue generation that helps expand the margins also. On the cost side, we see several dimensions to this, including work to optimize our content programs, recalibrating our investments in community growth and the cost to serve our community to better match the long-term financial potential of each market. In Q3 specifically, we're seeing the benefit of a mix shift in where impressions are being delivered, in particular to Sponsored Snaps and to a certain extent, Spotlight and as you've noted, these surfaces have higher margins, and this contributed directly to gross margin improvement of 55% in Q3, up from 52% in the prior quarter and 54% in the prior year. So lots of work to do there, but we're excited about the progress and what we saw there in Q3. Operator: Next question comes from Mark Shmulik with AllianceBernstein. Mark Shmulik: Evan, just a follow-up on that last answer kind of beyond Perplexity. How do you see Snaps are all evolving here as kind of this distribution channel? It sounds like there may be something about kind of brand messaging integrations, but could we potentially see the ad stack open up as well? And then Derek, kind of on the commentary around the Q4 engagement headwinds, if we try to compartmentalize that, is the bulk of that kind of like onetime in nature as we kind of think about some of these regulatory type headwinds and then we kind of rebuild the ramp from there. Is that the right way to think about it? Evan Spiegel: Thanks so much for the question. I think as it pertains to opening up the platform further, what we're seeing is a lot of our advertising clients are investing a lot in these conversational experiences, whether they're educational or really designed to improve consideration or folks who are going and developing full-fledged commerce experiences inside their own chatbots. But despite all this investment in building out that customer experience, folks are struggling to find distribution channels for those experiences. And so while there's a lot of development of AI agents right now, I think we're very quickly seeing people shift their focus to try and to develop more distribution. So I think given Snap's primary engagement around messaging, there's a real opportunity to open up our chat inbox and chat interface to more of these agents and to really to distribute them through our Sponsored Snaps products. So that's an area of investment for us. The work we're doing to support Perplexity and the development of our APIs there will also support other partners over time, and it's certainly something we're excited about. I think it's also a really compelling customer experience given what we're seeing in the way people are shifting their behavior patterns to engage with these chatbots. So definitely, as a chat service, we're very excited about the evolution in the customer expectation there. I think as it pertains to the overall DAU growth and our efforts. We've been doing a lot to overcome ongoing engagement headwinds to DAU, primarily by introducing new conversation starters. So if you think historically on Snapchat a lot of conversations have been started by folks replying to friends stories. As we've seen engagement shift from things like friend stories to content posted on Spotlight, for example, we have to migrate that friend story replied behavior to things like sharing Spotlight videos or reposting Spotlight videos or playing games with friends, and we've got some forthcoming product initiatives as well that are oriented around new ways to start conversations and spark conversations with friends. I would say big picture though, in terms of our growth in daily active users. I outlined in my letter, I think that was released back in September, this crucible moment for Snap and really a pivot to more profitable growth during this period. And we tried to provide a few examples in the earnings release, but we're experimenting with things like changing the way we do prefetching and cashing in certain geographies for our content business changing the candidate size, number of candidates essentially in our ranking and retrieval systems in certain geographies and really trying to line up our infrastructure and marketing investments against the geographies where we see the largest long-term monetization potential. So I do think there will be trade-offs there in terms of engagement. But ultimately, as we focus on more profitable growth, I think those are trade-offs that we're going to want to accept. And then -- we're also, of course, investing in things like memory storage plans or Lens+. I think those are things that reflect the real in terms of large-scale cloud storage or new AI tools in Lens+, but those also add some friction to the user experience. And then I think perhaps most importantly, we're going to be proactive. We're going to get on the front foot when it comes to rolling out age assurance. There are new age assurance signals that Apple is providing us. This quarter, we're going to use those signals to detect underage users. I think Google is rolling out a solution as well, perhaps at the beginning of next year. And so as we roll out those age assurance signals that may have an impact on daily active users as well. But -- but we think that's the right thing to do. It's important for maintaining trust with our community and, of course, as well with regulators, but that could be a headwind to growth as well. Operator: [Operator Instructions] The next question comes from Doug Anmuth with JPMorgan. Unknown Analyst: This is Maggie on for Doug. We can tell that midsized advertisers are clearly focused for Snap. Could you just expand a bit more on your go-to-market efforts and product road maps to unlock greater spend from this segment? Evan Spiegel: Yes. We're so excited about the growth we've been seeing with our small and medium-sized customers. We've obviously got very strong product market fit with our app product, lead gen, of course, our web direct response product as well. A lot of what we've been focused on from a product perspective, are things like speeding up signals onboarding or simplifying account setup. We've also improved partner onboarding as well, which is helping us scale, and we've seen some improvements in the median log in to spend time for that advertiser. cohort. I also just want to recognize the business development team has been doing a great job onboarding more customers. So we'll definitely be investing there as well as we work to further accelerate the growth we're seeing with small and medium customers. Operator: The next question comes from Michael Morris with Guggenheim Securities. Michael Morris: Wanted to ask about direct response advertising. Can you share how much was the 8% growth in the quarter an acceleration from the core trend in the second quarter when we removed the impact of the execution error that you guys had. And then as you look forward, can you return to double-digit growth in direct response advertising. And if so, I know that you have a number of initiatives. I appreciate all the details. But would you maybe give us the top 2 or 3 contributors that can really impact that growth rate over the next year and I've got just slip one more in. Following the error that you did experience last quarter, could you just provide an update on your comfort and confidence with the stability of the bidding and optimization tools now that -- to kind of ensure that you wouldn't have that happen again. Derek Andersen: It's Derek speaking. Thanks for the question. Yes, direct response revenue was up 8% year-over-year in the most recent quarter. It was an acceleration of 3 percentage points over the prior quarter. So we're pleased with the progress there. What we saw was good strength in our pixel purchase demand as well as the app to optimizations and really broadly across the SMB segment, helping to drive that acceleration in the quarter. When you're looking at ad revenue broadly with direct response being the vast majority of it, we saw really good strength across Europe and rest of world. Europe in particular, grew 12% year-over-year. That was an acceleration of 6 percentage points. Rest of World grew 13%, which is an acceleration of 10 percentage points in the quarter. So really strong results there, both across LCS and in particular, the SMC market there. As we look at North America, that business still lagged a little bit and so dragged on the rate of acceleration on the overall business as well as in DR specifically. Within North America, though really pleased with what we're seeing on the SMB segment up to more than 25% year-over-year in Q3. So given the strong momentum that we're seeing in Europe and Rest of World and with the SMB business globally, we're pretty pleased with what we're seeing on both the ad platform and our ad units there in terms of driving improvement on revenue and the business generally. I think as it pertains to our large client segment in North America, we saw a small decline there. We've been really focused on doubling down on what's working in the business, but also making targeted adjustments or go-to-market operations there in order to drive growth. We don't have recovery in that North America large client segment really baked in Q4, obviously, with the guide, but we expect that the work that we're doing there will help us build momentum over time. And if we can bring the growth in that portion of the business back up to what we're seeing elsewhere than that is the path to further improvement in the overall growth in ads business going forward. So hopefully, that gives you a sense of what's driving the growth and acceleration on DR. And of course, we're watching our ad platform extremely carefully and the road map there and working with our teams to execute well there, and I think it's showing up in the results that we're seeing on the ad platform across the business globally. Thanks very much. Operator: The following comes from Shweta Khajuria with Wolfe Research. Shweta Khajuria: Okay. I just had a quick 1 on infrastructure costs for next year. I guess, could you please talk to your conviction level on keeping infrastructure costs basically flat next year? And what, in your view, could drive those costs higher? And when would you think you would step in? Derek Andersen: It's fair speaking here. There's a number of different drivers here. Obviously, over the last several years, one of the really big drivers of our growth in infrastructure cost has been the rapid growth and investment of ML and AI infrastructure. And we do expect that we're going to be able to deploy capacity there, but we're getting a big focus on capacity utilization improvement. The other is we've scaled the business, obviously, a lot with the growth in our community and there's an opportunity for us to do work around the efficiency of that cost structure and our cost to serve. So both in terms of the services we're utilizing from our cloud partners, the pricing of those services, but then also just how we're engineering our product and the cost to serve, which Evan talked about a little bit earlier in terms of our ability to calibrate that cost to serve relative to each market and its long-term financial potential. And so we think across each of these vectors that there's a lot of opportunity for us to make progress on the infrastructure costs and make progress towards that specific goal we had stated of working to make infrastructure flat into 2026. Hopefully, that gives you a little more color. Operator: The final question comes from Ross Sandler with Barclays. Ross Sandler: Great. Evan, just a question on spectacles. So there have been recent press reports about potential financial partners. And I think some of your peers have done partnerships with these manufacturing or distribution entities. So what's your latest thinking here? And your AR software stack is fairly advanced versus the field for smart glasses. So how are you thinking about leveraging software versus the hardware side? Just any updated thinking there would be great. Evan Spiegel: Thanks so much for the question, Ross. We've got a really exciting year ahead here as we prepare for the public release specs. And we've been thinking a lot about ways to accelerate our technical leadership in the space is a form factor, obviously, we've been focused on now for more than a decade. And I think we've been able to really leverage our advantages in terms of lens core huge ecosystem of lenses that have already been built, the amazing developer tools and Lens Studio and obviously, now the Snap operating system that runs on the current developer version of specs. So one of the things that we have been doing to create more optionality in terms of our ability to accelerate is putting specs into their own stand-alone 100% owned subsidiary. That will give us some options as we think about potential partners to work with to accelerate our leadership here in the space as we prepare for the public rollout. So definitely some great opportunities to partner. We really believe that the killer use case for specs is lenses, and we've seen some incredible lenses that have been created so far almost weekly, it seems like developers are rolling out new and unique experiences. So if you haven't gotten a chance to check out the latest, I'd highly recommend it. Thanks so much. Operator: This concludes our question-and-answer session as well as Snap Inc.'s Third Quarter 2025 Earnings Conference Call. Thank you for attending today's session. You may now disconnect.
Operator: Hello, everyone, and welcome to the Traeger Third Quarter Fiscal 2025 Earnings Conference Call. My name is Charlie, and I'll be coordinating the call today. [Operator Instructions] I will now hand over to our host, Nick Bacchus, Vice President of Investor Relations, Treasury and Capital Markets at Traeger to begin. Nick, please go ahead. Nicholas Bacchus: Good afternoon, everyone. Thank you for joining Traeger's call to discuss its third quarter 2025 results, which were released this afternoon and can be found on our website at investors.traeger.com. I'm Nick Bacchus, Vice President of Investor Relations, Treasury and Capital Markets at Traeger. With me on the call today are Jeremy Andrus, our Chief Executive Officer; and Joey Hord, our Chief Financial Officer. Before we get started, I want to remind everyone that management's remarks on this call may contain forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on current expectations and views of future events, including, but not limited to, statements made regarding our organizational focus, our mitigation efforts to offset the direct impact of tariffs, our Project Gravity initiative and its impact on our business and our outlook as to our anticipated full year 2025 results. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied herein. I encourage you to review our annual report on Form 10-K for the year ended December 31, 2024, and our other filings for a discussion of these factors and uncertainties, which are available on the Investor Relations portion of our website. You should not take undue reliance on these forward-looking statements, which we speak to only as of today. We undertake no obligation to update or revise them for any new information. Now I'd like to turn the call over to Jeremy Andrus, Chief Executive Officer of Traeger. Jeremy? Jeremy Andrus: Thanks, Nick. Thank you for joining our third-quarter earnings call. On today's call, I will provide an update on our third-quarter results. I will also discuss our Project Gravity streamlining effort and review our outlook for fiscal 2025 before turning the call over to Joey. This afternoon, we released third-quarter results that were ahead of expectations. Highlights include a sales increase of 3% to $125 million, driven by growth in our grills and consumables categories. Adjusted EBITDA of $14 million was up 12% over the prior year as our expense reduction initiatives are beginning to flow through the P&L. Third-quarter results reflect our management team's unrelenting focus on navigating a highly dynamic environment. I am pleased with our ability to grow our revenues and adjusted EBITDA in the face of a challenging backdrop. Our results give us the confidence to reiterate our guidance for the fiscal year. In this environment, preserving profitability and enhancing cash flow is our highest near-term priority. As such, we have made significant progress in executing our tariff mitigation strategies. We continue to believe that we are positioned to offset about 80% of the approximate $60 million in unmitigated tariff exposure in fiscal 2025, utilizing 3 main strategies that we have previously discussed. First, we are continuing to focus on driving savings and efficiencies in our supply chain, including successful cost reductions. Further, we are planning for and implementing our strategy to diversify our production away from China. We have had productive discussions with manufacturing partners and remain committed to materially diversifying production out of China by the end of fiscal 2026. We currently have plans in place to produce all new grill SKUs going forward in Vietnam, and we'll continue to work towards shifting production on existing lines of product out of China as we move through the balance of this year and into next year. Next, we took price across our assortment to protect profit in the face of higher costs due to tariffs. As we expected, in the third quarter, we saw an impact on grill sell-through volumes tied to the pricing increase. However, elasticity at the consumer level was largely in line with our expectations. The final strategic pillar of our tariff mitigation strategy is cost management. This includes near-term cost savings measures such as a reduction in travel and entertainment expenses and the deferral of nonessential projects as well as our Project Gravity streamlining initiative. With respect to Project Gravity, I continue to believe this effort will be transformative for our business and a significant driver of long-term value for the company. Last quarter, we discussed the 2 phases of Project Gravity. Phase 1 consists of the organizational structure changes we implemented in the second quarter as well as the integration of our MEATER business into Salt Lake City Infrastructure. In the third quarter, we made significant progress on the MEATER integration, significantly reducing headcount based in the U.K. and shifting most of the key functions of the business into our Utah headquarters and Traeger infrastructure. We believe MEATER's operations are well-positioned to benefit from the significant pool of talent at Traeger. As we look to the future, we believe the integration of MEATER will reshape its P&L and will unlock the ability to focus on its long-term growth drivers, including the expansion of its retail channel penetration and new product development. Overall, we continue to target Project Gravity Phase 1 run rate cost savings of $30 million once fully implemented. Turning to Phase 2 of Project Gravity. The second phase of our transformation effort is being driven by a broad-based review of our business with a focus on increased efficiency, simplification and return on investment. This strategic review is ongoing, and we have retained a global consulting firm to assist with the assessment and implementation of Phase 2 initiatives. We have also established a transformation management office, which will act as a coordinating body during the implementation of Gravity to help ensure consistency, transparency and accountability between the executive team and working teams. Today, we are announcing a run rate cost savings target of $20 million identified in connection with Phase 2 of Project Gravity. These savings are being enabled by channel optimization, supply chain and manufacturing efficiencies and other streamlining and productivity efforts. Phase 2 savings are incremental to the $30 million of run-rate savings tied to Gravity Phase 1 for a cumulative $50 million run-rate savings target. We expect to largely implement Gravity initiatives by the end of 2026. One of the largest drivers tied to Gravity Phase 2 savings is channel optimization. As we review profitability by channel, geography and retail customer, it became evident that there is a meaningful opportunity to streamline distribution and exit certain channels, which are not accretive to profit on a fully burdened cost basis. We are making several shifts to our distribution footprint, which we expect will drive increased efficiency and profitability in the years to come. First, we will be exiting the Costco roadshow business. This program was an early driver of Traeger's brand awareness and growth. However, over time, this business' profitability has been declining, given increasing costs, including transportation rates and labor. Costco will remain an important partner to us, and we will continue to sell Traeger products through Costco's traditional in-line business. Next, we are planning to shift our traeger.com website to a content and brand storytelling focus, and we'll be exiting the direct-to-consumer commercial aspect of the website after the fourth quarter. Consumers seeking to buy Traeger products on traeger.com will be redirected to our retail partners' websites. Our website is a critical asset, and it is the first place where many of our consumers go to conduct research on our grills. However, profitability in this channel is not where we would like it to be, and we believe that by redirecting consumer traffic to our retail partners' websites, we can retain a meaningful portion of these sales at a higher incremental margin while reducing overhead and complexity tied to our own DTC business. We will also be partnering with our retailers to optimize the digital media and advertising strategy for Traeger Online in an effort to drive demand and return on advertising spend for these partners. Not only do we believe this shift will drive efficiency to our business, but we also believe the change will result in a better experience for our consumers. Last, we are shifting to a distributor model in our European markets, which are currently operating under a direct model. We believe employing a 100% distributor model in Europe offers a more cost-effective and asset-light approach, which will unlock savings going forward while retaining our presence in this key international market by partnering with experienced local distributors. We are also sunsetting certain unprofitable SKUs in the market as part of this shift. In total, these channel optimization initiatives will drive meaningful simplification and cost savings to our business. We expect that these initiatives, along with other Phase 2 strategies will drive $20 million of run-rate savings once fully implemented. And while we anticipate a loss of revenue tied to channel optimization, this aligns to our strategy of transforming into a leaner, more efficient and more profitable business, albeit with a smaller base of revenues in the short term. It is important to note that while the near-term focus on Project Gravity is to drive significant savings and efficiencies, this streamlining will serve to optimize our cost structure, which will allow for continued focus on our key growth pillars of product, innovation and brand. Driving increased household penetration for the Traeger brand remains core to our strategy, and we expect the transformation that will occur as a result of gravity will enable our long-term revenue growth. Let me now briefly discuss our outlook for fiscal year 2025. Today, we are reiterating our prior guidance of revenues of $540 million to $555 million or down 8% to 11% and adjusted EBITDA of $66 million to $73 million. I am pleased with our ability to reiterate guidance today, and we are planning the balance of the year prudently. Now let me briefly touch on some highlights from the third quarter. In terms of our grill business, we saw 2% growth in revenues versus prior year. Growth in grills was driven by strong shipments of sub-$1,000 grill units where we continue to see outperformance. The quarter also benefited from a resumption of direct import fulfillment with our larger retail partners, which was mostly paused in the second quarter. Direct import fulfillment allows for an optimization for both Traeger's and our retail partners' supply chains, creating value for both parties. Reinstating this process in a heavily tariff environment demonstrates our resilience and represents a significant win for the team. On the consumables front, we achieved 12% revenue growth in the third quarter. We are pleased with our consumables performance, which was driven by positive sell-through of pellets, and we continue to see this part of our portfolio as a stable and recurring revenue. New distribution, including our launch into Walmart late last year, remains a growth driver for consumables, and we are seeing expanded distribution of consumables hitting the shelves across several of our largest grocery partners. In terms of consumables innovation, in August, we launched our first-ever sauce collaboration with our long-standing partner and world-famous Pitmaster, Matt Pittman of Meat Church BBQ and also brought back the fan favorite Meat Church Pellets. Both launches have seen a favorable reaction from consumers with the partnership's Holy Cola BBQ Sauce quickly becoming one of our top-selling sauces. Last, our accessories business was down 4%, driven by a decline in MEATER revenues. We expect to see continued short-term pressure on MEATER revenues. However, we believe that the integration and P&L reshaping strategy in motion through Project Gravity will drive growth and expand profitability in the long term. Notably, Traeger-branded accessories demonstrated strong double-digit growth in the third quarter as our significant installed base of grills drove these attachment sales. In summary, the entire Traeger team is highly focused on navigating the current dynamic backdrop and executing against our plan to transform the business and reshape the P&L via our Project Gravity initiatives. I am pleased with the progress we have made thus far with respect to Gravity and believe the $50 million in run-rate savings targeted thus far will meaningfully unlock significant value for our shareholders. And with that, I'll turn the call over to Joey. Joey? Joey Hord: Thanks, Jeremy, and good afternoon, everyone. Today, I'll walk through our third quarter financial performance and provide some additional context on our results and guidance for fiscal '25. We are pleased with our third-quarter results and our ability to drive growth in both revenues and adjusted EBITDA. These results, along with additional efforts we are announcing on Project Gravity, demonstrate our ability to successfully navigate a dynamic environment. As a reminder, enhancing profitability and cash flow in the current environment remains our top priority. Third quarter revenues increased 3% year-over-year to $125 million. Growth was led by double-digit gains in our consumables business as well as a modest increase in our growth business. Looking at category performance, Grill revenues increased 2% in the third quarter. This was primarily driven by an increase in average selling prices tied to the pricing increase implemented earlier this year as part of our tariff mitigation efforts, which more than offset the decline in unit volumes. Third-quarter grill revenues also benefited from a pacing shift out of the fourth quarter. Consumables revenues grew 12% to $25 million with wood pellets seeing healthy replenishment and distribution gains contributing to growth. Accessories revenues decreased 4% to $24 million due to lower MEATER sales. We are pleased with our Traeger-branded accessories business in the quarter, which saw growth in excess of 20%. Gross profit for the third quarter decreased to $49 million from $52 million in the third quarter of '24. Gross profit margin for the third quarter contracted 360 basis points year-over-year to 38.7%, reflecting the impact of tariffs and other supply chain pressures. The reduction in gross margin was driven by tariff costs totaling $8 million and generating 670 basis points of unfavorability. This cost was partially offset by: one, pricing actions worth 170 basis points; two, supply chain efficiencies worth 90 basis points; three, improved pellet margins worth 30 basis points; and four, other margin positives of 20 basis points. In the third quarter, we showed strong expense discipline with our cost reduction and streamlining efforts beginning to flow through, as demonstrated by our ability to drive adjusted EBITDA growth. Sales and marketing expenses declined to $20 million, down $6 million year-over-year, representing a 550-basis point improvement as a percent of sales. General and administrative expenses were $22 million, down $2 million or 8% year-over-year with a 210-basis point improvement as a percentage of sales. In the third quarter, we recorded a $75 million noncash impairment charge to our goodwill related to a sustained decrease in our stock price and market capitalization. As a result of these factors, net loss for the third quarter was $90 million as compared to a net loss of $20 million in the third quarter of '24. Net loss per diluted share was $0.67 compared to a loss of $0.15 in the third quarter of '24. Adjusted net loss for the quarter was $22 million or $0.17 per diluted share as compared to $7 million or $0.06 per diluted share in the same period in '24. Adjusted EBITDA grew to $14 million, up from $12 million in the prior year, demonstrating our ability to drive profitability even in a challenging macro environment. Looking at the balance sheet, we remain in a solid position with liquidity of $167 million with no outstanding borrowings under our revolver or receivables facilities at the end of the third quarter. Inventory at the quarter end was $115 million, up from $107 million at year-end. Increased inventory costs tied to tariffs represented the majority of the growth versus prior year. We are comfortable with our inventory position going into the end of the year. As Jeremy spoke to, we continue to make progress on Project Gravity, our comprehensive strategic initiative to drive operational efficiency and long-term profitability. We previously discussed Phase 1 actions, including headcount reductions and the integration of MEATER into our headquarters, which are still expected to deliver $30 million in run-rate cost savings with approximately $13 million of realized cost savings anticipated in FY '25. Today, we are announcing an incremental cost savings target tied to Gravity Phase 2 of $20 million once fully implemented. The drivers of Phase 2 savings include channel optimization, supply chain efficiencies and other general productivity measures. Phase 2 implementation will occur through the end of fiscal year '26, and we expect these initiatives to more fully materialize in our results in fiscal '27. The strategic review for Project Gravity is ongoing, and we will provide further updates as the plan evolves. It is important to note that Project Gravity is a transformation exercise that will drive a meaningful reshaping of our P&L. Gravity initiatives are expected to drive material improvements to our cost structure once fully implemented. The key pillars of Gravity are: one, to drive efficiencies and profitability in our business; two, to enhance return on investment; and three, to open up capacity and resources for investment into our highest growth opportunities. Some of these actions were intentionally reduce our revenue base as we exit unprofitable areas of the business, enabling a smaller but more profitable business and opening up investment capacity to drive our long-term growth. Given year-to-date performance, we are reaffirming our full year guidance. Revenue is expected to be between $540 million and $555 million or down 8% to 11%. Gross margin is expected to be between 40.5% and 41.5%. For adjusted EBITDA, we are reiterating our guidance of $66 million to $73 million. We continue to expect grill revenues to be down high single digits for the year with expected pressure on unit volumes driven by elasticity following pricing increases taken earlier this year to mitigate tariffs and protect profitability. For consumables, we are expecting growth for the year. In terms of the fourth quarter, recall that we are facing a difficult comparison from the prior year when we had a large load-in of our new Woodridge line. We also benefited from a revenue pacing shift in the third quarter of '25, which will pressure fourth-quarter revenues. Second half of '25 performance is expected to be in line with our prior view. In closing, I want to thank our team for their dedication. We're encouraged by our third-quarter performance and remain confident in our ability to navigate the current environment while laying the groundwork for sustainable growth. With that, I'll turn the call back to the operator for questions. Operator? Operator: [Operator Instructions] Our first question of the day comes from Brian McNamara of Canaccord Genuity. Brian McNamara: I just wanted to drill in on your decision to kind of exit DTC and kind of redirect traeger.com traffic to retail partners' websites. Is that certain types of retailers? Or just any clarity there would be helpful. Jeremy Andrus: Yes, Brian, thanks for the question. I'd say a couple of things. First of all, while in many consumer businesses, the direct channel is the margin monster, that's not the case in our business just due to the supply chain, the size and weight of shipments and dropping them on it's the last mile that's expensive. Frankly, it's the last mile that also suboptimizes the consumer experience. And so as we looked at both the economics, the bandwidth and cost needed to drive that channel from technology infrastructure through advertising to acquire customers. And then we looked at the end consumer experience. It was clear to us that this was not the right channel for us to be driving. And so as we think about what that will look like, I would say, first of all, we will -- we're working with retail partners so that we can offer choice to our end consumers. We're being thoughtful to the consumer experience that they can provide. First of all, ensuring that we can connect into inventory levels, send a transaction to a retailer that they can quickly service and that they can service in a high-quality way. We'll look at capabilities like assembly and delivery, which is clearly a better experience than the last-mile outsourced truck or van sort of dropping off a grilled box in someone's back porch. We think we can partner with retailers that improve this experience. And so we're in the process of defining exactly who that will be. And we've got technology selected. And we're confident that this will be an opportunity to continue to drive revenues, but at higher margins at better experience to the consumer. We're certainly going to be attentive to ensuring that we drive as much of that revenue there as we can. We want to make sure that there's minimal breakage in the process. But long-term, we really believe in this approach. Brian McNamara: Great. That's helpful. And then just on your retail partners' attitudes towards inventories in the current market. We've heard from other players, obviously, smaller price points that several large retailers kind of are being tight on inventory, shifting their business from direct import to domestic fulfillment. I was just curious like what are you guys seeing, obviously, given a much higher price point? Jeremy Andrus: Well, I would say there have been some meaningful shifts over the last couple of quarters. As the tariff landscape shifted, it didn't make sense for a period of time for retailers to direct import the inventory largely because the tariff exposure was so much higher on the wholesale cost than on our cost of goods. And so a lot of our partners did shift towards a domestic fulfillment model. Fortunately, we've worked very closely with them to implement a first sale process, which is an efficient way to direct import without driving higher aggregate tariff costs. And so that's actually one of the things that drove some of the some of the shift into the third quarter, we were fulfilling domestically, some of the revenue shift, I should clarify. We are filling domestically, but we've shifted the largest retail partners back to direct import. In terms of their behavior or their point of view around inventory in general, we're not really seeing that change. We're not seeing any change to the allocation of space at retail to the assortments. And we're not seeing a different strategy with regards to inventory than we were seeing pre-tariffs. Brian McNamara: Great. And then finally, I'm just curious, it seems like that sub-$1,000 price point grill continues to outperform just probably 3 years running now. I'm just curious your thoughts on how that maybe changes or affects your overall pricing strategy? Clearly, you have a premium brand status, but does that change how you think about things? You launched a relatively upmarket grill earlier this year. Just curious your thoughts there. Jeremy Andrus: So we talk a lot about pricing strategy vis-à-vis our brand position. And we continue to believe that Traeger is well-positioned in terms of the product experience, the brand, the perception of the brand to be an accessible premium brand. And we believe that will continue. And it will continue in part by how we position it, but also in part by how we think about our product road map strategically. What we learned in our consumer research and in our pricing studies is that the lower price points, getting to a sharper opening price point expanded the addressable audience for Traeger. I think it does a couple of things. Number one, it inspires a consumer who is spending closer to the average of a grill in the U.S., which is -- it's around $325 at retail. We're able to migrate them north, a consumer who is probably buying a propane grill before, but has been looking at Traeger is willing to step up a little bit. So we clearly have -- are reaching a new consumer. But I would also say that when we've reached that consumer and they come into the Traeger community, they start to appreciate the benefits and just the experience of cooking on a Traeger grill, a wood pellet grill, we believe that they stay. They stay not only to cook with the wood pellets, the accessories, the lifetime value of that consumer is meaningful. But I would say equally importantly, they tend to upgrade as later on their second purchase as they become committed to the brand and the solution. So we see it as a strategic opportunity to enhance the size of the market. We don't think it constrains our ability to position the brand or to grow. I do think there's -- one of the things that is clearly happening, not only expanding the audience of addressable consumers, but this has been -- it's been a tough consumer environment for high-ticket discretionary durable products. And I think in light of that, high interest rates, we've seen the consumer shift to lower price points. We think that is a temporary phenomenon, and we continue to position to drive higher ASPs going forward. But we like the strategy of getting a little bit sharper on that opening price point because we do think it brings in an incremental consumer. Operator: Our next question comes from Peter Benedict of Baird. Peter Benedict: First, I don't know if you could maybe frame the size of the revenue loss that you're expecting to incur from the Phase 2 distribution strategy plans. They make sense. Just kind of curious if you frame the size of that for us, maybe the timing on when that might -- we should expect that to play out? That's my first question. Joey Hord: Thanks for the call, Peter. I'll take that question. So overall, we're essentially walking away from approximately $60 million of revenue, but we do believe there's going to be a recapture of that revenue in either the channels that they're in, i.e., Costco inline or the other channels that we operate in. With that said, the timing of this, this is -- we're making the shifts in January and into February. And then the recapture and the value of this is going to be sequentially within the first half of FY '26 into -- sorry, the first half of '26 into the second half and then long term into '27. These are -- this is a structural shift in nature, and we just don't want to overcommit for next year. At the same time, this is absolutely a value capture of $20 million. Jeremy Andrus: Let me just add to that, if I may. It was -- as we step back and think about what are we trying to get done right now, we're seeing an opportunity that I would say was originally driven by tariffs and a need to cut costs so that we could preserve profitability and financial health at the moment. But as we sort of moved into the late second quarter, early third quarter, we were very committed to doing this because we see a long-term benefit from -- for the business. This Project Gravity is fundamentally a transformation exercise, which early innings will drive profit. It will drive cash flow. It will delever our balance sheet. But ultimately, what it does is it streamlines the business and it opens up investment capacity so that we can reinvest back in growth. And so to the extent that revenues decline in the near term, we're going to be driving higher profitability, and we're going to be creating capacity to make sure that what the consumer cares about, which is a better product experience, it's a better interaction with the brand, the recipe content, all of the content that improves that experience that we can fund these things, that we can fund the experience at retail that a consumer has when they walk in there. It's been an interesting -- maybe challenging is a better word. It's been a challenging few years coming out of the pandemic. And as we've gone through these budget cycles and feel like we're not -- we don't have the investment capacity to adequately fund what we believe is really important to the consumer. We really saw this as an opportunity to shift to completely reshape the P&L and to shift how we go after to shift structurally so that we can really do the right thing for the brand long term. So we're actually really excited about the process that we're going through. There will be some decline in revenue as both Joey and I have said, but it will be really an enabler to medium-to longer-term growth. Peter Benedict: Got it. That's a helpful perspective. My second question is around maybe you can give us a sense of the margin profile of going with the distributor model in Europe, kind of how that compares maybe to what you would see as going 1. Just kind of curious what the margin was on the distributor side of things. Joey Hord: Yes. So margins -- when you shift the distributor model, there's obviously an impact to margin overall because that's -- the third party we're going to work with has to drive a profit or deliver a profit as well. At the same time, if you look below margin, the cost structure that we're taking out of the business is going to make up for more than the margin loss. And so back to what Jeremy said in being smaller but more profitable, this is a perfect example. And then we're not -- we believe we can serve the consumer in Europe in the same way that we were serving them in the direct model, but just in a much more profitable way. Peter Benedict: Got it. Makes sense. Last one is just -- can you maybe expand on the elasticity response? You've seen obviously price up, you saw units come down. Certainly, that was expected. I just I'm curious how that maybe informs your promotional plan for the fourth quarter and into next spring. Just kind of an open-ended question there. Joey Hord: Yes. It's a prudent question. So as far as elasticity in pricing, we took pricing in the low double digits. Generally speaking, we're very happy with our -- with the way sell-through is tracking. There is a divergence of above 1,000, below $1,000 in terms of performance. Speaking about promo overall, though, the consumer reacts when we promo. And it's something that we use to think about our inventory management, our profitability in your quarter-to-quarter management. And so we're going to -- we continue to be committed to promo. Keep in mind as well, promo is funded. We split promo costs with our channel partners. So it's a really great -- it's a good way to get grills into the hands of consumers, and we're committed to continue promo long term. Operator: [Operator Instructions] Our next question comes from Joe Feldman of Telsey Advisory Group. Joseph Feldman: I wanted to clarify something. You mentioned this grill pacing shift that helped the third quarter, but maybe shifts out of the fourth. Can you explain that a little more? Like was that your -- the end market trying to get ahead of tariffs or -- and purchasing more goods early? Or what drove the shift basically? Joey Hord: Yes. So very simply put, we had around $8 million paced from Q4 into Q3, and it's just candidly an organic pacing shift. There was some revenue or grills that we were going to ship at the end of Q3 -- or sorry, in the beginning of Q4, and they shipped in Q3. There's not a lot more to it than that. At the same time, we have adjusted Q4, and we are reiterating guidance. Joseph Feldman: Got it. Right. Yes. No, that's fair. And then maybe -- I know it's maybe a little early for 2026, but you guys had a lot of newness and innovation this year. And I'm wondering how you guys were thinking about next year in terms of lapping that. Obviously, you've got a lot of work ahead with this Project Gravity and reshaping the P&L, but -- and so maybe that's going to be the answer. But I was just curious, from a product standpoint and the flow to drive the top line, how do you lap Woodridge and Flatrock launches? Jeremy Andrus: So a couple of thoughts on that, Joe. The first is we really believe that a good product strategy that has -- that is consumer-centric, that has innovation at its core, it continues in a very consistent, steady fashion. And we don't think differently in some -- in one macroeconomic moment versus another. just because 2, 3 years out, we can't anticipate what that moment will look like. And so one of the things that we've really invested in over the last 3 years is the infrastructure from a team perspective and the process and tools internally so that we can predictably and consistently bring new products to market. So that's our intention. We'll continue to do that. If you look at the strategy that we laid out a few years ago in introducing products at a premium price point and bringing innovation downstream, you've seen us launch the Timberline XL, which is a $4,000 grill this year -- the year after that, we launched the Ironwood, which had elements of technology that were inspired by the Timberline. And then we saw a similar movement downstream in Woodridge. And so we will continue to do that. The focus will always be on our core wood pellet grill experience. We think that's really what drives our consumer and the community, and we've done some -- we've invested in accessories to enable that to make that experience better. We have done a little bit of work in adjacent categories with the Flatrock 3-zone and 2-zone products. But the wood pellet grill is the center of our universe. -- and we will continue that process to bring value downstream. And then as is, I think, the circle of life and product development, we'll then go back upstream, launch new innovation and bring it downstream. So we're going to continue that process. And we believe that over time, the consumer will see Traeger as the innovator as always being fresh in its portfolio, product portfolio, and that is an important foundation to our business. Operator: [Operator Instructions] Our next question comes from Peter Keith of Piper Sandler. Peter Keith: Jeremy, I was wondering if you had an assessment of the overall grill market so far, whether it was Q3 or year-to-date, maybe how grills -- the grill industry is trending on a sales basis or unit basis? Are we starting to see some rebound in demand at this point? Jeremy Andrus: Yes, Peter, boy, as we came into 2025 and as we think about the ownership life cycle of a grill and the pull-forward demand that happened in the pandemic, we really view this as a category growth year, and we were positioning our investments, not just in product, but in channel and in brand to drive growth consistent with what we thought was likely coming. Tariffs definitely shifted the landscape. I think it's -- a consumer goes to buy a grill. And if it's not broken, they see a grill at 10%, 15% higher. They will use what they have for another season or so. And so that driver that moment of a consumer retail, we generally believe has been muted just by the tariff environment. We think the market for grills is down slightly. There are a number of factors that we think contribute to that, including the higher price points, but the higher interest rates of -- where Americans heavily finance, their consumer discretionary purchases, housing relocations continue to be at all-time lows. But fortunately, as we think about some of these catalysts going forward, we seem to be entering a period of declining interest rates. We think that will be a positive from a house transaction perspective. certainly from a consumer borrowing perspective. And the further that we get from the pull forward of the pandemic, the more our conviction grows that we're entering into a robust replacement cycle, but it hasn't happened this year. The market is slightly down and our share in the market is about flat right now. Peter Keith: Okay. And then I think right at the end there, you're mentioning another topic I wanted to ask about, which was the sort of elusive replacement cycle. Given you can track Traeger customer usage quite closely, are you seeing any green shoots around replacements from some of those 2020 or 2021 purchases? Jeremy Andrus: Let me step back and first say all of the data that we see on consumer engagement is robust. I think that we see that in the cook data that we get from our connected grills. And we also see it in the consumables business, which grew in the third quarter, both on a revenue and a sell-through basis. But I wouldn't say that we are seeing data suggesting the pandemic buyer is rebuying at this point in time. The word that you use is elusive. It is elusive. We've done the math 100 different ways, and we would have expected that absent some of the macro headwinds that have come that this year, we would have entered a sort of 2- to 3-year period of higher demand just based on the pandemic consumer rebuying. The one thing that I'll say that we view as a positive in our business is as we look at the market down, we're holding share on what I would consider to be relatively low demand creation investment. And in fact, we've actually seen our unaided brand awareness increase. We do a semiannual contract at a semiannual unaided brand awareness survey, and we saw that increase by about 100 basis points over the prior 6 months. So we continue to feel bullish on our brand position on the products that we're bringing to market. And boy, this elusive replacement cycle it's coming. And so on balance, we look at the next 2 to 3 years and say, we like our position, we like the market. And we feel like this project gravity is really positioning us not only to be -- to drive greater profitability, but to invest back strategically in the areas that will help us take advantage of this replacement cycle when it comes. Peter Keith: Okay. Maybe lastly, just with advertising, it's good to hear the unaided brand awareness is going up. But do you feel like your advertising is somewhat constrained today? And interesting on the discontinuation of the Costco roadshow, which in itself is a big marketing vehicle, would you look to sort of maybe some cost savings, but also reallocate those dollars to other, perhaps more effective media streams? Joey Hord: Yes, I can take that one. The underpinning of Project Gravity is really what you're speaking about is unlocking -- it's really thriving in the tariff environment. And we didn't want tariffs to suffocate the business just financially. So, unlocking investment capacity, reinvesting, and that's going to be -- that's something we're starting to think around about as we exit '25 into '26. So the short answer is yes. Jeremy Andrus: And let me just add specifically on Costco roadshow since you mentioned it. I think that's a really good example of how we're stepping back and really assessing why we do what we do, how we do it, what the most profitable, scalable way to run this business is. And the Costco roadshow, I think, it's a great example of a program that's been great for our business. We're more than a decade doing Costco roadshows. And it was profitable. Supply chain costs increased, T&E costs increased, labor costs increased. It was neutral. And then we started to think about just the cost or the value of the impressions that we gained. And I would say that the tariffs were the last sort of the last piece of economics that really just made it not work anymore. With that said, it's been foundational. We now get an opportunity to redirect or redeploy the savings from that program into more scalable ways to drive awareness and conversion. So I'm actually really proud of the team for digging deep and deeply assessing elements of our business that were important and that have been sacred but being willing to really think about what is the better way to drive the business going forward. Operator: Thank you. At this time, we have no further questions. So therefore, this concludes today's call. Thank you for joining. You may now disconnect your lines.
Operator: Good day, and thank you for standing by. Welcome to the Arm Second Quarter Fiscal Year 2026 Webcast and Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the conference over to your first speaker today, Jeff Kvaal, VP, Investor Relations. Please go ahead. Jeff Kvaal: Thank you, Sharon, and welcome, everyone, to our earnings conference call for the second quarter of fiscal '26. On the call are Rene Haas, Arm's Chief Executive Officer; and Jason Child, Arm's Chief Financial Officer. During the call, Arm will discuss forecasts, targets and other forward-looking information regarding the company and its financial results. While these statements represent our best current judgment about future results and performance, our actual results are subject to many risks and uncertainties that could cause results to differ materially. In addition to any risks that we highlight during this call, important risk factors that may affect our future results and performance are described in our registration statement on Form 20-F filed with the SEC. Arm assumes no obligation to update any forward-looking statements. We will refer to non-GAAP financial measures during the discussion. Reconciliations of certain of these non-GAAP financial measures to their most directly comparable GAAP financial measures can be found in our shareholder letter as can a discussion of projected non-GAAP financial measures that we are not able to reconcile without unreasonable efforts and supplemental financial information. Our earnings-related materials are on our website at investors.arm.com. And with that, I'll turn the call to Rene. Rene? Rene Haas: Thank you, Jeff, and welcome, everyone. We continued fiscal year 2026 with strong momentum, fueled by accelerating demand for AI compute from milliwatts in the smallest of edge devices to megawatts in the world's largest hyperscale data centers. Artificial intelligence is reshaping every layer of technology and Arm is the only compute platform delivering AI everywhere. Q2 is our best second quarter ever, with revenue of $1.14 billion, up 34% year-on-year, marking our third consecutive billion-dollar quarter. Royalty revenue reached a record $620 million, up 21% year-on-year, driven by growth in all major markets, including data center, smartphones, automotive and IoT. Unprecedented compute demand has led to our data center Neoverse royalties to more than double year-on-year. Licensing revenue rose 56% to $515 million as companies continue choosing Arm to build their next-generation AI products. Our strong results lifted non-GAAP EPS above the high end of guidance. During the quarter, we announced a strategic partnership with Meta to scale AI efficiency across every layer of compute from AI-enabled wearables to AI data centers on a consistent compute platform. This partnership combines Arm's leadership in energy-efficient compute with Meta's innovation in AI infrastructure and open technologies to deliver richer, more efficient AI experiences to billions of people worldwide. In the data center, access to power has now become the bottleneck, and this is accelerated adoption of Arm's Neoverse compute platform, which has now surpassed 1 billion CPUs deployed. Our compute forms the foundation of custom silicon from leading partners, including NVIDIA Grace, AWS Graviton, Google Axion and Microsoft Cobalt. For example, Google's Arm-based Axion chip delivers up to 65% better price performance while using 60% less energy. And as a result, Google is migrating the majority of their internal workloads to run on Arm. Customers are increasingly deploying Arm Neoverse CPUs alongside their AI accelerators to orchestrate massive clusters, highlighting the versatility and scalability of our platform. The addition of 5 new Stargate sites this quarter further expands visibility into future AI capacity and reinforces is Arm's central role in the hyperscale build-out. As AI chip design becomes more complex, our compute subsystems, or CSS, are helping customers accelerate their development cycles and reduce execution risk. Demand for CSS continues to exceed expectations. During the quarter, we signed 3 new CSS licenses, 1 each in smartphone, tablets and data centers, bringing our total to 19 CSS licenses across 11 companies. We also expanded our collaboration with Samsung, which is leveraging CSS for its Exynos family of chipsets, driving up to 40% AI performance over previous non-CSS generation. As a result, the top 4 Android phone vendors are now shipping CSS-powered devices. CSS has quickly become the starting point for customers, building next-generation silicon, offering faster time to market and delivering higher royalty rates for Arm. In the quarter, we also launched Lumex CSS, our most advanced mobile compute platform to date. Lumex enables rich on-device AI experiences such as real-time translation, image enhancement and personal assistance. Flagship devices from partners like OPPO and vivo are expected to ramp later this year, bringing console-quality performance and new AI capabilities directly to mobile devices. At the edge, AI is transforming how people interact with their devices in their hands, homes and vehicles. Google launched the Pixel 10 smartphone featuring the new Arm-based Tensor G5 chip, which runs Gemini models up to 2.6x faster and twice as efficiently as prior generations. NVIDIA began shipping its Arm-based DGX Spark system for AI developers, a compact desktop supercomputer for local model training, fine tuning and inference. In automotive, a flagship electric vehicle built on Arm's platform introduced advanced park assist, voice control and safety features featuring Arm's Automotive Enhanced technology. Tesla's next-generation Arm-based AI5 chip delivers up to 40x faster AI performance, enabling the next wave of intelligent vehicles and autonomous machines. Our leadership in AI is amplified by our unmatched software developer ecosystem, now more than 22 million strong, representing over 80% of the world's developer base. This ecosystem is a powerful growth engine for Arm. Every new ARM-based device brings more developers, which drives more software innovation, which in turn fuels greater demand for our compute platform across every market we serve. As mentioned in our last call, we are continuing to explore the possibility of moving beyond our current platform into additional compute to subsystems, chiplets or complex SoCs. As a result, we continue to accelerate the investment in our R&D as we are seeing increased demand from our customers for our work from Arm. AI is shaping how the world computes and Arm is a foundation making it possible. From milliwatts to megawatts, we deliver the performance, efficiency and scalability to meet this moment and the years ahead. And with that, I'll hand it over to Jason. Jason Child: Thank you, Rene. We have delivered another strong quarter. Total revenue grew 34% year-on-year to $1.14 billion, a record for Q2. It exceeded the midpoint of our guidance range by $75 million and marked our third consecutive quarter above $1 billion. Royalty revenue exceeded our expectations, growing 21% year-on-year to a record $620 million versus our guidance of mid-teens. The biggest growth contributors were smartphones with higher royalty rates per chip and in data center where we continue to see share gains from custom hyperscaler chips. Royalty revenue from smartphones grew in order of magnitude faster than the market as multiple OEMs ramped smartphones based on Armv9 and CSS chips. Data center royalties doubled year-on-year given the continued deployment of Arm-based chips by hyperscaler companies. Automotive and IoT both continued to grow year-on-year and contributed to our strong royalty performance. Overall, royalty growth rates continue to reflect Arm's increasing royalty rates and rising market share. Turning now to license. License and other revenue was $515 million, up 56% year-on-year. Growth was driven by strong demand for next-generation architectures and deeper strategic engagements with key customers. We further expanded our license and services agreement with SoftBank. We also signed 4 ATA and 3 CSS deals. These agreements reflect the continued investment by our customers in next-generation Arm technology. As always, licensing revenue varies quarter-to-quarter due to the timing and size of high-value deals. So we continue to focus on annualized contract value, or ACV, as a key indicator of the underlying licensing trend. ACV grew 28% year-on-year, maintaining strong momentum following the 28% year-on-year growth we reported in Q1. This is well above our usual run rate of low teens growth rate -- low teens growth and is also above our long-term expectations of mid- to high single-digit growth for license revenue. Turning to operating expenses and profits. Non-GAAP operating expenses were $648 million, up 31% year-on-year on strong R&D investment and slightly below guidance. These investments in R&D reflect ongoing engineering head count expansion to support customer demand for more Arm technology, including continued innovation in next-generation architectures, compute subsystems, and possibly chiplets or complete SoCs. For example, over the past 4 years, we've invested heavily in developing the technology that makes up the Lumex Compute Subsystems for smartphones, which we announced in September. This project took around 1,000 man-years with a team size peaking over 450 engineers and required around hundreds of billions of dollars in investment -- hundreds of millions of dollars in investment. Lumex CSS has attracted strong market interest and we're already seeing royalty revenue from an early licensee. Non-GAAP operating income was $467 million, up 43% year-on-year. This resulted in a non-GAAP operating margin of 41.1% and an improvement from 38.6% a year ago. Non-GAAP EPS was $0.39, $0.06 above the midpoint of our guidance range, driven by both higher revenue and slightly lower OpEx. Turning now to guidance. Our guidance reflects our current view of our end markets and our licensing pipeline. For Q3, we expect revenue of $1.225 billion, plus or minus $50 million. At the midpoint, this represents revenue growth of about 25% year-on-year. We expect royalties to be up just over 20% year-on-year and licensing to be up 25% to 30% year-on-year. We expect our non-GAAP operating expense to be approximately $720 million and our non-GAAP EPS to be $0.41, plus or minus $0.04. Our higher revenue allows us to both accelerate R&D investment and pass-through upside to EPS. We are seeing strong demand from our customers for Arm technology, which gives us confidence in our long-term growth trajectory, and our strategy to enable AI everywhere, in the cloud, at the edge and in physical devices. And we will continue investing aggressively in R&D to capture these opportunities and ensure that AI runs on Arm. With that, I'll turn the call back to the operator for the Q&A portion of the call. Operator: [Operator Instructions] And your first question today comes from the line of Sebastien Naji from William Blair. Sebastien Cyrus Naji: Congrats on the nice results. Rene, I wanted to ask about the AI opportunity. There's been a seemingly nonstop stream of new data center deals announced over the last quarter, calling for tens of gigawatts of additional computing capacity to be stood up. How do you feel about Arm's strategic positioning with respect to these AI deals? And what do you view as the opportunity across the build-out? Rene Haas: Thank you for the question, Sebastien. As a Board member of SoftBank and also given our heavy involvement there with Stargate and regular dialog with OpenAI, I believe I have a unique perspective in terms of visibility in terms of this market. One thing that's become quite evident is that power has become the bottleneck for everyone and power not only means access to energy, but everything underneath it in terms of infrastructure build-out, turbines, transformers, everything associated with generating power. So in that environment, everyone wants to move to the most efficient compute platform as possible. Arm is about 50% more efficient than competitive solutions. We've seen that across the board in benchmarks, but also more importantly, in real-life performance. And that's why we see NVIDIA, Amazon, Google, Microsoft, Tesla, all using Arm-based technology. We see an unprecedented demand for compute and all the incremental compute that we've seen announced literally has all been based on Arm. So that's driving huge growth opportunity for us, and it's one of the indicators as to why we've seen such growth in our Neoverse business more than doubling year-over-year. Operator: Your next question comes from the line of Joe Quatrochi from Wells Fargo. Joseph Quatrochi: I noticed in the filing you announced your intention to acquire DreamBig Semiconductor. Curious just kind of what's behind that? And how does that kind of fold into your plans to potentially expand beyond your current kind of offering platform? Rene Haas: Yes. Thank you for the question. So DreamBig is a great company. They've got a lot of interesting intellectual property particularly around the Ethernet area and already make controllers, which are very, very key for scale-up and scale-out networking. So when we look at the demand for what's going on inside the data center and particularly in the area of high-speed communications, that type of technology will be very helpful for us to broaden our offering to end customers. So we're very excited about the company and DreamBig has got some fantastic engineers. Operator: Your next question comes from the line of Jim Schneider from Goldman Sachs. James Schneider: I noticed in your disclosures that you saw a material step-up in related party revenue. So I was wondering if you could maybe talk a little bit about -- there's also been many announcements related to Stargate and SoftBank since the last earnings call. Can you maybe give us any kind of color you can on the nature of that relationship and how things are changing in terms of design activities? Rene Haas: So one of the ways to think about Stargate and particularly given the relationship between Arm and SoftBank is a huge opportunity for Arm to partner with SoftBank and SoftBank's partners to provide technology into all those solutions. So without getting into too many of the specifics, but at a high level, if you think about what's associated with building out these data centers, you have the compute, obviously, you have the networking, you have everything associated with power distribution, you have a potential technology that gets into the power mechanism of the data center and then everything associated with even potential assembly of the data center. So as a result of all the work that SoftBank and the SoftBank family of companies are doing, it provides huge opportunity for Arm to provide solutions into that space. So that, at a high level, is the way to think about how the SoftBank family works together on these designs. Operator: Your next question comes from the line of Ross Seymore from Deutsche Bank. Ross Seymore: I wanted to go back to the OpEx side of things. I know it was a little bit below your guide in the second quarter, but the fourth -- third quarter looks like it's going to step up again. Kind of a bigger picture one. You mentioned about exploring different sorts of go-to-market methodologies, chiplets, et cetera. When do you expect to give us more color on when that's going to go from exploration to return on investment or the actual strategy, how should we monitor that and expect to get more information from you? Rene Haas: Yes. Thank you for asking. The best detail I can give you is there's nothing I can talk to you about today in terms of time line, about products or technologies. When the time comes for us to announce it, you'll be the first to know in terms of what we're doing. Right now, the best commentary I can give is that everything associated with those solutions does require a significant level of R&D. Now as you've seen on the guidance going forward, our revenue go forward is higher than our OpEx increase, which is something we've been very careful to manage. So we feel comfortable about that. But at the same time, what we're looking at in terms of the opportunity for compute and more importantly, compute using Arm has never been greater. So as a result, we want to make sure we're in the best position possible to capture it. We're looking at all possibilities in terms of how to do that. And when we're ready to talk about what that is, we will certainly advise. Jason Child: The only thing I would add is, I think last quarter, we said, as soon as the way we think about when we announce something, if it were to be something related to full SoCs, it would be once there's tape-out, once there's samples back and once there's actually noncancelable customer orders, when we achieve all 3 of those milestones, that's when we would probably talk about something because this would be a new business and something we haven't done before. So whenever those milestones are achieved, that's when you should expect to hear from us. Operator: Your next question comes from the line of Vivek Arya from Bank of America. Vivek Arya: I just wanted to clarify how much was the SoftBank contribution in Q2 versus what you thought? And then what is baked in for Q3 and hopefully, if you have the number for Q4? And the real question is how long can this quarterly rate persist? And if you do move into physical chips or chiplets or any other products as part of target, does it start to cannibalize this licensing stream? Jason Child: Yes. So thanks for the question. In terms of the impact, it was about a $50 million increase from last quarter. So last quarter, we think we were about $126 million. It actually went up $52 million, so now about $178 million. and that's a good run rate to assume going forward. The only way it would change is if we have any additional deals. And again, these are license plus design services. So think of it as being licenses to our IP to work with SoftBank on exploring solutions. But then think of the design services being effectively a kind of a funded R&D model. And so that's a lower margin revenue, of course. So these -- in terms of how long these revenue streams will occur, we're not at liberty to say yet, but I would say, as Rene said, at some point, probably in the next year or so, you'll hear us talk about what products those might be. But obviously, that's not just up to us. It's when SoftBank is ready to talk about what these products could look like and what the revenue profile, et cetera, is. And so when that would occur, it's likely to assume that there would be some different revenue source, whether it's royalties or gross revenue from selling a chip if in fact, it's a full SoC. Those are all things that are still to be worked out. And yes, I would think of that as being, to some extent, cannibalistic of whatever the current license and design services. But then, of course, if there is a product, you could also assume there could be successive generations of products after that, in which case you could stack royalty between license and design services. But then, of course, there could also be royalties or whatever the revenue relates to whatever the product that ships in market is. So I would think of it as very much durable revenue, in that I think if SoftBank wasn't a related party, we would just be booking license and design services, and it wouldn't be a related party, but then the numbers would be pretty similar. And so the fact that the related party I think is probably what makes it look somewhat unique. But the reality is we also, as Rene already mentioned, this is not really just between us and SoftBank. They also have contracts with many others, OpenAI, other Stargate partners as well. So I would think of this as all being part of a larger effort. Operator: Your next question comes from the line of Timm Schulze-Melander from Rothschild & Co Redburn. Timm Schulze-Melander: I had 2, please. Just following on, on the Stargate theme and the sites. Can you maybe just talk about the shape of what that revenue opportunity looks like on a sort of 1-, 3- and 5-year view just kind of when it's going to start having an influence on the revenue -- the annual revenue or quarterly revenue of the business? And then my second question was, just to make sure, I wasn't sure I caught it right. You talked about the Lumex CSS. I think that's a product that you launched in September, but I think you also said that you already have royalty revenues associated with that. If you could just maybe expand on that a little bit, that would be really helpful. Rene Haas: Sure, sure. I'll take the first part of that question, and I'll let Jason take the second half. Without giving you kind of a go-forward forecast of 1, 3, 5 years, maybe a way to think about it is, back in January of this year, OpenAI with Oracle and SoftBank announced Stargate, which was a $500 billion project to build out data centers over the next number of years. When we go back to where we are now 11 months later, I would say the demand picture for compute is greater than it was at that time. So this is a bit of why you're seeing all kinds of different accelerated announcements around spend, et cetera, et cetera. So if nothing else, I think the opportunity for compute has only grown since we made that Stargate announcement. And to be clear, that announcement is around a joint partnership with OpenAI and SoftBank being equity partners in this investment for compute. So we are quite bullish in terms of this overall demand for compute. Right now, what is in the way of realizing that potential is all of the infrastructure required around the power. But from everything that we can tell from people we talk to inside the ecosystem, the demand for compute to train these new models, reinforcement learning to make them great and then inference to serve them, the demand opportunity is stronger than what we announced 11 months ago. So this is why we're accelerating all the investments that we talked about to take advantage of that opportunity. On the Lumex CSS royalty question, I'll let Jason answer that one. Jason Child: Yes. So I would say the licensee that's already actually -- that we're already receiving royalties from, that is, I'd say, earlier than expected. And the way -- because we just launched this in September, the way it's happened so quickly is this actually -- we're not able to say which partner it is, but it is a partner where this is not their first CSS, this is their second CSS. So as a result, there was already kind of close partnership on the first generation. And so then when we launched the next generation, because the teams have already been working pretty close to each other, it allowed that second generation to be adopted very quickly and for royalties to come really just within a couple of months after the technology was delivered. So kind of unusual, a little ahead of what we had expected, but it very much speaks to exactly why CSS has been more successful even than we thought when we launched it 2 years ago. It's really about speeding up time to market, and this is an excellent example of that occurring. Operator: Your next question comes from the line of Harlan Sur from JPMorgan. Harlan Sur: Rene, you talked about Neoverse royalties growing 2x year-over-year with all these cloud-based CPUs ramping. And then on top of that, with these high-performance AI clusters, right, they're using more DPUs or SmartNICs that are also using Arm cores. On the networking side, data center switching and routing chips have multiple Arm cores embedded in them for things like telemetry, load balancing, overall system management. The bottom line is that there's significant Arm compute going into all aspects of the data center, right? We're also even seeing Arm taking over x86 in the service provider networking markets as well. So last fiscal year, cloud and networking accounted for about 10% of royalty revenues. We're midway through this fiscal year. Maybe you guys could just true us up, I assume, this mix has increased. Is it approaching 15%, 20% of total royalty revenues for the team? Any color here would be great. Rene Haas: Yes. I'll let Jason address the numbers, but thank you for being a great salesman and describing our penetration across domains. You're 100% right. There's Arm technology in virtually every set of the networking stack. The BlueField technology at Mellanox, DPU-based, that's Arm. Significant technology goes into the switches around Tomahawk and Arista are all using Arm technology. So we are definitely seeing an acceleration of all that. And at the same time, I think the power efficiency piece is probably the biggest accelerant I think we're going to see just in terms of being able to offload as much as everything you can on to the more power-efficient domain of the compute platform. So I'll let Jason comment on royalties scheme in terms of where that is going directionally. Jason Child: Harlan, so on the royalties, yes, I mean, it ended the year at around 10-ish percent. And so we're certainly with the growth rate in infrastructure being double, I'd say, all the other categories in overall average royalty, you should expect it to continue to increase. We'll provide a full update at the end of the year. But your trajectory of somewhere in the 15% to 20% range is not a bad assumption and probably a reasonable expectation for where we expect to trend throughout the year. Rene Haas: So I would say it's probably going faster than we expected a year ago. Operator: Your next question comes from the line of Krish Sankar from TD Cowen. Sreekrishnan Sankarnarayanan: I have a question for Rene. Clearly, you kind of highlighted how you have strengthened smartphones and also increasing market share in data centers. I'm kind of curious, when you look over the next few years, how do you see chip demand and token generation playing out and its implication for Arm, especially as you move into more of an inference world where edge devices may play a bigger role? Rene Haas: I think from some accounts of people who I talk to will say that today on some of these data centers, these build-outs of multi-hundred megawatts that still -- and again, depending on how you define training versus inference and reinforcement learning, majority of compute is being used for training still. That clearly will flip. Well, at some point, it has to, we think. And then that demand starts to move to inference. What we're seeing is all kinds of demand for different architectures and compute type of solutions to run inference not in the cloud. Obviously, you're going to not rely 100% on something on the edge. But today, it's the reverse. It's about 100% on the cloud. And we think that is going to change. We are seeing already lots of demand for the CPUs and Lumex that have these scalable matrix extensions, and these are the extensions that allow you to run AI workloads at higher performance. That's only going to continue. And I think for Arm, that is an enormous trend for us on 2 levels. Number one, huge trend for us because the further you move away from the cloud on to battery-level devices, that's a domain that Arm can play in, in the sense of the software workload running exclusively there. But at the same time, customers would love a scalable software solution between the cloud and the edge. And that's a lot of what's behind the announcement that we made with Meta in October. This is around working in such a way with Meta where whether they're running something in the cloud or running in the edge, for developers, they're able to port models in such a way that it's as efficient as possible no matter where you're running. So this is all, I think, a good thing for us because more tokens means more compute, more computes means more compute needed at the edge, and more compute at the edge is really good for us because that's a -- I think we're in a very, very unique position to address that. Operator: We will now take our final question for today. And the final question comes from the line of Lee Simpson, Morgan Stanley. Lee Simpson: Well done everyone on a great quarter. I see China is maybe 22% of sales this Q. And I was just wondering what is driving that? Is it more licensing or royalties for strength in the quarter? And maybe just as you look at the licensing pipeline for the rest of the year, have you seen more reason to be confident in the growth this year for licensing, especially as you look to Q4, which, as I believe we said before, there's potential for good renewal deals this year. Jason Child: Thanks for the question, Lee. In terms of the China performance, yes, it definitely has done well. And I would just overall say the demand in China looks to be as strong as we've ever seen. We did have one of our largest license deals actually come out of China. And so I would say license was slightly more of a -- I'd say, more of the overperformance came from license. Royalties are also growing strong in China as well, but license was a little bit of a bigger driver this quarter. And our pipeline indicates that we have a pretty strong license pipeline for the remainder of the year. In terms of overall license revenue, hard to say as we get into Q4. There are some large deals as we always have. In terms of timing. Right now, we're just guiding on Q3. But next quarter, we'll definitely have much more clarity around what deals are going to be able to land in Q4 and whether there's any pull forward, pushouts or whatnot. But as a reminder, we don't -- the deal cycles on large license deals are usually 6 to 9 months, and we don't really lose deals. It's really just about what exactly are the market needs for customers and when do they need it. And given the certain -- the current CapEx kind of forecast and all the AI cycles that continue to be as strong as they've been for the last couple of years, I have a lot of confidence, but we'll give you a little more detail next quarter on what's going to land in Q4. Operator: Thank you. That was our final question for today. I will now hand the call back to Rene for closing remarks. Rene Haas: Thank you, and thank you, everyone for the questions. As we stated, we could not be more happy with the results last quarter. Royalties at a record, 34% growth year-on-year, just terrific results. But more importantly, when we think about the opportunity for Arm going forward, the future has never been brighter because if we look at what's going on with artificial intelligence, artificial intelligence is driving unprecedented demand for compute. And given the unprecedented demand for compute, we are seeing all kinds of constraints on power and infrastructure to deliver that compute, which means that the compute that's being delivered for AI needs to be as efficient as possible. That's also a great place for Arm. And then as more and more of this AI compute moves from the cloud to edge devices and requires the most efficient compute on the planet, that's a great place for Arm, too. So we are extremely excited about the future going forward. We continue to invest to ensure that we can take advantage of that opportunity. And on behalf of everyone inside Arm who made this quarter happen and to our partners and customers, thank you so much, and thank you for all the questions. Operator: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.
Roberto Cingolani: Dear all, nice to digitally meet you again today for the presentation of the third quarter of 2025. Before getting started with the numbers, I'd like to share with you some of the news. You have partly read something on the communicate. First, I'd like to introduce you on my right, Claudia Introvigne who will be the new chief of the Investor Relations. There will be a new direction at the direct report of the CEO for Investor Relations. So welcome, Claudia, and thank you for being here today, joining us today. On my left, of course, Alessandra. Alessandra today, there is an important announcement. Alessandra, for personal reason, will leave the Leonardo. She will be with us continuing today the presentation and the last things for the Q3. And of course, she will pass the -- most of the information for the balance sheet of next year and for -- closing of the budget. We already have a succession plan in place in the company. This is existing since a long time. So there will be no break even for 1 second. And I thank you very much, Alessandra, for giving this availability to give total continuity to the business and to the operations. And of course, I want to thank Alessandra heartfully because she really did a great job with us, and thank you for staying with us and also helping us in closing this very dense period of work. So we go now to the numbers of the third quarter. And then, of course, as usual, Alessandra will give most of the information concerning the division and the KPI -- the financial KPIs and then the question and answer. Thank you, and I go to the Board now. Okay. Here we go, as usual, with our lead wall. The quarter 3 of 2025 turned out to be particularly good. As you've seen -- you can see here from the numbers, the new orders year-over-year are growing by 24.3%, reaching -- passing the threshold of EUR 18 billion at month 9 of 2025. On the same footing, we have an increase in revenues in the range of 12.4%. So we are reaching this month, EUR 13.4 billion. The EBITDA is growing by 22.7%, reaching EUR 945 million. I remind you year-over-year last year, it was EUR 770 million. And return of sales is growing by 0.6 points. That is we reached 7%. Free operating cash flow is improving by 22.3%. That is very satisfactory for us. And the net debt is under control with a decrease of 25.9%. So those are the numbers that are characterizing our third trimester. As usual, Alessandra will give you much more information about the -- how this is shared by the different divisions and business units. But the highlights are reported in a very synthetic way in this slide. So in general, all divisions performed rather well. There is no -- there are no spikes in terms of geography or there is no killer product that jeopardize all the other performances. I would say performances are well distributed across the portfolio of products. About electronics, there is a solid order intake across all domains. The Eurofighter and the GCAP are performing well. I'll give you more information later. The Naval business with the frigates and also with the multiple purpose offshore patrol vessels are doing quite well for Indonesia in this specific case. Land defense, particularly with the new contract with the Ministry of Defense is growing as expected. DRS is also showing a good performance actually, a strong performance, especially on electric power and propulsion technologies. And this is -- this class of products has to do with the Columbia Class programme, which is one of the leading program of DRS. Concerning helicopters, there is a rather solid order intake across all regions. This is driven primarily by defense and governmental customers and the offshore sectors. They are both very well distributed, strong revenues across both platforms and services that you remember, I'm sure, helicopters are growing in services continuously. Aircraft is doing quite well, strong sales. Those are reflecting the Kuwait Air Force business. It's a jumbo order, EUR 2 billion plus. We cannot give more details, but it's a big one. On top of that, solid contribution from the GCAP. At the moment, we have in the range of a bit less than EUR 0.5 billion programs, which has been already funded. I'll give you more details later. And even the C-27J has been growing as a business with an order in the range of EUR 100 million. There is a lot of increase in the training services, not only the customers, we now have even the U.S. Air Force customers, but also the number of flight hours that have been delivered by the IFTS, the training school, that corresponds to something like EUR 90 million. So that's a very, very encouraging result in terms of training services. Last but not least, the 345, the small trainer aircraft is finally in the phase of having a syllabus at the Italian Air Force bases. So this is now going to be an operating machine. Aerostructure, in this -- in the area of Aerostructure, we are satisfied because we confirm the rate of increase from 5 to 7 fuselages in Q2. And moving towards 8, I'm sure you remember that we -- the plan we are making together with the potential partner for the creation of a new joint venture is based on a progressive improvement of the situation, which is actually in line with our forecast at the moment. I will give you more information about the aerostructure situation later on during the presentation. On top of that, I should add that the Airbus 2020 rear fuselage contract has been awarded. So we now are double source for those components for our colleagues in Airbus as well as the NEMESI optimization program for manufacturing has delivered the first fuselage of ATR. That's an important result because it took a bit of time to optimize the manufacturing. Now we're happy with what we have. Cyber is undergoing a strong growth. I mean numbers of cyber are extremely interesting, thanks also to the inorganic growth program, the acquisition of the Zero Trust Technologies. So at the moment, the secure digital transformation program is running very well with the governmental and defense customers. There is a strong acceleration in the business with the European institution like European Commission, eu-LISA and the European Space Agency. And finally, the cleaning of the product portfolio and the production of new products that are proprietary of our division is clearly impacting on the improved profitability of the division. We are very satisfied of this trend at the moment. Finally, concerning space, there is a strong order performance across the service market, including earth observation both in Italy and for export. And I should say that our new activity related to the earth observation constellation is growing fast. We inaugurated recently our facility together with our colleagues in Thales, the facility in Rome for the fabrication of satellites. And we are now starting the construction of the constellation and also the contact with other important countries that are interested in investing in new constellations. Before going to the technology news and the product news, I'd like to comfort all of you about the tariffs. You remember there were a bit of doubts at the beginning, what could have been the impact of tariffs on our business in the American market. I'm sure you remember that the preliminary evaluation was that tariffs would have impacted on less than 5% of the global market we have in U.S. So we expected something in the range of EUR 20 million as an actual impact. Now fortunately, the US-EU trade deal has been officially implemented and now is exempting the civil aeronautic sectors and also the components for the civil aeronautics and even the helicopters. As a matter of fact, at this point, we expect a clawback for the September cash out of approximately EUR 2 million. This is actually no longer a complex issue. We don't have to go to the court. It's something we do with the form fit basically. And we are starting now the potential clawback for the cash out that has been done before the trade deal implementation. So I can say safely that with this piece of information, we can consider right now with the situation that we have at the moment, we can consider the tariff issue as a marginal one, I would say, even closed. We don't expect any surprise under the present conditions. Update about the efficiency plan. This is running exactly as agreed. We are on schedule. As already reported in the previous quarters, most of the savings come from the procurements, primarily great attention in the procurement, but also renegotiation of long-term contract. And this renegotiation is fundamental to keep under control the prices and of course, the mitigation of the inflation. At the moment, we are approximately at target. We were planning to have a saving in the range of EUR 20 million to EUR [ 30 ] million in 2025. We are very close to this value. And apparently, the trend, which is you can see here with the green dots, this is the actual trend, is very close, slightly better than the expected trend, which is the pink line. So no news from this point of view. I think the machine is well started. People are very committed. So we will continue informing you about those numbers, but I think there's no surprise because the technology for the implementation saving plan seem to be operating very well. Now let's go to the description of the large-scale initiatives. As you remember, at the last quarter presentation, I told you that was -- that started as inorganic growth, but now most of this is becoming organic growth because it's now in our -- it's incorporated in the plan of the company and a lot of work is running. I will go analytically one-by-one through the different initiatives. Let's start with the Leonardo Rheinmetall Military Vehicles. You remember very well that in this specific initiative, we -- the execution means that we have to integrate payloads, weapons and turrets on existing machines to see motors, transmissions. So basically, the challenge here is to have a very efficient integration of top-notch electronics, weapons, control systems and top-notch military carriage technologies. At the moment, commercial and operational actions are underway because we have to secure that the delivery, which is for the first period is shown here is respected. Actually, we already secured a contract for the Advanced Infantry Combat systems, which are those smaller with smaller gas, but multipurpose. And right now, we have -- already EUR 400 million have been allocated on the AICS and another EUR 350 million program is supposed to be launched very soon, the second phase of the program. So we are starting the real business. Five of those machines will be delivered by the end of the year. In the meantime, we are all working on the MBT. It is more complicated, of course. The chassis has to be prepared, and we have to start the system integration on the Main Battle Tank, which will come later compared to the AICS. As you see from the plot, the red is the AICS and the blue will be the MBT. Now the peak of the red start rising earlier, whereas for the Main Battle Tank, we expect the first prototype between '29 and 2030. But anyway, we are on track. We are working with our partners in Rheinmetall. And I would say the team is really attuned and committed to results. At the moment, I don't have anything -- any danger or any, how to say, uncompleted part to communicate. The program is running well. On the same footing, I can tell you more about GCAP. Now in the scenario in which the competitors like those in U.S. or like those in Europe seem to be -- seem to progress very slowly if they are progressing. GCAP is really now up and running. The Edgewing organization, which is actually the top company that coordinates the activity of the NatCo, has currently reached 180 people. The target is going to be something like between [ 20, 2050, ] so it's almost completed. The ramp-up is progressing very well. And also new governance and operational procedures are in place. So the Edgewing mother company in the GCAP is actually almost ready, fully operative. In the meantime, we have launched the consortium that involves Leonardo, Mitsubishi and others to deliver the next-gen of ISANKE, so the integrated sensing and non-kinetic effect electronics and Integrated Communication System, ICS. Those are essentially fundamental, crucial elements of the GCAP architectures. They represent the heart of the communication and control. And now we are working to the delivery of the next-generation technology for the ISANKE and ICS. On top of that, I should say that at NatCo level, so now I'm dealing with the NatCo connected to the Italian funding of the GCAP, quite a substantial budget has been secured at the moment. We are EUR 1 billion plus. And this is being used -- this is by the end of the year. It's being used to cover the national technology program that should essentially incorporate high-performance computing and AI technologies into the building blocks of the future GCAP architecture. The concept and the assessment phase for the Adjunct, the Adjunct is simply a fighter drone that could be universal, controlled by GCAP or by any other sixth-generation fighter. And finally, the working environment and the digital infrastructure that will control all the components of the system of systems. So this is now initiated at NatCo level with our domestic funding, and our engineers, our teams are already working on the development of those components. Now last but not least, there is also another good news from this point of view. GIGO, which is the governmental structure on top of the GCAP is now discussing and negotiating the first international contract that will be provided to the Edgewing and the Edgewing with that money will boost the activity of the three NatCo. This is going to be not only national activity, but coordinated sovereign national activity of the GCAP consortium, having to do primarily with the platform and so on and so forth. So apparently, the GCAP machine is moving. The company is up and running. And I think if we work seriously, and we're all committed in getting the results on time. I think our GCAP road map will grow properly. And that's very important because apparently, our competitors at the moment are slowing down for different reasons. Let me go now to the third initiative. This has to do with the Baykar and Leonardo collaboration, the LBAs, Leonardo Baykar Advanced Systems. So what are we doing now? We are working, first of all, with the regulatory -- for the regulatory approval because we are making a sovereign national joint alliance. And this, of course, needs several regulatory approval, not only antitrust, but also authorization, certification. So we do need a lot of work to make sure that those machines can fly because, as you know, in most war combat area, war scenarios, drones are not certificated. But now we are thinking to an industry that massively produce machines of different payload, different size, and we want to have machines that are certificated and can be sold everywhere in the world, not only in Europe. In the meantime, we are progressing in the integration of payloads and platforms. Now let me show you a bit more in detail, I'll just expand the plot here. This is the industrial plan. So I start with Ronchi dei Legionari, our plant in -- close to Trieste in Northeast. This is the Leonardo plant that originally was involved in drone fabrication and design. So here, we're going to assemble, make the final assembly of the TB3, which is one of the cash cow of this category of machines. And in the meantime, we're also recovering, improving the Mirach, which is a Leonardo platform actually. It's in the range of 200 kilos with a payload of approximately 50 kilos, which is a lot for a machine like this. It's pretty much like a missile more than a standard drone. And this will be assembled in our Ronchi dei Legionari plant. So integration of electronics, payload, sensors, weaponization will be done there, starting from these two platforms. In Genoa, close to Genoa, Villanova d'Albenga, we're going to make the final assembly of TB2 and Akinci. Akinci is the bigger machine, 22 meters wingspan. They have quite a big payload, and those machines will be assembled there. Meanwhile, in Torino, where we do have a lot of aircraft activity, aviation activity, we have all the engineering and certification activities, which are crucial for the future expansion of this market. In Rome, now in our plant -- in the electronic plant in Rome, we're now -- where we did our roadshow 2 years ago, we are now developing in the new multi-domain facility, all the technology that are needed to control, to govern the multi-domain situations that involve drones. And finally, in Grottaglie, which is our plant for aircraft, civil aircraft, carbon compounds and so on and so forth, we're going to make composite manufacturing and final assembly of the Kizilelma. The Kizilelma is the fighter. It's a real aircraft, something that looks like an aircraft. And this one actually is going to be our adjunct -- universal adjunct fighter that can be coupled to any machine as long as you can develop the electronic for the control. And this is, of course, what we do because this is one of our specialty. So now as you see, the geographical fingerprint of the drone activity is quite well organized at the moment. We are making all the necessary investment and upgrade of the production lines. We are working on the integration. And as soon as the regulatory issues will be fixed so that we are working daily with the authorities, including the Ministry of Defense, I believe that already next year, the first product will be delivered to the market. Let's go now to the Iveco Defense acquisition. Iveco Defense, of course, it's -- you know the story, it's quite recent. Now what are we doing with Iveco? This is a rather young initiative. 3 months ago, we completed the agreement. And now we are working on, first of all, regulatory approval that is quite very important at the moment. And of course, we are negotiating to ensure the deal closing. Now to be clear, Iveco Defense at the moment needs to fix a few important things. The first one is that the supply chain has to be guaranteed. Originally, Iveco had a sort of mixture of civil and military technologies. So some of the components were produced by the civil part of Iveco, and they were delivered like an internal supply chain delivered to the military part. Now, of course, we own -- we are supposed to own the defense Iveco part, but the civil part will go to another owner. So in collaboration with the government, we are working through the prescriptions in the Golden Power to make sure that this internal supply chain will be ensured for at least 1 decade under the same conditions. This is very important to have no interruption in the production pipeline. It doesn't seem to be a problem. There is maximum availability. And I have to say that this negotiation discussion is progressing very well. We don't see big obstacles, big hurdles. But anyway, it's something we have to fix supply chain first. Then a second thing which is very interesting is the technology of land drones. At the moment, we are studying together with our partners and colleagues, I should say, in Iveco, land drones that are ranging between 600 kilos and 2 tons. So those are land drones with trails, not on wheels, but can also be on wheels. And they can mount and transport different payloads. They have different functions. And of course, in the concept of the multi-domain interoperability, having land drones together with all the other manned machines, it's very appealing. So we -- there is a special focus now in our technical teams and commercial teams about the land rules. The third issue that we are developing, we're studying is that -- I'm sure you remember, originally, we were discussing with our partners, Rheinmetall, about the possibility to carve out the trucks as opposed to the armored vehicles. Actually, now that our teams are working together, we are studying all the perspectives. It is yet unclear because the due diligence is in progress, whether it's more convenient to keep things together or to carve out them. This is just industrial analysis. It depends on how much money you have to put to change to double, to split a line or so. But one thing is sure, the trucks that at the moment, Iveco can offer 6 x 6, 8 x 8, 10 x 10, 12 x 12 wheel traction can be very interesting for a number of applications, including the transportation of different weapons and different payloads, massive payloads. And so we are now analyzing also what kind of market openings we can have by combining different payloads, different GaNs or different missiles or radars with the different platforms for transportation. This is now under examination. We have to see -- basically, it's just an industrial analysis. We have to see whether it's more convenient to split, to double or to concentrate. It will depend, of course, on the financial and commercial analysis, which is in progress. But for sure, the more we work on the Iveco analysis, the more we are convinced that this is a very promising -- it was a very promising choice from the technology point of view. Needless to say that Iveco ensures the possibility to offer the same armored vehicles on trucks or on trades or on wheels. And this is a unique possibility now we have, depending on the market, we can offer wheeled machines or machines with trails or with trucks that can go in different ground and different combust scenarios, so you -- of course, you will be informed continuously about the evolution. I think we are online. We are on time on the -- for the closing of the deal that should be the first quarter, if I remember correctly, of 2026. So the teams are working continuously on this assessment. I go now towards Aerostructure. I know this is -- you're very much interested to the aerostructure issue. So let me tell you that the good -- very good thing is that we are really progressing according to the agenda. You remember in July, our counterpart, our partner -- potential partner approved our stand-alone plan and gave a very positive evaluation, financial and technical. Now it's the other way around. They are making their own stand-alone plan that should be complementary to ours to create synergies. They're working with our people. Basically, on a 2-week basis, we are at their place or they are at our place. There is a number of important things. I mean we -- of course, we are working on the deployment of the synergies that the merge of the two partners can make, and this is the most interesting part. At the moment, we have -- so the teams working in commercial and industrial synergies, this is done by a joint working group, which is quite consistent, quite big. We are working at the same time with the key stakeholder. Needless to say, we have to share our vision and the idea of this joint venture with our main customers, those for which we build the components. And this is already in progress and reaction seems to be interested. And then we are working on the joint venture governance and organization, which comes out of the industrial choice, but also on the sovereign national character of the initiative. There is a detailed joint venture implementation road map at the moment. To make a long story short because of the confidentiality constant given by our partners still very strong. They gave us a disclosure only to discuss with the key stakeholder, client suppliers basically. But to make the story short, we maintain our target to sign the partnership agreement by the end of the year. Of course, we are working very, very hard for closing this very complex negotiation. We believe we can keep at the end of the year as the target, and we will make a special session, information session, communication session to you guys, of course, not waiting for the first quarter of '26, that should be months after January. So the sooner, the better, as soon as we close, we call you and disclose everything. But as you can imagine from what I told you, after almost 1 year of work, clearly, there is a strong motivation, very strong motivation. And also, I have to say there is a strong interest by the governments of both partners. So that's an extra guarantee that we are on the right track. I can't say more, as you know, about that, but I inform you about the progress and you see -- and you can see that with this kind of progress, clearly, our partners really want to make things, want things to happen for real. Least but not last -- last but not least, capacity boost. Now, I -- we explained to you the concept of capacity boost in the last quarter. Now the capacity boost team and the external adviser and our dedicated team is now focusing on a number of specific actions. So let's go on the -- let's consider this column. Engineering is responsible for 30% to 40% of the extra workload, so millions and millions of hours that is necessary to improve the efficiency in production. Manufacturing is responsible for at least 10% to 15% of the extra workload necessary to improve our capability. And finally, supply chain is responsible for 10% to 20% of the total strategic supplier -- well, actually not responsible. In the space -- in the supply chain, we have identified 10% to 20% of the strategic suppliers, which are classified as critical, and this has to be addressed by the capacity boost. So those are the three pillars where we are moving. Now about the engineering, we are working essentially on engineering digitalization. So the infrastructure is fundamental because if -- the more we digitalize the engineering, the more efficient is the process. We have selected a few partners for engineering, optimizing the partnership to have basically more hours, less price and of course, more focused collaboration. And we are working a lot on talent attraction. That will be the first talent attraction campus in close to Napoli, where is Aerostructures, but this is now being extended to many other manufacturing areas and engineering areas of Leonardo. Just to let you know, within the industrial plan period, we plan to hire 17, 1-7, 17,000 people, partly replacing retirements, maybe 9,000 or so, but most of them are fresh brains. And of course, those fresh brains will be STEM primarily, and they're going to contribute to the efficiency of the engineering. Now in order to make a very good hiring program, we need to invest on talent attraction. And this is exactly what we are doing now, and our HR department is fully committed in developing this strategy. Second, manufacturing. Now because we want to reduce the inefficiency in manufacturing, that sometimes really impact on margins. We have now a number of case studies. In La Spezia, we are making a very strong analysis and improvement for the land platforms. This is crucial for the Rheinmetall program for the land defense program. We are investing in Cameri, in Caselle, in Venegono, which is a pilot experiment for helicopters. So in that case, we are really working on the divisional plans to improve manufacturing. That means many things, process engineering, rules, supply chain, warehouse organization. There is a lot to be done, and we are working full time on that. Finally, about the supply chain, we are working on the supply chain. There is a program for the supply chain. By the way, this is also supported by funds, not necessarily from Leonardo. We need to invest in our supply chain, not only financially, but also, for instance, moving productions of products that don't have big margins, but they can fill the capability of the supply chain. So we are really working in the optimization and distribution of workload with our most important supply chain representatives. Now last thing that I didn't mention before is a new program that we call mixing the blood. I mean this sounds a little bit like a one-time movie, but that's very important because recently, I've been in Washington, visiting our colleagues in DRS. And by the way, welcoming the new CEO, John Baylouny, that I think is starting in these days. And then we've been in London talking to our guys in the various plants that are distributed in the U.K. area. Now the point is that, I need much more integration, I need much more synergy. We cannot do sort of independent industrial plans because we belong to the same multinational company. There must be synergy. No problem at all in deciding that a company, DRS makes something, and we don't make it in U.K. or in Italy as long as this product is the best and also it's available to all the others in the Leonardo Galaxy, in the Leonardo family. So the mixing the blood program means that we will start soon in having top managers in U.K. from Italy, top managers from U.K. to Italy, being resident and working side-by-side with the others and also revisiting a little bit the synergy with DRS, which is very important because there are new areas where DRS is starting, for instance, space, for instance cyber where we can really benefit of each other. We can open much more market for DRS in Europe, and they can open much more market for Leonardo Europe in U.S. We have to exploit the synergy. Otherwise, we miss big opportunities and frankly speaking, big money. So the mixing blood program is basically a program performed, carried out by a team of HR strategy, operations in collaboration with the divisions and the plants because we have to accomplish this in the next 6 months. We have to improve a situation that at the moment gives fragmentation, zero synergy and ultimately loss of good opportunities. We will make also jump to see what is the situation in Poland. Most important is that when I was in U.K., I spoke to the Under Secretary of Defense, honorable [ Healey. ] I will meet him again in [ Naples, ] mid-November because we are trying to boost the collaboration with the U.K. government. We have a company -- we have a plant in Yeovil that is not getting industrial grants, public governmental grants from the U.K. government since 14 years. And you understand that in order to make sure that this plant is not only subsidized by Italian orders and technologies, we need to have more participation. So we are negotiating a bit more attention to our industrial presence there. Anyway, I can say, as I found good faith and good willingness by everybody, I'm sure we can make much better than in the past. This will be the commitment for the next few months. I just go now to the -- towards the conclusion, and I want to tell you a bit more about the future and the future has to do with the recent news that I'm sure you've heard. We've been working for more than a year, almost 1.5 years with our colleagues in Thales and Airbus for the creation of a giant. We signed this agreement with Airbus and Thales to create a key European player for space technologies. The new company is expected to be operational in 2027. We have about 1.5 years or so, maybe 1.5 years or 2 years to -- first of all, to face the antitrust situation and then to coordinate and develop the synergies. But most of the conceptual work has been done. We aim at creating a European space of space basically. Till then, Leonardo will work -- I mean, every company will work on its own. And of course, Leonardo and Thales within the Space Alliance. And we will try to do our best to provide -- to develop satellite constellation, promote end-to-end solutions like expected, like proposed by the industrial plan. However, we are all in the mindset that we have to converge, carve out those things, merge into a unified new company and work together. This is crucial from our point of view, in view of the multi-domain solutions in which space is a key pillar that would be necessary for integrating air defense and earth observation. So the Bromo company, which is this new company that we -- you have heard about, and we mentioned so far, mean to establish European space global player that can compete with the big players in U.S., China, very likely India and other emerging countries. We will be very careful not to jeopardize the PME, and the small medium enterprises, sorry, [ SME ] and the start-ups. But of course, we need at global level, a very competitive big machine. The governance structure in a simplified form, the Space alliance, Thales plus Leonardo is at 65%. Airbus is at 35%. Within the Space Alliance, as you see, Thales and Leonardo are equivalent, 32.5%. The JV will be based on five NatCo, Italy, France, Germany, Spain and U.K. This reflects the geographical fingerprint of the constituting companies. And there is a matrix where you have the six domains and five NatCos. And if you are sitting at the head of a NatCo, you will be responsible of the domain, which is relevant for that NatCo and all the activity will be done by the NatCo. The domains are earth observation, SatCom, navigation, exploration and science, equipment and ground operations. Now there's a lot to be done. But the very important thing is that in this -- in the idea that we have of Bromo, actually, the NatCo, they're going to have legal autonomy and profit and loss management, so they have a balance, so they are real companies. They have the responsibility for the sovereign decision of the government in dealing with security because we have -- of course, we have to consider that each country wants to have sovereign dominance of the security area. And of course, each NatCo, will be in charge of the supply chain to make sure the supply chain is boosted and not jeopardized. Anyway, this is now in a nutshell, what we will do with Bromo, we're going to work in the next, let's say, 18 months to making this thing happen for real. So the concept, the scheme is clear. Now we have to see how this will work in a very operative way. We need a lot of good managers, a lot of participation and goodwill to make this work, but it's going to be a very competitive company in the world if we make a good job. At the moment, the revenue profile is approximately EUR 6.5 billion with 25 people -- 25,000 people involved. And the synergy in a very conservative way, we expect easily EUR 0.5 billion synergies from scratch. Of course, we have much, much bigger opportunities. This is just to give you a very rough idea of day 1. The ambition is really high. I conclude because I want to wrap up what has been -- what has happened in the last 2.5 years. And what could be the Leonardo's architectural vision for the future. This has to do with the integrated air defense system that I'm sure you remember, I introduced you at the last quarter, that was my last slide when I introduced you the “Michelangelo Dome, this concept of air defense dome that should be customer-friendly, very flexible, adaptable to any effector, any missile, any weapon. So not a rigid system, but something which really makes the difference because it essentially takes advantage of all the strategic choices that Leonardo has been doing in these 3 years. Number one, creating a space division, launching the constellation and creating Bromo at European level, launching a large-scale initiative on drones. So cutting the edge and basically accelerating the drone technology. The GCAP for the sixth-generation fighter, which has been launched and as you've seen before, is up and running. The land defense boost given by the Rheinmetall-Leonardo collaboration, Iveco acquisition and so on and so forth. The strong investment on digital high-performance computing and artificial intelligence as a connect home of the entire company, which allow us to produce electronics, which is for command and control, combat systems, almost ubiquitous in all our platforms. We can do platforms for all domains, land, sea, space, air, sharing a concept electronics, which is meant to interoperate all the platforms in the multi-domain approach. And finally, the strong investment on cyber technologies, which has brought to a strong increase of our cyber technology capability and also of our cyber technology product. Now all these things should converge into something that takes advantage of the fact that Leonardo produces all kind of state-of-the-art radars from 30 kilometers to 1,000 kilometers, produces all kind of platforms, drone, land system, contribute to ships, sixth-generation fighter, all the ground systems, all the armored vehicle. We do -- we can do all platforms. We start now working with our constellation, but of course, Intercom with other constellations. So if you have all the ingredients, the problem now is the interoperability, to develop the proper electronics that makes it possible to enable any platform to enter in this sky dome and to neutralize any threat from 30 kilometers in that zone to 3,000 kilometers, no matter whether it is hypersonic or subsonic or whatever. I can't say more now, but I want to tell you that on November 26, we're going to present this program, the “Michelangelo Dome, the “Michelangelo program to our Ministry of Defense and all the military forces in Italy. And on November 27, we will present the “Michelangelo project to the market and to the most important stakeholder. So please save the date, you will get an invitation. The presentation will be done in detail at the multi-domain center that we created in the Tiburtina plant in -- close to Rome. For most of you attending the first roadshow when we -- 2 years ago, 2.5 years ago, we presented the industrial plan, you were there. So this will be the place. And I hope you will realize how the vision developed in this almost 3 years that was really making a new Leonardo, now will be transferred into the Leonardo of the Future, which is the interoperable multi-domain machines, multi-domain company that has to guarantee global security for any kind of threat. This is now the system of system evolution of the effort we did so far in Leonardo. I look forward to seeing you on the 27th in Rome, either by video or in presence, we will show how this will be deployed. Thank you very much for your attention. And now I'd like to give the stage to Alessandra, who as usual, will give you all the details about divisional activities and KPI -- financial KPI in a much more precise way than I'm able to do. Thank you very much for your attention, guys. Alessandra Genco: Thank you, Roberto, and good afternoon, everybody. I'm very pleased to be talking you through how we have delivered another good quarter and so very solid 9-month results. We're continuing the positive trends that we saw earlier in the first half, especially in our main Defense and Security businesses. We're seeing new orders coming through at a good pace, and we're delivering off a record backlog of EUR 47 billion. This is driving higher volumes and solid double-digit top line growth and high double-digit operating profit growth and higher profitability. We have also delivered another quarter of improving free operating cash flow, and we are reducing net debt with disciplined capital allocation aimed at supporting growth while improving shareholder returns. We are on track on all our key metrics, and we're confirming the full year guidance that we have upgraded a few months ago in July. We see strong performance across all group KPIs with increased order intake, growing volumes and profitability. Let's now look at the key group KPIs. In the first 9 months, group new order intake was EUR 18.2 billion, an increase of 24% year-on-year. We have also seen strong commercial performance across Defense and Security in Electronics, Helicopters and especially Aeronautics with a very strong recent quarter, which includes the recently signed extension of the Kuwait Eurofighter multiyear support contract. This order intake is consistent with the upgraded guidance that we set out in July when we flagged potential large orders in the pipeline. Book-to-bill was 1.4x. We're seeing sustained demand all across Defense and Security and fast growth in areas like cybersecurity. Then group revenues grew 12.4% to EUR 13.4 billion. We have continued to see across all divisions the capability to deliver versus last year. By virtue of good visibility in our backlog, we see strong growth going forward. Plus, we have a strong capability and focus on program milestones and good support from the supply chain in general. And this has translated into higher EBITDA across the group, an increase of 23% to EUR 945 million with good performances across the group. Return on sales improved to 7%. And as we saw in the first half, we are proceeding at improving profit at almost twice the pace of revenue growth. And we have continued to strengthen our financial position. In the 9 months to September, we saw an improved free operating cash flow with a cash absorption of EUR 426 million versus an absorption of EUR 548 million last year. As at September, our group net debt was significantly lower at EUR 2.3 billion versus EUR 3.1 billion last year, in part because also of the proceeds of EUR 446 million from the sale of the underwater business, which we completed in January. In August, we received another credit rating upgrade from Fitch, and we're very proud of it. So a good first 9 months on track, and it underpins our confidence in our targets for the full year. Now let's go deeper into the results and performance at business level. Starting with Helicopters. We saw continued positive momentum supported by a good flow of business with progress on all programs as well as customer support. New order intake was EUR 4.9 billion in the 9 months, a good performance against a strong comparator for the previous year. Continued solid order intake on defense and governmental, including the AW249 program for the Italian Army, governmental orders in Malaysia, customer support orders from the U.K., MoD for its Merlin fleet and orders for the Italian military for ground-based pilot training systems and other logistics and follow-on orders also in the U.S. -- from the U.S. Air Force on the MH-139. Helicopter revenues increased to EUR 4.1 billion, up 13%, driven by increased activity on the AW family, the dual-use area as well as the good contribution of customer support and training. And this was all supported by good resilience in the supply chain. This is an element that Roberto stressed whose importance we can't absolutely under-evaluate. Leading -- all of these results have led to an EBITDA of EUR 320 million, up 18% with a slight improvement in return on sales, supported by consistent program delivery. So a good performance from Helicopters with strong demand across the business and good growth in revenue and EBITDA. Now moving on to Defense Electronics, which continues to perform very well across all segments, both geographically and across domains. Electronics Europe achieved good growth in orders, volumes and profitability. In the first 9 months, new order intake was EUR 4.9 billion, up 2.5% year-on-year, excluding the underwater contribution. And the book-to-bill was 1.4x. All of this is showing growth across all domains and especially in Defense Systems and good demand for the upgrade and renewal across a broad range of platforms. We saw additional orders for the MK2 radar for the U.K., Eurofighter Typhoons for our Royal Air Force customer as well as Defense Systems for the 16 Eurofighter for the Italian Air Force. And in the naval sector, the order for combat systems for the Indonesian Navy Patrol vessels. Electronics Europe revenues were up 13% at EUR 3.5 billion, reflecting higher volumes as we delivered off the growing backlog. EBITDA rose to EUR 450 million, an increase of 18% and return on sales increased to 12.8%. Contributions from strategic joint ventures were in line with expectations, and MBDA continues to perform well, thanks to a continuous flow of business and strong program margins. At the same time, as you have heard last week, Leonardo DRS has also reported a good 9-month performance, showing new order intake of EUR 2.8 billion, up year-over-year about 9% with continued broad-based customer demand across the business and especially for counter UAS, advanced infrared sensing, naval network computing and electric power and propulsion technologies. Revenue rose to EUR 2.3 billion, up 11.7% on the back of growing volumes. And EBITDA grew to EUR 217 million, up 15% with an increased return on sales of 9.4%. Moving on to cyber, Cyber & Security, where we see the first 9-month volumes and the profitability continuing to trending up significantly compared to last year. New orders were EUR 700 million, up almost 20%; revenues of EUR 532 million, up 19%; EBITDA EUR 41 million, up 86%, with return on sales rising from 4.9% to 7.7%. So continuing its positive trajectory with increasing profitability driven by higher volumes and product mix. Order intake included various orders for Italian public administration through the PSN fund for digitalization, the cloud infrastructures and the secure communication as well as new governmental orders in the U.K. and elsewhere. As we mentioned at the half year, we are now presenting the Aeronautics division. This reflects our role as a leading player in fixed wing aeronautics in both the military and civil sectors, with our Aircraft and Aerostructures units combined. And it also now includes our participation in the next-generation GCAP. You remember that the GCAP program was previously reported under the other activities. We're also developing our activities in unmanned aerial systems. You can see the aggregated Aeronautics division's high growth in orders and revenues, while the EBITDA fall reflects the losses in the first 9 months in Aerostructures and ATR. To make operating performance comparable, we are also setting out for you the KPIs for aircraft, now including GCAP and then for Aerostructures. You can see aircraft has been performing very strongly this year, especially with new order intake. After an excellent third quarter, new orders in the first 9 months have now grown to EUR 4.3 billion, well over double the previous year's level, benefiting from the follow-on logistics support contract for 5 years for the Kuwait Eurofighter program. We are also seeing orders coming from the GCAP program and export orders for the C-27J multi-roll aircraft, as Roberto mentioned at the beginning of his speech. Revenues have grown in the first 9 months to EUR 2.3 billion, up almost 16% on the back of higher volumes across military programs such as C-27J, GCAP and JSF. EBITDA grew to EUR 265 million and maintaining strong double-digit profitability. We have previously mentioned that now about 1/3 of the Aircraft division's revenues are coming from customer support. And that is representing an attractive margin and cash flow business, which also is showing how we have successfully been implementing the servitization strategy over the last few years, which was one of the pillar and is one of the pillars of our industrial plan. Now moving on to the civil side of Aeronautics. In Aerostructures, order intake in the first 9 months increased to just EUR 789 million, up on the previous year on the back of orders from Boeing. Revenues were $510 million and EBITDA losses rose slightly to $135 million, excluding ATR. As planned, we have just returned to a second shift per day in Aerostructures and are increasing production levels relative to the first half of the year when we were unwinding inventory, which, by the way, we continue to unwind. And this is leading to better underperformance -- under absorption of fixed cost and reduced losses in the second half. Our actions are taking effect to narrow the gap in line with the ramp-up by Boeing for the B787 to 7 ships per month. Separately, ATR's contribution in the 9 months was negative $34 million, with lower deliveries impacted mainly by supply chain constraints, which are currently being addressed. And we're now pleased to see more positive signs at ATR in terms of new order intake. Turning to Space. We have continued to see improving commercial performance and profitability. New orders were EUR 655 million, notably in Telespazio Satellite Systems and Operations and geoinformation segments, also leading to increasing revenues. The more positive EBITA contribution reflected the confirmed profitability of Telespazio and also partial recovery in TAS following the efficiency plans launched last year, which benefits mainly on the SG&A line with close attention on program deliveries. You've heard Roberto talk earlier about the exciting proposed combination of our space activities with those of Airbus and of Thales to create a leading European player in space. Our higher group EBITDA in the first 9 months also helped drive a better bottom line performance. EBIT grew to EUR 722 million, up 13.5% and the group net result grew to EUR 466 million versus EUR 364 million in the same period of 2024, with lower financial expenses in line with our reduced debt levels. The bottom line net result of EUR 735 million benefited from the capital gain recognized on the sale of underwater business to Fincantieri completed last January. We have also made continuous progress in improving our cash generation, which, as you know, for us, is one of the key highlights and key drivers of performance metrics. It is driven by robust performance on defense and governmental. And year-over-year, there is a reduced outflow with a cash absorption of EUR 426 million versus EUR 548 million in the last year 2024. This is reflecting our improving operating performance and higher EBITDA and the efforts we have been making to manage working capital and cash ins. You know that this is a key area of focus for us, and the culture of cash is being permeated within the company. We have full confidence in our 2025 free operating cash flow targets, which we have raised last July to a range of EUR 920 million to EUR 980 million. Then we continue to focus on executing on our disciplined financial strategy. And you can see how, over the last 3 years, we have achieved a very solid investment grade, receiving repeated upgrades in rating and in outlook. Most recently in the last few months, there have been 2 upgrades in our rating and 1 upgrade in our outlook. We remain fully committed to maintaining a very solid investment-grade status while supporting growth and improving shareholder returns. We also recently announced a successful renegotiation of our ESG-linked revolving credit facility. It was oversubscribed 3x, confirming the positive sentiment and the support that the market has for Leonardo. We also achieved a margin reduction of up to 30% and savings on financial charges. These improved terms reflect our stronger balance sheet and the solid investment grade we have achieved. We also are including new ESG indicators in the credit line, which are in line with the financial and sustainability strategy we have put forth. Let me finish with the confirmation of our full year guidance. You have seen in the period to September that we have continued our good start earlier in the year, and we are on track with our expectations. We continue to see clear momentum. And as such, we confirm the full year upgraded guidance, which we gave you in July. Our main businesses on the defense governmental side are delivering strongly in order intake, revenues, profitability and cash flow. We're seeing good demand for our core defense and security products, technologies and solutions with solid commercial performances across all divisions. New order intake has been very good and especially in the last quarter, and it gives us confidence. Orders are an indicator of the future. They are not linear, as you know, but overall, the trend is positive and a step up again this year. We're pleased with not just the level of orders, but also the quality. And as I said earlier, this order intake is consistent with the upgraded full year guidance we gave you of EUR 22.25 billion to EUR 22.75 billion when we flagged potential large orders in the pipeline. We're also confirming the full year guidance for revenues and EBITDA with top line revenues growth as we deliver from backlog and improved profitability and the full year free operating cash flow that we upgraded in July. So now to conclude, we are continuing to deliver well on track with a good performance across all key metrics. Thank you all, and I will now hand you over to the Q&A. Claudia Introvigne: Thank you, Alessandra. Good afternoon to everybody also from my side. I think that it is now the time for the Q&A. We can use the remaining 20, 30 minutes for the Q&A session. So I leave the word to the operator, and you can open the line. Thank you. Operator: [Operator Instructions] Our first question comes from Alessandro Pozzi with Mediobanca. Alessandro Pozzi: And let me start by saying congratulations to Claudia for the new role, and I wish all the best to Alessandra. The first question on results, clearly, very strong set of numbers. The only issue here is that you haven't changed the guidance, and therefore, Q4 looks really low, especially when you -- the implied guidance for Q4 once you factor in the seasonal trends. And I was wondering how you feel about the guidance and the reason why perhaps you haven't upgraded the guidance, especially for order intake, which seems to be really strong in Q3 and also in light of the fact that there are probably new contracts that you will sign in Q4, very large, like the Turkish Eurofighter, the Germany Eurofighter contract, just to name a few. The second point I would like to discuss is Iveco Defense. I believe that you are doing an industrial analysis at the moment. And I don't know whether I understood correctly, but maybe the carve-out of the truck division of Iveco Defense is not on the table anymore or maybe it's perhaps. So I was wondering whether there is a chance whereby you end up with 100% of Iveco Defense. And maybe the last one, you mentioned synergies with DRS. Historically, it's been really difficult to create synergies between the European subsidiaries and U.S. subsidiaries. And I was wondering how do you think you will be able to improve that? And longer term, what's your view on your stake in DRS? Roberto Cingolani: Yes. Thank you for the set of questions. Okay. I will be, at the very beginning, a bit qualitative. And then obviously, I will ask Alessandra maybe to point out a few aspects of my answer. To be frank, guys, at the last quarter, I had a discussion maybe because of my scientific background, but I like to have kind of algorithms or KPI that are giving us a guideline. I mean, of course, they are very flexible, but they give a criteria for us to make actions. For instance, I was wondering whether it makes sense that we update the guidance every quarter because there is an increase of 1%, 2% of the specific KPI. So I just proposed, but that was a very flexible proposal, okay, just to give a criteria, not because I would say it's not mandatory. It was just a proposal. Let's communicate a change of guidance when we expect, let's say, 10% increase on a specific KPI, which was the case. We might argue and discuss, I'm totally flexible, no ideology at all. If you think 10% is too high, we can make 5% or whatever. I was just trying to give to the team an idea that we have a target. If we go above that target, we changed the guidance. If we are below, even if we grow, maybe it's not so relevant to give a marginal change to the guidance. For instance, -- to be honest, I'm pretty sure, guys that we go well above EUR 19 billion. We already have EUR 19.2 billion or so for revenues, and we possibly break the roof of EUR 1 billion for the free operating cash flow, okay? I'm very confident this will happen. So in some sense, I would feel very confident to give you -- to propose you an upgrade in the guidance. But it's going to be 2%, 3% because we are growing, we are growing fast. We did a lot of work, and now I expect to grow rather continuously. Maybe there is no point to update the guidance every quarter. But with the same transparency and honesty that I told you in my premise, if you think it is better to update even a marginal increase 1%, 2%, we do it. We're not, how to say, hiding or protecting or acting in a conservative way. I'm sure we're going to pass the target this quarter or the next quarter, for sure. I wonder whether it is useful to anybody to give an upgrade of 2% or 2.5%. If you think so, we are ready to get the lesson and to do it. I mean, really, we are absolutely agnostic in this respect. So I know that it's a nonconventional way to answer. But as I said, I feel confident with the numbers. So at the end of the day, for us, it doesn't make any big difference if you say we correct the guidance every 3 months, plus 2%, plus 3%. We can do it. Or if you look at the single line algorithm, we don't disturb you if it is less than 10% or 7% or so. Now concerning Rheinmetall, as I tried to explain before, the due diligence in the industrial analysis is really very complicated now. So we know exactly what we could do in Iveco, for instance, splitting an internal supply chain line or doubling a production line in the plant. Now we have to see whether the investment to do it is worth to make it to carve out a specific part and maybe to sell this to our partners or we better keep all unified and anyway, having commercial agreements with our partners, which would have exactly the same result in the end of the day without a massive investment. We're going to make this analysis in the next weeks. There is a team of about 20 people, including advisers that are working with us. As soon as we are clear this with the numbers, of course, we will make a proposal. But to be honest, we cover both scenarios, 2/3, 1/3 or everything for Leonardo. There is no, how to say, financial problem for that. We are ready to both. We want to make the things which is more effective and requiring less investment. I think you had another question. Which one? Yes, synergy for DRS. Yes, what we conceived with our colleagues in DRS is to create a mixed team of top managers that from U.S. are staying in our place and from Leonardo, let's say, Europe, they move there to have a more -- a much closer interaction of people and of course, to update and align the industrial plan that DRS has made and of course, Leonardo has made and not always coincident or maybe sometimes overlapping with less synergy and more repetitions or overlaps. Now maybe some thought about the operation of the proxy can also be done. But this is one of the avenues we are discussing together. I mean we have a common aim to integrate more, to make more synergy, mixing the blood means mixing the people and also the product. And this is what we're going to study in the next 3 months. But by the end of the year, beginning of next year, we should have 1 or 2 scenarios to propose and develop. I hope I answered. And of course, Alessandro, if you want to say more... Alessandra Genco: I think you have covered it all, Roberto. Valeria Ricciotti: Okay. So we move to the next question. Alessandro Pozzi: I also agree on raising the guidance only when you think you can beat by a certain amount. So again, raising -- changing guidance by 2% to 3% every quarter, maybe -- yes, I agree with you on the style. And also on the equity participation of Avio, maybe can you say something? You announced the sale of a 9% stake in Avio. What is the longer term? Roberto Cingolani: So first of all, thank you for stressing the point of the guidance. I'm very relieved that you understand how flexible we were. There was no intention to do anything strange. It was just a basic thing to feel confident at some automatic decision system. So happy that you -- that is acceptable. But of course, always happy to receive suggestions and criticism because we are trying only to speed up the machine. Concerning Avio, so the point is the following. Avio has made an industrial plan, which moves the central mass of the company from launchers to, let's say, missiles and propulsion systems towards missiles, moving the business in United States progressively and somehow, how to say, seen by us in Leonardo, we were in Avio because our interest was 90% on launchers because we do the missiles with MBDA. So for us, it would be a nonsense to nurture 2 competing missiles activities in 2 companies that we control, we participate in, while losing the focus on launchers. So in a very collaborative spirit, we discussed with Avio that we are not interested in the augmentation of capital in this new initiative because that will be, first of all, for us, quite an amount of money to be invested to stay at 28% in a company that, however, is moving the business towards a direction which is competitive to what we already do with MBDA. So industrially, I don't think my Board and even you guys that are investing on us would understand the philosophy. Why are you duplicating something and losing the focus on launch that was the original idea, even though it was not very successful. But anyway, that was the idea. So we didn't want, however, to stop Avio because I think they have the right and they want to play their cards, obviously. So we said, of course, we agree on the augmentation of capital, but we don't participate directly. I mean, to be honest, this happened exactly the same with Hensoldt if you remember, a couple of years ago. So it was a very mild way to say, okay, we don't follow you, but we understand your reasons, okay? Now technically speaking, that meant not participating in the augmentation of the capital, but we had to sell the right of options [indiscernible] residual value. So in doing this, we collaborated with the group of the bank advisers, and they suggested something like selling a bit of shares and then using part of the income of the sale to resubscribe some of the share of Avio. This is not actually augmenting -- participating in the capital augmentation, but subscribing again, of course, brings us around 18%, 19%, which is the minimum participation Leonardo should have in Avio, not to abandon Avio because also the government wants to make sure that we still have some presence in -- not the government, the Minister of Finance, which is our main shareholders. There is some presence ensured in Avio for the -- at least for the beginning of the action. So we diluted from 28% to 18%, 19% or so. We monetized in an amount in the range of EUR 20 million to EUR 21 million or so, our rights. And now we are there, not making hurdles to have on one hand, but on the other hand, meaning that we cannot follow the plan towards the missiles in the United States. Now there are other companies that would be interested, for instance, MBDA and so, but we are discussing those things went very fast. So no one could take a decision. We were prudent, and we decided to follow this strategy. So in the end of the day, we get some cash. We diluted from 28% to 18% or so 18%, 19%. I don't remember the exact number, but we'll see in a few days. And then in a couple of weeks, we confirm we're going to resubscribe some of the shares to stay constantly at 18%, 19%. And then we will see how the market behaves and how the initiatives takes off. And of course, we wish the very best to Avio in the meantime to be successful with the new strategy. Operator: The next question comes from Ross Law with Morgan Stanley. Ross Law: Hope you can hear me. So 2 from me. The first is similar to Avio, but more specific to Hensoldt and your stake there and how you're thinking about that? And then the second one is just on the NHI deal with Norway. You flagged that your free cash flow guidance now includes the impact. Can you just confirm what the magnitude of that impact is? And does it all fall in Q4? And is this payment in line with your shareholding in NHI? Or is it slightly different? Roberto Cingolani: Okay. For Norway, I'll leave the word to Alessandra because she closed fantastic of the deal. I will tell you a bit more about Hensoldt immediately after. Alessandra Genco: Okay, Ross. So on the closing of the transaction with Norway, the cash outflow -- total cash outflow for Leonardo will be EUR 125 million, which is 41% the stake that Leonardo has in NHI of the settlement amount, EUR 305 million. The distribution from a timing standpoint of this outflow is mainly in '26. This year, we're going to have a negligible EUR 10 million to EUR 15 million payment, and the majority will be in 2026. Clearly, as you know, the closing of the transaction is a very positive event for us. This is a legacy contract, 20 years old. The risk has been -- from a court stance perspective, the risk has been tangible. We could have had a much worse outcome at the end of the day. So we really brought down the amount of exposure down to EUR 300 million of a consortium. So it's a really good outcome that we are satisfied with, and we are closing once for all the topic. Back to you, Roberto. Roberto Cingolani: Yes. So Ross, about the Hensoldt. After the contact I had with my colleague, Oliver Dörre, the CEO of Hensoldt, we met a couple of times recently. So we are now studying what next. Of course, this has to be integrated into a very complex situation. On one hand, we have the extra funds from Europe, the SCAF program, ReArm Europe and so on and so forth. And on the other hand, we have the big boost that the German government is putting on defense, which means that they need the German companies to be really committed on the domestic programs. So I gave my complete availability to discuss any scenario with Hensoldt and eventually with the authorities on about -- what could be the best scenario for them and, of course, for Leonardo. So the discussion is in progress, very constructive, very friendly. Well, of course, we have to see how the Bazooka German program is deployed to understand what is the best solution for both of us. At the moment, however, the collaboration is ongoing on the legacy programs. The numbers are, okay, good, we cannot complain. I mean there is no red light anywhere. But in order to have a strategic choice made, we need to talk to our German colleagues when they have a clear planning of the situation. And at that point, we'll try to adapt our strategy to their strategy. In the end of the day, staying like this would not be bad. The point is, can we do better or can we do somewhere else something better? And this we will discuss with our colleagues as soon as they have a clear scenario in front of them. Operator: And the next question comes from Martino De Ambroggi with Equita. Martino De Ambroggi: I know the trend in orders is not linear. And you already talked about the guidance for the current year for sales and free cash flow, which may be better. I was wondering on the order intake, very strong in the 9 months. Q4 implicit in the guidance would mean at the lowest absolute value over the last 10 years in a much more favorable environment. So I was wondering specifically on order intake if there is the same conclusion that you mentioned on sales and free cash flow. And on Hensoldt, a follow-up on the previous question. When you talk about open to different opportunities and so on, does it include divestiture, either merger with other activities? So it's 100% every kind of possibility or I don't know, because you also mentioned if we stay as we are today, we are happy in any case. Roberto Cingolani: Yes. I'll give it the word for the first question, then I will specify [ Borenzso. ] Alessandra Genco: So Martino, on orders, you said it, orders are not linear. We are very pleased with what we have seen in the 9 months. And clearly, that's a very good outcome. And it's a performance that is also reflecting the jumbo order of the contract -- the [indiscernible] contract for customer support. So if you project into the full year, we confirm the guidance between EUR 22.250 billion and EUR 22.750 billion, and we feel very confident that we will hit that range. Roberto Cingolani: Martino, about Hensoldt, so let's say so, but this is my personal interpretation, and I believe it's reasonable. I think we could consider as totally abandoning this idea, the original idea 6, 7 years ago because I was even not in Leonardo when they started that one day, Leonardo could be -- could own 51% of the share of Hensoldt because that was another -- before the war, before everything. And now I'm sure that the profile of Hensoldt is growing a lot and the strategy of the German government is very clear. I'm sure they don't want to leave the control by another company of an asset such as Hensoldt. So this, we can discard. 2 years ago or 3 years ago, could have been yet still the case, but for sure, not now. Now what can we do? We can, of course, create -- we can divest, obviously, getting out. But I mean, this must have -- from our point of view, divestiture is made because we make money to reinvest in something which is very strategic. We don't sell things to make money, and that's all. We sell because we want to have money for a strategic investment. We did a lot of work so far, actually, a lot of new initiatives. Now implementation is really the challenge. And even if you have infinite money and you buy infinite new things, then you have to make them profitable, to make them efficient. And this means find managers, proper organization, so on and so forth. So I wouldn't do anything that would create extra load, extra payload to our managerial activity and industrial activity, unless it's really crucial for the global security program, for the multi-domain interoperability program. I think we are very close to have all the elements, and I don't want to do things that could make the machine more difficult to drive. Having said this, let's see also what our German colleagues propose. There are potential synergies between Leonardo and Hensoldt that could be further studied and developed. And this is also one of the areas where our teams are discussing. But as I said, I think now the ball is in the field of the German partner for domestic political reasons, for strategic reasons. We are happy to contribute to the discussion, but we look forward to having indications by Hensoldt to see what could be also for them a good way to go. And in the end of the day, we are rather flexible. We don't see any red flag, any red light anywhere, as I said, because the program is running, we are doing things together. Margins and numbers are satisfactory. So for me, it's much more important to fix in a permanent way other loss-making situations, as you know. So in this respect, you find me rather relaxed and flexible. But we are discussing quite intensively any possible scenario. Operator: And the next question comes from Gabriele Gambarova with Intesa Sanpaolo. Gabriele Gambarova: The first one is on aircraft. You got this huge contract with Kuwait. And at the same time, I remind that during your, let's say, March business plan, you assumed that aircraft margins would go down by roughly 200 basis points starting from next year. So I was wondering if this Kuwait contract, jumbo one changes anything about this? Another question is on the U.K. Roberto, you mentioned [ Yeovil, ] the plant, and we know that there is this new medium helicopter program ongoing. You are the sole contender. I was wondering if something is moving there, if you have any update on this? And the third one is housekeeping -- just housekeeping on the below-the-line items you expect for 2025. Roberto Cingolani: Okay. Will you go with this expectation for aircraft? And I go for Helicopters. Alessandra Genco: Sure. So Gabriele, the margins on aircraft that we have projected factored in a portion of the contract and of the servitization strategy that we had in place. Having said that, as you know, the aircraft division has proved to deliver very strongly at top level margin systematically year-over-year. So I would say that in the context of the opportunity that we see throughout the fighter business being Eurofighter in export, being Eurofighter for the 4 core nations, the JSF, which is a continuous positive contributor to the overall volumes as well as the GCAP, we will have a consistently solid and top level profitability in the division. Roberto Cingolani: So the question was the other one... Alessandra Genco: The NMH in U.K. Roberto Cingolani: Yes, the NMH in U.K. So Gabriele, look, the reason for me to go to U.K. and talk to the Secretary of Defense, Honorable Healey was just to make sure that things are coming and moving because there was a sequential delay of the decision point for the helicopter tender. And so we made clear that we are waiting. For us, time matters at this point. We cannot subsidize Yeovil forever. It's 14 years, 1-4, 14 years that we don't get any contract from the U.K. government. It's getting difficult for us to keep this big plant alive without institutional collaboration. I think the minister was very serious, very -- he's working on that. As I said, we will meet in Naple very soon. And our team, [ Clive Egans ] and team in U.K. are really working and kind of chasing the institution to see what happens. So I think we can be positive. But of course, we have to see what happens in the end. I mean those -- as you know, those are very complicated tenders, and there is a lot of political influence behind. And therefore, it's not simply an industrial issue. It's a kind of geopolitical issue. We want to see what happens. But of course, should this not happen, well, we should seriously consider why we keep a plant there for 15 years, not getting anything. So -- but this is part of the efficiency plan that we might consider in case things will not run properly. But I think we made a very clear statement, and we found a very collaborative and responsible answer. So let's see what happens in the next few weeks. The decision is made -- should be made by the end of the year. So we are really at the last mile, okay, we should not wait for long. Alessandra Genco: Gabriele, on your last housekeeping point, the expectation for below the line, before the closure of the NH90 program, I would have responded to your question as approximately in line with 2024. I have to say that given this extraordinary item, which is accounting for EUR 125 million, we may be slightly above last year. Operator: And our last question comes from Christophe Menard with Deutsche Bank. Christophe Menard: The first one is on the NH settlement. What is the impact, I mean, on the 2026 free cash flow guidance? You're obviously spending EUR 125 million or I mean that's the -- I mean, a little bit less than this, but what is the impact on what you guided? The second question is on capacity boost. Can you also remind us the free cash flow impact that it could have, if any, in the coming years? And the last question is on the [ Christophe ] project. I was wondering how it actually fits with the European Sky Shield initiative. What is the plan or strategic plan to insert it within ESSI? And also my best wishes to Alessandra. Alessandra Genco: Thank you, Christophe, for your well wishes. And let's start answering your question on NH90 settlement and impact on next year free cash flow. What I can tell you is that we will work our hardest to compensate that outflow with other inflows and maintain the outlook that we have provided last year. Clearly, this is a cycling -- budgeting cycling process, which has just started, and we will keep you posted. But the goal for us as management team is to not have a negative impact next year from this settlement. Roberto Cingolani: Okay. Christophe, concerning the capacity boost, let me remind the main motivation for the capacity boost is that we know already that with the exponential growth of demand that we're going to have in drones, aircraft, land defense systems, we soon are going to meet a bottleneck in our production capability. So before telling you what is the expected amount of -- the expected improvement in terms of cash, I want to fix the main problem, which is we need to deliver, for instance, in the case of land defense, 1,250 heavy armored vehicles, approximately 250 main metal tanks and approximately 1,000 advanced [indiscernible] combat vehicles. And we don't have the capability right now to deliver because we need a strong efficiency in our production capacity. So somehow, the -- how to say, the revenue or the money that we can get, it's a consequence of the fact that we can deliver more. And we don't deliver -- if we don't deliver, of course, we don't earn money. So that was the first motivation. And so it's a kind of indirect analysis we can do. But if you consider that we have about $20 billion program -- more than $20 billion program in 10 years for the land defense. That's an example, but I could tell you the same for GCAP for other things. You divide by 2, us and Rheinmetall, and you can see that the margin can be 15%, okay, you easily get how much money we can earn if we are able to deliver. If we don't deliver, this money is not taken. The second point is that we are facing something like -- I don't remember exactly, but we are talking millions and millions of offload engineering hours. And this is a cost. It's a net cost that goes against the marginal -- the margins of our manufacturing. Of course, in order to satisfy the demand, if you have to pay 10 million, 11 million, 15 million of engineering hours, you're going to pay that. And this is going to be a reduction in the margin. So reducing the number of hours of offload that we buy, it immediately turns into margins and of course, into euro or dollars or whatever. So we are not able to make the calculation now because we are trying to cut this 30% to 40% extra workload in the engineering, 10% to 15% extra workload in manufacturing. And if we manage, then we can give you an equivalent in euro. But clearly, the algorithm is very simple. The point is to act in a way that we can make the capacity boost. In terms of investment because, of course, you could ask, okay, but you have to put money on the plants to make them more efficient. Obviously, we invest in the optimization of manufacturing as long as the investment is below the expected gain in 2, 3 years in the budget plan. This is exactly what we're doing now, and it seems to be very effective as a model. So sorry for not giving you a number, but those are big numbers, to be clear. There was any other question? Yes, Michelangelo. Sorry, Christophe, I would like to ask you, can you repeat the question? Because you said how do you integrate your Michelangelo -- don't mean something, but I didn't understand the acronym. What did you say exactly? Christophe Menard: Yes. Yes, I was hinting at the European Sky Shield initiative that Germany sponsored, which is a multilayer defense system. Roberto Cingolani: Okay. Sorry, I didn't understand. Yes. So we do have a product portfolio of approximately 150 components in electronics, radar, sensors, effectors mounted on land defense systems, vessels, aircraft, helicopters, and we built our own constellation. These things are already on the portfolio. So I'm talking about the largest integration program ever in the defense industry, but we do have all the components. I don't think anybody else has the portfolio ready. So one thing is to say, I would like to do this. One thing is to say, I have these components, I want to integrate them. So I'm not able to compare because I know what I have, but I'm not aware of what they have. But for sure, they don't have all the platforms and all the components. So I think they are a little bit -- if I remember correctly, they made a statement that we candidate ourselves to drive the design of the air defense system. Fine. It's a candidature. What I'm going to present is a product. Christophe Menard: Yes. Looking forward to the presentation. Roberto Cingolani: Sure. We'll be happy to give all the details as long as we can disclose everything, but it will be very clear. Claudia Introvigne: Okay. I think we are to the end of our presentation. Thank you for your participation. And I leave the last word to Alessandra. Alessandra Genco: Thank you. Thank you, Claudia. And let me make -- let me say a few words here. Our journey together started exactly 8 years ago in November 2017. These 8 years have been phenomenal, extremely intense and Leonardo throughout this time frame has become bigger, stronger, more profitable and more cash flow generative. I thank Roberto for this great time we spent together, and I thank you all for the fantastic journey that we have done together. And I'm confident that Leonardo will continue to do great in the future. I look forward to crossing path again with each and every one of you in our future. Roberto Cingolani: We will, for sure.
Operator: Greetings. Welcome to The Eastern Company Third Quarter Fiscal Year 2025 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Marianne Barr, Treasurer at The Eastern Company. You may begin. Marianne Barr: Good morning, and thank you, everyone, for joining us this morning for a review of -- The Eastern Company's results for the third quarter of 2025. With me on the call are Ryan Schroeder, Chief Executive Officer; and Nicholas Vlahos, Chief Financial Officer. The company issued an earnings press release yesterday after the market closed. If anyone has not yet seen the release, please visit the Investors section of the company's website, www.easterncompany.com, where you will find the release under Financial News. Please note that some of the information you will hear during today's call will consist of forward-looking statements about the company's future financial performance and business prospects, including, without limitation, statements regarding revenue, gross margin, operating expenses, other income and expenses, taxes and business outlook. These forward-looking statements are subject to risks and uncertainties that could cause actual results or trends to differ significantly from those projected in these forward-looking statements. We undertake no obligation to review or update any forward-looking statements to reflect events or circumstances that occur after the call. For more information regarding these risks and uncertainties, please refer to risk factors discussed in our SEC filings, including our Form 10-K for the fiscal year 2024 filed with the SEC on March 11, 2025, and our Form 10-Q filed with the SEC on November 4, 2025. In addition, during today's call, we will discuss non-GAAP financial measures that we believe are useful as supplemental measures of Eastern's performance. These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from GAAP results. A reconciliation of each of the non-GAAP measures discussed during today's call to the most directly comparable GAAP measure can be found in the earnings press release. With that introduction, I'll turn the call over to Ryan. Ryan Schroeder: Thanks, Marianne. Good morning to everyone on the call, and thank you for your interest in The Eastern Company. Overall, it was a disappointing quarter from a results standpoint. Revenue from continuing operations for Q3 was $55.3 million, down 22% from Q3 of the prior year, and EBITDA was $3.5 million for the quarter that made earnings per share of $0.10. Our disappointing performance is primarily attributed to the pullback in 2 key end markets, specifically Class 8 truck and automotive. We saw OE truck production in the quarter down 36%. This included summer shutdowns at the beginning of the quarter and a number of days removed from customer schedules towards the end of the quarter. The returnable packaging portion of our business is very heavily influenced by the North American automotive market. More specifically, the number of vehicle model changes impact our sales. And with the pullback of many new EV models, we saw a reduction of new projects in the quarter, specifically with 13 less platform launches in 2025 that led to a reduction of 34% the prior year. We have had success diversifying still within automotive, but outside of our historically large customer as well as within military and heavy equipment producers. We did see the slowing in both of these markets coming and made significant proactive changes to our structure over the preceding 2 quarters to optimize our workforce and align resources with current market conditions. Among other things, we reduced the size of our SG&A, reorganized our Big 3 operational footprint and sold an underperforming business unit. All in, these actions led to a savings of $1.8 million within the quarter. Furthermore, we have taken steps to enhance product innovation, expand into new end markets and both deepen and diversify our customer relationships to position us to capture emerging opportunities, reduce volatility and support sustainable long-term performance. Turning to our balance sheet. We have repurchased approximately 118,000 shares through the end of the third quarter. This represents almost 2% of our outstanding shares and demonstrates our ongoing commitment to allocating capital to benefit our shareholders. We also reduced debt by $7 million and entered into a new $100 million revolving credit facility with Citizens Bank that provides us with additional flexibility to enhance our priorities, including continued investments into long-term growth initiatives and potential M&A opportunities. Given the proactive steps we have taken and our historically strong balance sheet, we are confident that Eastern Company is well equipped to weather the cyclical market downturn and to capitalize on opportunities when our markets return to healthier positions. With that, I'll hand it over to Nick to dig a little deeper into the quarter. Nick? Nicholas Vlahos: Thanks, Ryan. I'll focus my review today on the company's financial results from continuing operations for the third quarter of 2025. Net sales in the third quarter of 2025 decreased 22% to $55.3 million from $71.3 million in last year's third quarter. The decline was primarily due to decreased sales of returnable transport packaging products and truck mirror assemblies of $9.9 million and $6.4 million, respectively. Our backlog as of September 27, 2025, decreased $23.6 million or 24% to $74.3 million from $97.2 million as of September 28, 2024, driven by decreased orders for returnable transport packaging products of $15.2 million, latch and handle assemblies of $4.7 million and truck and mirror assemblies of $3.6 million. Gross margin as a percentage of net sales was 22.3% for the third quarter of 2025 compared to 25.5% for the prior year period. The decrease was primarily due to an increase in raw material costs incurred as we transition from customer-provided material to in-house sourcing on a mirror project as well as the impact of reduced volumes. As a percentage of net sales, product development costs were $1.6 million or 1.6% for the first 9 months of 2025 compared to 1.8% for the 2024 period. Selling, general and administrative expenses decreased $0.7 million or 6.5% in the third quarter of 2025 compared to the last year's period. The decrease was primarily due to $1.1 million of lower compensation charges, offset by restructuring charges of $0.3 million. Other expenses increased $0.1 million in the third quarter of 2025 compared to the same period in 2024. The increase was the result of lower lease income. Net income from continuing operations for the third quarter of 2025 was $0.6 million or $0.10 per diluted share compared to net income of $4.7 million or $0.75 per diluted share for the 2024 period. Now turning to a non-GAAP measure. Adjusted net income from continuing operations for the third quarter of 2025 was $0.8 million or $0.13 per diluted share compared to net income of $4.7 million or $0.75 per diluted share for the prior year period. At the end of Q3 2025, our senior net leverage ratio was 1.64 compared to 1.23: 1 at the end of 2024. In addition, we paid dividends of $0.7 million in this year's third quarter. Subsequent to the quarter close, we entered into a new $100 million revolving credit facility with Citizens Bank. As of September 27, 2025, inventories totaled $56.8 million or $1.6 million, up from the end of 2024. During the third quarter of 2025, we repurchased 36,413 shares of common stock under the share repurchase program Eastern's Board authorized in April 2025. To date, we have repurchased 118,000 shares or approximately 2% of our outstanding stock. This completes my financial review. I'll now turn the call back over to Ryan. Ryan Schroeder: Thanks, Nick. Clearly, it's been a challenging macroeconomic environment in the heavy-duty truck and automotive segments, as you've certainly heard from other industry participants during this earnings season. Trucks are getting older, and we are well into a freight recession. It really is only a matter of time until trucks -- market begins to bounce back. We are seeing some marginal improvements in Q4 already, but we'll have to see where it goes from there. On the positive side, Eastern's new leadership team is fully in place and operating full speed ahead. Together, we have successfully implemented a much needed restructuring and plant closure program. Through cost containment and operational improvements and even with the reduced volume, we're making our operations more efficient and profitable. We're also staying nimble and close to our customers to mitigate the effect of changing dynamics on our businesses. Given this, I believe we are very well positioned for success going forward. Lastly, we are looking for acquisition opportunities that fit our size and strategic criteria, taking a very disciplined and opportunistic approach as we evaluate companies. With that, operator, I'll open it up for questions. Operator: [Operator Instructions] And the first question today is coming from [ Garvit Bhandari from Singular Research. ] Unknown Analyst: So a few questions from my side. This is Garvit from Singular Research. Firstly, on the gross margins, you have seen contractions during this quarter. So is it temporary? Or should we expect structurally lower margins going forward as well? Ryan Schroeder: Yes. There certainly was a mix element associated to the gross margin reduction within the quarter, especially comparing to the third quarter of prior year. So I'd say, in general, it's -- I won't call it a one-off, but I think the trend definitely leans towards improved gross margins in the future back towards maybe the norm that we've seen in the past. But Nick, maybe you want to expand upon that... Nicholas Vlahos: Yes. So the gross margins were impacted by reduced volumes. So as we expect the volumes to come back to a normal state in the future, we will see the gross margins impacting as well. Unknown Analyst: Okay. Okay. Understood. And then on the overall demand side, you have indicated that you're seeing some recovery, but if you can just throw some more light on -- is it -- are you seeing early signs of recovery in the heavy-duty truck market? Or do you expect volumes to bounce back in the coming quarter and going into FY '26? Is that something that we should sort of take forward from your comments? Ryan Schroeder: Yes. So I'll take this one, Nick. I think we certainly have seen some bounce back in the fourth quarter. That being said, we haven't seen volumes begin to return to the more historical norms. We certainly watch this very closely, as I'm sure you do as well. Right now, the truck industry, the heavy truck industry is forecasting some recovery next year. We're seeing some in the fourth quarter here. We're not sure if that's transitory associated with some of the changes in tariffs or not, but we are seeing some limited additional volume in the fourth quarter. Right now, forecast that we've received show a soft first half of 2026. That's what we're planning for and then some incremental improvements towards the end of 2026. That being said, we frankly don't know. We are well positioned to react as our customers need us to. We're ready to ramp up. And if things are going to remain difficultly slow for the next few months, we are positioned -- we have positioned our factories to operate in that mean as well. That being said, yes, we've seen some limited volume improvements here in October, and we're expecting that through November, and we'll kind of see what happens in December and then in the beginning part of the year. Unknown Analyst: Okay. Got it. And then on the -- I think last quarter, you had mentioned about the USPS vehicle program, before contract that you had won from the government. Is there any update on that? How are you seeing the revenues ramping up there? Ryan Schroeder: Yes. That program certainly has been a bright spot. I know we've spoken about that many quarters in the past. I left that out of this note just because it has ramped up nicely. It's been an important part of our overall business. And for Eberhard, it's this last quarter actually that Oshkosh became our largest customer for the quarter, recognizing -- it's not going to stay that way, but it's become an important part of our overall business, and it's been a nice project for us that has taken a while for it to come to fruition, but we're in full production. It's going to run full through next year, and we'll see as the contract continues, how long that one will run, but it's been a nice one for us for sure. Unknown Analyst: Okay. So is it possible for you to quantify the revenue contribution from the program and any -- and would we see a material impact on revenues in FY '26 as well from this program? Ryan Schroeder: In terms of specific revenue on that, I would probably pause to be overly specific on that, just not to reveal too much in a public setting. I'm certainly happy to answer some questions for you offline as it pertains to that. If you take Eberhard though, as an important business within Eastern, Eberhard has enjoyed some good volumes with the -- on that U.S. Postal Service program, but at the same time, have another important market segment for them is the Class 8 truck market. And when you think of truck market, specifically the sleeper cab portion of the truck market, the levers and latches and locks and things of that nature, are an important part of Eberhard's business. That has obviously been a slow segment for us, as we've spoken about in these prepared remarks, but also in the past, we've seen that slow down. We expect that to bounce back in the future just as the truck market will bounce back. But for Eberhard's specifically, the Postal Service program has been a nice offset to the softness of the truck market. Unknown Analyst: Okay. Okay. Understood. And then lastly, on the Big 3, has there been any increase in the pace of model refresh cycles? Have you seen pace increasing? Or has it slowed down further? And if so, are you seeing any impact on the order flow there? Ryan Schroeder: Yes. It slowed -- it has been a very slow quarter. Really, we've had 2 material impacts to our business within the quarter from a negative standpoint. One was the truck market and then the other was the automotive model changes. So that part of our market in the third quarter of our business has been significantly negatively impacted. If you look back, really the number of models launched this year is at a historical low for a very long time going back. And for that reason, we are forecasting and already seeing an increase in model launches for next year and beginning right now. We're a number of months ahead of the actual launch is where we tend to be impacted favorably. And we're already starting to see specific to Big 3, our backlog improve there. So more to come, certainly more to come with that, and we'll have to see where it goes. But the sort of change in direction from EVs in this year certainly impacted the total launches, and we've had to make some adjustments accordingly for that. But yes, we are expecting that to improve some next year, and we'll be prepared for that as it comes. Operator: [Operator Instructions] And there were no other questions at this time. I would now like to hand the call back to Ryan Schroeder for closing remarks. Ryan Schroeder: I'd just like to say thanks again for joining this morning. It clearly has been a very challenging quarter, but the company is in great shape looking forward. I look forward to giving you an update after the fourth quarter. And if you need any additional information in the meantime, please reach out to us. And with that, I will end the call. Thank you very much. Operator: Thank you. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.
Tomás Lozano: Good morning, everyone. This is Tomas Lozano, Head of Investor Relations, Corporate Development, Financial Planning and ESG. Welcome to Grupo Financiero Banorte Third Quarter Earnings Call for 2025. Our CEO, Marcos Ramirez, will begin today's call by presenting the main results of the quarter and the first 9 months of the year and will comment on the strong results of our core business as well as extraordinary that impacted this quarter's results. Then Rafael Arana, our COO, will go over the financial highlights of the group, providing details on the margin evolution and sensitivity, asset quality and expenses and will cover the adjustments in the guidance to reflect Bineo's impairment and the group's operational strength. Please note that today's presentation may include forward-looking statements that are subject to risks and uncertainties, which may cause actual results to differ materially. On Page 2 of our conference call deck, you will find our full disclaimer regarding forward-looking statements. Thank you, Marcos, please, go ahead. José Marcos Ramírez Miguel: Thank you, Tomas. Good morning, everyone. Thank you for joining us today. Before starting our call, I'm proud to share with you that yesterday, we concluded our 125th anniversary celebrations, with a special Board meeting in Monterrey. We thank you for your patience as we had to move our official reporting dates to make this celebration special. We achieved 125 years of sharing with you, our shareholders, a transformational journey that has a lot to become one of the leading financial groups in the country. Your trust and support has been key as you have helped us to execute and embrace digital transformation, expand our business participation and reimagine the way we operate by placing our customers at the center. Moving on with our results, let me begin by highlighting that this was an overall strong quarter. Our core business continues to demonstrate the structural strength, supported by the solid performance across our business units, expanding margins and disciplined expense management. However, it was overshadowed by 2 extraordinary items that impacted our results. The first item has to do with the NIM. As you well know, we announced itself in September. Although this transaction is still awaiting regulatory authorizations, accounting standards require its classification as a discontinued operation with an initial valuation impairment of MXN 1.3 billion. Second, we recognized a new nonperforming case for the commercial portfolio with its corresponding impact on higher provisions and cost of risk for the quarter. It is important to highlight that, that is an isolated case and we do not expect any particular industry to be at risk. These extraordinary events do not reflect a weakening of the structural strength in our core business or operating trends. Additionally, our cost of risk outlook for the full year is not modified since the possibility of occurrence of such case was previously anticipated. We expect the positive trend in our quarterly results to continue during the fourth quarter, together with the usual seasonal dynamics that characterized the end of the year. Regarding the Mexican economy, our economic analysis team maintains its GDP growth forecast at 0.5% for 2025, driven mainly by Brazil [indiscernible] and signs of recovery in domestic consumption. Looking ahead to 2026, we anticipate a rebound in GDP growth to 1.8%, supported by a combination of factors expected to stimulate private construction and tourism, such as Mexico participation in the FIFA World Cup and the renewing momentum in key sectors such as investment in construction. On the fiscal front, the Mexican government expects to uphold fiscal consolidation efforts to 2025 to 2026, in line with the budget proposal recently submitted to Congress. Additionally, we foresee a continued constructive and collective dialogue between Mexico and the U.S. in the coming months, which could support the process of the USMCA scheduled for next year. Regarding monetary policy, we forecast 2 additional 25 basis cuts in the reference rate, bringing it to 7% at year-end. For next year, we expect 2 further reductions, with the rate reaching 6.5% in the first quarter and remaining stable throughout 2026. Finally, we expect a steady Mexican peso for the remainder of 2025 as the broad weakening of the U.S. dollar and the increased appetite for risk assets have favored the currency. As a result, our economic analysis team forecast MXN 18.80 per dollar by year-end. Now starting off with the financial results on Slide #3, we highlight the group's sound structural performance. Margin for both the group and the bank expanded in the quarter, supported by the neutralization of our balance sheet sensitivity. Cost of fund optimization has absorbed the impact of decline in rates in the loan portfolio, which also reflects the natural hedge of larger fixed rate loan balances. The overall expansion and composition of our credit portfolio continues to support revenue generation, driven by a resilient internal demand and the implementation of the hyper personalization strategy. Our capital generation remains strong, driving the capital adequacy ratio to 22.3% and creating opportunities for capital optimization. We will provide greater detail later in the presentation. As for the extraordinary items that I mentioned before, we see Bineo's impact. And regarding the risk metrics and increase in the NPL ratio to 1.4% and cost of risk reached 2.7%, reflecting the isolated case during the quarter. On Slide #4, net income for the third quarter decreased 11% sequentially and rose 1% with accumulated figures, mainly affected by both extraordinary items already discussed. Nevertheless, results still reflect a strong structural performance in our core businesses. ROE for the first 9 months reached 22.3%, in line with the full year guidance. Results by subsidiary on Slide 5, despite a minus 4% sequential decline in the bank's net income to MXN 11.3 billion, mainly affected by higher provisions that offset the dynamic consumer activities in core banking products and structural efficiency in margins. Consequently, ROE for the bank stood at 27% for the quarter. With accumulated figures, net income from the bank grew 2%, reaching MXN 34 billion. Despite higher provisions, the bank is playing a sound [indiscernible] and higher market-related income from heavier trading activity. The business was positively impacted by the neutralization of our balance sheet sensitivity to rates, supported by larger lending volumes along with the consistent optimization of our funding costs. Our banking operations still showing resilience on consumer dynamics and the positive impact of higher fees from the insurance company. Altogether, these results yielded an accumulated ROE of 28.4%, in line with the guidance. Our insurance business grew 20% during the first 9 months of the year, driven by higher billing issuance, mainly in the life sector. The overall positive evolution of the business is also capturing higher lending activity of auto loans and mortgages at the bank, which offset greater fees paid for the bancassurance operation. Annuities expanded 28% quarterly due to the higher business volume despite a greater competitive market. With accumulated figures, it grew 3% driven by a positive technical result on lower inflation adjusted reserves. In the brokerage sector, the quarterly decline was driven by lower evaluation in securities. However, the first 9-month expansion derived from increased fees due to higher trading operation and market-related gains. Lastly, results in the pension funds business were driven by higher yields on financial products in both comparison periods. On Slide #6, the loan portfolio, excluding the government book, grew 10% year-over-year, driven mainly by consumer lending. In the year, the commercial and corporate book grew 9% and 7%, respectively, still supported by short-term working capital financing, primarily in the tourism, real estate and industrial sectors. Deceleration in both portfolios is in line with our expectations for the year since customers in both segments continue to wait for trade clarity before committing to long-term investments. Moreover, these portfolios were further impacted by FX variations in the dollar book, which currently represents 40% of the total loan portfolio. On the other hand, our government portfolio declined 12% in the year, largely related to lower activity in the federal government and prepayments from states and municipalities. Nevertheless, we reiterate our appetite for the segment, and we anticipate a seasonally active fourth quarter. Turning to Slide #7. Consumer lending continues to drive overall loan growth. The 12% year-over-year expansion was supported by our ability to capture the disposable market with digital capabilities, process efficiencies and hyper personalized business model. In this sense, auto loans sustained stronger-than-expected annual growth, increasing 31%. This expansion was driven by our ongoing efforts with existing strategic alliances to improve our availability and the competitiveness of our offering within the partnership, and our capacity to gain market share by capturing business from competitors. The credit card portfolio rose 16% year-over-year, mainly supported by our resilience on private consumption, improved promotional efforts that derive in larger building balances, targeted marketing campaigns and the continued success of our rewards and loyalty programs with our existing customer base. Payroll loans grew 10% in the year, driven by an observed greater demand, process optimization and increased availability to digital channels. Moreover, we continue to enhance our value proposition with differentiated high liquid products designed to align with evolving customer needs. Finally, mortgages rose 8% in the year, supported by improved origination processes, strategic alliances and our hyper personalization strategy. On Slide #8, the structural asset quality continued to demonstrate solid performance across most of the products. However, as noted at the beginning of the call, our risk indicators reflect an isolated nonsystemic case with the commercial portfolio. I would like to insist that it does not indicate broader sectorial or geographical concerns nor a deterioration in our quality forecast. While the recovery outlook remains strong, such case resulted in elevated provision. In this sense, both NPL ratio and cost of risk rose in the quarter. However, we are still holding our cost of risk guidance range for the year between 1.8% and 2%. On Slide 9, net fees grew 1% quarter-over-quarter and remained relatively stable with accumulated figures. Sequential slowdown reflects lower transaction activity compared to a seasonally high second quarter. With accumulated figures, higher transaction volumes in consumer products and investment funds were offset by regular fees paid on credit origination to the external sales force. Moving on, on sustainability in the Slide #10. I would like to highlight that in line with the high growth rates of auto loans, a growing proportion of this portfolio is related to hybrid and electric vehicles. This supports growth in sustainable products such as Autoestrene Verde [indiscernible] auto loan product. Similarly, on the social front, our book in payroll clients demand stronger support from them through financial education workshops, which help our clients make better informed decisions when hiring the different financial products available to them. Lastly, the environmental front, we are very close for reaching our 2025 target of 226,000 planted trees across Mexico, in line with our commitment to One Trillion Trees organization. So as you can see, our core business and structural expense continue to have a sound evolution. In this sense, apart from Bineo consolidation impact of net income, we are maintaining or improving all of the other operational ratios in the guidance for 2025, being confident we will comply with our commitment to the market. Now before asking Rafa to cover the main financial results of the group and the updated guidance for the year, I would like to address our capital allocation plans. The bank's organic capital generation enabled us the possibility of an extraordinary dividend during the fourth quarter. Accordingly, we are having a shareholders' meeting in the upcoming days to seek approval and proceed with the distribution of around 35% of the net income of 2024, amounting MXN 6.99 per share by year-end. With this, our total payable ratio will reach 85%. With this, I conclude my remarks. And please Rafa, please go ahead. Rafael Victorio Arana de la Garza: Thank you. Thank you, Marcos. Now we move to the financial highlights. And I would like to address and thank you for all the feedback that you give us yesterday concerning the results and some of the questions that allows to really go directly into what's really of concern of what you saw in the numbers. Firstly, let's remember that when we set up the guidance for the loan growth, we were expecting a country that was supposed to grow at 0 GDP. And we set up a loan growth with the exception of the government book, very close to 10% or double-digit growth. I will go in a minute to show that, that's still very feasible for us, and we're still going to keep that on the guidance. But if we see a very strong consumer that continues to grow in a very good way for us, it's not the same on the corporate and the commercial. That is much more a wait-and-see mode for the country, even though we continue to provide working capital and some CapEx for the commercial and the corporate. But that -- I would say that's where you see less activity in the group. The government book is starting to move forward in the way that we always expected that by the end of the year, the government book was going to continue to be trending up based upon many initiatives that were on the making for the -- I would say, for 6, 7 months on the book. So even though there was some concern about that the commercial and corporate was not growing in the bank and that we are only becoming more a consumer bank, that's not exactly the case, and it's most related to what I mentioned about the economic activity that is very related to what's going to happen with the USMCA in the corporate and the commercial. If you look on the positive side, concerning the growth in the lending side, we basically captured market in car loans, payables, credit cards, mortgage books, a piece on the commercial and corporate, but we capture market on that part. Governments start to move. This is positive information. So you we'll see that. We have really started to move from 26.4% to 27.4%, and you will reflect that on the on the fourth quarter. So all on all what we see is that we continue to see very strong demand on the consumer side and very healthy demand on the consumer side and we will see the numbers in a minute. And what Marcos mentioned about this isolated case that was very not expected for us, we're working with that case for many months, but it was really not in our hands to sort it out. And Gerardo will explain that in a moment. So if we now move because what I don't want for the investors to see is that Banorte is starting to really slow down on that part. I think the third quarter is always the most difficult one, but you will see a very good pickup on the fourth quarter on the loan growth to achieve, but we guide the market to [indiscernible]. If you go to the slide that we're showing on NII, I think the key part is looking at the NII, especially on the -- what is loans and deposits. NII concerning loans and deposits is growing at a very healthy 15% on that part. So when you see another part on the NII, when you see the MXN 1.5 million that was really not expected to happen because it's related to the strength of the peso, that is causing us to lose on the net income, on the NII, MXN 1.5 billion that was not expected in any way when we set up the guidance. If the peso starts to go more in a trend to the 18, 19 something, you will see a recovery on that part. But NII, especially on the loans and deposits continue to be very healthy and growing in a nice way. So that's what I would like to result on that part. That expansion on the NII will continue also into the fourth quarter. Based upon all the cost of funds that we have, we will see in a minute how the spread of the book continues to expand based upon all the strategies that we set up on the on the balance sheet. So very reasonable NII in the loans and deposit, 15% year-on-year on that part, and a negative impact in the valorization from FX of MXN 1.5 billion that was really not expected where we set up at the beginning of the year. So if I move now to the next one, the bank NIM continues to expand in an important way. Now it's reaching 6.9% based upon all the strategy that we set up on the balance sheet. And that also has allowed us to compete in the market because by having the lowest cost of risk and NPLs, we can provide the market with very attractive prices if we like the risk. So we are very, very diligent on the risk. But based upon the spreads that we're getting on the group, we can really go for the clients and we like to have that at the bank. So I already discussed the NII. Bank net fees, some people are concerned about the bank net fees. Remember that out of this -- the third quarter is really a kind of a slow month on that. You will see a lot of activity in the fees in the coming next 3 months because of all the promotions and things that accompany the end of the year. We have a very -- I would say, we are very confident that fees will continue to expand. And remember that when you have to look at fees, since we are selling really cars and mortgages in a very important way, I mean we -- in parallel, we are basically the leader in the market and in the mortgage which we are seconding market but very close to the first one, is that you have to pay the dealers on the commission basis what you have with the dealer to the sellers with the sales force that we have and the same happens on the mortgage front. Then you absorb that through the life of the loans. So this is related to the very fast pace that we are growing the group in the mortgage book and in the car loans. And another important thing to mention is that we have 2 very large issuers that was a very important part of the fees that were running to us because of the very large number of transactions. But we decided based upon a very I would say, a profitability metric analysis that we did on those 2 clients, but it was not on the best for the bank to keep on sharing those because there was basically no money to be made on that. You will see that balancing out in the next quarter. So when I go to the next page and the sensitivity continues in the same way that we have been planned in the group. So the sensitivity on an NII basis is nothing and basically, and on the balance sheet on the peso route, this continues to be very, very, very low. On the dollar book, you see that's much more active balance sheet management, not in the same that was in the peso that you have a long way to really position the balance sheet. And the reason for that is that we don't have fixed rate loans on the dollar group. We have a lot of fixed rate books on the peso book that allow us to hedge the balance sheet in a natural way. In the next -- what you see, the bank's net income was basically affected by the -- what Marcos was already mentioned, but that's an extraordinary base that we had on the commercial side. The ROA of the bank continues to stay at 2.5%, and the ROE of the bank, including the loan that was mentioned before, stay at 27%. But in accumulative basis by the end of the year will be very, very in line with what we guide the market today. I will jump to the next one, and it's basically the graph about the managerial NIM, but you see the effect of the annuities and insurance on that part. You see now basically those 2 trending. So there's no -- the only thing that happened on the pension book was a slight effect on the URBI because of inflation that happened in the quarter. The most important part also in the next slide to see why we are confident that NIM will continue to expand and continue to deliver pretty good numbers on the margin side. You see that when you look at the graph, you see the active -- the rate that we are really having on balancing the active rate that is present in the market how we are dealing with the reduction of the fees. But you see, and also a very important part is the reduction that we are having on the funding side that you can see that on the red dotted line on the low part of the graph. And then you move into the next one that is -- no, no, no -- into the next one, that is really the spread. And the spread is 8.9%. And you see that, that spread continues to extend even though the rates continue to drop. And that spread will continue to move up through the remaining of the year and into the next year. So basically, what you saw -- you see in those graphs is that you see the portfolio continues to post pretty good numbers around 12.9%. You see a deep reduction on the active rate that is basically the lowering of the rates that the Central Bank is doing. But you see that the spread goes in the other way, and that's exactly what we plan the balance sheet to do so we started to position our balance sheet. So that will continue in the coming months. The next graph really shows the trend that we have on the funding cost and that graph will continue to grow in the coming months. As you know, basically, October, November and December are pretty rich months concerning the noninterest-bearing deposits, and we will continue to see that drop in the funding cost has stayed there for the remainder of the year and into the next year. There was a concern about -- on the funding side that it was like a drop on the interest-bearing deposits. That was a deliberate move because there was expensive funding that we were holding on the balance sheet and we don't need that anymore. So we got rid of those expensive funds, okay? And in the next graph, it is really what is creating Banorte being such steady on the NPS and cost of risk, it was kind of a surprise for the market and also for us, the big pickup that we have on the cost of risk is -- I think is mentioning that it's tough to keep the risk numbers the way we have been keeping for many, many months and years. And this is really an extraordinary pace. Gerardo will go in a minute to explain exactly what this case is posing. But what I would like to address is that we still hope that Marcos mentioned that we will, on our guidance, on the cost of risk from 1.8% to 2% on that part. And the write-off rate that you see continues to be quite steady on that. So this was the big pickup that we have in the third quarter. And another thing that you will see is that an addition MXN 400 million provisions were put also on the third quarter that those provisions will be reversed in the coming quarter because it was basically because of a calibration of the models from the credit cards that we are coming into -- before integrating the Tarjetas del Futuro, the Rappi integration with us. I will pass and then I will continue, but please Gerardo, you would like to address the case? Gerardo Salazar Viezca: Yes. Sure. Thank you. Good morning, everyone. I will say that the higher provisions recorded during the period is primarily attributable to a single isolated exposure within the commercial loan portfolio. The specific case required an additional reserve following a detailed credit review that considered updated financial information and collateral valuations. Importantly, this adjustment is not indicative of a broader portfolio trend. Comprehensive statistical and credit analytics confirm that the event is idiosyncratic and nonreplicable. The exposure in question has characteristics that differ materially from the rest of the portfolio. That is including sector, geography, obligor structure and collateral profile. And those does not share risk drivers or behavioral patterns with other loans. Portfolio level analysis support this conclusion. Let me explain 3 factors. The first factor is correlation test between the affected exposure and the rest of the commercial loan book show provisions statistically indistinguishable from 0, confirming the absence of common risk factors. Second, migration and delinquency rates across all other commercial cohorts remain stable and within historical norms. And third, vintage performance and profitability of default distributions exhibit no significant drift compared to prior quarters. Consequently, the increase in provision should be interpreted as a one-off technical adjustment, reflecting the institution's conservative provisioning framework rather than a signal of credit deterioration or a change in portfolio quality. This proactive approach strengthens coverage ratios and demonstrates the bank's commitment to prudent forward-looking risk management practices, ensuring portfolio resilience under diverse economic scenarios. Rafael Victorio Arana de la Garza: Thank you, Gerardo. If you've got more questions, we will address that during that. The other thing that we would like to touch, the next slide please, is -- when we commit to the market at the beginning of the year about the guidance, we said that we were going to push hard to go into single-digit numbers, the expansion on the ratio. As you can see on that part, we are very, very close to achieve that to reach lower cost expansion for the year and started to go back again to single digits. And from then, a continuous evolution into what we like our 34% cost-income ratio. This was a big step, and you will see that big drop also on the fourth quarter on the expense line. But we are right on target what we promised the market that we will be below 2-digit numbers into single-digit numbers. That's -- I think that's another part that we will discuss when I touch about the guidance. The next one goes with the capital. Marcos already announced and the distribution of the extraordinary dividend. And the reason for that, you can see easily on the quality of the capital and the size of the capital base, 14.8% is what we have and own on the core Tier 1. That number when we pay the dividend, will go for the first quarter close to the 12.5% and evolve here very close to the number that we would like to have, that is the 13% for Teir 1 ratio, fully compliant with TLAC. No issue with TLAC in any way. So capital continues to be a very strong generation of dividends for our investors, and we continue to hold a very prudent management on the capital base. Now I will move into the guidance to see what are the adjustments that we will have in [indiscernible]. The first one was loan growth. The new guidance that we are putting in the loan growth, the range is open because there's pipeline, but we have to go to make that pipeline a realistic one. But we think that without the government group, we're going to be very close to the double-digit number, if not above the 10% in double-digit numbers, but we have to see how the pipeline evolves on the remainder of the months. The pipeline looks strong, and I think we could achieve what we promised the market on that. Net interest margin for the group will be a bit -- a little bit above what we guide the market on the range. The NIM of the bank, for sure, will be very close to the 6.7%, 6.8%. The recurring expense growth that we were putting double-digit numbers is going to range from 9.4% to 9.7%. That put us on an efficiency ratio from 35.5% to 36.9%, trending to the number that we would like to have that is the 34%. Cost of risk will continue to hold the 1.9% to 2%. We feel confident about that. Tax rate, the same. The net income basically has been affected by Bineo. If you strip the Bineo number, the bank is exactly on guidance. And you have to consider that we were not taking into account MXN 1.5 billion of FX that happened to the bank that really affect the net income in the MXN 1.5 billion basis. So on the net income basis, basically, what you see is the effect of Bineo. And let me tell you this. There's a lot of initiatives trying to minimize this effect. But in order to try to be as close as we can be for the guidance by the end of the year and not promising that we will be on the guidance, but efforts are being made to be very close. We continue to see very good consumer, government is coming alive and also a pipeline on the dollar book is becoming quite effective. At the same time, we don't see any hiccups on the quality of the group on the consumer and no more in extraordinary cases under the commercial and corporate. Return on equity for the group will continue to go from 22% to 23%, up from 21.5% and the return on equity of the bank will be from 28% to 29%. The ROA will stay at 2.2% to 2.4%. So with this, this is the guidance that we have at this moment. But I would like to address the fact that important efforts are being made basis of the dynamic of the bank that we could really achieve a better number on the -- of the net income guidance by the end of the year that will be close to what we promised the market on that. With this, I conclude my remarks. Happy to jump on Q&A. Tomás Lozano: Thank you. We will now move to our Q&A session. As always, we kindly ask you to present only your most relevant question, and we will be happy to take any other questions any time after the call. [Operator Instructions] We are now ready to start our Q&A session. We'll start with Brian Flores from Citi. Brian Flores: [Foreign Language] I wanted to ask you on the proposed interchange rate caps for credit and debit cards. If you have any color on your conversations from the regulator, any, I don't know, initial gauging of impact that you could have I think it's probably going to become a very relevant discussion. So any color you can have on that would be really appreciated. José Marcos Ramírez Miguel: Thank you. Yes, we are aware of that. It's still moving, nothing is said about that. So we should wait. We have a meeting with the Ministry of Finance and [ one of the ] bank of Mexico, and we are waiting to start working and to move on, and we have some days ahead to maneuver and to see what's going on. So far, we don't have anything. And as soon as we know, we will let you know. But so far, we are -- it's a work in progress. And they open the doors, that's very important to negotiate and to hear from the [indiscernible] Mexico, what's going on. So we will see in, let's say, 1 month around that the conversations. I cannot tell the word because I don't know anymore. Tomás Lozano: Now we'll continue with Jorge Kuri from Morgan Stanley. Jorge Kuri: Congrats on the great results. I wanted to ask you about your market-related income. Just trying to figure out what -- what's the number going forward because it's evidently been a really big contributor to the profits this year. You're on track to basically double the amount of market-related income this year versus 2024. And if I just try to benchmark it in any way, the number really looks above trend. If you look at it as a percentage of revenues, it'll probably be around 6% this year versus a very consistent 3% over the last 3, 4 years. If I look at it as a yield on your marketable securities, that's around 1%, which is also exactly double of a very consistent 0.5% that it's been over the last 3 years. So can you walk us through what's behind this really big increase? And I guess most importantly, how sustainable that is as we look into 2026 and '27? José Marcos Ramírez Miguel: It's not sustainable, it was what it was because they saw an opportunity. The rates were going down, the effect was somehow it was clear to see what was going in the market. So we'll take the advantage. But I think, for the future, we are not depending on the trading for the bank. So if we see an opportunity, we will take it. But again, you will see for the next year, the budget is going to be a -- Boeing one, I don't how to say it, but it's going to be the same, but this month. And we do not expect to move the needle there too much. Rafa, do you want to say something? Rafael Victorio Arana de la Garza: Thank you, Jorge, for the question. And sorry that we cannot project this graph, but you will see that even though you see a big number on the trading book, if you compare that number to the expansion on the -- basically on the NII and compared to the expansion that we have on the technical results of insurance and annuities and also the impact of the net fees, the trading when you look on a percentage basis, continues to be basically the same trend. As Marcos mentioned, it was a very easy gain based upon the way we position the balance sheet and the acquisitions. But it's not that we are chasing or changing in any way the strategy on the trading book. But we are very, very -- I would say, very carefully looking at this is that the NII continues to expand much faster than this. The net interest -- NII also for the annuities and insurance continue to expand faster than that and also the fact of the net fees. If we see that this takes another trend compared to this today to what I mentioned about the NII and the fee, then that will make us to put into another strategy on the trading group that we are not really moving anything on the strategy. We will send this graph, I'm happy to put that on the web page for everybody to see that we take a very delicate balance about trading, NII of the insurance and the fee base. And yes, this was a very good part of the year, but also because the other also were not in an important one. Jorge Kuri: Can I just ask a clarification. Rafa, I think you mentioned there's going to be a reversal of loan loss provisions of MXN 400 million during the fourth quarter? Did I understand that correctly? Rafael Victorio Arana de la Garza: Correctly that. Tomás Lozano: Now we'll continue with Yuri Fernandes from JPMorgan. Yuri Fernandes: I would like to explore a little bit the insurance results here. And I know this is volatile and it's hard to predict the dynamic. But this quarter, we saw the premium decreasing a little bit, like 3% quarter-over-quarter. But technical reserves, they were down 17%. So basically, the insurance reserves, they didn't follow as much premiums. And this helped right in the end, like this help insurance results. So if you can provide a little bit of more color why this happened like any clarification? How do you see the insurance results? And a second one, and this is very quick, Rafa and Marcos, just on the guidance. So just make it clear. The guidance excludes -- includes Bineo. So basically, we are doing all the calculations with your accounting earnings, meaning that the 4Q could be stronger, right? Like basically, you are using the MXN 13 billion as net income for this quarter to get to our guidance? José Marcos Ramírez Miguel: I start with the second one. Thank you. Yes, the guidance that we are providing to you, if you see there is a better guidance in some items, and this is the guidance included in the Benio. That's the one that everything is in there. And the first one, taking the insurance, Rafa, please go ahead. Rafael Victorio Arana de la Garza: Yes, I think the first thing to notice is that the insurance business is having an extraordinary good year. We expect net income to grow very close to 20% or above that. You know that the return on equity of the company is 68%. What happens is basically that one wealth management product that we are actively selling on our wealth clients had a small reduction on the year. And that really explains the reduction in the technical reserves because that product basically, you need to reserve 100% when you put on the book. But there was not a lack of growth on the company basically on the property and casualty. And also, we are becoming quite important on the wealth management fees for this product. So nothing really to worry about that something is going on, not in the right trend on the insurance. On the other hand, I think, the insurance business providing the 20% and the 68% of return on equity, and the activity that the company is having is becoming really a very important part of the net income of the whole group, the insurance company. So no, it's basically -- and that is explained very well on the group that we provide to you how the technical reserves went down because of the -- we have a reduction on the placement of this product for this quarter that will start again on the fourth quarter. So that's basically this. And I also want to add another thing on there because somebody would like to ask this, what's going to happen with the insurance provisions in going around the market that some companies didn't provide. Banorte just fully, you can -- fully provide for the issues about the taxes on the insurance part. So there will be no effect for us on the insurance side. So that's for the market to know in that part because that was also another concern for some investors that what's going to happen once the settlement of the insurance business at what's going to happen with Banorte. Banorte is as always fully provided that. Operator: Now we'll take our next question from Ricardo Buchpiguel from BTG. Ricardo Buchpiguel: As you mentioned in the presentation, we have been seeing that the bank has been growing quite a bit in consumer loans. So could you walk us through what is driving that trading demand that you talked in the presentation, especially given the slowing down macro environment? And are you expanding to new customer profiles or regions here? Or is it mostly growth within the Banorte traditional portfolio base? Rafael Victorio Arana de la Garza: I think that what's very important, Banorte has been really revamping all the processes that we have for the consumer and not for the companies. But on the consumer, especially on the mortgage process and on the card process and on the credit card process, you really see most of them of the -- most efficient process in the market that allow us to serve that and go back to the client in a very short period of time. So what you see on the numbers of Banorte, and you can compare that to the other bank that is very active on that bank, on this part is that Banorte really is penetrating the market on a month-by-month basis. And the most important thing, if you look at the NPS of the car loans that stayed really lower 0.6% and also NPLs on the mortgage group that is still very low, just fairly above 1% on NPL is basically all the processes, and we are serving our clients, but also we are attracting a lot of new clients by the products that we sell on the mortgage part and on the car loans and also on the credit cards. If you see the expansion that we have in credit cards and charge, you continue to see that card loans are growing 31%. So many of those clients are clients of Banorte, but a lot also are coming from the market. Credit card was growing 16%. So we are also outpacing the market in that. And the most -- and in the mortgage group that is around 8% to 9%. The most important thing is that we are really attracting the clients that we like and it's basically -- based upon the pricing policy that we follow based upon the risk of the client and the value of the client, we think that we are offering the best deal in the market for the mortgage part. So it's coming from the already existing client base, but also a new -- a lot of new clients are coming to the bank based upon the offers that we've had on the car loans and on the mortgage and on the credit. Tomás Lozano: We'll continue with Ernesto Gabilondo. Ernesto is having some comments, so he sent me his questions to read them. We believe there are 5 negative headlines for next year. One, a potential deceleration on the auto portfolio because of higher tariffs to autos and auto parts from Chinese cars? Two, lower U.S. rates in the loan portfolio that you have in dollars. Third, lower tax banking deductions. Other banks have anticipated the basis points impact of the effective tax rate. Fourth, the value-added tax impact on the insurance sector. Other banks are disclosing the impact for next year. Five, the proposal in the interchange fees, I think Ernesto, that has been already covered. And finally, can you please elaborate on your initial thoughts on these impacts and the potential tailwinds, especially if Mexico reaches the USMCA renegotiation? José Marcos Ramírez Miguel: Yes, that's the bad things. There is also good things. The GDP is going to be [ corporate ]. We still don't know, as we said, the proposal in the interchange fees, so that's out. And regarding the orders, we can work one by one. And yes -- but the insurance sector, we have covered regarding that is not a fit for us. So I see more plus than minus for the next year. Maybe Alex can walk us how we see things for the next year [indiscernible]. Rafa, please go ahead. Rafael Victorio Arana de la Garza: Let me -- Ernesto, let me guide you on the impact of the VAT for the insurance. Remember that Banorte prices the insurance based upon the risk of the client. So we don't have just a single price for that. So I think we could accommodate that impact that the VAT will have based upon this volution that we have. And just before Alex comes and say, look, this year was supposed to be 0 GDP, and we continue to grow on that part. Next year is expected to be somewhat a better year on that part. So there will be headwinds that you mentioned that potentially coming for everywhere. But I would say that if the USMCA goes forward, the tailwind was -- is going to be quite strong. Alejandro Padilla: And yes, this is Alejandro Padilla, Economist. Well, from the macro side and answering some of your questions, first, in terms of GDP, as Marcos was mentioning before, we are holding our 0.5% GDP for this year. We observed a contraction in the third quarter. However, I think that in the fourth quarter, we should see a recovery, why because of what we mentioned before, there are some seasonal factors that tend to be very positive in terms of consumption by the end of the year. Moving forward to 2026, our forecast is 1.8%, and this is supported by several factors. The first one is that we're going to have an inertial growth component of slightly above 40 basis points. Then we expect a recovery in private consumption combined with a rebounding tourism during the summer, this is associated, as Marcos mentioned before, with the FIFA World Cup. This could add between 40 to 50 basis points to growth. Then we have a positive effect on primary activities due to better weather conditions in 2025 that will benefit crops in 2026. The fourth one is that we expect a solid external sector performance as Rafael was mentioning before. Considering that Mexico has an effective tariff rate that is lower than the rest of the world, and this has been supportive of the Mexican exports that have been growing at a 2-digit pace throughout 2025. And I think that although not at the similar pace, but they will continue growing throughout 2026. And the big one is that public construction and also infrastructure projects that the government plans to reactivate as part of its priority programs will be equivalent to almost 1.4 percentage points of GDP, and this could be also beneficial for GDP in 2026. And then if we move into tariffs, well, although Mexico is facing 2 types of tariffs, the specific country tariffs that the U.S. has imposed to Mexico and Canada and the tariffs that are associated with sectoral goods to the rest of the world, the effective tariff in Mexico is less than 7% in the world, is 17.4%. So we have relative position that is stronger vis-a-vis the China and other competitors. So I think that will support exports for the remaining of 2025, but especially in 2026. And then regarding the USMCA, we have a very constructive view in that regard. We believe that Mexico will continue playing a key role within the highly integrated value chains with the U.S. And we think that the review process in 2026 will go in a very positive way taking into account that there is a lot of cooperation and coordination between Mexico and the U.S. and that this will result in a USMCA 2.0 that will allow Mexico to increase its participation in the U.S. market. Tomás Lozano: Now we will continue with Tito Labarta from Goldman. Daer Labarta: A couple of questions. first, just on the Bineo. So there should be no more impairment charges from here, I assume. Is that correct? And would there be any potential tax benefits that you can get from this? And then -- but maybe more importantly, I mean, you sold it to another fintech, I guess, mostly just to get rid of the license and get maybe something in return. But maybe talk a little bit about your own digital operations, how that's evolving, why you feel comfortable selling Bineo and how the whole digitizing the bank is going, particularly as fintechs maybe get a little bit more relevant over time? And then I have a follow-up on provisions after. José Marcos Ramírez Miguel: Thank you, Tito, for the question. First, there is no more impairment charges. That's it. We don't see more -- everything. We don't see any tax benefits on the other hand. So that's it. We won't talk about Bineo anymore. And we learned a lot. There is a lot of experience that we learn. Remember that 4 years ago, we took all the roles, possible roles and we learn from them. So it's obvious that we -- now we are prepared, and we are stronger, and we did take our digital banking inside and whatever. So I don't know if Rafa want to say something else, but yes, there is a lot of learning, obviously. Rafael Victorio Arana de la Garza: Yes. What Marcos mentioned, Tito, is that we learned a lot on that, but what we also discovered that, that it was not just the issuance of having a digital bank from scratch that was supposed to provide that learning process. And I think it did. But the most important thing is that Banorte has a very clear path on how to address the digital evolution that we see on the young people and the newcomers into the banking system with a very good proposition that you will see in the market pretty soon that basically addresses the issues of the newcomers that they really need a lot of financial education and a lot of practical ways to manage the interaction with the client, with the app on that part. And based upon all, of course, that we have learned and all the learning process that we have also in the artificial intelligence part, we will deploy that in a very short period of time to address the capabilities of Banorte to really reach that part of the population that was not really an important, I would say, goal of Banorte for a time because we basically were very happy delivering a very good mobile application for the mid- to the high end of part of the payer mix. But we were losing a little bit on the part that we learned from Bineo and from Rappi, the newcomers into the banking process. But I think we have a very good response to that, and you will see that in a very short period. Daer Labarta: Great. And then my follow-up on the provisions, right? You mentioned the cost of risk excluding isolated case was 1.87%. So it implies the additional provision was about MXN 2.5 billion, if I'm correct when -- is that the right number? And given there could be some guarantees here, do you expect to be able to recover this over time? How quickly? And does the guidance factor in any recovery there? And also, I guess, is this now fully provisioned? Gerardo Salazar Viezca: Yes. Up to now, Tito, it is 45% provisioned. But let me tell you about -- despite this higher provisioning, the intrinsic economic value of the underlying assets and collateral structure supports a favorable recovery outlook. The exposure retains substantial realizable value given the quality, liquidity and marketability of the pledge collateral as well as the borrowers receivable repayment capacity. From a valuation standpoint, internal stress testing and discounted cash flow analysis indicate a higher expected recovery rate, well above typical levels for comparable distress exposures, the assets net present value under conservative recovery assumptions remain significant, limited ultimate loss severity. Accordingly, while the provision reflects a prudent accounting treatment aligned with expected credit loss models, the economic loss expectation is materially lower. This positions the bank to achieve a reasonable recovery ratio as resolution progresses mitigating the impact on capital and profitability metrics. Daer Labarta: Okay. And is that the MXN 2.5 billion the right amount? I had a different number initially, but just want to confirm how much that was the provision for the isolated case? Gerardo Salazar Viezca: Yes. The provision is around 2.2%. Operator: Now we'll take our next question with Marcelo Mizrahi with Banco. Marcelo Mizrahi: So my question is regarding the cost of earnings. So what we see -- we saw very good results coming from that part. And we -- it's important to hear you about the competition, how you guys are thinking about the competition and the cost of funding, why the cost of funding of Banorte is going lower, and it is already impacting the NIM and probably could be some good upside to the next year. So the question is regarding how is the competition? And how do you believe guys that the cost of funding will be in the next couple of quarters? José Marcos Ramírez Miguel: Thank you, Marcelo. I guess the competition -- you're talking about the newcomers, I mean, also, no? Rafa, please go ahead. Rafael Victorio Arana de la Garza: Yes, we continue to see -- as you can see on the funding cost that is going down, not just because of the rates because we are getting rid of expensive funding that we needed when the rate of growth of the asset side really happened to Banorte. Now we are a note we are balanced that with our own funding part. I can give you some numbers on this. So the overall growth of the non-interest bearing demand deposits is around 6%, and it will end the year well above that because of the seasonality of the year. Time deposits also is a pretty good story around 10% with a very reasonable. I would say, price to offer to the client based upon the quality and profitability of the client. So we don't see really the big effect that happened when the new entrance were offering 15%. And that is also going down, and it's becoming a lot more rational on that part. So we continue to see pretty good activity on the funding side, lowering the cost on a permanent basis. And I think. As Alejandro mentioned, next year will be a good activity on the funding side with a very, very balanced cost on the different types of offers that we do for the non-interest bearing and interest bearing deposit. And the mix continues to be quite nice, 31% is in time deposits and 69% in demand deposits. So I think we have a well-positioned bank that provides a lot of services and opportunities for the people. But we see is that we are opening now more new accounts at the branches and on the digital side than any year before. So we continue to see that the clients based upon our model that you can open everything in minutes on digital or in physical, is attracting a lot of good clients, and that is giving us a noninterest-bearing part growth and also the time deposits growth on a very balanced cost. Marcelo Mizrahi: Looking forward, it's possible to maintain you guys believe that if we will see a better environment to growth it's possible to maintain this cost of funding, this percentage compared to the interest rates or not? Rafael Victorio Arana de la Garza: Well, I think so. I think we will continue to keep the funding cost trending down. There's a lot of initiatives all over the place: transactional banking, cash management, SMEs, individuals, all over the place we are looking for funds. Gerardo Salazar Viezca: Let me drop. I would like to make a position regarding the last question of Tito Labarta. Tito, if you are still there -- let me be very precise with the provisioning for the quarter, it's 1.7. José Marcos Ramírez Miguel: Yes. Product specification. Tomás Lozano: We'll continue with Renato Meloni from Autonomous. Renato Meloni: So first I wanted to focus a bit on this decline on the interest-bearing deposits -- was this -- you mentioned that it was some expensive funding that you've eliminated? Was this concentrated or among separate clients? And then your loan-to-deposit rate went to 105%. So I'm wondering if you can still increase leverage here or keep growing with that level. And then just a second follow-up. During the presentation, Rafa was mentioning that the provisions for the credit card business. As far as I understand, would be reversed in the upcoming quarters. So just wanted to make sure that this reversal is happening and why are you provisioning now and then reversing it later? Gerardo Salazar Viezca: Yes. I will tell you, Renato, that from the overall point of view, we see the increase in provisions for credit card loans during the third quarter primarily reflecting the extraordinary expansion of the portfolio. As you remember, Marcos was mentioning a 16.1% growth year-over-year. That's very important to keep into context. And this effect is mechanical and volume-driven as provisioning is applied to a larger base of forming assets, particularly those in early stages of seasoning that naturally carry higher model probabilities of default. Importantly, delinquency rates and risk metrics remain stable across cohorts or clusters and that confirms that the high provisions stem from the portfolio growth and composition effect. Another factor that we must take into consideration for this third quarter should be the extraordinary provisioning with Tarjetas del Futuro credit card portfolio. And this effect is expected to be reversed in the short term due to model calibration. And that's the quantitative effect that Rafa was mentioning is MXN 400 million. So we expect a reversion, but this is not just mean reversion, but reversion in absolute value of around MXN 400 million in provisions. Rafael Victorio Arana de la Garza: Yes. You mentioned about the interest-bearing deposits, remember that Banorte had a very strong years, 2 years ago on the loan growth that really, really overshoot concerning our capacity to fund the book. So that created a need to go into the market and go for market funding. Now that we have been growing the funding side in a very important way, and we are now very balanced assets against liabilities, we have the capacity to get rid of funding that is not necessary anymore. And it was much more expensive against the funding that we can really go into the market today or keeping the growth on the natural funding side on the interest-bearing deposits, retail deposits, commercial and SME deposits. So that's the reason that you will continue to see an expanding size on the -- or the size of the deposit or the deposit growth, but also with a much better price in the coming months based upon the trend that we see in the noninterest-bearing and the trend that we continue to see on the time deposits with a very reasonable rate that really reflects the value and the different values that we provide to our clients. So I think we are getting again into a very balanced position. And you can see that easily on the LDR. You will see that, by the end of the year, the LDR will also drop again around 98%, 97% with a very good funding costs for the year. Tomás Lozano: We'll continue with Daniel Vaz from Safra. Daniel Vaz: Congrats on the strong NIM performance, I was looking at the sensitivity right now is practically 0. So you have been able to expand margins in this easing rate environment. It's quite impressive. And to face, well, I think, Ernesto mentioned, the negative headwinds. You see the funding benefits that you mentioned, you see better GDP? And I want to focus on the favorable loan mix as your consumer lending has been outpacing the portfolio, right? So on retail, looking ahead to 2026, you're growing now 12% year-over-year, right? So on the consumer portfolio, and well above this in car loans and credit cards. I saw -- I noted some acceleration in payroll and mortgage. I think it's normally much more important and tend to perform better on lower interest rate scenario. So my question is, do you see room for this portfolio -- this consumer portfolio to expand above this current base of 12% for the next year? And maybe if that -- it's a follow-up question, would it be enough to guide the market to NIMs even better than your guidance in 2025? José Marcos Ramírez Miguel: Thank you, Daniel. You're pushing the bar too high, but it seems that, yes, there is room for improvement. Yes. We think that next year, we will grow double-digit growth in our portfolio. And we will release that in January, I guess, next year. But yes, we're -- let's call it that way. We are optimistic and documented optimistic. So we expect a good year next year, and we are working on that and that we need to handle a lot of things internally. But it seems that it's going to be a good year, and we are expecting -- and yes, we can grow more than in the consumer portfolio next year, the answer is yes. And the better NIMs, we're happy with the NIM that we have right now, but maybe you can improve them a little bit. That's right. I don't know, Rafael, you want to say something? Rafael Victorio Arana de la Garza: The only thing that I would add is that we see a big opportunity on the payable portfolio. We are launching a lot of improvements on the value proposition on the payable portfolio, and it linked with the commercial and the corporate and the government and the retail part. So the payroll will be a good story. Credit cards continue to be, I would say, the most efficient product to be -- to be acquired in the market and also on the benefits. If you walk into one of our offices and you decide to go into the offices and in 5 minutes, you will get your credit card, the credit card that you like and based upon your profile on that. But if you want to go into the mobile, it would be exactly the same. You will get your digital credit card in less than minutes, in 5 minutes. And then if you want to get your card in physical, that we'll send it to you in a very short period of time. So a lot of improvement on the process side allow us to compete in a better way. And being the first in the market by the response to the client, that gives us an edge that we have been using in this. And also, we are adding more and more value into the propositions for the client to become really a very related client to the bank in cross sell. We expect cross-sell to keep increasing an important way. The hyperpersonalization process that we are using by providing each of the clients base of the risk of the client and the value of the client of what they are outside with us, that is allowing to bring a lot of good clients into the bank. So the processes are in place and improving. I think the analytics are in place and it's very, very relevant the way we do this. And the pricing also, we price every single client differently based upon the risk and potential value for the bank. So that is what really is driving the growth on the consumer. It's not just pure demand, it's that really the value proposition that we are offering on a client-by-client and basis is being the difference in the market. Operator: Now we'll go with Andres Soto from Santander. Andres Soto: My question is regarding some comments that you guys have already made in terms of GDP growth and loan growth for next year. I understand you are expecting rebound to 1.8%, and you expect loan growth to remain at double digit in 2026. I would like -- given that 1 important consideration there is the USMCA renegotiation, I would like to understand what is your expectation in terms of timing for this? Do you expect next year to be and even year in terms of growth? Or do you expect most of the growth to be delivered in the second half of the year given this expectation? And also tied with that, how these shape of recovery will translate into your cost of risk performance over the next few quarters? Alejandro Padilla: Thank you, Marcos. Thanks, Andres. Well, we think that's going to be pretty balanced, the growth dynamics for 2026. Regarding your question about the USMCA review, well, according to the agreement, it will officially start on July 2026. However, some issues have already been addressed by Mexico and by the U.S. as well, like, for example, making the consultations with industry leaders and designing the whole negotiating process. So I think that although it's going to be difficult to have the complete agreement by 2026, we can have a very good idea of what's happening on a sectorial basis. I think it will depend also on midterm elections in the U.S. and how President Trump sees the result for the Republican party because on that, it will depend if he goes and tries to reach a faster agreement or not. Regardless of that, I think that by the third or fourth quarter of 2026, we will have a very clear idea of what's going to happen with the USMCA 2.0. And I think this is going to be positive in terms of investment, for example, that has been one of the main sectors in Mexico that have been lagging behind, obviously, for the uncertainty coming from tariffs, but I think that the 2026 can be a good turning point in the price relationship between the Mexico and the U.S. And that's why we are optimistic and our GDP number of 1.8% contemplates that idea. I don't know, Rafael, you want to go through the loan question. Rafael Victorio Arana de la Garza: On the baseline of a scenario of a 1.8% GDP growth, the cost of risk is expected to remain contained around the same interval between 1.8% and 2%. This is going to be supported by several structural and cyclical factors that are favorable to the bank. On the structural side, the institution benefits from a very well-diversified loan portfolio. We have to remember that. And also a conservative underwriting framework and enhanced early warning and collection models that include to improve -- that continue to improve risk discrimination and recovery rates. Cyclically, stable employment conditions, moderate inflation and gradual easing of interest rate should sustain borrower affordability and credit performance, and particularly on -- in the payroll and mortgage segments. Furthermore, the ongoing optimization of provisioning models after calibration adjustments in 2025 will likely normalize credit cost levels, and that's our expectation. Let me tell you that, Andres, overall, these dynamics suggest that despite modest economic expansion, the bank's cost of risk should remain within historic range, reflecting both prudent risk management and resilient asset quality fundamentals. Andres Soto: If I may, a follow-up question to Alex. In this 1.8% GDP growth expectation, what are you considering in terms of private investment? And I imagine this is mostly dependent on the USMCA renegotiation? Or is there any other factors that make you optimistic about private investment recovery in 2026? Unknown Executive: Well, that's a very good question, Andres, and I can tell you that our forecast in terms of private investment will be highly correlated with the investment that the government will deploy throughout 2026. As I was mentioning before, in the budget of 2026, the government is planning to spend close to MXN 500 billion, 1.3 percentage points of GDP on infrastructure and -- well, I think that's plan Mexico and other type of mix programs between the private and public sector will be deployed in 2026 as well. So I think that's positive. And the second 1 is that, yes, I think that we might see some firms that will start doing some CapEx taking into account more certain scenario in terms of trade between the U.S. and Mexico. So all of these are contemplated into our 1.8% GDP forecast for 2026. Operator: Now we'll take Edson Murguia with from Summacap. Edson Murguia: Okay. I'm not sure if I'm listening. But I have 2 questions. One is specifically for Dr. Salazar. Could you give us a little bit more color about this calibration model, specifically in the consumer loan book? Because you mentioned Dr. Salazar, this was related to calibration, but could you elaborate a little bit more? And my second question is regarding on the brokerage business. Could you give us a little bit more color about why total assets has a reduction this quarter, but the AUM increase stop trying to figure out the rationale between the business, per se. José Marcos Ramírez Miguel: Let's go with the first one. Rafael Victorio Arana de la Garza: Yes. The bank is continuing to refine it's retail credit risk models. And that is to enhance the accuracy or expected loss estimation across consumer and payroll portfolios. The ongoing calibration process incorporates updated behavioral data, revised macroeconomic assumptions and recent portfolio performance trends that assures that the probity of default and loss given default parameters reflect current risk conditions more precisely. And that always gets proven by statistics like called Kolmogorov-Smirnov, the KS, receiver operating characteristics, ROCs, also the area under the curve and R-squared. So if data is telling us that we have permission to calibrate our models, we will go ahead and do it because this is always data and model based. Remember, we use in the retail side of our loan portfolio around 120 internal credit risk models. And they go all the way from different segments, different products around also different clusters of the markets that we are attending. Tomás Lozano: And the second part, Edson, remember that we do see the position between bank and brokerage and we have movements every day or every quarter. So I think it's really not material to see a movement in any of the isolated books. Edson Murguia: Okay. And last, just a clarification. Marcos, you mentioned that the dividend that is going to propose to the extraordinary shareholder meeting is going to be MXN 60.99, or it's going to be MXN 0.90? José Marcos Ramírez Miguel: No, MXN 0.99, sorry about that. Tomás Lozano: You can find the full information if you want in the assembly. Now we'll continue with Carlos Gomez from HSBC. Carlos Gomez-Lopez: First of all, congratulations on your first 125 years of existence many more to come, I hope. Second, in particular, you mentioned the interchange fee, and that is still to be negotiated. However, what is not negotiated, we understand is the nondeductibility of the IPAP contribution. Could you comment on that and would you expect that partially or totally to be passed on to deposit costs? And if Tomas doesn't kill me, just follow-up on the growth question. We understand that you expect better 2026. But when we look at the numbers right now, we seem to be slowing down, at least that is our perception. Is that what you see? Do you see the economy, which is still getting slower, and you expect it to recover during 2026, or you have already started to see a recovery? José Marcos Ramírez Miguel: Let's start for the -- as you can see it's not only Mexico, a lot of countries, they have these regulations, so, we need to live with that. And maybe part of this is going to be passed on and maybe we will, I don't know how to say the word, swallow it. But it is what it is. And for the next year, you will see it on the guide and it's going to be included there. But we don't see that affect us too much. That's the correct answer. We don't like specific taxes, but -- but this is -- if you see in other contracts they have it, so we will manage it. And the second one. First, Rafael... Rafael Victorio Arana de la Garza: Carlos, we -- if you look at the consumer book from the October numbers are pretty, pretty strong, even stronger than the September numbers. So we haven't seen any slowdown in the consumer at all. On the contrary, we continue to see very strong numbers coming from the consumer. And at the same time, very active now is the government book and also dollar book starts to come alive again. So no, we haven't seen as much... José Marcos Ramírez Miguel: Alex? Unknown Executive: Yes. And well, regarding the GDP question, yes, Carlos, as you notice, the third quarter GDP came in with a mild contraction. However, with some high-frequency indicators. This suggests that we might see a rebound in the fourth quarter. Indeed, we are expecting an increase of 0.3% on a quarterly basis. And this is mainly by some more positive drivers coming from consumption, which has been lagging throughout 2025, but we are starting to see some recovery. So I think that this trend can extend into 2026, this recovery that we might observe throughout the fourth quarter of this year. Tomás Lozano: We have a follow-up question from Bradesco. Marcelo, please go ahead. Marcelo Mizrahi: So regarding the efficiency, so the efficiency ratio are thinking about expense into the next year. I believe that the sale of Bineo could bring some upside to the efficiency ratio in the next year or even in the next few years. Could you guys give us some color about that target or something about that? Rafael Victorio Arana de la Garza: Yes. The fact is that by canceling the operation of Bineo, you will see that basically, what we put on the group today on the -- what was the impact of the Bineo operation, we think that just to give you an idea that based upon the cost savings, we will recover that in 7 months. So that gives you an idea of how the evolution of the efficiency ratio comes. Also, once we get the go from the regulators, the Rappi operation will be included into the scale of Banorte. So that will be also a reduction in cost. And the most important part is that when you will look at the recurring days of cost of Banorte and what was Bineo and Rappi adding was close to 5 percentage points. So we started to go down to 3 percentage points less in the coming year. Just based upon on these 2 operations, plus efficiencies that we can we can achieve. So you will start to see -- now it's in 1 single digit, but it's in uppers 1 single digit. You will see those numbers trend from the 7% to the 8% from the next year and then drop again to very close to inflation plus 150 basis points by the third year. That's the evolution that is on the efficiency ratio. Tomás Lozano: Thank you very much. Thank you for your interest in Banorte. With this, we will conclude our presentation. Thanks.
Operator: Good afternoon. My name is Rebecca, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fastly Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Vern Essi, Investor Relations at Fastly. Please go ahead. Vernon Essi: Thank you, and welcome, everyone, to our Third Quarter 2025 Earnings Conference Call. We have Fastly's CEO, Kip Compton, and CFO, Rich Wong, with us today. Webcast of this call can be accessed through our website, fastly.com and will be archived for 1 year. Also, a replay will be available by dialing (800) 770-2030 and referencing conference ID number 7543239, shortly after the conclusion of today's call. A copy of today's earnings press release, related financial tables and investor supplement all of which are furnished in our 8-K filing today can be found in the Investor Relations portion of Fastly's website. During this call, we will make forward-looking statements, including statements related to the expected performance of our business, future financial results, product sales, strategy, long-term growth and overall future prospects. These statements are subject to known and unknown risks, uncertainties and assumptions that could cause actual results to differ materially from those projected or implied during the call. For further information regarding risk factors for our business, please refer to our filings with the SEC, including our most recent annual report filed on Form 10-K and quarterly report filed on Form 10-Q filed with the SEC and our third quarter 2025 earnings release and supplement for a discussion of the factors that could cause our results to differ. Please refer, in particular, to the section entitled Risk Factors. We encourage you to read these documents. Also note that the forward-looking statements on this call are based on information available to us as of today's date. We undertake no obligation to update any forward-looking statements, except as required by law. Also during this call, we will discuss certain non-GAAP financial measures. Unless otherwise noted, all numbers we discuss today other than revenue will be on an adjusted non-GAAP basis. Reconciliations to the most directly comparable GAAP financial measures are provided in the earnings release and supplement on our Investor Relations website. These non-GAAP measures are not intended to be a substitute for our GAAP results. Before we begin our prepared comments, please note that we will be attending 4 conferences in the fourth quarter. The RBC 2025 TMT Conference on November 19 in New York; the Sixth Annual Needham Tech Week on November 20 in New York, UBS Global Technology and AI Conference in Scottsdale on December 3, and the Raymond James 2025 TMT and Consumer Conference in New York on December 8. Now I'll turn the call over to Kip. Kip Compton: Thanks, Vern. Hi, everyone, and thank you for joining us today. We had an outstanding third quarter, and I'm pleased to share our results. These results reflect our disciplined execution, exceeding the high end of our guidance on revenue and operating profit as well as achieving record free cash flow. This momentum drove record results across all 3 of our product lines. When I became CEO, I laid out a clear mandate to accelerate our growth and drive to profitability. This quarter marks the next step in Fastly's transformation, accelerating growth and innovation with operational rigor and discipline. As a result, we are raising our full year guidance for revenue, profitability and free cash flow. We believe our Q3 performance demonstrates that the strategic initiatives we put in place earlier this year are translating into results. Now turning to highlights from Q3. Our third quarter revenue was $158.2 million above the top end of our guidance and a record high. Our gross margin of 62.8% also exceeded the top end of our guidance. This was an improvement of 380 basis points sequentially as we delivered healthy margin leverage on our revenue upside. We posted record operating income of $11.6 million, significantly above our $1 million guidance midpoint. Similar to Q2, we achieved strong operating leverage in the third quarter with OpEx up 10% year-over-year compared to 15% year-over-year revenue growth. This strong financial performance drove record quarterly free cash flow of $18 million. Our financial performance this quarter demonstrates strong rigor in our go-to-market motion with revenue growth accelerating to 15% compared to 12% in the second quarter. Our platform expansion and cross-sell strategies were major contributors driving our security revenue growth to 30% year-over-year. These results reflect operating leverage in our business and our continued focus on spend discipline. Our cross-sell motion accelerated this quarter, highlighted by a major multiproduct win with a top 10 strategic account. This customer is now using products across all 3 of our product lines, positioning us for continued growth. We believe this win enabled by our expanding security portfolio highlights the tangible value our customers experience from consolidating onto the Fastly platform. Our innovation engine is firing on all cylinders. Our teams are developing advanced security capabilities that address our customers' most pressing needs. In Q3, we introduced additional security and AI enhancements on the Fastly platform. including API discovery, the first step in our comprehensive API resiliency strategy, helping customers continuously identify and protect their APIs as traffic flows through the Fastly platform. We launched industry-first deception capabilities in our next-gen WAF. This feature is designed to actively mislead attackers and bots, disrupting their ability to adapt while giving our customers security teams the decisive upper hand. Additionally, we introduced AI integration with the Fastly MCP server, making it easier for our customers to better understand and manage their Fastly services using AI. Since being named our President of Go-To-Market last quarter, Scott Lovett and his team have continued to drive gains with our go-to-market transformation. This effort, based on our platform strategy is catalyzing greater upsell and cross-sell as well as new customer acquisition. We believe our success in the third quarter illustrates why customers turned to Fastly, performance, flexibility, programmability and industry-leading support. Let me share a few examples from the third quarter. A major retailer in the LatAm region wanted to streamline its operations with a single vendor. They chose the Fastly platform to unify their Edge security, delivery and bot management. This strategic win demonstrates the turnkey nature of our platform, providing exceptional performance, security and operational efficiency. A leading APJ based specialty retailer wanted to consolidate vendors and unify their Edge cloud strategy. They chose the Fastly platform for our superior performance and our in-time zone customer support to resolve critical security and delivery issues quickly. An American streaming leader needed a solution that would integrate seamlessly with their existing workflows. They chose our WAF over our competitor's and consolidate their delivery, security and image optimization needs with Fastly. By moving to the Fastly platform, they drove operational efficiencies, while enhancing their technology stack. A prominent weekly news magazine needed to relaunch their app on a tight timeline. This was an example of our customer advocacy flywheel, 3 internal champions who loved Fastly at prior companies successfully advocated for its adoption at their new employer replacing a competitor with our delivery and security solutions. All of these wins are powered by our platform strategy. Our focus is squarely on execution and disciplined investment to drive growth. This is concentrated in our platform strategy and includes goals of continuing to expand our platform, especially through Edge security capabilities. increasing the value customers get from our entire platform by driving simplification and a superior developer experience through AI, sustaining and growing the strong go-to-market execution demonstrated this quarter. we are focused on new customer acquisition and significant cross-sell and upsell opportunities and continuing to invest in our international expansion, particularly in APJ, where we are seeing early results with new customer wins. We are excited about the significant opportunity ahead. We are confident in our team's ability to execute, and we're pleased to raise our financial targets. Now I want to introduce our new CFO, Rich Wong. We are incredibly excited to have Rich on the leadership team. He has hit the ground running, focusing on scaling the business and maintaining strong cost discipline. His leadership is already making a difference in the business, as you can see in our Q3 results. He will now walk you through our financial results and updated guidance in more detail. Rich, over to you. Rishi Jaluria: Thank you, Kip, and thank you, everyone, for joining us today. I would like to start by saying that I'm very excited to be here and about the opportunity that lies ahead. I chose to join Fastly because I was excited by its leading technology and superior performance among Edge cloud platform companies. Customers love our technology, our products and our best-in-class support. I truly believe that we are positioned at the right place, the Edge Cloud at the right time as we see workloads shift to the Edge to complement central cloud. I also saw an opportunity to unlock value for our customers and shareholders. Since coming on board, I have seen many opportunities in finance where we can influence better outcomes with our customers as well as our financial performance with our investors. For example, as we move into year-end 2025 and looking ahead to 2026, we are implementing a rigorous budgeting process across the company, and we are building more discipline around the ROI of our spend with a focus towards growth and scale. I've added staff to the finance functions to support this effort, and I've also brought in a new Chief Accounting Officer. Before I dive into our Q3 results, I would like to say I am very proud of our financial performance this quarter. Having achieved our third consecutive quarter of accelerating revenues. We've also achieved near record gross margins, record profitability and record free cash flow. We continue to launch product enhancements that our customers love. I'm excited to be here and partner with Kip and the team to help Fastly scale to the next level. Now on to our Q3 results. I'd like to remind you that unless otherwise stated, all financial results in my discussion are non-GAAP based. Revenue for the third quarter increased 15% year-over-year to $158.2 million, coming in and above the high end of our guidance range of $149 million to $153 million. This revenue asset was driven by 3 key factors: first, successful cross-sell motion where we signed a big multiproduct win with one of our top 10 strategic customers and made inroads on security sales with other customers; second, competitive share gains through a new customer acquisition; and finally, greater upsells with existing network services customers. Together, these 3 factors provided a strong tailwind in the quarter and led to an outstanding top line performance. Network Services revenue of $118.8 million grew 11% year-over-year. We saw healthy traffic levels in the third quarter due to stronger market conditions and the success of the upsell motion. Security revenue of $34 million grew 30% year-over-year, comprising a record 21% of our total revenue. This was due to the expansion of the security portfolio over this past year, coupled with the success of our cross-sell motion. Our other products revenue of $5.4 million grew 51% year-over-year, driven primarily by sales of our compute products. In the third quarter, our top 10 customers represented 32% of revenue. We continue to see strength in our broader customer base with revenue from customers outside our top 10 growing 17% year-over-year and 5% sequentially. Also, no single customer accounted for more than 10% of revenue in the third quarter. Affiliated customers got our business units of a single company generated the aggregate of 10% of the company's revenue for the quarter. Our trailing 12-month net retention rate was 106%, up from 104% in the prior quarter and up from 105% in the year ago quarter. The quarter-over-quarter and year-over-year increases were primarily due to revenue increases from a few of our largest customers in prior quarters. Our last 12 months net retention rate closely follows our overall revenue growth rate trend. We exited the third quarter with RPO of $268 million, growing 16% year-over-year. During the third quarter of 2025, we discovered an error in how we historically calculated RPO around our treatment of termination for convenience rights. As a result, we recast our historical RPO found in the investor supplement. We want to emphasize that this change will not impact our continued focus on increasing the number of customers with revenue commitments were also driving them towards higher commitment levels. I will now turn to the rest of our financial results for the third quarter. Our gross margin was 62.8% in the third quarter, coming in 330 basis points above our guidance midpoint at 59.5% and up 410 basis points from 58.6% in Q3 2024. We experienced $1.6 million in a nonrecurring cost of revenue tailwind, primarily due to accrual reversals. Accounting for this our gross margin would have performed at approximately 62%, well above our guidance expectations. During the quarter, we experienced gross margin leverage on our revenue upside and saw pricing declines moderate to the favorable end of our typical high teens year-over-year declines. Operating expenses were $87.7 million in the third quarter, coming in slightly better than expected due to lower discretionary spend and a more rigorous cost management process. We are continuing our focus on our operating expenses and driving greater leverage in our operating results as we scale the business. We had an operating income of $11.6 million in the third quarter coming in better than the $1 million midpoint of our operating guidance range of $1 million loss to $3 million profit. In the third quarter, we reported a net profit of $11.1 million or $0.07 per diluted share compared to a net profit of $3.8 million or $0.03 per diluted share in Q3 2024. Our adjusted EBITDA was $25.7 million in the third quarter compared to $14.6 million in the third quarter of 2024. Turning to the balance sheet. We ended the quarter with approximately $343 million in cash, cash equivalents, marketable securities and investments, including those classified as a long term, a sequential increase of $22 million over Q2 of 2025. As a reminder, our March 2026 0% coupon convertible notes balance of $188 million became current in the first quarter and continues to be reflected in our current liabilities. We have adequate liquidity to cover our working capital operating requirements and to pay the March 2026 convertible notes when they come due. Our cash flow from operations was positive $28.9 million in the third quarter compared to positive $5 million in Q3 2024. Our free cash flow for the third quarter was $18.1 million, representing a $25.2 million increase from negative $7.1 million in the Q3 2024 quarter. Our cash capital expenditures were approximately 9% of revenue in the third quarter. As a reminder, our cash capital expenditures included capitalized internal use software. I will now discuss our outlook for the fourth quarter and full year 2025. I'd like to remind everyone again that the following statements are based on current expectations as of today, and include forward-looking statements. Actual results may differ materially, and we undertake no obligation to update these forward-looking statements in the future, except as required by law. Our revenue model is primarily based on customer consumption, which can lead to variability in our quarterly results. Our revenue guidance reflects these dynamics in our business and is based on the visibility that we have today. In September 2025, the Trump administration issued an executive order establishing a framework that lets TikTok continue operating in the U.S. if it completes a qualified divestiture to a new U.S. majority-owned joint venture. The administration also paused enforcement of the [ divester Wanhal ] until January 23, 2026, while the transaction of National Securities safeguards are finalized. For perspective, the United States traffic of ByteDance the parent company of TikTok represented less than 2% of our revenue in the third quarter. We perceived the losses of business due to these actions as less likely than in prior periods. And for our Q4 guidance, we will once again incorporate all sources of ByteDance revenue into our forward guidance. As Kip discussed, we saw revenue strength from successful cross-sell and upsell motions and share gains due to competitive takeouts and anticipate this momentum to continue in the fourth quarter. As such, we expect revenue in the range of $159 million to $163 million in the fourth quarter, representing 15% annual growth at the midpoint. We anticipate our margin leverage on higher revenue levels to continue to favorably impact gross margins. We anticipate our gross margins for the fourth quarter will be 61.5% plus or minus 50 basis points. For comparison purposes, we call that we experienced $1.6 million of favorable cost of revenue tailwinds in the third quarter. Guidance for our fourth quarter operating results reflects the impact of a sequential increase in revenue and expected sequential decrease in gross margin and an expected modest sequential increase in operating expenses. As a result, for the fourth quarter, we expect a non-GAAP operating profit of $8 million to $12 million. We expect a non-GAAP net earnings per diluted share of $0.04 to $0.08. Note that for the fourth quarter, fully diluted share count for positive EPS will be approximately 168 million shares. For calendar year 2025, we are raising our revenue guidance to a range of $610 million to $614 million, reflecting annual growth of 13% at the midpoint. We anticipate our 2025 gross margins will be between 60% and 61%. We are increasing our non-GAAP operating profit expectations to a range of $9 million to $13 million reflecting an operating margin of 2% at the midpoint and highlighting our profitability compared to 2024's operating loss margin of 4%. We expect our non-GAAP net earnings per diluted share to be in the range of $0.03 to $0.07, and we expect free cash flow to be in the range of $25 million to $35 million compared to negative $36 million in 2024, an improvement of $66 million year-over-year at the midpoint. And finally, we expect our cash CapEx to be in the range of 10% to 11% of revenue for the full year. Before we open the line to questions, we would like to thank you for your interest and your support in Fastly. Operator? Operator: [Operator Instructions] Your first question comes from the line of James Fish with Piper Sandler. James Fish: Nice quarter, and thanks for the questions here. Look, I understand security cross-sell did well and NRR was up 2 points sequentially on a trailing 12-month basis, but I'm backing into that the implied period is a little bit lower. And so security really accelerated. It kind of raises the question as to what's going on with the delivery business expansion. So can you just walk us through the dynamics there as to why -- what's going on with delivery expansion versus kind of what you reported here for overall? Richard Wong: Yes, Jim, this is Rich. Thank you for the question. I would say that from a net revenue retention perspective, we look at it in aggregate, across all 3 business lines. I would guide you, if you're looking at Network Services, just look at the year-over-year growth rate with Network Services. For the quarter, we've delivered about 11% year-over-year growth on the Network Services side, and that was our third quarter of accelerating Network Services revenue. James Fish: Fair enough. And then competitively, obviously, you guys, over the last few quarters have had a bit of a tailwind on Edgio, but there's discussions around Quill now. I guess how much of an opportunity with them seemingly winding down here, could that be given some customers were trying to use them a bit for somewhat of a DIY approach. Kip Compton: Yes. Jim, we've not been running into Quill very often. I think any opportunity with Quill would obviously be significantly smaller than the Edgio tailwinds that you referenced. But of course, we see an opportunity and we expect there may be some benefit. Operator: Your next question comes from the line of Frank Louthan with Raymond James. Frank Louthan: Great. Just wanted to see if there is anything onetime or anything in the quarter that we should know about? Or is this sort of a good jumping off point going into Q4? And then can you update us on the seasonal trends you're seeing in the delivery business in Q4. How are they trending so far this fall, maybe relative to last year? Richard Wong: Yes, I'll take your first question around any onetime items on the quarter. I think the quarter just had a confluence of a number of activities. I would say at first, we just had a very good cross-sell quarter where I think Kip mentioned in his script, we had a top 10 customer by all 3 products. And so that was number one. I think the second one was that in that quarter, we also had very strong bookings linearity. And so in that quarter, we had almost half of our bookings in the quarter, book in the first month, which is not typical for us. And so that booking linearity really helped the Q3 results. I think when we look at Q4 guidance, we are being prudent based on what we see today. And I think that we feel really good about the guide. I think the traffic, to the second part of your question, around where are we seeing traffic. We do see pretty good traffic for Q3. We're seeing it continue in Q4, which is why we felt really good about raising the guidance from where consensus is by about $6.8 million. Kip Compton: Yes. And specifically to your question about seasonality in the Network Services business, right now, we're not seeing anything out of the ordinary on that front. Operator: Your next question comes from the line of Jonathan Ho with William Blair. Jonathan Ho: Congratulations on the strong quarter. I just wanted to maybe start out with your security portfolio. Where are you seeing the most strength in terms of your new offerings and sort of demand generation on that side? Kip Compton: Great question. It's actually fairly broad-based. As you know, we've launched a number of products over the last 12 months or so, and we've been enhancing those products as follow-on releases. So I'm referring to things like bots, the AI bots management, the DDoS capabilities. And we've all seen those received very well and in many cases, implemented together in combination for customers. And so our award-winning leading Next-Gen WAF continues to do well, but the new products are helping us with growth there. Jonathan Ho: Got it. And in terms of that large competitor displacement, I was wondering if you could give us a little bit more color in terms of why specifically did they choose you? What is it about maybe the product portfolio that drove these supporters to sort of standardize on Fastly. And what does that opportunity look like going forward? Kip Compton: Well, I think you're referring to the example I shared about folks who had worked with Fastly at a prior employer and rallied for the adoption of it at their new company. And I think the -- we have a lot of customers who've used our product and see the -- really, I think, the performance and the support are 2 things that I hear a lot in those stories, in general. And I think that was a notable win, but it's an actually surprisingly common occurrence for us to see that we were winning an account due champions who had used our product at prior employers. Operator: Your next question comes from the line of Fatima Boolani with Citi. Unknown Analyst: This is Joel on for Fatima. So just thinking of international as a key area of investment, Kip, I think you mentioned some positive traction in APJ specifically, could you get into detail on some of the returns that you're seeing internationally? And then also comment on what sales capacity looks like, how much more heavy lifting is there to do? Just what you're seeing so far? And what's down the road for international in the near term? Kip Compton: Sure, no, I appreciate the question, and I'll I make the point because I don't think your question reflects this. But in the past, there's been some concern about the impact on, for example, CapEx in our international expansion strategy. And I think as your question framed it very well, our international expansion strategy is around sales coverage and going after opportunities that are based in those areas. Obviously, we already operate the global network that delivers traffic just about everywhere in the world already. And so it really is, as you rightly framed it, a sales and opportunity-driven strategy. The genesis of it is we're underindexed against the opportunities outside the United States. It's not an unusual situation for a company based in the United States, and we're seeing those markets, particularly in Asia Pacific grow very quickly. And so we've been -- Scott Lovett, our President of Go-To-Market has been making investments on his team. I think we mentioned in our last quarterly call that we hired a new leader for the overall APJ region, he had previously just been part of a single international region that also covered Europe with the leader in Europe. And this move has allowed us to increase our focus in Europe because that leader now can focus, frankly, on a smaller number of time zones. And obviously, having a new leader overall for Asia Pacific has been an incredible benefit for the team, and they're already seeing her leadership. I mentioned, I think, in my examples in the prepared comments of wins of several from the APJ region. And so as we're increasing our sales coverage there, and we certainly plan to continue that through the rest of this year and into next year. We're just getting exposed to more opportunities and able to position our platform the benefit of more of those customers. In terms of results, I mentioned we're seeing early results now, and I think those are reflected in my comments. We think this is something that could be more significant as we get into next year. So it should not be -- it's not an immediate benefit, but given the nature of it as a sales coverage and go-to-market type of investment, the returns should come relatively quickly. Operator: Your next question comes from the line of Rudy Kessinger with D.A. Davidson. Rudy Kessinger: On the security revenue in the quarter, $34 million, I don't -- it doesn't sound like there's anything onetime, but could you quantify maybe that large cross-sell or across other deals like upfront rev rec that maybe doesn't repeat in Q4. I'm just trying to get a sense of that $34 million in new baseline. Should we expect that to grow sequentially in Q4 and into next year? Or if there's any kind of upfront rev rec that won't repeat in Q4. Richard Wong: Yes. Thanks. I think I -- we mentioned earlier, there was bookings linearity early in the quarter. And I think this one was a bookings linearity where we did see the benefit of security that end up benefiting all 3 months. I do think that there is still opportunity here as we continue to push for cross-sell across the sales organization that this $34 million and a 30% year-over-year growth rate, we will continue to make sure that we focus on this and sustain those numbers. But this is -- that one benefit from that one quarter and that big deal really helped the big sequential jump that you see. Kip Compton: Yes. And we really saw a significant increase in our security revenue run rate early in the quarter as we had a number of opportunities, certainly led by the large one that Rich mentioned, ramped very quickly and very early in the quarter. And so while there's no onetime rev rec or anything like that, I would just guide that we probably got a full quarter of benefit from that increase. Obviously, that business, we expect it to continue in this quarter and beyond. But it's not one of those situations where we got a partial quarter benefit and then enjoy another leg of growth on that particular piece of business with a full quarter benefit in the following quarter. Rudy Kessinger: Okay. Just to double quick on that, then I actually do have a separate kind of follow-up. So that -- I mean, the revenue you got from that, those deals you secured in Q3. That's fully ratable revenue that will repeat again in Q4 for a full quarter? Richard Wong: Correct. Kip Compton: Yes. It's just aligned with the rest of our, if you will, recurring revenue, it doesn't constitute like onetime service and implementation or other things like that. So we expect that revenue to continue. Rudy Kessinger: Okay. Got it. Very helpful. If I look at the, obviously, very stable growth, 17% in the non-top 10 customers. If we look at the top 10, quarter-over-quarter, they accounted for close to half the revenue growth. It sounds like a lot of that is probably from that top 10 customer that expanded into security. Could you just talk about maybe the rest of the top 10 and the trends that you saw quarter-over-quarter on the delivery side and what you're expecting from that cohort in Q4 into next year? Kip Compton: Sure. I mean I think I would say we've not seen anything notable or out of the ordinary with that cohort outside of the significant security cross-sell that we mentioned. We expect that business, I mentioned earlier, seasonality so far looks normal for that business. I guess one comment would be that we were excited with the ability to cross-sell in that top 10 segment, especially our security portfolio and we're looking and believe there may be additional upside there over time. So I think the ability to apply our platform strategy even with our largest customers is something we're very excited about. Operator: Your next question comes from the line of Jeff Van Rhee with Craig Hallum. Daniel Hibshman: This is Daniel Hibshman on for Jeff Van Rhee. Kip, Rich, congrats on the quarter. Just one for me. Going back to the seasonality questions that have been already asked and sort of expecting some regular seasonality this quarter. When I look at historically, of course, Q4 is the seasonally strongest quarter, you see often upper single-digit, even double-digit sequential uplift in Q4. This quarter, midpoint of the guide kind of points to 2% sequential. So actually the small sequential increase from Q3 to Q4 that we've seen so far this year. Now typically, we see a big uplift there. Just anything to call out in terms of that in terms of just conservatism? Are you expecting a different pattern going into Q4? On a sequential basis, how you're thinking about that? Richard Wong: Good question, Daniel, and thanks for the question. I think when we look at the Q4 guidance, I mean, we do typically see usually a slower Q3 and a bigger Q4. I think this quarter, just we had a confluence of events where Q3 was a bit higher. So if you look at sequential growth in Network Services for the quarter, we were about $4 million up, and so I think for us, we saw some special pickups in both Network Services. And we've also obviously benefited from the security from the security. So we think that based on what we see today on traffic patterns, in Q3 and Q4, we do think the sequential guide, we think, is pretty reasonable. Daniel Hibshman: Okay. That's helpful. And then just on the gross margins, I mean, I called out the one time I think you said ex that one time, a 62% underlying non-GAAP gross margins is the strongest, I think we've seen in several years. Just anything else you can call out in terms of from a hardware network perspective, walking us through what's changing there that -- obviously, you mentioned scale, but the company has been scaling for a long time. So something different there driving those higher? Just kind of talk us through the underlying dynamics. Richard Wong: Yes. Q3 was a really good quarter for us. If you exclude that $1.6 million tailwind we mentioned on the earnings script, the gross margins would have been 61.8%. For the quarter specifically, I think we attribute it to 2 main reasons. One is the scale that we talked about as a platform, especially when you see the sequential kind of rise in Q3. But I think second is that engineering -- our traffic -- our engineering team have made a lot of investments around truck engineering, making the network much more efficient. And I think that we're seeing some of the benefits from that. I think when you look at the Q4 guide, we're guiding to kind of roughly flat versus Q3, continuing that advantage that we built in with the traffic engineering that we've been doing. Operator: [Operator Instructions] And your next question comes from the line of Tomer Zilberman with Bank of America. Tomer Zilberman: Maybe to continue on the line of questioning around security. I know you've called out before potential for some volatility in that segment as you're building out your go-to-market muscle. So if I ex out that onetime deal that you spoke about, what do you -- are you seeing stabilization of that volatility? Or do you think we can still expect to see some different trends as you're building out these new product motions and go to market? Kip Compton: Great question. What I can share is that in our internal analysis when we excluded that one large deal, we still had accelerating growth in security. So it's certainly, we're very excited and proud of that one deal, but that wasn't the only thing driving good growth this quarter in security. Tomer Zilberman: Got it. And maybe as a follow-up, pivoting a little bit away. If we look at the net retention rate, we've seen some improvement over the last couple of quarters versus kind of the declines we saw last year. Where do we think that net retention rate goes forward as we look out maybe the next 2, 3 years, can we return to that kind of peak of 120% you had a couple of years ago? Or do you think it stabilizes at this kind of 106% rate? Richard Wong: Yes. I think that we're very happy and proud of the NRR we achieved this quarter. I think it really goes to show the investments that Scott and his team have made around cross-sells and upsells and they're really beginning to pay off. We do think that there is room going forward on this metric. We do think it's going to increase next quarter. I just want to remind you that like when we think about this metric, it is a last 12-month metric, and we are beginning to lap some of the headwinds we saw in 2024. And so for Q4, we do think this metric has room to improve. We don't give guidance on this. And so I can't say the 120% or where it will be, but I do think that from where we are today, Q4 should be up. Operator: [Operator Instructions] And at this time, there are no further questions. I would now turn the call back over to Kip Compton for closing remarks. Kip Compton: Thanks, Rebecca. We believe this quarter demonstrated tangible progress in our ongoing transformation. We are committed to building the world's most powerful and flexible Edge platform. We're placing -- we are pleased with the strong momentum we saw this quarter and are focused on building sustainable, profitable growth. I want to thank our Fastly employees for all of their contributions, our customers for their trust and partnership, and our investors for their continued support. Thank you. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
Deborah Belevan: Good evening, everyone. Welcome to Duolingo's Third Quarter 2025 Earnings Webcast. Today after market closed, we released our Q3 shareholder letter, which you can also find on our website at investors.duolingo.com. Today, we have Luis von Ahn, our Co-Founder and CEO; and Matt Skaruppa, our CFO. [Operator Instructions] Please note that this event is being recorded. [Operator Instructions] As a reminder, we'll make forward-looking statements regarding future events and financial performance, which are subject to material risks and uncertainties, some of which these risks are set forth in our filings with the SEC. These forward-looking statements are based on our assumptions that we believe to be reasonable as of today, and we have no obligation to update these statements as a result of new information or future events. Additionally, we'll present both GAAP and non-GAAP financial measures on today's call. These non-GAAP measures are not intended to be considered in isolation from, a substitute for or superior to our GAAP results and we encourage you to consider all measures when analyzing our performance. And now I will turn it over to Luis. Luis von Ahn Arellano: Hi, everyone, and thanks for joining us today. We had a strong Q3 with solid performance across all metrics, and we're on track for another exceptional year. More than 50 million people now use Duolingo every day. And we're guiding to nearly 1.2 billion in bookings this year with 33% growth and an adjusted EBITDA margin of 29%. Putting that all together means that we have rapidly scaled our impact while expanding profitability. And yet, we still feel early in our journey. We believe AI will fundamentally transform education, and we have line of sight to building a product that teaches better than ever before. That's what makes this such an exciting moment for Duolingo. And now we'll take your questions. Operator: [Operator Instructions] Our first question will be coming from Bryan Smilek with JPMorgan. Bryan Smilek: Luis, just to start, can you just help us better understand the underlying drivers of DAU growth in the 4Q and engagement overall? And how close do you think you are to getting back on track in terms of marketing in the U.S.? I know you mentioned growing impression volume. But is that starting to translate to user growth now? Or how should we think about that into the fourth quarter? Luis von Ahn Arellano: Yes. Great question, Bryan. Thank you. So we just posted 36% year-over-year growth for Q3, and we're happy with that. There's puts and takes of how we got there. I mean, on the positive side, we have things like the locking partnership that we just -- that we talked about in the shareholder letter, which helped us grow users in Asia quite a bit. We also had a number of product improvements that helped with retention. So that was great. On the other side, just like we said last time, we passed all the unhinged posts in our social media for a bit because we were listening to our community and trying to build brand love. And when we don't post unhinged things that basically our posts were much less likely to go viral, and because of that, that did have an impact on DAU growth. The good news is that over the last few weeks, we have started the unhinged posts again in our social media accounts. And while it hasn't gotten all the way to the peak where it was, we've seen a lot of recovery. So that's really starting to show up. And we do expect that to affect DAUs positively. In terms of Q4 for DAUs, we expect some amount of deceleration from Q3 but we're pretty happy with where it has stabilized. What I'll say -- we're not guiding to Q4 DAUs, but what I'll say is that September and October were both at around 30% year-over-year growth for DAUs. And that's comping a pretty strong quarter last quarter -- last year. Bryan Smilek: Great. That's super helpful. And I guess, Luis, you also mentioned 3 core areas: monetization, user growth and just teaching efficacy overall. Can you just elaborate on really what's driving the decision to shift investments towards long view? Is it the AI opportunity or how should we just think about this impacting bookings growth? I know you've obviously talked to 25% plus as your North Star years ago. So just curious how do we get back there over time? Luis von Ahn Arellano: Yes. I mean, look, we're -- like you said, and like I said in the shareholder letter, there's a huge opportunity right now. We see a huge opportunity -- over the next few years, education and the way people learn, they're going to change fundamentally and it's because of AI. And also because of AI, we see -- we have line of sight now to create an app that can teach really, really well, much better than anything that humanity has seen before. As good as a human tutor, but that is also more engaging. And if we're able to do that, right now, we have, I don't know, we just posted 135 million monthly active users. If we're able to do an app that teaches just that well, way much better than we have now, we will be talking about billions of users that we have and that's what we want to shoot for here. So this is why we are investing in the long term. And what that looks like is that we are putting relative -- more relative investment in things like teaching better, which -- teaching better -- if we teach better, what that does is that, that helps user growth, but there's a lag. Just whenever you improve your courses, users do grow, but it takes a while for that to happen. And then user growth, there's a lag to get to monetization because people take some time to subscribe. So this is kind of a long-term thing, but we're very bullish on this, and this is why we're doing that. And the goal here is because the opportunity is so large, the goal here is to be growing DAUs fast for a very long time. Operator: Our next question will come from Nathan Feather with Morgan Stanley. Nathaniel Feather: Given the scale of the opportunity ahead that you're talking to, is the focus on greater long-term prioritization, a durable shift in strategy that we should expect to continue? Or would you plan to return to the current prioritization mix at some point? And then in connection with that focus, should we expect the pressure on bookings that you're seeing in 4Q to continue into next year with the durability of that shift? Luis von Ahn Arellano: Well, okay. So the -- for -- it's going to be years until we get to a point where we have an app that I think is just the best possible way to learn any major subjects. So we will be investing for a while. And that's important to know. I should say, though, we're not really guiding for example, to next year, but we're very excited about a lot of the initiatives that we're going to put out in the product for next year. We're going to have much better video calls that are for beginners. It's something we're calling guided video calls. The app is going to be a lot more social. We're going to have all the -- right now, the math course only has a little bit of content. In the next few months, we're going to have all of the common core K-12 content in the math. Our chess course is going to have player versus player and it's doing super well and growing really fast. We're going to have a full revamp of our music course. And for the top 9 languages that we teach, we're going to be able to teach from 0 to Duolingo score 130, which is where you can get a job in that language. So there's just a lot of things that we're very excited about. And I don't know, Matt, if you have something to add to that. Matthew Skaruppa: Yes. I think, Nathan, I want to put it back in the context of kind of what we've said before. So we've talked to you all and our investors for a long time about wanting to maximize platform LTV. And what Luis is describing is a change of small proportion right now that is going to help us grow users for a long time, get users to do more lessons, learn or spend more time on the app and, in general, be more engaged Duolingo users. And we think that if we do that and we do that effectively, we'll both grow users for a long time and will increase platform LTV for a long time. So I think that will -- we're down to bookings and the financials ultimately as well. I think there's a -- we guided to a really strong 2025. There was a -- so we think that this can exist like it has strong financial performance. And this is just a balancing act that we've always done, and we're telling you all that we want to make sure that at the present moment, we're balancing it so that we can grow really rapidly for a long time in the future. Operator: Our next question will come from Wyatt Swanson with D.A. Davidson & Company. Wyatt Swanson: I'd love to hear a bit more about how the new chess course is progressing. I think at Duocon, you mentioned millions of daily active users. On that front, do you see any differences in engagement or retention for users in the chess course versus your core language forces? And as it relates to that, kind of curious about your new PVP offering? Can you talk about like when you expect that to be fully rolled out? Luis von Ahn Arellano: Yes. So needless to say, we're very excited about chess. It is the fastest-growing course that we had. It's growing much faster than math and music and faster than the way originally languages grew. It's true we have millions of users. We're not saying exactly how many, but it is -- it's already surpassed math and music. The retention of chess users, it hasn't been around for all that long. Our chess course has been around for 3, 4 months. But so far, from what we can measure over the last 3 to 4 months is slightly higher than language learning and so we're very happy with that. We also -- as we mentioned, we started rolling out PVP. That means player versus player, so people being able to play with other people. At the moment, 50% of users on iPhones, on iOS can see it. It's not yet on Android, but it's going to come out on Android pretty soon. So we expect that within the next few weeks and small -- few weeks/small number of months, every person that has the Duolingo app will be able to do PVP chess. And over the next year, we just -- we expect quite a bit of growth from chess, and I'm very happy with it. Wyatt Swanson: Great. And then just one quick follow-up. What does prioritization of user growth instead of monetization look like? And how should I think about the actual changes in the app? Luis von Ahn Arellano: Yes. I'll give you an example. That's just -- okay. We've always had to make trade-offs between -- whenever we run an experiment, some experiments improve all metrics. Great. That's an easy call, just launch it because it improves all metrics and that happens. But there are times when experiments improve one metric but hurt another. I'll give you a fictitious example. If right now, a free user -- free users get 25 energy units at the beginning of the day and every exercise that they do spends 1 unit. If we were to do an experiment that decreases that from 25 to, say, 24. That's 1 fewer unit of energy per day. We know that would make us more money. It just does because more people run out of energy, so more people end up wanting to pay to subscribe. However, we also know that would decrease daily active users because it would frustrate some of the users. We've always had to make decisions about different judgment calls about this. What we mean is that what we -- the change that we are doing is that we are going to be prioritizing user growth over monetization in this type of judgment call. So in the fictitious experiment that I just gave you, we would not launch that experiment going from 25 to 24 energy units even if it meant quite a bit of bookings gains, if it has a real hit on daily active users. That's the type of stuff that we're doing now. And again, just to remind you, the reason we're doing this is because the opportunity ahead is so big that it's just good for us to grow fast for a long period of time. Operator: Your next question will come from Ralph Schackart with William Blair. Ralph Schackart: Luis and Matt, kind of going back to the line of questioning here. I guess maybe the question is like why now, what signals are you seeing on the shift or maybe the semi shift focus more on growth over near-term profitability as AI advancements, kind of what's prompting this? And then can you give us a sense of the duration of this pivot or shift? Is this something it's going to take -- I don't know all through 2026? Is it more short term in nature? Anything you can add there would be great. Luis von Ahn Arellano: Great. As to why now is -- I mean, it's a great question. The reality is that over the last couple of years, it has just become progressively clear and clear that we are in a unique point in time, particularly with education in terms of how education is going to happen in the world and also how well we can teach at Duolingo. We just see it in our own metrics in how fast we can put out content with things like video call. We just see how much it is improving every month. And so that just kind of has been coming for a while. And what has happened is that over the last month or 2, I've really rallied the company towards this shift. And really, it's like, okay, it's not like it was one day where I woke up and decided let's do that. It's just -- we really rallied the company to say look, opportunity is huge for us, let's prioritize, making sure that we can grow for a long period of time and also making an app that can teach really better than anything that we've seen before. As to how long this is going to take. This is -- it's an interesting question. I mean, I think you're asking something to the effect of like, well, is this going to hurt bookings and is this going to hurt bookings forever? I don't think that's the case. It's just -- it's going to take some time for us to see results -- financial results over these long-term investments that we're doing. But we're going to be acting for a while like there is a humongous opportunity because there is one until we get it. But I think we're going to be seeing good results from this even much sooner than that. So it's not like our -- we're saying, oh, throw away all the bookings or anything like that. Matthew Skaruppa: Yes. I think the only thing I'd add to that, Ralph, is that, I mean, you've seen us navigate this trade-off over the past 3 years as well, users have grown 55% per year on average over the past 3 years, and bookings has grown about 45%, and all of that while we were making similar trade-offs. And now we're just slightly focusing a little bit different as we navigate those. So it's not that we haven't been making any of them. And you've seen that like in the rest of the year guide and the Q4 guide, there was a small impact to this. It's not that big. And so would we expect some of that to persist into 2026? Sure. But again, I think as a general framing of this, it's a relatively small financial impact from this kind of reprioritization. And we think that, that's worth it because, as Luis said, it's a huge opportunity. So the risk reward seems right. Operator: Your next question will come from Alex Sklar with Raymond James. Alexander Sklar: Just following up on Wyatt's question and maybe, Ralph's, your remarks to Ralph at the end there. Just in terms of framing how meaningful some of these changes might be, is it as simple as maybe focusing a little bit less on paid conversion just to improve the premium experience today? Or are there kind of broader thoughts about maybe moving video call down into some of the lower packages? And then I've got a follow-up. Luis von Ahn Arellano: Okay. So a way to see this is what you said first. It is as simple as in some of the experiments which, by the way, not every experiment, many experiments we run, just improved our metrics. This is good. In some of the experiments where judgment calls are needed, we're going to shift the balance a little bit more towards user growth. It's not a humongous change, but it is a change. In terms of are we going to move video call to other tiers, et cetera, that is likely to happen, at least we're likely to attempt to do that, but that is unrelated to this. We were anyways -- we're always thinking about moving different features in the different plans and we'll test that. It may be the case that, I don't know, video call, but it may be the case that some of the Max features are better in super or even in the free tier, and we'll test all of that. And while we test that, we are trying to optimize lifetime value of our like platform LTV. We're trying to optimize for that. So you may see us test stuff like that. Matthew Skaruppa: Okay. Alex, I'm glad you said the free-to-pay conversion because that's exactly how like it really manifests in the business. And I just want to make sure we're clear on this. So for example, when Luis said over the past couple of months, he mobilized the company. In September, we saw some of this and what it looked like was slightly lower free-to-pay conversion, but that free-to-pay conversion was still growing year-over-year. So it's still good free-to-pay conversion. It was just on the margin. It was slightly lower. So I think that's an example as you think about the financial impact. You're right to point out that that's how it would flow through. Alexander Sklar: All right. That's great color there. And maybe for a follow-up, Luis. Just on the last call, you brought up this idea on video call about average number of words spoken per session. And that was kind of a new metric you were going to start testing towards. What have you learned so far now that you've kind of been optimizing for that metric? And then what's kind of the time line to get some of the changes into the product as a result? Luis von Ahn Arellano: Thank you for asking that question. So yes, this is actually a great metric and we've managed to move it. This is important to know about our company. Whenever we fixate on a metric, we are very good at moving it. And this particular metric, we have been moving at -- it's more than doubled this year in terms of average number of words spoken per Max subscriber and so we're very happy with that. In terms of changes to video call that you'll see coming soon, one that I'm very excited about is video call at the moment is a monolingual experience in the language that you're learning. So if you're learning Spanish, it's all in Spanish. That's great for practicing Spanish. But for beginner users, it's too hard. If you only know 20 words, it's very hard for you to have a full conversation just in Spanish. So the thing that we're testing now is these things we're calling guided video calls, which are basically bilingual. So it's -- if you're an English speaker learning Spanish, this would be part in English, part in Spanish, and it's a lot easier for beginner users. We're seeing that when we give that to beginner users, they actually speak more words per call because they're actually able to do something. And so we think that this is going to really help with Max conversion, by the way, I should say 2 things. Most of our users and certainly most of our Max subscribers are beginner users. And so we really think this will help with mass conversion. The other thing that I'll say is that these guided vehicles, we are not advertising them yet or we're not using them converting users into Max subscription yet. So we've put them out and the next step is kind of to tell nonsubscribers that these exist so that we can get them to subscribe. So we're pretty excited about what that can do to Max. Operator: Your next question will come from Ygal Arounian with Citi. Ygal Arounian: Just on AI and making education sort of better than ever, the way you're talking about things. Can you just -- does that accelerate your road map in terms of adding new language learning modules. I know within the ones that you currently have, but moving into new subjects and -- what is it about what's changing right now around AI that's letting you do that today? Luis von Ahn Arellano: Yes, the types of things you will see. It definitely accelerates our road map in more coverage of languages. That doesn't mean new languages. The reality is languages, it's very love sided what languages people want to learn. We now teach 40 languages. The rest that we don't teach is very little demand for them. But the top 9 languages that we teach, these are kind of like the Spanish and English and French and German and Italian like the big languages that people want to learn. The top 9 account for the vast majority of our users. And what you'll see us do is you'll see us go faster in terms of adding content to these top 9 languages. And right now, for most of them, we don't get you to the place where we want to get you, which is the Duolingo score of 130 in which is equivalent to CFR level of B2, which is where you can get a knowledge job in that language. You will see that over the next few months, we're going to be adding content that can do that for all the top 9 languages. The other thing that you'll see is you'll see us just at a lot more different modules in the way we teach languages that are just a lot smarter at teaching you. I mean they're going to adapt a lot better to you. And you're also going to see us just use a lot more things that use AI in the background to allow for many more free responses, so that it adapts a lot more to you. In terms of -- we're going to also be using AI for other subjects. We're using it pretty heavily for math for getting a lot more content out there. So we're going to do that. In terms of adding other subjects, at the moment, we're not working on any other subjects. I'm not going to say that we're not going to add other subjects next year. That may be the case. Like you saw with chess, it took us 9 months from idea to actually launching. So it is possible that we'll add other subjects next year, although a little unlikely, but it is possible. But at the moment, we're not working on any other subjects. Ygal Arounian: Okay. And then maybe sort of another broad one on AI. Can you just talk about what you're seeing around compute costs, gross margins coming in a little better than expected. And is that coming in faster than you think? And how is that impacting? One of the big questions we get is just generally on the competitive landscape and how AI is evolving that? What are you seeing there? Luis von Ahn Arellano: Okay. In terms of cost, look, costs are coming down. They've come down just without us doing anything, costs are coming down. For us, this has not been the top priority of optimizing costs. At the moment, the top priority is just making the best possible experience for our users that teach us the best and that is the most engaging. Every now and then, if we see low-hanging fruit we will -- in terms of optimizing costs, we will do it. But it's not like we have all of our people trying to optimize cost. And the reason we can do that is because most of our AI features, at least the ones that cost the most money are behind Duolingo Max and because the price of that is high enough that we're -- for us, the usage of AI is anyways profitable. So that's why we're not going -- not trying to optimize the cost on that. In terms of the competitive landscape, I think people say things like -- the 2 things that people say about the competitive landscape with AI are: number one, why would anybody want to learn a language with Duolingo when you can just learn it with ChatGPT. Okay. We're not particularly worried about that. We've said it before. The main thing that we do really well not only do we teach well, but the main thing that we do really well is keep people engaged. And in order to learn a language, you need to be engaged for years. It really takes years to learn a language coming every day and we need to keep you engaged actually doing it. And not only that, we also need to have curriculum for years for you to do that. So with ChatGPT, you can go there and you can ask it to teach you a few words here and there, but it's not like you can have really curriculum for years that teach that. So we're not particularly worried about that aspect. And then the other thing that people have said that they're worried about is, oh, well, nobody is going to want to learn a language because we're going to have simultaneous language translation and okay. Also not worried about that. I believe in 100% of the Google I/O conferences over the last 10 years, they have showcased simultaneous language translation. They do it every single year, and it's good. It works. But this has been happening for the last 10 years, and we have not seen the desire to learn a language go down at all. In fact, it has come up. And I think the biggest reason for that is because if you look at our users, they fall into 2 big categories. One big bucket is people who are learning a language as a hobby. It kind of doesn't matter whether our computer can do that because -- they're the same with chess, by the way. Computers are way better than humans at chess, but still we have millions of people wanting to learn chess. So it doesn't matter if it's a hobby. The other big group of people that are learning a language with us are people who are learning English and they actually want to learn English. Like that is -- for them, being able to have like a phone that they have to hold out, it's just kind of -- that's not what they want to do. So we just -- we're not particularly worried about that. It just so happens that people like to tweet about that. We're not worried about it. Matthew Skaruppa: Just a couple of points on that. Since we -- the AI costs and Max, just to make sure everyone's aware, Max is now 9% of our subscribers. It doubled in Q3 year-over-year in terms of bookings. So it's clearly doing well in that regard. It's underperforming our lofty expectations for it, though. We expected a bit more than that. And so that's why Luis is talking about guided calls and all the other things we're going to do to help it achieve what we think it can achieve. And then finally, because AI costs have come down, though, I don't want folks to take away that we're not willing to invest as Luis is talking about the seminal moment we're in to go attack a very large opportunity. We're -- we've shown that we can grow to this scale incredibly profitably. We're guiding to a 29% adjusted EBITDA margin for the year, which is very, very close to our long-term adjusted EBITDA margin range. And so as we do that, we are not going to be afraid to invest in innovation. And so we're going to make those investments over time. Operator: Your next question will come from Mark Mahaney with Evercore ISI. Mark Stephen Mahaney: Okay. A couple of things I wanted to go through. One, I know you had some price actions or price increases earlier in the year. Have you -- what kind of reactions have you seen to those? Secondly, I think you were going to hold off on doing any other -- I think it was just on like new people coming in on the standard plan, but your thoughts on rolling out other price increases. I don't think you're going to do that now given your prioritization of user growth in the fourth quarter and beyond, but just talk about that. And then third, just so we're clear on the deceleration in bookings and revenue growth in Q4 is largely due to the fact that you're going to sort of slow down the conversion rate from free to paid and really just focus on user growth. I just want to make sure that that's the main driver, and it's not like you're seeing a reduction in retention amongst paid subs, higher churn amongst paid subs possibly because of the price increase. Luis von Ahn Arellano: I mean I can take some of those. I'll take the last one. Yes, the change in Q4 is pretty much because of the shift to go to longer-term initiatives. And that means user growth and also spending some of our -- not only are we prioritizing user growth, we're also spending relatively more effort, shifting some effort to teaching better which we're taking some of that from our monetization efforts. So that's basically what you're seeing. And it's not like a humungous thing, but it is a shift. In terms of price increases, you'll see us -- we'll be testing prices. We'll be testing all kinds of things. And we will see us launch the things that we think are good for the whole platform. I don't know exactly what's going to win, but you'll see us test prices. And by that, I mean up and down. We'll probably test some prices much lower or a package -- and this I'm speaking about things that we may do, but I don't know if we'll end up doing them if we don't like the results. But we'll probably do a package that is like half price, that is like super light. That's the type of stuff that you may see us do. Matthew Skaruppa: Yes. And Mark, just to round it out, I think 2 points. One is, we've talked a lot about taking price up as a price point every now and again, we do that. Luis just said, we're going to continue to experiment with that, and that will continue to happen. ARPU has gone up this year, every quarter, kind of mid-single digits. That's also reflected in the guide and that's mainly come more from Max than it has from price point changes. I will say that we did take pricing at various times over the past a little bit and that does influence our ability to discount during our one and only discount of the year. So again, if you have a higher price, you can run different experiments with the level of discounting and one of the things that happens every Q4, when we talk about it, as we talk about the ability in our Q4 bookings guide because Q4 is our most variable quarter because we run this New Year's promotion. This year, we did energy, which is a core pricing mechanic, and we have never run a New Year's promo with energy. And so we're going to be experimenting with all sorts of things as we get towards the end of the year with the promo on how we run it, how we show it and display it, when we run it, all of these type of things. So that is also baked in here in the guide. Operator: Your next question will come from Ryan MacDonald with Needham & Company. Ryan MacDonald: Luis, maybe stick with me a little bit on this question. I apologize in advance. But how learners -- people learn differs by generation and by demographic. I think we've already seen that with sort of advanced English learners require -- meeting different requirements from Duolingo than maybe the traditional core base. So can you talk about how -- or if you are going to be targeting certain demographics, Gen Z learns or generations, Gen Z seemingly learning different than millennials with some of these product updates? And then how should we think about the metrics that you will be looking towards to prove out this works? Because obviously, user growth can be beneficial -- can be benefited by some changes, but that might not always mean that, that sticky user growth where MAUs might not always convert to DAUs. So again, long-winded question, I apologize. But how are you targeting or what are you targeting in terms of these changes? And then how are you measuring success? Luis von Ahn Arellano: Yes. I mean you asked about -- it's true. Some people learn different than others. That is true. But you would be surprised that there are a lot more similarities than differences. The reality is, I mean, this is not just generations, also geographically. I mean we always hear these things about like, "Oh, well, people in that country do that or people in that country do that." What we have found time and again is that not only a lot of people learn pretty similarly, also the things that get people to use the product more are pretty similar across the geographies. I mean like a streak, it works in every country or it's just -- so there's a lot of similarities. So at the moment, you're going to see us just make a better course for the masses that's what we're going to be spending most of our effort on. Of course, the courses do adapt to each individual and probably one of the places where there is most adaptation that is needed is the pace of learning really is different. And it just happens that as you get older, you get slower. That is just -- that's not controversial as somebody who's getting older and slower, I can tell you that. So the pace -- but that's very easy to adapt. We're just -- we really do just adapt to the pace pretty easily, and we've been doing that for a while. Now in terms of the metrics that we're going to be looking for, certainly, user growth is an important metric that we're going to be -- that we're really keyed in on right now, probably the most important metric in the company. So we're going to be looking at that a lot. Now the thing about improvements in teaching, and this is what I was saying before, they don't translate to user growth immediately because if you improve a course and it's much better, over time, maybe people are starting feeling that they're learning a little better, so there's more retention or maybe there's more word of mouth because the people are saying like, it really works for me. Let me tell you about it. So it does translate. We know that improvements in teaching do translate to user growth, but it's not immediate. And this is kind of what we mean by long term. What we're going to be looking at that, there are things like just improvements in learning outcomes, we can measure how well people are learning. And the good news is that really almost every year -- since we started measuring that every year Duolingo is actually teaching better than the year before. We're probably going to see improvements in how well we teach, move faster than in the past because we are taking it -- we're spending more effort on it. So we're probably going to be seeing that and our hypothesis, but it is a hypothesis that I very much believe in, is that, that will translate to user growth. It's just not going to be linear or quick. Ryan MacDonald: Makes sense. Okay. And I'm also older and slower, Luis. So no problems there. Luis von Ahn Arellano: Aren't we all? Aren't we all? But wiser, but wiser. Ryan MacDonald: We hope. We hope. Matt, I know you probably don't want to obviously get into a conversation about 2026 guidance or anything like that. But obviously, a lot of course investments, a lot of content investments. Can you just give us a sense of like the magnitude we should expect here? And like is there an expectation still that you can continue to expand EBITDA margins even through this process as we think over the next couple of years? Matthew Skaruppa: Yes. No, I appreciate Ryan. And even though you asked a very [indiscernible], I'm not going to guide to 2026 on this call, we'll do that in February. But I will -- and I mentioned this on an earlier question, we have made incredible progress towards our long-term margin while we've been growing the platform to a scale that has 135 million monthly actives, and we guided to nearly $1.2 billion of bookings this year. So we've [indiscernible] everyone that we can scale the business, operate with discipline and expand margins. And that's great. And we want to continue to do that. And we're going to continue to operate with discipline and grow the business along the lines of what Luis is talking about, hopefully to a whole other order of magnitude. While we do that, though, we're not afraid to invest. We think we can invest and still operate very profitably. But we are not going to prioritize linear margin expansion from here when we should be -- we view the opportunity is so big, so we can prioritize investing. That's how we think about it. Operator: Your next question will come from Andrew Boone with Citizens. Andrew Boone: I'd love to talk about kind of a topic that we've revisited maybe 2 or 3 years ago, right, in terms of advanced English learners and basically the improvement of efficacy driving those learners to the platform and kind of like whether AI has accelerated that and whether some of that thesis came to fruition and whether any of the slowdown in growth is impacting those types of learners. Or is there anything else you can kind of speak to in terms of that cohort? Luis von Ahn Arellano: Yes. As we mentioned -- I don't know whenever it was, a couple of years ago, we started talking about this. English learning is a major opportunity. I mean this -- 80% of the people who are learning a language in the world are learning English. And so we started investing in teaching better for English learners. We have done that -- we've done a major launch here throughout this year. Now all of our English courses now cover up until Duolingo score 130, which is the place where you can get a job -- a knowledge job in that language. So we have that, and we've been improving how well people learn English and we are seeing that in the metrics, our number of English learners and certainly a number of advanced English learners has been growing steadily. The other thing that I'll say is that the regions at the moment that are growing fastest are English learning regions. And so we're seeing that Asia is a really good example of that. There's -- we are certainly still posting or have never stopped posting unhinged content in Asia kind of from the social media side, but also we're just getting a lot more users there. So that's the parts that are growing the fastest. So I'm pretty happy with the progress there. We did mention that it was going to take a while, and it is taking a while for really the word to get out that Duolingo is very, very good at Advanced English and so while I believe that we've made good progress in that, we're still not there yet as this is a thing that even throughout next year, we're going to be seeing an increase in the number of advanced English learners that we're going to have. Andrew Boone: And then can we just get an update in terms of family plan? I know there were a bunch of features that you guys were adding and then just broader adoption, where are we today? And where can that go? Matthew Skaruppa: Yes. Yes. In terms of broad adoption, the Family Plan continues to do well. I think it was about 29% of subscriber [indiscernible] in the most recent quarter. So it's grown nicely. And I think there's a bunch of reason to believe that it's going to continue to grow nicely. For example, last year -- in Q4 of last year, really everything basically went right. which is why we grew so fast last year, I think, 42% year-over-year last year. Part of that was that the family plan during New Year's promo did really well. So there's reasons to believe that we still have room to run on Family Plan, Andrew. Operator: Your next question will come from Justin Patterson with KeyBanc. Justin Patterson: I'd love to hear a little bit more about just learnings from energy. There was a lot of optimism on this product, roughly 90 days or so ago. So I would love to hear how just that has evolved and might be playing into some of the trends we're talking about on this quarter. And then when we think about just the arc of reacceleration here, how much of this is really dependent on getting the product right versus really tapping into that cultural relevance that Duolingo had earlier this year and then and encounter that speed bump around the social backlash? Luis von Ahn Arellano: Okay. So energy, we're very happy with energy. It did exactly what we wanted it to do. It increased bookings and also increased DAUs. So that was good. The kind of the way it went is we launched all of energy for our iOS users first, then for Android. We rolled it out over a span of a couple of months for each one of these platforms. By now, it is done. We have, I don't know if it was a couple of weeks ago, we have every single person who has updated the app in the last, I don't know, 6 to 9 months has energy in there. And we're very happy because it did exactly what we expected it to do, and it's been launched. Now in terms of -- you asked a question about product versus kind of marketing, look, both are important for us to grow, product and marketing. The longer-term thing is if we have a product that is extremely retentive that also teaches really well, that's the best thing you can do, and that's where we spend most of our efforts, and we're going to continue spending most of our efforts on that. Yes, the cultural relevance matters. But to me, that's just an accelerant to something that is where the main dish is the product. In terms of kind of being culturally relevant, et cetera. We really are seeing a complete pickup on that. I don't know if you've watched, for example, the things that happened in Halloween. I mean there were throughout the world, certainly, there were thousands of Halloween costumes that were just Duolingo costumes. So we see that -- we're seeing that quite a bit. And so we're not particularly worried about that. Matthew Skaruppa: Yes. And the only thing I'd add to that, Justin, is there is -- we talked about it on the last call, which is we've had some success, particularly in the U.S., spending a little bit more on actual marketing, seeing a nice return in the U.S. in particular. And so that happened in Q3, and we're going to -- it's relatively small dollars, but we're going to continue that into Q4 because the U.S. growth, as we've talked about before, is slower than the rest of the world, in part because of the rest of the world. is growing really rapidly. But that continues. And so that's just the other element we'd add to the marketing mix. Operator: Our next question will come from Shweta Khajuria with Wolfe. Shweta Khajuria: I actually have 2. First one is on China. If you could please talk about how engagement has trended in China through the quarters, through the year and what your expectations are, what you're seeing there? And even if you could comment on likelihood of Max there this year or next. And then second is on renewal rates at Max in particular. Could you please talk about how that trended in Q3 so far and what your expectations are? Luis von Ahn Arellano: Okay. Let me take the China one, and then I'll let Matt take the renewal rates one. Okay. China. We are, of course, doing very well in China. I believe it's our fastest-growing country. It is our second largest country in terms of DAUs and growing fast. It's still not that large of a fraction of our business, it's about 5%, 6% of our business at the moment, but it is growing, and it is growing very fast and the engagement is very high, retention is high. Max in China is being tested at the moment. And so we have the permission to test it in China because of this is an LLM you need to get permission to test this. So it is being tested. And so this is going to launch in some number of weeks or months, it's hard for me to tell you exactly because it does depend on approvals, but it's moved along pretty well. So what I'll say at the very high level about China is that it's a pretty major opportunity for us. But of course, China comes with a risk. There's geopolitics, et cetera. So the way we're treating it is we're not spending a crazy amount, for example, in marketing in China. We're spending a very modest amount there, but we just happen to be growing quite a bit. So it's nice and it's a really nice opportunity. But if at any point in time something happens, we just didn't end up investing all that much there. That's kind of how we're treating it. And then I'll let Matt talk about Max renewals. Matthew Skaruppa: Yes. So just to put it in context, Max renewals are important, but the broader -- I think there was a question earlier on broader platform retention. That remains strong, no real changes in that. And then on Max, in particular, we mentioned in the last call that we were going to start to see in Q3 and then in Q4 larger cohorts come through the Max renewal cycle. And what we saw is that Max right now, again, there's still small as they've been ramping up, but was renewing slightly better than Super. But it's early, and Q4 is relatively a relatively sizable cohort. So we'll talk about this again on the next call. Operator: Your next question will come from Hanyi Cai with CITICS. Hanyi Cai: It's so good to have you connected. And it's really excited to hear the last question from like Max is finally rolling out in China. And I'm going to expand that question a little bit further because geographically, you see -- you saw that China was the fast-growing country in the past quarter. And for this -- in this quarter, you talked about like growing more users. So what geographically would you think -- like which country do you think like -- or which region do you think will be most potential to grow in the next quarter? And my another question is related to your Duolingo score you published in this year's score count because like that was related to the efficacy. And so I'm wondering like how do you think that this kind of efficacy measurement relate to the core user performance metrics? And how -- will that be like the key motivation for you to grow the users in the next quarter? Luis von Ahn Arellano: Yes. Thank you for the question. So region-wise, the fastest-growing region as a region is Asia for us and we expect that to be true for a bit. I would expect that's going to be true. I don't know the future, but I would expect that to be true for a bit. And certainly, China is leading that, but it's not just China. It's basically all of Asia that is growing pretty fast. In terms of the score, we're very excited about the score. Our announcement was that first of all, all of our major language courses now have the Duolingo score. And also you can share the Duolingo score on LinkedIn. We're seeing quite a good number of people sharing their score on LinkedIn. And so that really means they're using it kind of for job purposes and we have that -- the score there. The score also is in the same range as our Duolingo English test, at least for English learners. And English learners are the one that would care more about a score like that, particularly English learners in Asia are the ones that would care more about a score. So we're very excited about that. And it is something -- the ultimate goal for it is to become the proficiency standard for at least the major languages and certainly for English, where rather than when people ask you how much French do you know or how much English do you know at the moment where people say it's like, "Oh, I'm intermediate." We want people to say, "I am a Duolingo 60 in French or I'm a Duolingo 80 in English." That is what we want. And we think we're making pretty major progress. In the case of the score, particularly for English, the Duolingo English test is now accepted by over 6,000 educational institutions in the world, including all, Ivy League universities and also the 99 of the top 100 universities in the United States, accept the Duolingo English test. So we think the combination of that prestige plus the large scale that we have in the app plus doing things like sharing with -- on LinkedIn will hopefully get us to be the standard for proficiency. Hanyi Cai: Okay. And one thing is that we are not using LinkedIn that most like in China. So we are really hoping to like connect it to another social media platform [indiscernible]. Luis von Ahn Arellano: We are working on that. I can't really give you details on that, but we are working on -- it's not just going to be LinkedIn that we have the score on. We're working on that. Operator: I'm showing no further questions, and this concludes the Q&A section of the call. I would now like to turn the call back to the host for closing remarks. Luis von Ahn Arellano: Thanks, operator. I'd just like to thank everyone for joining us, and we look forward to seeing you on the next call.