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Operator: Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Wabash Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Jacob Page. Please go ahead. Jacob Page: Thank you, and good morning, everyone. We appreciate you joining us on this call. With me today are Brent Yeagy, President and Chief Executive Officer; Pat Keslin, Chief Financial Officer; and Mike Pettit, Chief Growth Officer. Before we get started, please note that this call is being recorded. I'd also like to point out that our earnings release, the slide presentation supplementing today's call and any non-GAAP reconciliations are available at ir.onewabash.com. Please refer to Slide 2 in our earnings deck for the company's safe harbor disclosure addressing forward-looking statements. I'll hand it off now to Brent. Brent Yeagy: Thanks, Jake. As we look back on the third quarter, it's clear that the softer market conditions we've been navigating through the year persisted and, in some cases, intensified. Demand across the transportation industry remained below expectations as customers continue to delay capital spending decisions, creating further pressure on order activity. This environment contributed to our Q3 performance coming in below plan. Turning to our truck body business. Market conditions remain difficult through the third quarter, evidenced by continued softness across medium-duty chassis production. Demand continued to ease across most end markets as freight activity, construction and industrial sectors slowed further. Larger fleets have also pulled back, influenced by ongoing housing market stagnation, a sharp reduction in household relocations and persistent uncertainty around consumer confidence. While these dynamics have weighed on near-term demand, they're also setting a stage for a potential snapback in truck body orders once replacement needs and end market confidence begin to rebuild. More broadly, the industry continues to work through the effects of prolonged freight recession and an extended replacement cycle following the elevated purchasing that occurred post pandemic. As a result, order intake and backlog came in below expectations and revenue finished below our guidance range. Looking ahead, we anticipate market conditions will remain soft in the near term, especially through the fourth quarter. In the meantime, we're focused on what we can control, maintaining cost discipline, pursuing share gains and strengthening our service and distribution capabilities so that we're well positioned to capture growth when demand begins to recover. While near-term headwinds have intensified, they also underscore the importance of the steps we've taken to strengthen Wabash's foundation. Our organizational structure and diversified portfolio enable us to respond quickly and align costs with demand. Within Transportation Solutions, we're executing additional actions to further adjust to the current environment. At the same time, our parts and service business once again delivered both sequential and year-over-year revenue growth in Q3, demonstrating its resilience and critical role it plays in providing stability to our overall performance. We recognize that the coming quarter will remain challenging, and we revised our guidance accordingly. However, our long-term view remains unchanged. We're confident that the structural progress we've made, particularly the continued expansion of parts and services, positions Wabash to emerge stronger when demand normalizes and capital spending resumes. With the recent inclusion of dry van and refrigerated trailers in the Section 232 steel and aluminum derivative tariffs, we expect to see gradual effects on the competitive landscape as the industry adjusts over the coming quarters. This development may ultimately serve as a catalyst for improved market share dynamics as the cycle strengthens through 2026. However, we recognize that these effects may take time to materialize as competitors evaluate their sourcing strategies and pricing responses. Our focus remains on maintaining cost stability and supply chain resiliency, areas where Wabash holds a clear structural advantage. Through our long-term agreements with partners such as Hydro and Ryerson, our 95% domestically sourced supply chain and our vertically integrated composite panel production, we are far better positioned than our peers to manage input cost volatility. As the full impact of the 232 tariff action unfolds over the coming months, it's important that we continue to educate our customers on the growing risk of pricing instability within the market. Wabash's consistent and reliable supply chain represents a distinct value differentiator, particularly as customers prepare for the next freight up cycle and look to manage profitability in the early stages of recovery. We remain disciplined and focused on execution, maintaining cost rigor and operational control while avoiding premature assumptions about pricing benefits. Our structural advantages position us to respond quickly and capture value as market pricing strengthens naturally over time. During the third quarter, we finalized a settlement related to the 2019 legal matter involving one of our trailers. The case had previously resulted in a jury verdict that included punitive damages exceeding $450 million, along with approximately $12 million in compensatory damages. Following post-trial motions, the court substantially reduced the verdict amount prior to the settlement. Under the terms of the settlement, Wabash payment obligation is approximately $30 million, with the remaining amount covered by insurance. As a result of this resolution, we recorded a net adjustment of approximately $81 million in the third quarter. The evidence in the product liability matter was undisputed that the trailer fully complied with all applicable regulations. Despite precedent to the contrary, the jury was prevented from hearing critical evidence in the case, including that the driver's alcohol level was over the legal limit at the time of the accident and the fact that neither the driver nor the passenger were wearing seatbelts. Unfortunately, this case reflects a troubling trend in America's courts, where aggressive plaintiffs' attorneys target reputable companies regardless of the facts. Verdicts like this threat not only innovation, but the stability of manufacturing and transportation companies that serve as economic anchors in communities across the country. While this matter has a significant overhang on the business, its resolution provides meaningful clarity and removes a source of uncertainty from our financial outlook. Wabash remains committed to maintaining rigorous safety, quality and compliance standards across our operations as well as a disciplined approach to risk management. We continue to manage our balance sheet prudently and prioritize capital allocation decisions that drive long-term shareholder value. Turning to the broader market environment. Demand across both the trailer and truck body industries remain soft with limited signs of near-term improvement. This slowdown is reflected in our own business with backlog declining to about $800 million at the end of the third quarter. Given these conditions, we're lowering our full year 2025 guidance to midpoints of $1.5 billion in revenue and approximately negative $2 in adjusted EPS. We expect the fourth quarter to be the weakest of the year, both in terms of revenue and operating margins. As a result, we're taking this opportunity to evaluate our cost structure to better align with near-term market demand and expect to share more on this topic in the quarters ahead. Even with this revised outlook, we still expect to be near cash flow breakeven for the year, including approximately $40 million of investment related to our Trailers as a Service initiative. Looking ahead, our 2026 order book is now open, and we're already seeing a few early wins in the fourth quarter. The bulk of larger fleet orders typically comes together between now and year's end, which will give us much better visibility into next year's demand profile. Based on early customer discussions and the most recent forecast, we remain cautiously optimistic that 2026 could mark the beginning of a gradual recovery, supported by pent-up replacement needs and improving freight conditions. Additionally, we're beginning to see signs of capacity exiting the market at an accelerating rate, driven in part by new driver qualification standards such as the English proficiency requirements that are reducing available labor supply. Over time, this tightening capacity should rebalance the freight market, setting the stage for a healthier demand environment as conditions stabilize. As always, we stay disciplined, aligned with our customers and ready to capture profitable growth as the market finds its footing. I'll now turn the call over to Mike for his comments. Mike Pettit: Thanks, Brent. Dating back to when we formed this segment 4 years ago, we discussed how we would be able to use a parts and service network to become an enterprise that can provide more value add to our customers as well as produce higher margins with a more predictable revenue stream. It was validating to see a revenue number in the third quarter that was among the best we've recorded in a very challenging freight environment. We believe this continues to prove we have established a revenue stream that will prove more resilient in all phases of the freight cycle. Third quarter margins were lower than what we would have expected to see on an ongoing basis as we are experiencing some soft demand in our high-margin OE parts supply business as well as some start-up costs at upfit as we successfully opened 2 new upfit centers in the quarter. We would expect margins in Q4 to be higher than Q3, but still below our longer-term expectation of high teens EBITDA. In the third quarter, the segment grew 16% year-over-year and about 2% sequentially. We have seen this growth in a market that is down over 40% in OE equipment from the peak in 2023, and that gives us confidence that we are seeing structural growth. One of the clearest proof points behind the parts and services momentum sits in our upfit business. Our upfit offerings let us deliver fully tailored equipment in just a couple of weeks, combining the scale of truck body production with the deep customer intimacy that defines parts and services. This is also a business where we are introducing some of our latest cutting-edge digital tools. Using AI, we are now able to quote and upfit a truck body almost instantaneously, allowing our customers to make pricing decisions in real time and place orders for their chassis and truck body together. This process has historically taken days or weeks in the truck body market. We shipped over 540 units in Q3 and about 1,500 units year-to-date. As discussed on the Q2 call, we did open 2 new upfit centers in Q3, one in Northwest Indiana and another in Atlanta, giving us capability in 2 strategic markets and keeping us on pace to exceed 2,000 units in 2025. We would expect to open another new location in Phoenix in the fourth quarter. These 3 new sites established in the second half of 2025 will set the stage for continued growth in this business into 2026 and beyond. We expect to do over 2,500 updated truck bodies in 2026. Trailers as a Service or TaaS, continues to help Wabash extend our manufacturing and distribution leadership through business model innovation. We continue to sign shippers, carriers and brokers across North America, many of whom bundle the trailer with preventative maintenance, telematics, nationwide uptime support and repair management. Wabash continues to redefine trailer accessibility with new trailers as a service offerings that have expanded to include TaaS pools. With pools, we continue to develop solutions that enable logistics providers to grow with flexible, scalable trailer solutions. TAS pools provide shippers with a universal trailer pool that replaces the complexity of managing fragmented pools across different partners. Shippers gain access to a nationwide pool of trailers positioned to support their operations. Every trailer in the pool is supported by Wabash Fleet Care for maintenance and compliance, giving customers confidence that equipment is always road ready. We continue to accelerate the technology road map inside TAS and have either launched or will soon be launching predictive analytics, alerts and automated tracking and billing, capabilities that turn raw data into actionable, measurable savings. We have continued to prepare our physical and digital capabilities for the eventual market upturn, and we'll be ready to ramp TaaS when our customers require it. We believe access to the flexible capacity that TaaS offers will become even more attractive as the market rebounds. We also continue to expand our aftermarket parts and service offerings in both physical locations and digital solutions. With our world-class dealer groups at the backbone, the parts network is extending our reach for our customers as well as providing a nationwide service network that underpins TaaS and fleet care. We've continued to expand our PPN network to over 115 locations, and each new location broadens our network and extends our reach and continues to fulfill our aim of providing more holistic aftersales support for our customers. In conclusion, parts and services provides our customers with connected support that keeps assets running day in and day out. We continue to layer entirely new forms of customer value, creating improvements with our parts and services offerings. From TaaS to upfit to aftermarket parts, these initiatives are closely linked to provide value for our customer. Importantly, we have been able to continue to develop these capabilities in a tough market, ensuring we'll be able to scale quickly as demand returns. The rationale behind scaling parts and services continues to be clear. While the freight market has continued to put pressure on equipment orders in Transportation Solutions, parts and services deliver secular growth and helps in stabilizing earnings through the cycle. As this segment expands, its higher margins will play an ever larger role in Wabash's bottom line and cash flow generation. We continue to grow because we found innovative ways to serve customers, solutions that extend value beyond the original equipment sale and well into the life of the asset. With that, I'll turn the call over to Pat for his comments. Patrick Keslin: Thanks, Mike. Starting with our third quarter financial results. Consolidated revenue was $382 million. During the quarter, we shipped approximately 6,940 new trailers and 3,065 truck bodies. Challenging market conditions, particularly in our truck body business, led to softer-than-expected demand and revenue coming in below our guidance range of $390 million to $430 million. The lower production volumes also created operational inefficiencies, which contributed to a gross margin of 4.1% and an adjusted operating margin of negative 6.2%, both below our expectations for the quarter. As a reminder, our adjusted non-GAAP results exclude the impact of items related to the settlement of the Missouri legal verdict. In the third quarter, adjusted EBITDA was negative $5 million or negative 1.4% of sales. Adjusted net income attributable to common stockholders was negative $21.2 million or negative $0.51 per diluted share, below expectations, primarily due to lower volumes. Moving on to our reporting segments. Transportation Solutions generated $334 million in revenue and negative $13 million in operating income. Parts and services delivered $61 million in revenue and $6.6 million in operating income, marking our third consecutive quarter of both sequential and year-over-year revenue growth. Despite the challenging market backdrop, we continue to execute on our strategy to build more resilient and recurring revenue streams through our parts and services business. This performance reinforces the stabilizing role of parts and services in our portfolio and highlights the value of a balanced business model as we navigate this down cycle and prepare for recovery. Year-to-date operating cash flow totaled $69.1 million with $60.6 million of free cash flow generated in the third quarter, reflecting strong execution and disciplined working capital management. Turning to the balance sheet. Total liquidity, including cash and available borrowings stood at $356 million as of September 30. On capital allocation, during the third quarter, we invested $5 million in traditional CapEx, $19.3 million in revenue-generating assets to support our Trailers as a Service initiative, repurchased $6.2 million of shares and returned $3.3 million to shareholders through our quarterly dividend. I'll provide additional commentary on our future capital deployment plans shortly. Turning to guidance. Our outlook for the fourth quarter includes revenue in the range of $300 million to $340 million and EPS between negative $0.70 and negative $0.80. This brings our full year 2025 outlook to approximately $1.5 billion in revenue and EPS between minus $1.95 and minus $2.05. From previous midpoints, this represents a reduction of roughly $100 million in revenue and $0.85 in EPS. The most significant changes from our prior outlook stem from lower volumes in Transportation Solutions, driven primarily by the truck body business, which Brent discussed earlier. In addition, the pricing required to fill our remaining Q4 backlog came in lower than anticipated. Combined, these factors have resulted in a gross profit reduction of roughly $0.85 per share versus our prior guidance. As Brent highlighted, this environment underscores the importance of being responsive and disciplined. With much of our 2025 cost structure already set, our focus in the fourth quarter is on realigning costs to current market realities while preserving flexibility to capture opportunities amid continued uncertainty. Looking ahead to 2025 capital deployment, we've adjusted our plans to reflect the current environment. We now expect traditional capital investment in the range of $25 million to $30 million. As you recall, our initial guidance for traditional capital spending for the year was in the range of $50 million to $60 million. We now expect to spend approximately half of that amount as we are managing our cash and balance sheet to reflect market conditions. Year-to-date free cash flow is $9 million, and we now expect to be near breakeven for the full year, including approximately $40 million of investment to support our Trailers as a Service initiative. We're taking a prudent and conservative approach to cash management as we move through this period of uncertainty. Until we have greater clarity on how 2026 shapes up, our focus will be on preserving liquidity and maintaining financial flexibility while positioning ourselves to act quickly when demand begins to recover. With that, I'll turn it back to Brent for closing comments. Brent Yeagy: As we close out the third quarter, I want to emphasize that we stay true to our values while making the prudent but sometimes difficult decisions needed to manage the cost basis of our business in this environment. Our balance sheet is working, and our liquidity provides the flexibility we need to both navigate near-term headwinds and invest in long-term growth. We remain active in advancing our strategic growth initiatives, building capability and scale even as we align our operations to current demand. We're growing share in dry vans, driven by improved on-time performance and higher customer satisfaction. And our new dry van manufacturing capacity is now fully online, delivering efficiency benefits today and ready to scale as demand improves. Across the organization, we continue to work on the business, strengthening our systems and processes, developing our talent and driving continuous improvement to position Wabash for the future. We will continue to align our structure and strategy with the environment we face today while also preparing for the inevitable freight recovery ahead, one that we believe will allow us to create outsized value for our shareholders, our customers and our people. We are not standing still. I'll now turn the call back to the operator, and we'll open it up for questions. Operator: Our first question will come from the line of Jeff Kauffman with Vertical Research Partners. Jeffrey Kauffman: So Brent, can we dive into the tariff question because now we have the Section 232, which I guess is supposed to level the playing field for domestic OEMs versus the OEMs that produce in Mexico. Can you talk a little bit about how you were hit by tariffs in your third quarter, whether it was steel and aluminum on the trailers or parts or things like that? And then you mentioned that the Section 232 is going to help a little more in '26. I assume that's because you have to kind of register different parts or different aspects of your costs with Department of Commerce and get it approved before you can get the rebate. And kind of walk us through how that's going to level the playing field or level margins and maybe address competition your product versus your competitors that build in Mexico. Brent Yeagy: Sure. Let me talk about the larger question about how the 232 tariff works and what specifically it's intended to do. And then I'll let Pat talk about what was the Q3 specific tariff impact to Wabash. So the 232 finding from the federal government was specifically framed around the steel and aluminum that is purchased and then incorporated into our non-U.S. domestic competitors. So it doesn't take into account the full trailer cost structure. It's just the specific steel and aluminum content, both the base metal and then the aluminum and steel incorporated into the procured subassemblies as applicable. So the way we think about it is that once that ruling is done, and so we're roughly about 45 days old on that, you go through a period of language writing that makes up the literal tariff structure that will then be put in place. That typically takes multiple months to occur and then gets put in place over the course and for us, that would primarily be -- or for the industry in the first and somewhat second quarter. That's when it starts to become real for the industry and for our competitors. And then you'll see a period of their decisions after that on how they manage it, in terms of how they look at pricing, how much they pass along to their customers, and then we'll respond accordingly. The 232, in this case, specifically, again, deals with steel and aluminum, it does not exactly level the playing field in all aspects that we're looking at in terms of the reality of how our competitors play in the marketplace. Those are ongoing conversations that we're having on how best to deal with that going forward, specifically in the climate that we're in right now. That's why we say that the 232 will primarily have an impact to a degree in the latter half of 2026, really setting up primarily for the 2027 buying season. Jeffrey Kauffman: So Brent, quick question. Maybe it applies differently to trailers than the truck OEs. But I thought there was a rebate component of the 232 that could be used to offset the steel and aluminum tariff cost to U.S.-based production or, let's say, the component of the parts that may come from outside the U.S. that are tariff. I thought that was supposed to kind of also help the U.S.-based producing guys. Brent Yeagy: That is a very unique construct that is specific to the steel and aluminum related tariffs that were part of the heavy-duty tractor-related, 232 binding. That is not applicable to the specific trailer 232 binding. Those are 2 different things. Our 232 binding is a much more traditional methodology and application. Jeffrey Kauffman: Okay. So the real benefit to you is just leveling the playing field to some degree versus your competition that builds trailers in Mexico and around the U.S. Brent Yeagy: And flipping follow up on your question about the third quarter. Mike Pettit: Yes. So we've talked about it in the past couple of quarters about our ability to insulate Wabash from direct impact of tariffs because of our mostly domestic sourced position. That doesn't mean there isn't the secondary impacts where our vendors, some of our vendors are getting hit with tariffs and then passing those along to us or engaging in negotiations with our team to pass those along. So the estimate that we have for the Q3 actual results is about $1 million, but those would be not from direct tariffs to Wabash, but price increases from our vendors that were passed through to us related to tariffs that are being imposed on them. So that's a fairly minimal number for the third quarter. We would expect to see a similar number in the fourth quarter. But then as we turn to 2026, we would expect those sorts of increases coming from our suppliers to increase into '26, and we're pricing our trailers and truck bodies accordingly with the anticipation of those second derivative tariffs coming to us get baked into our finished good price as well. Jeffrey Kauffman: Okay. And then one last follow-up. Just based on the guidance you're giving for fourth quarter on a revenue basis, $320 million at the midpoint, can you give us a rough idea of what the implied shipment count is beneath that in terms of you did 69-40 this quarter. What level in the fourth quarter would underlie that, that $320 million midpoint? Mike Pettit: That is just the trailers, Jeff? Jeffrey Kauffman: Yes, trailers and truck bodies, whatever you're comfortable. Mike Pettit: Yes. Truck bodies will be less than Q3, significantly less. We did roughly 3,000. We're looking at probably around 2,000 in the fourth quarter. That will be the biggest impact sequentially from Q3 to Q4. Jeffrey Kauffman: Okay. And then for trailer deliveries? Mike Pettit: It will be slightly lower. I don't have an exact number that I could give you right now. Patrick Keslin: No, that's fine. I was just looking for a little ballpark there. Operator: Our final question will come from the line of Mike Shlisky with D.A. Davidson. Michael Shlisky: As I look to some of the data in the market and talk to some folks, if there's a bright spot in the trailer market right now, it's in platform trailers. I'm not exactly sure, Brent, if you have any commentary as to what's behind that, whether it's either under construction and some of the large components needed to ship or people are anticipating an off-highway machinery improvement next year that would need more of these kind of trailers or what? I'd be curious whether you're participating in that kind of upside, if that's been a bright spot for you as well. I know it's a somewhat small size of the business, but any commentary you can tell us about how you might be able to find some growth in platforms in the near term, that would be helpful. Brent Yeagy: Sure. So for the platform business, that was a business that led into the freight recession almost 2.5, 3 years ago. It has been stable. There are absolutely some tailwinds that are starting to form, and there is a significant amount of customer rhetoric. We just got back from ATA, and it was there. There is some belief across that customer base that we could see a meaningful uptick in freight demand within the Platform segment. Hopefully, that results, right, in trailer purchases. A big part of it is the AI data center alcohol-related infrastructure actions that are coming to fruition. You're seeing a further increase in just general infrastructure spending as permits, building permits that were issued 18, 24 months ago are now becoming actionable. And so we see those types of activities kind of coming into the forecast for that specific segment. We look for... Michael Shlisky: Hello? Did I lose you guys? Can you hear me? Operator: This is the operator. I apologize but there will be a slight delay in today's call. Brent Yeagy: So I'm not sure where we got cut off, but let me follow up and ask that we fully address your question. Michael Shlisky: Yes. I sound like, hey, is going well in platforms. There's some specifics there on data centers and infrastructure. All sounds great. What I did want to just get the final part of the answer was how is Wabash capitalizing? Are you seeing the orders increase at least for that part of the business currently? And maybe... Brent Yeagy: Where we're at right now is that we absolutely see it stabilizing the momentum that we've relatively had throughout 2025. I would say right now, we are in the quoting and discussion phase of how our customers are interpreting where they think the market is going, specifically in platforms in 2026. Those look to be, we'll call it, beneficial at this point, but we have to work those through the actual sales process to get those back into the backlog. Michael Shlisky: Got you. Great. And then I just wanted to touch on the orders you've gotten so far last month or the last few weeks here in the fourth quarter. Pricing-wise, are you seeing any major trends there? Are people really asking -- are you getting a lot of pushback on price and you even raise price, et cetera? Just get a sense for the kind of environment there. Brent Yeagy: Yes. I would say the pricing environment is exactly what we thought it would be going into 2026. There are aspects of the market, certain products with I'll call it, certain industry niches that there are opportunities to have some level of, we'll call positive pricing influence. There are absolutely areas that there is a holding of serve in terms of just generally lower ASPs as compared to maybe where we were 18 months ago, but it is appropriate for what we would expect for the market as forecasted in 2026 sitting here right now. Michael Shlisky: Got you. And then maybe one last one. I guess I was curious, you touched on it in your comments about some fleet some fleets kind of winding down business. I know some of these are beloved customers or long-time customers. I've been seeing a little bit of that, too, just looking at social media, people kind of starting off, things of that nature. But can you quantify -- I mean, if you can ballpark what percent of maybe the national trailer fleet has maybe taken a step back? And how far along do you think we are as far as what inning we're in or what quarter we're in to seeing the correct national fleet kind of go forward? Brent Yeagy: I want to make sure I'm perfectly clear on your question. You're talking about where are we at in terms of the ongoing, we'll call it, fleet construct as capacity comes out of the market? Michael Shlisky: Yes. I hate to use the word fleet bankruptcies, but I just want to make sure is how far along are we to find the correct national fleet size? Brent Yeagy: We'll call it fleet rightsizing. So I think we are going to see a fairly measurable -- I don't want to necessarily use the word substantial because it's relative, but a meaningful level of capacity come out of the market over the next 6 months at a faster rate than what we have seen over the previous 6, which was faster than the 6 before that. And I think we are right at that level where we can break through a level of equilibrium and begin to create some positive influences in the overall freight pricing dynamics, which our customers desperately need, and we'd be very thankful for. The -- we'll call it, underlying information and data is showing this. We see through the data that we talked to. And again, we just came from ATA we somewhat got it from the horse's mouth that the data that they track is also creating some optimism on their part that if sustained, can absolutely begin to tilt the market in the first half of -- begin to tilt the market meaningfully in the first half of 2026, changing the freight lands into the latter half of '26. Michael Shlisky: If we start seeing fleets file do you anticipate a period of transition where there's asset liquidation has to take place first of some generally used units prior to new? Brent Yeagy: No. Because I mean, there can be some, I won't call it reconciliation of assets. But honestly, most of the carriers that tend to fall out at this stage are already -- they're past the first and second level use of these assets. So they play within a different market that we are very much arm's distance away from. So we see much less of an impact. What will primarily be the case is that as they see that meaningful level of capacity come out, our customers are just on the level of anxiety in terms of their lack of keeping up with replacement and cost per mile management is significant. They just need to know that they -- that it is a solid investment to begin to replace and to make up for the gap in replacement for them to begin to meaningfully come to the table with asset purchases as early as midyear 2026. That's all we're looking for right now. And I think that's where most of the, we'll call it, precipitated activity will be for us when we see this capacity come out. And that's before we even get into a growth conversation. Let's say that for 2027, just coming back to replacement and beginning to chew into replacement has very meaningful impact for us in terms of volume, not only now for vans, but for truck bodies, tanks and platforms. So it really serves itself up for a very interesting point acceleration as this capacity comes out. Operator: And that will conclude our question-and-answer session. I'll hand the call back to Jacob Page for any closing comments. Jacob Page: Thanks, everyone, for joining us today. We look forward to following up during the quarter. Have a great day. Thank you. Operator: This concludes today's call. Thank you for joining. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Option Care Health Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Nicole Maggio, Senior Vice President, Finance. Please go ahead. Nicole Maggio: Good morning. Please note that today's discussion will include certain forward-looking statements that reflect our current assumptions and expectations, including those related to our future financial performance and industry and market conditions. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations. We encourage you to review the information in today's press release as well as in our Form 10-K filed with the SEC regarding the specific risks and uncertainties. We do not undertake any duty to update any forward-looking statements, except as required by law. During this call, we will use non-GAAP financial measures when talking about the company's performance and financial condition. You can find additional information on these non-GAAP measures in this morning's press release posted on the Investor Relations portion of our website. And with that, I will turn the call over to John Rademacher, President and Chief Executive Officer. John Rademacher: Thanks, Nicole, and good morning, everyone. Before I begin my prepared remarks, I'd like to welcome and introduce some new members of the team. As we announced several weeks back, Mike Shapiro stepped down as CFO, and Meenal Sethna joined us as CFO on October 1. I want to thank Mike for his leadership and contributions over the past 10 years. He has been a great partner to me and our leadership team, and we appreciate his support during this transition period as he steps into his new role as strategic adviser. I'm also excited to welcome Meenal to the Option Care Health team. She brings a wealth of experience leading business imperatives and finance teams across a number of public companies and industries, including health care. Her early career and formative years were spent with a global health care products and services company, and her recent roles in technology, industrials and electronic manufacturing will bring fresh perspectives and best practices from across her breadth of experience. I'm looking forward to partnering with Meenal as we shape the next chapter of Option Care Health and continue our mission to transform health care by providing innovative services and improve outcomes, reduce costs and deliver hope to our patients and their families. I'm also pleased to welcome Stephen Shulstein as Vice President of Investor Relations, reporting to Meenal. Stephen is a seasoned Investor Relations executive with experience across health care and other industries, and his primary focus will be on fostering strong relationships across the investment community as we continue to drive shareholder value. With that, let's move on to the third quarter results. The Option Care Health team delivered another strong quarter with balanced growth across the portfolio of therapies. I'd like to recognize our team for their strong execution and continued dedication to providing broad access to quality of care to more patients. As a leading independent provider of home and alternate site infusion services, we are well positioned to leverage our significant scale, diverse portfolio of therapies and resilient operating model to win in the marketplace, and we demonstrated this again in the third quarter. We continue to benefit from favorable market trends, including ongoing shift of care to the home and ambulatory setting. Providing high-quality care at an appropriate cost in a setting in which patients want to receive it makes us an important part of the solution to reduce the total cost of care. We continue to capitalize on changes in the competitive landscape and further enhance our partnership with payers and pharma manufacturers. Our relationships with health plans remain strong. Our ability to provide both acute and chronic therapies on a national scale with local responsiveness uniquely positions us as a partner of choice. The strength of our platform provides a meaningful opportunity to broaden access to their members and provide better, more cost-effective care to help reduce the medical loss ratio and improve clinical outcomes. During the quarter, we expanded the utilization of our bed day management programs and site of care initiatives to deliver value to our payer partners. The robust and resilient operating model we have created enables us to deliver consistent results in any operating environment. We have demonstrated we are well positioned for success as we continue to navigate changes in regulation, competition and our portfolio of therapy. Meenal will go deeper into the financials in a few minutes, but to highlight some key takeaways. Our revenue momentum continued in the third quarter as we delivered revenue growth of 12% over last year. Acute therapy growth was in the mid-teens, and our team has been able to take advantage of shifting competitive landscape, allowing us to grow above assumed industry growth rates. Our national scale and local responsiveness are differentiators as we continue to partner with referral sources to safely transition patients out of the hospital setting to the home. As we have mentioned previously, coordinating care for acute patients requires tight collaboration with our referral sources, nurses and exceptional responsiveness by our pharmacies. This is done thousands of times a day by our teams at the local level, and we believe the investments we have made in our unique platform allow us to be the reliable partner of choice for hospitals and health systems. Our chronic therapies grew in the low double digits. We continue to see solid performance in both our core therapies as well as our rare and limited distribution products. We added new therapies and enhanced services to our platform in this quarter, taking advantage of our focus on providing enhanced clinical programs and data service expansion. We have partnered with specific pharma manufacturers to develop programmatic support for unique patient cohorts. The demonstration of our clinical capabilities, including our nursing network, payer access and national pharmacy infrastructure are differentiators as we partner with pharma to gain share in these new-to-world therapies, and we are encouraged by the pipeline of new therapies that are clinically complex and would benefit from our capability set. Part of our differentiation is our ability to have the right clinical resources available to support the breadth and complexity of our patient community and allow for growth. Nursing is at the forefront of our value proposition and the efficient and effective use of these resources is a key enabler. To this end, we conducted over 175,000 nursing visits with 34% of those in one of our infusion suites in this quarter. Additionally, Naven Health conducted over 55,000 nursing visits in the quarter across their entire customer base, allowing us to capitalize on the positive impact that we can provide at the point of care. We also continued our focus on expanding our advanced practitioner model, which represents an attractive complement to our current home infusion services and provides an opportunity to enhance our clinical competencies to serve higher acuity patients under the oversight of an advanced practitioner. Our investments in our infusion suite platform allow us to leverage our infrastructure more effectively by serving specific patients that benefit from this care model. We believe this will expand our market reach and provide broader access to new patient cohorts. As we near the close of 2025, we have raised the midpoints of our full year revenue, adjusted EBITDA and adjusted EPS guidance, which reflects our continued confidence in our platform and the execution by our team. With that, I'll hand the call over to Meenal to provide more details. Meenal? Meenal Sethna: Thanks, John, and good morning, everyone. I'm excited to join the team here at Option Care Health. I'm looking forward to continuing our strong track record of growth, resiliency and disciplined capital deployment. As John mentioned, the third quarter was strong, building off the solid momentum from the first half of the year. Revenue growth of 12% was balanced with mid-teens growth in acute and low double-digit growth in the chronic portfolio. Both the acute and chronic portfolios performed well across the board. However, growth in the chronic portfolio was negatively impacted 380 basis points from the additional adoption of Stelara biosimilars, which carry a lower reference price and reimbursement. Gross profit of $273 million grew 6.3% versus last year. This reflects the benefit from therapy mix with outsized acute and the core chronic therapies growth. Gross margin rate was also negatively impacted by the shifting Stelara dynamics as well as the impact from lower margin, limited distribution and rare and orphan therapies. Adjusted EBITDA of $119.5 million grew 3.4% over the prior year with the strength of the top line performance and spend management, partially offsetting year-over-year headwinds previously noted. Adjusted EBITDA margin was 8.3%. Adjusted earnings per share of $0.45 grew 9.8% over last year, benefiting from our share repurchases and a lower tax rate versus last year. Turning to our balance sheet and capital allocation. We had another strong quarter of cash generation. Year-to-date, we've generated $223 million in cash flow from operations. We also refinanced our term loan, reducing our borrowing costs and extended the maturity, while adding an additional $50 million in liquidity. Our net debt to adjusted EBITDA leverage stands at 1.9x at the end of the third quarter. As we identify strategic opportunities to deploy capital, our first priority for deployment is internal investments for profitable growth opportunities. In the quarter, we made investments to strengthen our platform. We added new infusion clinics and expanded our advanced practitioner footprint. We continue to look for opportunities to increase both our pharmacy capacity and our presence in key geographies. We also continue to invest in technology, artificial intelligence and advanced analytics to continue driving operating efficiency. In the quarter, we launched 3 new enhanced applications that we expect to drive efficiencies in our patient onboarding process, along with efficiencies in our staffing utilization and deliveries. Strategic acquisitions and related investments are our next priority. We've been working through the integration of the Intramed Plus acquisition from earlier in the year. The business continues to perform extremely well, and the team has met or exceeded our expectations as we close out our integration efforts. We remain active in assessing M&A opportunities, focusing on strategic tuck-ins and near adjacency opportunities. We continue to return capital to shareholders via our periodic share repurchases. In the quarter, we bought back over $62 million in shares. The strength of our balance sheet gives us flexibility to execute our growth strategy while balancing return of capital to shareholders. Finally, I want to provide an update on our expectations for the full year 2025. We now expect to generate revenue of $5.6 billion to $5.65 billion, adjusted EBITDA of $468 million to $473 million and adjusted earnings per share of $1.68 to $1.72. We continue to expect to generate more than $320 million in cash flow from operations. Consistent with our previous comments, our guidance incorporates our current expectations on the impact of potential tariffs, most favored nation pricing and similar policy changes, which we continue to believe will not have a material financial impact in 2025. Overall, we're excited about our performance and look forward to continuing our growth trajectory through 2025 and beyond. And with that, I'll turn it back to John. John Rademacher: Thanks, Meenal. In closing, I want to highlight our success that's ultimately driven by our responsiveness and strong execution. We have demonstrated our ability to take advantage of market opportunities through our day in and day out focus and consistency. And we continue to grow the business, overcoming challenges and headwinds within the marketplace. I am proud of our accomplishments this quarter, and I'm excited about the momentum we are building to deliver on our promise to expand access to the extraordinary care we can provide and to serve more patients and their families. With that, we'll open up the call for questions. Operator? Operator: [Operator Instructions] our first question comes from the line of Pito Chickering with Deutsche Bank. Pito Chickering: I guess what is the uptake of the Stelara biosimilar at this point? How do you think that evolves in the next 12 months? And is it fair to think about the economics of Stelara biosimilars following the same path as REMICADE? John Rademacher: Pito, it's John. A couple of things that I want to bring up first. First and foremost, love the progress that the team made in the quarter and really the balance of the portfolio across that. As we had said and Meenal commented in the prepared remarks, we are starting to see the uptake of the biosimilar. And knowing that, that has a lower reference price, it's going to have a revenue impact as well as gross profit as we had called out. So I think it's patterning. We kind of called out at the end of the second quarter, we started to see the uptick. That continued through the third quarter, which we put out there. Our expectations as we move forward are -- and we contemplated within the guidance that we provided for 2025 is that continued slow uptake that we would feel through that process. We know that with the January 1 roll of the calendar and the IRA impact, we will expect further step down in the price of the Stelara and the biosimilars will continue to gain momentum there. So we're not prepared to give '26 guidance. We're not in a position really to size up what we think the impact is going to be for Stelara. But I will say, given the balance of the portfolio and the momentum we're building, we expect growth, and we're going to continue to focus the organization around minimizing the impact that we can as we move forward and continue to support the broad spectrum of formulary that we have available and deepening the relationships that we have with the prescribers, with our payers and with our pharma partners. Pito Chickering: Okay. And then a quick follow-up here. I mean just we talked about the Stelara impact for '25. It was like $5 million in the first quarter and then $20 million sort of 2Q, 3Q and 4Q. As you're moving into the Stelara biosimilars and talking about sort of the gross profit sort of impact there, what would be the Stelara year-over-year headwind in the fourth quarter now that you're moving into the biosimilars? John Rademacher: Yes. As we had put out the original guidance of the $60 million to $70 million and then as we affirmed at the end of the second quarter that it was going to be at the high end of that range. That is just on the Stelara portion of it. That does not include what we see as the biosim conversion rate. As we came out with those original numbers, Pito, as we called out, the only view we had was around the discount that we were able to enjoy on that product changing and that, that was going to be moving more -- and it was hard to anticipate what the uptake of the biosims was going to be. So we've talked about it being a revenue event, and it's going to have a drag at that point. And as I said, we've contemplated that within the guidance in the remainder of the year, and we're working diligently right now in the budget process. And as we start to look and try to size everything with all the variables for the 2026, be able to be in a position to provide that when we're ready to do so. Operator: Our next question comes from the line of Joanna Gajuk with Bank of America. Joanna Gajuk: So I guess the 380 basis points -- sorry, just staying on Stelara for a second, a follow up. The 380 basis points in this quarter, so it sounds like there is expectation for additional like incremental, I guess, headwind as the conversion continues, right? Is the way to read that comment about next year? John Rademacher: That is correct, Joanna. As we have been calling out that we would expect to feel the headwinds. Again, it's -- revenue is going to have that impact. We have been talking about that since really the IRA and the announcement of that, knowing that there's going to be a step down in the reference price associated with that as we move ahead. And as I said, that was contemplated in the way that we have put the guidance forward for the remainder of the year and our confidence in continuing to tighten and raise the midpoint across that. So we're continuing to work through that, but that was contemplated in the way that we have articulated the view of the guidance of the company. Joanna Gajuk: And then as we think about the gross margin because like you said the biosimilar is a revenue event, there's a headwind to revenue, but the gross margin, I guess, so you had a step down on the Stelara on the brand and because of J&J actions. But now I guess, with the biosimilars coming in, is that also working the other way on the gross margin percentage? Or it's too early to talk about that? Or I guess... John Rademacher: It's too early to talk about, yes... Joanna Gajuk: How should we think about that gross margin, yes... John Rademacher: Yes. It's too early to talk about that, Joanna. And as you would expect, there's a range of outcomes. Each of the biosimilars have a different profile on that. So too soon. Joanna Gajuk: Okay. And so another, I guess, topic. So you mentioned dynamic regulatory environment. So are there any areas you focus on the most? And I guess, kind of how is your thinking about high-level changes that might be coming that would impact that business? John Rademacher: Yes. I mean we're continuing to keep an eye on what's going on in Washington, very dynamic environment from that standpoint. And as we said, we think we've been able to navigate pretty well some of the uncertainty that exists within the rhetoric that's coming out of Washington. There certainly are competitive dynamics in which we're seizing on opportunities within that. We continue to expand our portfolio of products, both from a limited distribution as well as deepening our partnerships with pharma. So all of those things are within the realm of the things that we're dealing with on a daily basis. But we've demonstrated time and time again our ability to have a resilient platform and a resilient operating model that can take on and seize on opportunities that are presented as well as minimize and mitigate wherever we can when it's a headwind against us. So I feel really good about the execution of the team. I feel good about the strength and the momentum in the quarter and carrying that into the fourth quarter, knowing that we've got some of these other dynamic environments that we're going to have to continue to work through and capitalize on where possible. Operator: Our next question comes from the line of David MacDonald with Truist. David MacDonald: A couple of quick questions. So John, look, we've seen the impact this year of a sizable competitor exit on the acute side. And we do hear from time to time reports of select provider exits in other markets. I'm just curious, do you expect to see an ongoing opportunity on the acute side, maybe obviously, maybe not to the same degree you saw this year, but just what you're seeing on that front? And then a follow-up question to that is, is it having any impact on pricing or conversations with payers in terms of just that business line, either the growth rate or the profitability of that business line? John Rademacher: Yes, David. So first and foremost, we do really feel strongly about the platform that we have put in place and the investments that we've made and the capacity that, that provides us to capture market demand. And the team has executed extremely well, as you said, given the sizable exits that we saw this year. Our expectations are we're going to continue to capitalize on the strength of our national network, but our local responsiveness and expectations are that we're going to continue to move that, albeit at probably a lower pace than this year and carry that momentum into 2026. We've talked about the 3 legs of the stool of our reimbursement and how we have been focusing around certainly making certain that we're paid fair value for the value that we deliver. But the opportunities to engage with our payer partners to articulate the value of the balance of our portfolio and how we can help with programs like I highlighted in bed day management and site of care initiatives are one that continues to deepen our partnership and the value that we can bring to them. With that, we're always looking to make certain that we're extracting fair value for the value that we're giving. And I think that puts us in a position to remain in network to continue to be part of the overall solution as they're thinking about management of medical loss ratio and the total cost of care. And we're going to continue to emphasize really the strength of the breadth of our portfolio in the way that we're engaging with them and we're negotiating to make certain that we're in network and we're in a preferred position. David MacDonald: And then, John, just one other quick -- actually a couple of other quick questions. Just on the advanced practitioner model, can you frame that up a little bit for us just how many locations currently in? I mean -- and when we think about 12 months from now or over the next 24 months or can you just give us some sense in terms of how aggressively you expect to roll that model out over the next, again, 12 to 24 months? And just any observations since the acquisition that have been either better or worse or a little different than you had expected? John Rademacher: Yes. So our growth of our infusion suite opportunity, we're going to continue to go at that pace. As we had called out, we're at 175 facilities today. 24 of those are advanced practitioner or infusion center capable at this point in time. And we're going to continue to look to expand that as we move that forward. Part of that will be operating and utilizing the infrastructure that we have. Some of it will be greenfield as we're looking to expand into different markets. I think as we called out before, Dave, there are corporate practice of medicine and other things that have influence on the path and the pace in which we're going to be executing around that. But we look at this as being extremely complementary to our pharmacy capabilities, both in the home and the infusion suite. We think it expands access to a broader set of patients. And we think for more clinically complex therapies and clinically complex patients, that ability to have that advanced practitioner oversee higher acuity patients, we think, is part of a comprehensive strategy and part of our growth as we're thinking about moving forward. So excited about where we are, learned a lot through the Intramed Plus acquisition as well as the Wasatch acquisition of years ago, and we're taking the best practices and applying that as we're looking to expand across our network and continue to advance this as part of our comprehensive strategy. David MacDonald: Okay. And then just last one. You mentioned in the prepared remarks, the bed day management program. Just in terms of some of these programs that you're working with payers on, are you seeing more impact around some of those programs in terms of share gain? Is it helping kind of grease the skids in terms of pricing conversations and profitability? Just any additional detail in terms of kind of further integrating yourself with the payers around some of these initiatives? John Rademacher: Yes, Dave, it's a little hard to tell the immediate impact just because of some of the market -- the competitive dynamics and some of the growth that we're seeing there. But to your question, we see it across all of those dimensions. We think that it is a value driver to the payers. For hospitals and health systems that are on DRG for some of their patients, it's a benefit to them as well to help to safely and effectively transition patients out of the hospital into the home for that lower-cost setting. So we see benefit across both the payer and the hospital and health system aspect. And we think it deepens the partnership. It allows us to have more confidence in the position that we hold. And we think that it's truly part of the solution as payers and health systems are trying to manage the total cost of care and bring the best clinical outcomes to their patients and their members. Operator: Our next question comes from the line of Matt Larew with William Blair. Matthew Larew: The first question, just on the cost side. G&A is up about 10% on a TTM basis. Could you break out what core G&A has been tracking at? Because I assume Intramed is a piece of that. And then absent other M&A, I guess, when would you expect to kind of get back to that longer-term target of kind of inflation plus for G&A? Meenal Sethna: Sure. Thanks, Matt. Let me give you just some color on the G&A. So in the quarter and as part of the prepared remarks, I mentioned that we did some debt refinancing. So there's some noise in there with that, take a percentage point out of that. The remaining drivers are really, a, as we think about the Intramed acquisition, right, that was a '25 acquisition. So you've got additional cost, additional growth there that wasn't in the prior year. I say that's one. Secondly, from a variable comp perspective, we were under target and paid out under target last year. So just getting us back to a more normal rate, you end up having to have an adder in the current year. I'd say that's second. And then the third piece is really just the investments that we're making in ourselves as we think about investing in our growth. John just talked about the advanced practitioner model, as we think about new therapy launches. And then also just from an efficiency standpoint, as we think about operating efficiency, we're making a number of technology investments. I know we've talked about it on past calls, but with some of the relationships that we have with Palantir and some of the investments we've been making in RPA, machine learning, that's also driving some higher cost. Over time, and we are seeing this from a leverage perspective and that our leverage is down as we think about it sequentially and year-over-year. Some of that you're going to see in G&A. But the other thing I would point out is some of the benefits we're getting are really coming through our cash flow, right? I mean cash flow and our -- the strength of our cash flow generation is really a part of the DNA of the company. So yes, while the P&L may look like costs are a little higher, we're seeing benefits in other places, and I feel really good about what we've been doing around better efficiency on our operations that honestly gives us much more optionality when we think about capital allocation. Matthew Larew: Okay. And then just another one on Stelara. And again, I appreciate given the moving pieces with biosims and heading into pricing changes next year that you're not going to put guardrails around it at this point. But I guess just at a high level, do you view '26 as another year where the size of the impact or the ranges of the impact will be of the magnitude that you need to call out like you did this year, some range because it is so disruptive to what investors view as the Option Care growth algorithm? Or is it a year where, yes, there's some uncertainty, but you still think you can track to kind of your stated long-term algorithm without having to box around what the impact is going to be? John Rademacher: Matt, let me take this and certainly look for Meenal to add any color on it. We're not in a position to give '26 guidance, and I appreciate the question and the form of it. I guess the way I would answer and continue to help to shape the way people are thinking about it is as we're looking forward and kind of understanding, there are a lot of dimensions that we're trying to -- and variables that we're working through. Number one is, we really need to understand what is the census that we have at the end of the year and the exit rate of that census. The second is the uptake of the next-generation products that are available to support chronic inflammatory disease. TREMFYA, Skyrizi, and ENTYVIO are all part of that equation as that moves ahead. The third is the uptake of the biosims and then which biosim the patients are transitioning on to that all have some level of impact on the chronic inflammatory disease therapeutic category group. And we're working through all of the components of that at this point in time. We, again, to reiterate, love the momentum of the business and the breadth of the growth that you saw in the third quarter that overcame even the Stelara impact that we highlighted of 380 basis points. So I think that demonstrates the breadth of the portfolio and our ability to execute on all of the other therapies around that as we continue to move forward. We expect that momentum to continue. We expect that, that will continue into 2026. And we're always going to continue to push our team around how we're thinking about reach and frequency, how we capture market demand, how we are a better partner of choice for referral sources and continuing the depth of the relationship with payers with site of care initiatives and other things. So again, I feel really good about the strength of the quarter and the momentum that we will carry into it. And at this point in time, it's just too soon to give anything that's guidance for '26. But I think this organization has demonstrated the ability to take momentum and to build around where we're going to see some changes or shifts in a specific therapy or therapeutic category and find other ways to grow through that. So Meenal? Meenal Sethna: Yes. Let me just add a couple of comments. As you can imagine, first 30 days, finding a lot of things. But in my top priorities is really looking ahead, understanding the business and looking ahead to '26 and understanding these dynamics. Echoing what John said, I feel very comfortable with the momentum of the business, the foundation that we've built. We have overcome headwinds over various points in time. And I fully expect we'll be able to do that in 2026. So just reiterating what John has been talking about. We do expect to grow going into 2026, no doubt about that. And so we're working through all the different mechanics and the different drivers that are going on. And as soon as we have better clarity, we'll continue to share that with you and be -- as we have always been, be really transparent about what we're seeing and what we know when we know it. Operator: Our next question comes from the line of Charles Rhyee with TD Cowen. Lucas Romanski: This is Lucas on for Charles. And actually, my question was answered on the last question there. So I guess, I don't know if you guys have sized it for this quarter, you might have -- I might have missed it. But should we think about the Stelara impact to gross profit being similar to the size that you gave at 2Q, i.e., being a nudge higher than $20 million? Meenal Sethna: So maybe I'll take that one. We had been talking about a range started at the $60 million to $70 million last quarter, we talked about the impact in 2025 being about $65 million to $70 million at the -- probably at the higher end of that range. Our guidance includes now just as we thought it is going to be closer to $70 million for the year. That's baked into our guidance. You see the impact of that in Q3 and the last of the impact in Q4 as well. So that works out to be math-wise, a little bit over $20 million in Q3 as well as in Q4. Lucas Romanski: Okay. I appreciate it. And then I guess at this point in the year, do you guys have a good sense on the moving parts as to what would drive that to maybe to above the $65 million to $70 million range that we're now looking at or below? And I guess what could be the moving pieces within that? John Rademacher: Yes. So I think we feel pretty strongly about it being at the upper end of the range on the impact of the Stelara. We know from what the discounts that we were able to negotiate on that, which is why we've been able to have a firm view around that range. And as Meenal said, we now expect that it will be at the upper end of that range for the full year of 2025. The variables that we don't have a line of sight into, and again, trying to answer, I'm not providing '26 guidance, but the view as we move forward is there are just a lot of variables that will go into not only the patient census that we have under management, the products that they actually transition over to and then some of the economics associated with the discounts in which we're able to buy the various therapies at that are all kind of at this point in time, under negotiation or moving around from that standpoint. So again, as Meenal said, I think we feel very confident in the upper end of the $65 million to $70 million as being what we'll see on the Stelara impact for this year, and that's been built into the full year guidance. And now what is still kind of moving forward, but we have included in our thinking is that transition over to the biosimilar and some of the impact that, that will have on the revenue and then more importantly, the drop-through on the gross profit. Operator: Our next question comes from the line of Constantine Davides with Citizens. Constantine Davides: John, can you just talk about the M&A opportunities you're exploring, whether they remain close to the core, if there are some adjacencies that you're increasingly contemplating? And I guess I ask this not only for -- to get a sense of what the pipeline looks like. But John, when you look at private transaction multiples occurring at twice the value of where you're trading, how is that impacting your thinking on where you choose to deploy your capital? And I guess, what is your perspective around this increasing disconnect? John Rademacher: Yes. So we are continuing to have a fulsome list of opportunities that we're assessing, as Meenal had called out in her prepared remarks. And we feel as if there are ample opportunities for us to continue to pursue. We're going to be disciplined in our approach as we move forward with those. But again, we think these are tuck-ins. They truly are ones that will be able to leverage the scale and the infrastructure that we have. Our first goal always is how do we select the assets that we have and the installed base to its fullest. So we're always going to look for those types of opportunities. As we've called out, there certainly are near adjacencies, and we're continuing to think about technology and the use of technology and how that helps our business and improve along those lines. There are additional things that we can be doing in support of manufacturers or payers that we continue to take a look at as the near adjacencies. But I don't -- I wouldn't leave you with the sense that there's anything that's transformative or significant difference than what you've seen in our pattern, which is around clinical capabilities, pharmacy capabilities, technology enhancements and capabilities that can enhance the relationship to support patient cohorts for manufacturers or others through that process. Constantine Davides: Great. And then you did also talk about this ongoing shift to home and ambulatory setting. How do you see that sort of playing out over the next several years? And I guess I'm also just curious, as we turn the page on '25, are you -- is it a meaningful shift in sort of health plan receptivity to site of care initiatives relative to maybe a year ago? Or is it more incremental sort of baby steps along that path? John Rademacher: Yes. I do think that when you're looking at high-quality care at an appropriate cost in a setting in which patients want to receive it, our solution checks those boxes, right? And so there is going to continue to be a movement towards these lower-cost settings, and we're on the right side of those conversations and the right side of the ledger when you're looking at from that perspective. I do think that in the conversations we're having with our market access team with our payer partners, they're looking for partners to help reduce the total cost of care. It's well documented some of the challenges that they're having with medical loss ratio and utilization rates. And when they're looking for who can help to drive a better clinical outcome at a lower cost, we're part of that conversation. And so we're seeing an increase in the level of the conversations that we're having. As I called out in my prepared remarks, we're seeing increased utilization of our capabilities for site of care initiatives and bed day management programs. And we expect that's going to continue to carry forward as they're looking at ways to support their members and do it in ways in which they have high-quality care and consistent clinical outcomes. Operator: Our next question comes from the line of Brian Tanquilut with Jefferies. Brian Tanquilut: John, maybe to follow up on your answer to Matt's question from earlier. As we think about just the dynamics in terms of where patients end up, whether that's Stelara, biosimilar, TREMFYA, Skyrizi, how does that all work out? I mean maybe what I'm trying to figure out is, is there a way for you to encourage greater biosimilar utilization back to your point on payers focusing their MLRs. Maybe that's one. And then I guess the second part of the question is, is there a world where you just say Stelara economics are not enough for us to stay in the therapy and we just exited, I mean down to like, what, 6% to 8% of EBITDA at this point. So just curious how you're thinking about all that. John Rademacher: Yes. Thanks, Brian, for the question. To be clear, our relationship with Janssen and the margin profile of the product is one in which it's still a benefit to us economically and again, a benefit to the patient. So our pharmacists are part of the care team. And they're always working with prescribing physicians around helping to select the best product that's available. Certainly, there are influences by some of the payers around product selection through that process. And so we love the breadth of the portfolio that we have and the access to all of the biosimilars and the product portfolio. We certainly have strong relations with the branded pharma manufacturers, whether it's Janssen or whether it's AbbVie and continuing to look for ways to support their patient cohorts and capitalize on the strength of our platform, both clinically as well as the national presence that we have in that local responsiveness. So we feel really well positioned to continue to deepen the partnerships with the payers, with the pharma companies as well as with the prescribers and health systems to help bring the best clinical outcomes and align the best products to the patients through that process as part of the care team. So all of that, I think, factors into where we can help to influence, we will for those clinical outcomes. And the economics are one in which, yes, there is a step down given some of the changes in the discount that we're able to enjoy. But Stelara is still a very good product for us and a part of our portfolio as it moves through this transition and has biosimilar competition. Brian Tanquilut: That makes sense. And then maybe, John, as I think about the fact that you're generating a decent amount of free cash flow, back to Constantine's question earlier on deal multiples are in the high teens range, it seems like. So how are you weighing now like the buyback versus M&A capital deployment position? Meenal Sethna: Yes. I'll take that one, Brian. So as part of my prepared remarks, I wanted to make sure that we added a little more clarity to our capital allocation strategy and just reframing that, investing in ourselves, we think there's a lot of opportunities around whether you call it organic investment, technology investments, but John talked a lot about the advanced practitioner model, really expanding our scale. I talked earlier about some of the operational efficiency that I think we can get that shows up whether it's in OpEx, but also shows up with generating additional cash flow and even just some of the data and insights and some of the work that we're doing with some partnerships there. So that's really first priority for us as we think about where we're investing. And by the way, that shows up in CapEx and free cash flow also. Secondly, for us is around the acquisitions, and that is going to be a priority for us. It's really no different than what we've been doing, which is focusing on -- John talked about the fact that tuck-ins and near adjacencies make sense for us, where we can add some additional capabilities into our portfolio. We're not going that, I call it, all within adjacencies that we know and appreciate nothing transformative that we're looking at. And then I would say the share buyback probably comes in after that. It's a balance, right? We always want to find a mechanism to return capital to shareholders. But where we think we can invest in ourselves, whether that's organically or through M&A, we think ultimately, that's going to become a better return for our shareholders. And so that is a priority for us. Operator: Our next question comes from the line of Michael Petusky with Barrington Research. Michael Petusky: John, I'm just curious, given the talk about Stelara, not just on this call, but over the last year, I mean, would it make sense as we enter '26 to just sort of be more granular about the revenue attached to the business and patient census and just things that maybe could help investors have a better sense of sort of true sort of longer-term exposure to this issue? John Rademacher: Yes, Mike. Look, it's always a balancing act of how much information we can provide into the public markets and still stay competitive and be able to have our differentiators in the marketplace on that. So we're always going to try to provide as much transparency as possible and provide insights around that. I guess as we enter into '26 and kind of move beyond, the reality is the size just continues to diminish. It becomes a smaller part of our overall portfolio. And you've seen the growth in the other therapeutic categories that we've had. We've called out that there is no other product in our portfolio, no other therapy that has over 5% of the revenue. It's no longer that we have a profile of one product like we had with Stelara. So we'll do what we can to make certain that we give line of sight around the drivers of the business and why we're as confident around the growth trajectory and the areas that we're investing in that are going to bring that sustainable growth. But as we enter into '26 and beyond, it honestly just isn't going to be as big a part of our portfolio. So spending a lot of time going deep on something that just has a smaller amount of impact just will weigh your comments accordingly. Michael Petusky: Okay. And if I can just sort of follow up on some of the earlier questions around capital allocation. I'm just curious, John, like obviously, a few years ago, you guys made a run at more of a transformative asset in home health. I'm just curious, the adjacent markets that maybe you're most interested in, I mean, can you just sort of call out a couple where, hey, these are markets that are interesting to us? John Rademacher: Yes. Well, without trying to increase the multiples of areas that we're looking at on that, I mean, I'm not going to give you the pipeline of organizations. But as we've called out before, I mean, when we talk about near adjacencies, and I tried to articulate that. We certainly have depth of relationship with manufacturers and having additional things to support manufacturer services are areas that we're always looking at. The platform that we have, the clinical capabilities from our pharmacists, our dietitians, our nurses, our advanced practitioners, all of that kind of fits into what we think is a comprehensive strategy to support. And there are things that we can be looking at that could help enhance or accelerate some of our capability sets there. We have done acquisitions of nursing agencies, which is an adjacency but an enabler of our capability set along that. We continue to look for those tuck-in and other pharmacy that can bring us either density in a market or in some instances, some difference in their operating model. So those are the things that we're looking at. As both Meenal and I have said, nothing on the horizon on a transformative standpoint. All of these things we look at as being additive and accelerants to some of the strategies that we put in place. And we think that there are ample opportunities for us to think about in a disciplined way, deploying capital in order to help grow the business and return value to our shareholders. So just I'll end with the cash flow generation of this organization is tremendous, right? And we don't take that for granted. It's not our money, it's our shareholders' money. We're going to spend it wisely, but we truly believe there are opportunities for us to continue to invest in the business and look for these M&A opportunities to continue our growth and to increase our presence and relevance in the health care ecosystem. So that is the goal, and we're going to continue to operate with that mindset. Operator: I'm showing no further questions at this time. I would now like to turn it back to Nicole Maggio for closing remarks. Nicole Maggio: Thank you all for joining us this morning and participating in our call. We appreciate your interest in Option Care Health. We will be participating in a number of conferences in November and December and look forward to speaking with you then. Conference information as well as other company collateral will be posted on the Investor Relations portion of our website. Take care, and have a great day. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Prysmian's 9 Months 2025 Integrated Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Massimo Battaini, CEO. Please go ahead. Massimo Battaini: Good morning, everyone, and welcome to the earnings call of 9 months 2025. I'm very excited today to share with you this fantastic success. Quarter 3, EBITDA, '25 is the best quarter ever. It is over EUR 100 million higher than the same quarter last year, '24, in spite of the EUR 30 million -- almost EUR 30 million adverse impact. So you should raise on a like-for-like EUR 670 million versus EUR 540 million. Remarkable also the EBITDA margin that reached the outstanding level of 14.8%, 1 percentage point higher than the 9 months comparison to last year. The organic growth in the quarter has been outstanding also with a 9% increase that brings the overall 9-month growth for '25 at 6%. We also continue our successful journey towards sustainable targets. 39% has been the CO2 emission reduction in Scope 1 and 2 versus deadline and recycled content of material in our cables risen to 21%. Let me now enter into each business unit to explain you the strength and the performance of the individual business. Transmission, first of all, strong backlog, EUR 16 billion. We had it in line with what was in the past despite additional revenue consumption. And on top of this EUR 16 billion backlog, we have been pretty successful in the order intake in quarter 3 with EUR 3 billion worth of projects awarded in this quarter. They will turn and convert into backlog in the coming months as this project will be awarded in notice to proceed. Amazing has been the growth of Transmission, 40% in the quarter, which confirmed a solid growth in the 9 months, almost 39%, 40% also for the 9 months and outstanding is the EBITDA that has risen from EUR 90 million last year, same period to EUR 150 million. And by the way, this EUR 150 million, probably already is in 1 quarter, what one of our competitor makes in the full year. Extremely rewarding for us is the EBITDA margin achieved in the quarter, almost 18%. You'll remember that we set goals for 2028 for value, we need to achieve a range of 18% to 20% EBITDA margin by 2028. So we are well ahead of that trajectory. 17.8% is 2.5 points higher than same quarter last year and if you take the 9-month view is the same. We are 3 percentage points higher than last year. Thanks to outflows as a cushion, thanks to better margin in our backlog and thanks to entire team, regions in the Transmission BU working hand in hand to maximize the results and maximize the execution of the CapEx and the relevant projects. Let me now move into to Power Grid space. The organic has been significantly high 15%, basically driven by all countries, with North America actually outpacing this 15% growth, more than 20% was the growth in the United States. When you look at EBITDA, you see a moderate growth in EBITDA, but you have to take into account 2 effects in this EUR 6 million only increase in EBITDA in quarter '23 -- in quarter '25 or '24. There is a ForEx impact of close to EUR 8 million. And there is a Midwest impact driven by tariffs that hit one element, one family of products in our portfolio business in U.S., the overhead business. It's a project-driven business, where we have a firm price and we've been hit by projects landed in quarter 1 and quarter 2, where we could not stand a chance to increase and adjust the price to reflect the Midwest premium impact. So you see a temporary blip in the EBITDA margin, 15.2% last year, 14.7% this year. This will be recovered in the coming months as we flush out the old project backlog and we will end the new project. The rest of the Power Grid business in U.S. is immune to Midwest premium because we have formula in frame agreement to transfer the cost to the market. The organic growth in the 9 months has also been pretty successful with a solid 6%. Moving to Electrification. In spite of this moderate growth in I&C Global, you have to see behind this strong organic growth in United States, 10% year-over-year growth in quarter 3, remarkable growth in EBITDA in U.S. in quarter 3. Despite a weak start with July still affected by negative tariffs, thanks to August, September, we had performed a 15% EBITDA increase quarter 3 '25 over quarter 3 '24 in the U.S. in the I&C space, namely more than EUR 30 million in absolute value. Unfortunately, this has been offset by ForEx and has been offset by some pricing normalization in LatAm, where we had spikes last year in quarter 1, quarter 2, quarter 3 in Argentina, which has normalized over the period -- this period of time. The EBITDA margin, we achieved sustainable 14.5% level. And when you look at the 9-month view, you see the upgrade and the accretion of the EBITDA margin associated to the -- attributed to the acquisition of the accretive and profitable perimeter over Encore Wire. Specialty, I cannot say that we are happy. Actually, we are disappointed about this, nothing that was not foreseen. We are still struggling with the automotive performance. The demand is very weak. Price pressure is very high. We are still working on the disposal of a few plants and a process is -- unfortunately, I have taken longer than expected. We will resolve this in the next months. And we also continue to see some level of softening in the elevator space in the U.S. attributed to the weakness of the residential market in the U.S. Moving to the last business unit Digital Solution, we reported a significant organic growth stand-alone legacy Prisma, 13% in the quarter. And you see the EBITDA left from EUR 45 million to EUR 88 million, thanks also to the perimeter change. There is the inclusion of more or less EUR 40 million coming from the Channell integration. This is the first quarter where we have the full consolidation in the treatments of the Channell perimeter. Amazing is the EBITDA margin. We never had better than 14% EBITDA margin in the business in the past. Now we raised this level of margins sustainable in the future to 20% with additional scope, with additional connectivity in the U.S. space. Before I hand over to Francesco for more financial insight, let me draw your attention to maybe one only of these KPIs in the first one on the top of right-hand side of the page, revenues linked to sustainable solution. We raised this revenue from 43% last year to 44%, 45% already. In 12 months, we will show another improvement over this level. We have a target of 55% by 2028 as per our Capital Market Day. This is our important way, it is an important way, it's an important KPI to read our ability to innovate to drive EBITDA margin improvement. And the 14.8% EBITDA margin achieved in quarter 3 is a real reflection of the efforts that commercial, R&D, operation and rest of the team has put in innovating our portfolio, innovating our solution to increase share of wallet on the one end and improve profitability. And now Francesco. Pier Facchini: Thank you, Massimo, and good morning to everybody. As usual, let me recap our profit and loss and summarize some messages that Massimo has already passed. The -- an outstanding quarter, this 3 quarter. Starting from the revenues, EUR 14.7 billion with an organic growth in the third quarter, very robust, over 9%, which was driven by an outstanding growth in Transmission and a very strong improvement in the growth of Power Grid by the way, across the board, as Massimo said, both in North America, but also pretty strong in Europe. The highest quarter ever in terms of EBITDA. You see the bridge on the right of this page, quarter-by-quarter. I would focus on quarter 3, EUR 644 million, an increase of over EUR 100 million versus Q3 2024 in spite of pretty significant adverse ForEx effect of EUR 27 million, which is mainly in the Power Grid and the Electrification business, but also Digital Solutions business. In terms of margin, I don't have much to add to what Massimo said. At constant metal in the quarter, we grew 1 percentage point from Q3 2024, mainly driven by the growth of the margin, but also of the revenues in transmission, which is obviously changing the mix in the positive sense. It was driven definitely the increase of margin by the full inclusion of Channell in our third quarter results. And I would add also a pretty robust Q3 in I&C in North America, in particular. On the lower part on profit and loss, you see group net income, which is almost doubling compared to the first 9 months of 2024, over EUR 1 billion, EUR 1.022 billion. Of course, this was heavily impacted, positively impacted by the disposal of our 23.5% stake in YOFC, which generated gains in the region of EUR 350 million. But let me say that even taking out this obviously one-off effect on our net income, the net income was very robust. And I like to confirm what I did already in the first half of the year that in terms of growth of our EPS, we are definitely above the level that the CAGR, you remember the midpoint of this CAGR was 17% for the period '24, '28 that were setting last March in New York as a target. I would say we are more in the region in the first year of a 25% EPS growth for the full year versus 2024. Okay, I flip quickly to the cash flow generation. That's the usual bridge of our net financial debt from September '24 to September '25, it's a strong deleverage, which was obviously fueled by the cash proceeds coming from the YOFC disposal. You read the number on the right of this page, EUR 566 million, which were definitely much higher than we expected, thanks to the incredibly strong share performance of the company, specifically in the month of July and even more August. In terms of last 12 months free cash flow, we are a bit below the level that we saw in the last few quarters. You remember that we were last 12 months, half 1, slightly below EUR 1 billion, let me say. And this is not very concerning, in my opinion, because it's almost entirely attributable to a different distribution of cash flows in our Transmission business. To be more specific, last year, specifically in the first 9 months, Transmission was generating very strong cash flows because it was benefiting of a very, very large down payments and milestones that this year are more skewed on the fourth quarter. So no concern. I think that we will come back and we will regain our nice level of EUR 1 billion plus, by the way, in line with the guidance that Massimo will comment in a while. Also in terms of net debt, the boost of -- other than our strong cash flow, the boost of the transactions like YOFC will generate a faster deleverage than we originally expected. And I anticipate a net debt by year-end in the region of the EUR 3 billion, which was -- which is definitely much lower than the, thanks also to YOFC, of course. Back to Massimo for the outlook and the final conclusion. Massimo Battaini: Thank you, Francesco. So let me walk you through the upgrade of the guidance. On the right-hand side chart, you see the evolution of our guidance for the EBITDA. We started the year with a EUR 2.3 billion midpoint for full year guidance. We raised it to EUR 2.40 billion in light of the perimeter change, which was particularly set by the ForEx. So the EUR 40 million additional is the organic growth of the EBITDA of the legacy Prysmian perimeter, excluding the Channell benefit. And now we are happy to raise it to EUR 2.4 billion, so another solid EUR 60 million additional EBITDA coming from the strength of quarter 3 and the expectation of the quarter 4, of course. Free cash flow also you don't see the upgrade here, but we had a EUR 1 billion low range EUR 1.075 billion, now we raised EUR 25 million, the bottom range and by EUR 50 million in the top range. So making a net increase of circa EUR 40 million in free cash flow for the full year. Let me move to the final remark and wrap up the meeting and leave time for you to address comments and questions. So definitely, a quarter, which reported an excellent performance, as flawless execution in Transmission, also supported by a good order intake. The benefits of the accretion of the EBITDA margin coming from the Channell acquisition and a strong driver of the business growth coming from North America, Power Grid, I&C and Transmission with now North America really posed to benefit from the tariff benefit in the coming quarters. So thank you. I'd like now to open the Q&A session and get more insight into the business. Operator: [Operator Instructions] We will now take the first question from the line of Vivek Midha from Citi. Vivek Midha: I hope you can hear me well. My first question is around the I&C margin in the third quarter. Would it be possible for you to give a little bit more color around where the profitability of the U.S. low voltage business stands and how that progressed over the course of the quarter? You mentioned that July was lower and August, September improved. And then also on that, you mentioned just now about the benefits of the tariffs in the U.S. coming through in the coming quarters. Could you maybe give some color around how you expect that to phase in over the coming quarters? Massimo Battaini: Yes. Thank you, Vivek. So the I&C space in the United States, we had many turbulence in the very months -- in many months of 2025 due to the different dynamics interpretation of tariffs in the market. In July, we were still in the old scheme where tariffs were applied to metal, so imported metals, imports of metal and not on import cables. From August 20 -- from August 13, all the tariffs were set in a way that's also the meta content of cable imported were charged with 50% in addition to this called country tariff. So from August 13 onward, we had a full recognition of the fact that we are looking for local producer. So given that circumstances, in August, September, we've seen a reverse in trend. While in July, we saw pricing pressure because we had cost that importers didn't have from August -- from beginning of August onwards, we had certainly more even and normalized competition. Another pressure is on importers. So the I&C margin in quarter 3 in U.S. is the best ever margin achieved by Encore Wire best ever. Despite July was weak due to the former setting of tariffs. We are at least 1 percentage point ahead of the same quarter last year, 2023, which, by the way -- 2024, which, by the way, was a strong quarter, as you recall. Now how we are going to benefit from the tariffs in the coming quarters? We don't know what is going to happen. Certainly, the supply chain from imported is a long one because they're shipping cable from every place in the world. It's normally -- we consider it a supply chain of treatment. So it will probably take another 1.5 months or so before this -- the quantity of product has been shipped and our in stock in U.S. will gradually run down. And so we should be seeing hopefully, certainly from quarter 1 onwards, less lower pressure from importers and more opportunity for us to gain share of wallet. So we think that in the aluminum building wire space, the market started already and will more progressively shift from importers, whose price is not going to give them any more benefit into for -- into local suppliers. So we will certainly have a share of wallet opportunity. Whether this will turn in additional profitability, we will see. We'll have to gauge it. It depends more -- it doesn't depend on tariff. It depends more on the possible dynamics of shortage of cable availability in U.S. vis-a-vis the local demand. Local demand is expected to grow beyond that in '25, driven by the usual data center expansion, but also by some expectation that the residential market in light of the further reduction in interest rate will rebound a little bit in quarter 1, quarter 2 next year and also thanks to our solidity of the nonresidential market. I hope I answered your first question, Vivek. Vivek Midha: Absolutely. Just to clarify to make sure I heard correctly. I think you said was it was from -- at some point in the quarter, that was the best ever margin in Encore Wire, given that they had some very, very good margins after the pandemic. Did I hear that correctly, best ever margin? Massimo Battaini: Yes. July was not the best margin but August, September was few points higher than the same period 2024. So yes, you're right. Vivek Midha: Okay. And my second question is around the Power Grids margin. Just a clarification. Thank you for the color on the Midwest premium impact. Could you maybe confirm then was the margin in the power distribution business and high voltage AC, i.e., the business outside overhead, stable relative to the second quarter? Massimo Battaini: As you noticed, the blip in the EBITDA margin was really minor. The rest of the product -- the rest of the family side of Power Grid, so high voltage AC, power distribution and network components were not suffering any sort of margin contraction. It's only the overhead business in U.S., where we win projects is similar to the transmission space. We win one-off projects. We win projects and the price and the project is firm until you completed there's a cushion. And the Midwest premium has risen in the last 2 quarters due to the additional aluminum tons supplied to metal imported in the U.S. We could not transfer this to those firm price project. While we've been completely successful transferring this Midwest premium increase to the rest of the business, call it I&C, low voltage, medium voltage distribution, no way. We have no issue there. We have formula to reflect the cost inflation coming from Midwest premium, copper rod, all the rest to our customers in the existing frame agreement. In this specific niche on the portfolio Power Grid, we didn't have this chance. We actually renegotiated some contracts, but vast majority at firm price. So when we get past the end of this year, it is a backlog of old projects that suffered this price pressure -- sorry, this margin contraction due to cost increase will fade away and will enter 2025, '26 with a different speed. That's why I call this blip in 1 -- in '26, sorry, quarter 1, this will be fully reverted back to the original level of margin, 15% plus. Operator: We will now take the next question from the line of Daniela Costa from Goldman Sachs. Daniela Costa: I'll ask two, one on Electrification and the other one on Transmission, but given we just talked on Electrification, just following up on the comments there you made before. I think when you think about sort of this potential impact that you'll be better positioned versus the importers going forward on the Section 232, what's your view in terms of like will your intent be to mainly just grab share because they will be much more expensive? Or are you also planning to leverage pricing? Has that gap becomes so wide now out there? Massimo Battaini: Yes, it's a complicated answer because the tariff -- due to tariffs, first of all, been only applied to imported cables in the aluminum space. We expect the same treatment, the same approach to happen from December onwards where also for copper products imports, there will be the same logic. So the metal content of cable or copper cable import in U.S. will be charged with the same 50%. So -- but this still has to happen. Our interaction with the administration suggests that also for the copper space, this will happen. Should this happen, we'll have Electrification, Power Grid overhead, high-voltage businesses, where we see our position in the U.S. strengthened by the fact that importers have additional cost to live with, to bear with. Some of those importers decided to eat this cost to digest it. So they didn't increase the price. By now, after 3 months, we noticed the attitude or the chance to hold the same price and getting charged with is 50% of metal content and on top of country is becoming; too overwhelming for them. So we expect to see a reduction of imports of cables across the board for all importers in U.S., in high voltage, low voltage, medium voltage and electrification. So this reduction of supply to the U.S., driven by the extreme cost impact due to tariff will certainly create some imbalance in the market. So we think that the first immediate benefit will be the share of wallet. It is too early now to say whether on top of the share of wallet, we also have a price benefit. But be reassured that every time we had a chance to increase price and to improve profitability without losing share in the market, we go for it as we've done in the last 9 months. The market was not that strong, but we haven't seen a particular EBITDA margin erosion in any space in the United States, despite tariffs were not in favor of local producer. So price we will see. Certainly, share of wallet is within reach. Daniela Costa: And moving to the question on transmission. I mean, as you've mentioned, you're pretty much there sort of at the 18% and there's upside, as you said, to the 18% to 20% or that you're comfortably in there in the 18% to 20%. But the backlog is not dramatically different to the backlog we had at the CMD. So I guess you had visibility on sort of like what the gross margin on those projects were. So can you elaborate what you changed in execution and whether this is something that we kind of see has more longer lasting? And in that case, what is the ultimate ceiling of transmission margins? Massimo Battaini: To be honest, we also have to be more accurate in setting the target for '28. So the 17.8 today is based on standard metal. Should we base also the 18%, 20% target on the same standard metal, so the historical metal 10 years ago, we should naturally raise 18%, 20% to 18.5% to 20.5%. So in my view, the natural ceiling is 20.5% is the top of the range. It's the top of the range because it is true that the backlog is what it was 6 months ago. We've definitely been more successful or better -- sorry, more successful than anticipating in the execution, let me say. And some of the risks that were in our execution and that we quantify and we assigned to provisions didn't materialize or we handled them with lower cost than anticipated. So it's again back to this execution. The strong team, strong assets. So don't forget, we have now plenty of new assets. And the new Monna Lisa is a new super performing installation asset with different capabilities and Leonardo da Vinci. Alessandro Volta, the asset will join our fleet in December '26 has a different set of capabilities as well. So we have different tools for installing/burying cables underground. We have new factories. We have new vertical lines in Pikkala that has come to -- that came on stream at the beginning of this year. We have a new production line in Arco Felice. We have a fantastic new asset. Our cohesive team working with a strong focus on execution, and this is what has driven the significant uptake in EBITDA margin in quarter 3. And this has given us confidence that the 20.5% top of the range is also achieved over by 2028. Operator: We will now take the next question from the line of Max Yates from Morgan Stanley. Max Yates: Just my question is on capacity utilization in your Encore facility. So you've kind of mentioned there may be the opportunity to take share and take customer wallet share from -- as a result of the tariffs. So could you just give us a sort of indication of if 25% of the market is going to be challenged by these tariffs, how much can you ramp up your Encore facility in the next 1 to 2 years to maybe take advantage and knock out some of that competition that then has to put through higher prices. So where is capacity utilization and sort of how much room do you have? Massimo Battaini: Our strategy is pretty simple. We have spare capacity in the range of 30% in Encore Wire. We are not there in idle wire because we like to have spare capacity. It's there to guarantee the service. But in case we need it to respond -- to fast respond to market demand, we can utilize the Saturday and the Sunday shift to expand this capacity and leverage this available at incremental output. Of course, in the short term, this will be the answer. But as soon as we see stronger structural demand growth, we will resort to the short-term action to gain share and then we back up this action with additional investment, which might take 12 months, 18 months, it depends on what we're going to do in terms of where we want to spend capacity. Of course, it would be [indiscernible] which line. So short term, we respond with the shifts -- available shifts on Saturday and Sunday to avoid to compromise in the long term, the service level, we will immediately activate the CapEx deployment to increase the structure of the capacity. So we are the only one with this benefit, thanks to Encore. We didn't have it in Prysmian because Prysmian run facility at full capacity on 7 days a week. And the same does the other -- the same to the other players in the United States. So with this opportunity, we can certainly leverage the tariff in a better way than the other people and hopefully to gain share in the market. Max Yates: Okay. And maybe just a second question around what the competition are doing in North America? Because I guess when we look at Encore margins, they're clearly at very attractive levels. Obviously, your biggest competitor, Southwire is private, so it's harder to keep a track on kind of what they're doing. But when you speak to your sort of salespeople, what do they say about what the competitors are doing on capacity? How much availability do they have to ramp up? And are you seeing kind of new entrants or people expanding capacity that maybe you didn't see before given how attractive margins are now in this North America business? Massimo Battaini: Yes. The margin attracted new entrants from outside are really not coming because of the challenge. So there could be new entrants from inside, I doubt it. The copper building wire market is in the hand of 2 players, Southwire and Cerro and the aluminum in the hand of us and Southwire, the rest are importers. So behavior in the market is pretty simple to define. Southwire is very disciplined when it comes to price. Of course, they are suffering more than in the past because they are too exposed to the residential market. They have a significant exposure to residential market. This market has been sluggish and flattish over the last 2 years. And so they're probably not enjoying what we've been enjoying on the contrary of our side because with the electrification space, again, from Encore Wire, we have a huge exposure larger than before to the nonresidential space. And on top of the nonresidential space market, we have access to data center, stronger than anyone else because we have a product range, very broad, large and complete, from telecom to Electrification, to Power Grid, to Transmission, which is unique, not common to a telecom player like Corning on Costco, not even common to Sourthwire. So they are disciplined. They always follow our price. Sometimes they are the first at price increase in the market. For example, in the last 2 weeks, we've seen copper increasing -- increases that forced us to increase the price, but Southwire anticipated us. They came with a price increase in the market first. So we are happy about the level of competition. Whether they have spare capacity, I don't know. But what matters to this market is the service level. So if you have gained so much share in the center space, is because we serve these demanding companies, the likes of Microsoft, Meta and so on with our 24-hour service. It is because with 3, 2 days spare idle capacity we can respond with massive output increase that other people cannot respond to. So we are well positioned to leverage now the settlement achieved by the tariffs in the market to leverage our strength, our portfolio and the asset of McKinney and gain additional share in the market. Operator: We will now take the next question from the line of Sean McLoughlin from HSBC. Sean McLoughlin: Can I just build on the previous answer. Maybe could you specify what kind of growth you've seen in data centers, maybe across the different divisions? And my second question is related to fiber, particularly if you could maybe split out the growth in Digital Solutions in the U.S. versus other regions. And particularly, if we're looking at fiber shortages in the U.S., what kind of positive pricing impacts do you expect this might have over the coming quarters? Massimo Battaini: Thank you, Sean. In data center space, we've seen our revenues 9 months to date versus 9 months last year, doubling in value. And this is pretty much across 2 main spaces, Electrification, U.S. and Optical Digital Solutions U.S. So now in the optical space, 40% of our volume -- trade volume in U.S. belongs is for serving this data center business. And in Electrification, I say that we have 25% of the total Electrification business, I&C business U.S. attributed to the data center expansion. This is not the same that we've seen in other regions yet. We are still working in Europe, in LatAm and APAC to become more relevant, to become more engaged with the go-to-market with a proper supply chain to win more share in data center space also as well. As far as fiber is concerned, you are totally right. There is a shortage of fiber in U.S. to the point that we are really backfilling our capacity in the U.S., we have a factory in U.S. producing fiber with fiber production coming from Europe, price improvement happening -- has happened in quarter 1. Quarter 2 is happening as we speak. And so we count on this pricing and profitability enhancement in the coming quarters to set a new level of EBITDA for Optical Digital Solutions business U.S. next year. Operator: We will now take the next question from the line of Monica Bosio from Intesa Sanpaolo. Monica Bosio: I hope you can hear me. The first question is on -- from a strategic standpoint, Massimo. If I'm not wrong, in occasion of a recent interview, you anticipated that Prysmian could be ready for a big acquisition in 2026 in LatAm or Europe. Can you please give us more flavor on this side? And just a question, would you see as reasonable and external growth in the digital solutions space or in other areas? That's the first question. The second one is related to Sean's question in the Digital Solution space. So pricing is coming -- so what kind of margins could we expect on a steady state in the Digital Solution space and more in general, given the exponential growth of the data center, do you see any supply constraints or disruption that could bring to some stops and growth along the trajectory? Massimo Battaini: Thank you, Monica. So yes, our position regarding M&A is the usual one. We consider M&A, the natural to top up our organic actions, organic plans. We think we are well positioned based on our track record of M&A to leverage additional opportunity. We will be ready for large ones. And by that one, that means something closer to the size of Encore from 2027 onwards, not in 2026. We have some more financial flexibility also in '2026 due to the disposal of YOFC shares, the treasury share. So we have still some room for minor midsize acquisition in '26. Another point is to work in identifying the specific targets, the one that we can start the highest level of synergies. And certainly, we are looking at North America, LatAm and Europe as main priorities to expand leadership, expand portfolio and become more relevant within the customer base. I didn't capture the question about the standard growth in Digital Solutions. You mean internal -- the organic -- so there is growth in U.S.A. in Digital Solutions, again, partly driven by the rollout of Fiber to the Home and also complemented by rollout of data center expansion. There is not that much level of growth in the other countries because they are much more advanced in the fiber-to-the-home implementation. France is almost at the end. The U.K. is almost at the end. Spain is made way too. So Europe will not probably give us satisfactory organic growth. North America will continue for 5 years at least to support organic growth of Digital Solution space. Monica Bosio: Yes, my question was -- sorry, Massimo, my question was given the pricing that is coming in the U.S. in the digital solution, this could be a lever for further margin improvement. What you... Massimo Battaini: Okay. So the margin was coming to the point of mind. We reached a 20% EBITDA margin. So I think it's the level we consider sustainable. There will be upside in U.S. There will be probably stability or slight reduction in Europe. So I would not bank on significant expansion beyond 20%, which is already very accretive vis-a-vis the past trend. Of course, there will be additional synergies that we want to leverage, thanks to the acquisition of Channell. Because now we own a satisfactory portfolio of connectivity products with the ones that we had in Europe, with acquisition that we made, a small acquisition that we made in Australia, the Warren & Brown and Channell. Now we can leverage the full portfolio and eventually further enhance the profitability of the business unit. Operator: We will now take the next question from the line of Alasdair Leslie from Bernstein. Alasdair Leslie: I had 2 questions on Transmission. So you talked about 2028. I was just wondering whether you could help us a little bit in terms of kind of calibrating how transmission scales up here in maybe the next 6 to 12 months? I mean how should we think about top line growth margins both in the balance of 2025, but maybe also 2026 as well? Any early thoughts there as consensus only has around 15% like-for-like growth in '26. It feels like maybe that's now too conservative? And maybe also just a little bit more detail around the phasing of capacity coming online, please. I don't know whether you can kind of update us on those lines of Pikkala. The first one, I think you highlighted again, that's up and running. But the second 1 maybe an update there. Can that be brought forward a little bit? And maybe if you can, what's the kind of run rate on that submarine cable now in Pikkala? I think you were talking about starting with 32 tons and wanted to double that. So where do we stand now? Massimo Battaini: Your question is too detailed. I don't like to share all this stuff with -- not with you, but with the other people connected to the earning calls. I'll tell you a simple explanation what is going on. You draw a line from '26, '25 through 2028. You take the, let's call it, EUR 580 million EBITDA this year and take almost EUR 1 billion by 2026. This growth from EUR 550 million, EUR 580 million to EUR 1 billion is supported linearly by additional capacity increase across many sites. There is Pikkala with 3 lines. There is drone for HVDC interconnects with 3 lines. There is Naples with 1 additional line. There is capacity in Abilene, United States for HVDC capability. The capacity will grow linearly from this level of 2025 through 2028 from EUR 550 million, EUR 580 million EBITDA this year to EUR 1 billion. To complement this cable capacity across different submarine interconnectors, offshore and land interconnectors, you have the installation capacity that will grow hand in hand with the manufacturing capacity. So you draw this line, you can figure out what the organic growth for next year will be and for '27 and for 2028. Bear in mind that while we grow, expand the business organically with capacity and with expansion of installation capability, we also benefit from -- as we did in quarter 3 this year execution and better margins in our backlog. So move from the 17.8% margin today to 20%. I hope this clarifies the trajectory. And forgive me if I can enter into these tons kilometers details that really we don't like to share with our peers. Operator: We will now take the next question from the line of Uma Samlin from Bank of America. Uma Samlin: My first 1 is fairly short term. You mentioned that for Encore, you saw record margin profile in September and August this year. So what are you seeing in terms of Encore demand and pricing so far in October? If you could comment on that, that would be really helpful. And also for your raised '25 guidance, how much have you accounted for in terms of the tariff impact on I&C in Q4? And how should we think about this benefit going into 2026? That's my first one. Massimo Battaini: The record margin August, September is certainly an important -- is certainly important trend in the market. It is not really related to the tariff to the reduction of imports related to the fact that there is clarity in the market about where the market stands in terms of tariffs. October is coming in with a strong volume with some pricing or margin pressure due to the cost of copper cost increase that has been kind of sudden and sharp. And of course, us supplier, all keen on passing into the market. So October is coming up in a nice way as well. The big chunk of the 2025 upgrade -- guidance upgrade comes from North America due to the strength in Power Grid and I&C but also it comes from Transmission business. So those 3 family of products, I&C North America Power Grid, North America and also Europe, to a certain extent. And transmission is what has driven the 60-meter increase in 2025 guidance upgrade. Uma Samlin: Yes, super helpful. My second question is a slightly more longer term. Is that -- how should we think about the sustainability of the tariff benefit that you're seeing now? Do you expect to see further consolidation of the market? And what kind of long-term pricing benefit do you expect there? Massimo Battaini: It is a million-dollar question because we've never been in a situation like this where finally the U.S. market is -- that's historically been super protected against importers will be even further protected. So give us a couple of quarters to really assess what the situation would be. I think that things went in the way we think that we go, there will be significant reduction on the imports of cable in U.S. in favorable of local producers. As said before, we have capacity available to respond to the sharp market demand. And we have a CapEx and capital allocation available to be released to support the organic growth of the market in U.S. As we've done in the past, we'll do in the future, the market becomes more solid, more protected in the end of a few players. It's already kind of highly consolidated. And we made the last moving consolidation with the acquisition of Encore Wire. Operator: We will now take the next question from the line of Nabil Najeeb from Deutsche Bank. Nabil Najeeb: My first question is on data centers. Your direct sales into data centers have, of course, been very strong. And I think you previously said that you're on track to double data center-related revenues. Can you give us a sense of how you might look at the overall opportunity within data centers? I wonder if you've got any thoughts on the share of data center CapEx, you can maybe capture across low and medium voltage cables as well as fiber and connectivity. And the second question is on the New York listing. Do you have any updates on your plans there? I think earlier, you wanted to focus on the integration of Encore and Channell, which seems to be well underway. There were also some headlines that pressed on a potential revival of these plans. So just wondering if you can comment on that. Massimo Battaini: So data center, we've seen a significant growth in '25 or '24. We think that growth will continue. We have a visibility of long pipelines of projects and we become stronger and stronger, as time goes by because we add the innovative solution to our product range that can really benefit the data center. In the optical space, they require high-density cables with very compact standard diameter. And we just -- we cannot announce it today, but we have a breakthrough that we disclose to the market shortly in terms of size of fiber for compact cables for data centers. So we will be really benefiting from data center expansion. I think the growth, per se, will probably slow down because this year, we've seen a 150% growth over last year. So the pace of growth will probably slow down, but it still remaining -- this will still remain an important driver of EBITDA expansion and EBITDA margin increase in U.S., for sure, massively and also in other regions. U.S. listing is not an abandoned project. It's something that we parked for a few -- for the moment. I think you are correct. The integration of Encore is proceeding well. The Channell integration is also proceeding well. We will reopen the discussion in 2026. The project is extremely valuable to us. It will give more -- it will give us access to this company to many U.S.-based investors. So it is a priority for us. At the moment, we made the proper decision. Operator: We will now take the next question from the line of Chris Leonard from UBS. Christopher Leonard: Yes, hopefully you can hear me. Just digging in maybe on the margin differential again between North America and Europe. And I wonder Electrification division for Q3 if weakness in Europe was dragging margins down? And could you maybe speak to the potential for you to bridge the gap in the future and grow European margins? And is there anything in your strategy you're looking at to try and improve that? And maybe is M&A into '26 or '27 an avenue that you would pursue within Europe? Massimo Battaini: Yes. You're right, there is a significant difference in and between North America and Europe. Why in other regions, for example, a time a similar margin to U.S. So -- but Europe is not one margin fits all. It's a strong margin in the Nordics, weaker margin in the South Europe. Now how to bridge this gap? We are trying to implement similar mindset as the one we have in Encore Wire, also in Europe. So to leverage -- or to value the service more than the other part of the factory. So to make sure that we become more appreciated by customer for the short-term lead time, for the short-term service than anything else. Differentiation in sustainability and innovation in this space is also important. We have guide to cover, and we are really working across all drivers -- fixed cost organization, factoring footprint and possibly consolidation of the market in Europe to bridge this gap. Bear in mind, there is a structural difference between the fragmentation of the U.S. market, which is minimum and the fragmentation of the European market, which is extremely large, both on customer side and supply side. But we are working hard to reduce and minimize as possible as we get. Hope I answered your question, Chris. Operator: We will now take the next question from the line of Akash Gupta from JPMorgan. Akash Gupta: I got a couple as well. The first one is the clarification on your remarks earlier. I think you said that Encore had all-time high margins. And clarification, is this all-time high since you acquired or in their history? And given question -- given in 2022, they made more than 30% EBITDA margin. So just wondering if you can provide some context to these record margins at Encore? Massimo Battaini: Thank you, Akash. There is an important clarification of cash. Yes, you're right. This is not the all time ever. It's no time not since we acquired, it's no time since the level of EBITDA margin at Encore normalized, level of margin at Encore normalized after the spike in '22 and '23 towards the end of 2023. And since then, so let's say, quarter 4 '23 onwards, we had this kind of a stable EBITDA margin of 15% with some peaks and troughs, especially in 2025. So the EBITDA margin highest ever mentioned quarter 3 is the highest since quarter 4, 2023. Akash Gupta: And my second question is on your guidance range. I think if you recall last year, you had a bit of softness towards end of the year in Electrification because of some weaker volumes in end of the year, which also continued in early this year as well. So just wanted to understand the framework behind the guidance range that have you incorporated a similar scenario as well for this year? And maybe if you can also talk about what will take you to the upper end of the range and what will need to happen to come at the bottom end? Massimo Battaini: Yes. Thank you, Akash. So yes, you're right. Last year, we had a soft volume performance in November, December due to seasonality, but also due to some shortage in demand. October started very strong in volume. And we have visibility of a part of November. Don't forget that this is a very short-term business. We have weighted the month and we gained the orders of the month through the month itself. But prospect is positive, probably volume in October is the first reflection of some slowdown in cable imports, so that there is more demand for local producer. Volume is positive. We think that quarter 4 this year will also be extremely satisfactory versus quarter 4 last year. And so this expectation for quarter 4 I&C has played an important role in the guidance of a grid, but also the performance of Power Grid that at the global level, was in the quarter, 14% organic growth, by North America much more. And the growth we expect to see from North America in quarter 4 is in line with what we've seen in quarter 3. So also Power Grid U.S. has played its important role in convincing us to upgrade the guidance to a midpoint '24. And we think we will end up around the midpoint. So to be in the top part of the range we have to think of something that we don't think is realistic. So an extremely important shift change in the market to a local producer, importers decided to work away pricing going to a different level. So a scenario that we don't see realistic. So the tariff will play an important role benefiting us, but this will gradually kick in, in the market. So I don't see this spike possibly happening in quarter 4. Gradually, we will gain, as I said before, more share of wallet, more relevance and the importers will be neglected. They will be really considered the last resort also because they won't have the only leverage that they had in the past to enter the market, the price. The price will go because the cost they have to bear is immense. So this is how I see how we drafted the guidance and how I see we will end up vis-a-vis the different business movement. Operator: We will now take the next question from the line of Alessandro Tortora from Mediobanca. Alessandro Tortora: I have 3 questions, okay. The first 1 is on the Channell performance on a stand-alone basis. If you can comment a little bit on the organic performance of the company, but also the underlying profitability? This is the first question. The second 1 relates to the around EUR 3 billion net debt indication I got in the conference call. So if you can help understand the underlying assumption on CapEx and also, if you are assuming, let's say, significant advance payment in the last part, I may recall to the [indiscernible]? And then the last question is on the -- let's say, sorry, I don't recall lately, but if you can also give me some ideas on the tax rate level for this year because it was let's say, low in the 9 months and also on the level of financial charges. Massimo Battaini: Channell benefits from the strong rebound of the telecom market. The Channell performance in quarter 3, 2025 is well ahead over quarter 3, 2024 as also North America, our performance in optical cable business, '25 is ahead of that of last year. The market has rebounded. So Channell benefited from organic growth -- benefited organic growth upside, but also profitability side, the level of EBITDA that used to be in the range of 40% in 2024 has risen to a more solid 43%, 44% for quarter 2 this year. So we had this twofold the benefit coming from Channell, which, again, given the strong demand of optical business, U.S. supported by use cases like data center and fiber-to-the-home, we believe that it's going to be sustainable in the coming years. I will hand over to Francesco for the NFP, and tax rate question. Pier Facchini: Yes. The assumptions are pretty simple on the EUR 3 billion debt. First of all, let me highlight that the EUR 3 billion debt, of course, assumes -- is based on the treatment of the hybrid bond as equity, just to be very clear on that point, which is according to IFRS. So nothing new, but better to clarify. The assumption is that we are in the midpoint of the guidance of the free cash flow that Massimo highlighted. And of course, in this assumption, there is the down payment of AGL 4, no doubt. By the way, I commented that the reason why we are confident to recover the level of the free cash flow on a full year basis after the drop down to EUR 859 million last 12 months, September is exactly a very strong cash generation of Transmission business, which is more skewed on the fourth quarter than compared to last year. Nothing else on the extraordinary transactions which has been completed. And so this will not impact -- will not have a different impact from the one that you see in September. You are right. The tax rate is very low. The reason why it's very low is a technical reason, I would say, an accounting reason, which once again has to do with the disposal of YOFC, basically, the big gain of EUR 350 million has a pretty low level of taxation. And so I expect this to be stable also in the full year around 22%. It's a good point that you make because it's not certainly our sustainable long-term rate, it would be too naive to be true, Yuri. I go back to the indication that I gave at the Capital Market Day where our sustainable tax rate is more in the -- between 25% and 27%, I would say. And the financial charges are reflecting, obviously, the acquisition than in the past. The new financing are progressing quite steadily at EUR 70 million, EUR 70-something million a quarter. So an easy projection is in the region of EUR 285 million, let me say, between EUR 280 million to EUR 290 million for full year versus the EUR 216 million year-to-date September. Operator: We will now take the final question from the line of Xin Wang from Barclays. Xin Wang: I'm not sure if I'm the only one confused here, but I want to clarify one thing. So on the tariff impact, I think you explained how the aluminum tariff works, which is in July, it's applied to metals, not to cable. Therefore, you saw cost pressure in July. And then by 16 or 18th of August, is expanded to cables and you saw the best margin of Encore. And then you said we expect the same logic to apply to copper. Does this mean that we haven't really seen the tailwind from the copper side this quarter yet? And do you expect this to come in the coming quarters, please? Massimo Battaini: Yes, you are totally correct. The 232 section tariffs applied to metal has been expanded to import cables as far as aluminum cables is concerned from 18th of August, and our interaction with the administration suggests the same logic will apply to copper. This will probably take another quarter to be implemented. So we expect this to happen from somewhere in quarter 1, 2026 onwards. Then, of course, the copper space is not that relevant as aluminum space. So 80% of the aluminum I&C market is in the hand of importers. In terms of copper wire market, they are barely importing copper cable in U.S. in electrification, in I&C, but there are cable imported into the U.S., copper made in middle-market space and by distribution in HVAC. So we will not see a significant benefit of the total tariffs applied to import cables in I&C space, we will see some benefit in Power Grid and high-voltage should this approach be implemented at some point in the coming months. I hope I clarified the difference between the 2 family of products, aluminum and copper. Xin Wang: Yes. No, the first part is very clear. The second part, I just want to clarify, this is what I heard. Potentially, when we look at the benefit from copper and aluminum tariffs being on the I&C front or the Power Grid or Transmission front, you expect aluminum imports to be a more structural benefit that takes some time to flow through. Obviously, part of that is because aluminum import penetration is higher than copper and also is less exposed to the spot market. Massimo Battaini: Yes, correct. So the aluminum space -- I mean, aluminum cables are lighter than the copper cable. That is why U.S. is importing as other regions are importing more aluminum cable than copper cables. The aluminum space is inside the electrification space and that's the construction. The aluminum cables are also inside the Power Grid. For example, overhead lines are mostly made of aluminum conductors. And so a chunk of our transmission business that we own in U.S. compete head-to-head with importers bringing overhead transmission line from India, from China and other countries. And now also these importers that entered into the Power Grid space through overhead transmission line will feel the extra cost of the 50% tariff applied to metal content. And the conductor lines is only made of conductor, not insulation. So there are other benefits to come through. But again, I really suggested to pause a bit on tariff, it's not too big of a deal. We just had finally settlements in aluminum that will be copy pasted by copper approach in the next months, we will really need a few months to gauge the entire benefit. But be aware that we are really structurally poised to benefit from it. We have capacity available. We have a larger engagement with all major distributors and utilities in the U.S. So we have a strong connection with all customers. So we will be the beneficiary of the tariffs in a way or the other. And this is already starting to open in August and September for the I&C space, and this will carry on in the future. Xin Wang: It is very clear. We can totally afford to be a little bit more patient. My last question is on the high-density fiber cable and system. You talked about the opportunity out there because your peer Corning obviously is also talking about the same thing. I know you have made a technical breakthrough. But you -- but do you -- can you already share some thoughts on if there is any customer dialogue starting already? Or how do you think about the investment that is required out there? And on top of this, I think you made progress with Channell acquisition, but you previously also said you intend to grow -- to expand the portfolio offering on Digital Solutions. Do you have any progress to share, please? Massimo Battaini: So we keep working on innovation and Corning does the same, of course. So we have extremely -- we think that we have at least two breakthrough vis-a-vis Corning, but please don't make me share what we think of the other competitors. We have strong effort in innovating in fiber making very thin fiber solution and very compact cable solution. We're working on the local fiber, which is a new generation of fiber to increase speed of transmission of data, which is key for data center rollout. And we're working on very super compact cables that is also key for data center because there are little spaces in ducts, and they want to squeeze as many fiber as possible in the short space. So innovation is our key driver of profitability and volume and share enhancement in Digital Solutions space. You mentioned also Channell. Channell give us a range of products in connectivity and is completely complementary to that we are in Europe. And so now we will do a cross-selling. We would like to use the Channell product and sell them in European market using our go-to-market channels and do the opposite, the complementary use in our European portfolio connectivity and bring it to U.S. benefiting from the Channell to the market that Channell has. So the go-to-market Channell, Channell is go-to-market that this company we acquired has, which we didn't have before. So cross-selling our connectivity ranges, European one in U.S. and U.S. one in Europe is what we expect to deliver to our EBITDA in the coming quarters. Operator: We will now take the next question from the line of Luigi De Bellis from Equita SIM. Luigi De Bellis: Just one quick question for me. Could you share your current strategic view on the submarine telecom business? So are there any plans to renew the interest in expanding or investing in this area, considering market trend or potential synergies, if any, with your existing transmission and telecom activities, but also different business model, if I'm not wrong, so if you can share some view, please? Massimo Battaini: Let me share what I can because talking about strategy -- strategic decision, I cannot share much. We have a business inside the Transmission space, that is a telecom submarine. We are a small player because we can only play in regional connections, so short length, submarine telecom connection. We noticed that the market has certainly increased a lot in size because the data center expansion plays a significant role in expanding the market between -- especially in terms of long-haul submarine telecom interconnects, so planting interconnects between U.S., Europe and so on. Some players, the key players in the market have neglected the regional space. So we are thinking of expanding our presence in our portfolio in the regional, so short distance, midsized, short distance submarine telecom connection through organic moves and additional investments. I have to stop here. But we want to make this another opportunity for supporting transmission growth with another stream of revenues, more solid and more growing than what we are currently in our portfolio. I hope I gave you the sense of the strategic direction without giving too many details. Operator: There are no further questions at this time. I would like to hand back over to Massimo Battaini for closing remarks. Massimo Battaini: So thank you for your time and for your attention. We really want to give the sense of what's happening, a strong quarter and by more than some quarter a good selling for quarter 4 and what we think is going to turn out for us an opportunity in terms of Channell, organic growth, transmission growth in the coming quarters. So thank you very much for your time, and talk to you soon. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Anil Gupta: Good afternoon, and welcome to the Coinbase Third Quarter 2025 Earnings Call. My name is Anil Gupta, and I'm Vice President of Investor Relations at Coinbase. Joining me on today's call are Brian Armstrong, Co-Founder and CEO; Emilie Choi, President and COO; Alesia Haas, CFO; and Paul Grewal, Chief Legal Officer. During today's call, we may make forward-looking statements, which may vary materially from actual results. Information concerning risks, uncertainties and other factors that could cause these results to differ is included in our SEC filings. Our discussion today will also include certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are provided in the shareholder letter on our Investor Relations website. Non-GAAP financial measures should be considered in addition to, not as a substitute for GAAP measures. We'll start today's call with opening comments from Brian and Alesia and then take calls -- take questions from our retail shareholders and our research analysts. With that, I'll turn it over to Brian for opening comments. Brian Armstrong: Thanks, Anil. It was another great quarter for Coinbase. We continue to drive strong financial performance and build the Everything Exchange that we had announced last quarter. Financially, Coinbase's core business is incredibly strong, and we're very well positioned for the opportunities ahead of us. Our strong financial performance in Q3 was driven by continued product execution. Total revenue was $1.9 billion, adjusted EBITDA was $801 million. We ended Q3 with $11.9 billion in USD resources and another $2.6 billion in long-term crypto investments. So just a quick refresher. Our mission is to increase economic freedom in the world at Coinbase and crypto is the technology that we're going to harness to get there. Crypto rails will power more and more of financial services over time because they're faster, cheaper and more global. With just a smartphone, for instance, anyone in the world can access trading and payments, raise money to start a business or get access to credit. Coinbase is the most trusted brand in crypto with deep technical expertise. And as finance moves to these rails with increasing regulatory clarity, we're uniquely positioned to lead and capture the upside of this paradigm shift. In Q2, we introduced the Everything Exchange, a one-stop shop to trade every asset class. Customers want one venue to trade spot crypto assets, derivatives and options, but also equities, prediction markets, commodities and more. In Q3, we executed on that vision by expanding spot coverage, growing our derivatives offering and laying the groundwork for new asset classes on our platform. In terms of spot coverage, we turbocharged our trading platform in Q3 by adding decentralized exchange or DEX integrations, which expanded access to tradable assets from about 300 to over 40,000 assets in the U.S. With DEX integrated under the hood, customers get day 1 access to new tokens as they are created, and we capture the upside when one of those takes off. We've also made strong progress in growing our derivatives product. As a reminder, derivatives account for about 80% of all crypto trading volume. And in Q3, we were the first to launch CFTC-regulated 24/7 perpetual style futures in the U.S. Early traction is strong for our U.S. style perps product, which helps drive all-time highs in U.S. derivatives volumes and market share. We closed the Deribit acquisition, bringing the #1 crypto options venue into Coinbase and Deribit plus Coinbase saw over $840 billion in total derivatives volume in Q3, driven by stronger participation from institutions and advanced traders. Next, let's touch on how we're accelerating stablecoin adoption by improving payments. The majority of global payments will shift to stablecoins over time because they allow you to send money anywhere in the world in under 1 second for less than $0.01. No other payment rail can match this. Adoption is already well underway as stablecoin market cap hit $300 billion driven by companies and financial institutions using them for payments and treasury, and we expect policy tailwinds like the GENIUS Act to continue to accelerate this. In Q3, Coinbase customers held on average, $15 billion of USDC on platform, making us the largest contributor to USCC's all-time high $74 billion market cap. USDC continues to be the top-performing major stablecoin in the crypto ecosystem, growing more than 2x as much as the largest competitor. In closing, with regulatory clarity accelerating, crypto rails are set to power more and more of global GDP for trading, payments in every financial service. Coinbase is well positioned to be the partner of choice for companies and financial institutions, including Citi, which we just announced last week, who are looking to come on chain. Through the end of the year, we're heads down building the Everything Exchange and scaling stablecoin payments with USDC. Speaking of which, I'm super excited to share that on December 17, we're hosting our H2 product event, but we'll go through everything we've built in the second half of this year. Tune into the live stream for a closer look at the next phase of the Everything Exchange. I'll now turn it over to Alesia. Alesia Haas: Thanks, Brian, and good afternoon, everyone. As Brian shared, it was a strong quarter for Coinbase. We had total revenue of $1.9 billion, net income of $433 million, adjusted EBITDA was $801 million, and adjusted net income was $421 million. So let's dive deeper into our Q3 results. As always, any comparison I'll share is going to be on a quarter-over-quarter basis unless I note otherwise. In the third quarter, our U.S. and global spot -- sorry, global spot market trading volume increased 29% and 38%, respectively. This is a global market. Against that, our Coinbase's Q3 consumer spot trading volume grew 37% to $59 billion. And consumer transaction revenue grew 30% to $844 million. The main difference between the growth rate in volume and revenue was due to a higher mix of advanced trading volume, which has a lower fee rate. A couple of callouts on what drove this growth. First, as Brian mentioned, we made progress on growing the number of assets available to our customers, both in terms of spot and derivatives assets. Second, our advanced trading volumes were supported by price increases in the long tail of assets as well as our concerted effort to attract and retain high priority traders through a new white glove service offering. Our institutional business had strong results across the board. Total institutional transaction revenue was $135 million, up 122%. The primary growth driver was derivatives. We closed Deribit on August 14, which contributed $52 million to revenue, driven by continued growth of options trading, which led to all-time high notional volumes. Additionally, we saw revenue growth in both our exchange and Coinbase prime businesses in the third quarter. Now turning to S&S revenue, which grew 14% quarter-over-quarter to $747 million. We saw strong native unit inflows across USDC balances in Coinbase products, average loan balances across our institutional financing products and assets under custody. We ended the third quarter with $516 billion in assets on platform. Total operating expenses decreased 9% to $1.4 billion. Technology & Development, general and administrative and sales and marketing expenses collectively increased 14% to $1.1 billion, largely driven by headcount and USDC rewards growth. I note that Deribit contributed $30 million to total operating expenses in the third quarter, including $16 million in deal-related amortization, the majority of which was recorded in sales and marketing. We ended the third quarter with 4,795 full-time employees, up 12%. I want to turn your attention to 2 below-the-line items that affected our GAAP profitability. First, we had a $424 million gain from the ongoing fair value remeasurement of our crypto investment portfolio. Second, we had a $381 million expense in other expenses, largely driven by unrealized losses related to our investment in Circle as their stock price was lower as of the end of third quarter as it compared to the end of second quarter. Including both of these items, net income was $433 million. Excluding both of these items, adjusted net income was $421 million. Now let's turn to our Q4 outlook. The fourth quarter is off to a strong start, and we expect October transaction revenue to be approximately $385 million. We expect subscription and services revenue to be in the range of $710 million to $790 million, driven by higher average crypto prices and continued growth of the Coinbase One subscriber base. On the expense side, our expense range is higher quarter-over-quarter for tech and dev and G&A in the range of $925 million to $975 million, up approximately $100 million at the midpoint. Approximately half of this increase is due to the recent acquisitions of Deribit and Echo. The remainder of the quarter-over-quarter increase is largely due to headcount growth, which we expect to grow at a slower rate in the fourth quarter as compared to the third quarter. Sales and marketing is expected to be in the range of $215 million to $315 million. Where we land in this range will largely be determined by performance marketing spend opportunities and USDC balances and Coinbase products, which drive USDC rewards. Included within the above outlook ranges is approximately $70 million of total depreciation and amortization for Q4. This is an increase from historical averages, which has been driven higher due to amortization of intangibles from our recent acquisitions. Over the course of 2025, we've made a significant investment in headcount to capitalize on the many opportunities we see and accelerate our vision on the Everything Exchange. As we look to early 2026, we plan to absorb the employees we brought into the company and focus on execution and anticipate that our sequential rate of operating expense growth will slow as compared to our Q4 rate. With that, let's go to questions. Anil Gupta: Thanks. So let's begin with pre-submitted questions from retail shareholders. Many of the top questions touch on similar topics, so for efficiency we'll group by theme. The first topic is about competition. What's the plan to improve product innovation and velocity and increase market share? How are you thinking about listing stocks in prediction markets given the success of others. Brian? Brian Armstrong: Yes. So on this question, I'd say that we've spent a lot of time investing in policy and getting regulatory clarity both in the U.S. and a number of countries around the world. And that's starting to bear fruit, which is great. It's growing the TAM of crypto. It's making it trusted and regulated. Even as more and more people come into the space, we're able to power a lot of the -- that with our infrastructure services. But it does mean that lots of new competition is coming in. And so we need to make sure we're executing well. And we've talked since Q2 about this Everything Exchange vision. We've made really substantial progress toward that already areas where I think we're best in class, like I mentioned, the DEX integrations where we went from 300 tradable assets to 40,000 tradable assets in Q3. And we were the first to launch the CFTC-regulated U.S. perpetual style futures contracts, which has been growing really well. So there's a lot to like that there. Now we've been heads down working on the next pieces of that because we think that every asset class is going to come on chain. And our customers are asking for this, too, prediction markets and tokenized stocks and every on-chain asset you can imagine. So the Everything Exchange is really central to the next chapter of what we're building and I'm really excited that we'll have more to share on that on December 17 at our product showcase, so please tune into the live stream for that. And I'd say that Everything Exchange is really a perfect complement to all the other features that we've built into Coinbase including DeFi borrow lend, USDC, global payments, Coinbase card, people really love that product Base is having really strong momentum. And so I think these are all going to come together to be -- and our goal long term is to be the #1 financial app, and that's what we're working on. Anil Gupta: Thanks, Brian. So the second topic is Base. Brian, can you elaborate on how you're thinking about a Base network token and in particular, how shareholders could be beneficiaries of the distribution? And Alesia, can you talk about the monetization of the Base network and how that might evolve over time? Brian Armstrong: Yes. So I'll start it off. We're still early on exploring a Base network token. But the high-level goal is to help bring 1 billion people on chain and just to really grow the developer and create our ecosystem around Base. So there's not any specifics that we're going to announce today on the governance or distribution model or the timing of it exactly. But we are going to build this in the open and just continue talking with our customers, investors, regulators to make sure that we get it right. So Alesia, anything you want to add? Alesia Haas: I'll just speak about monetization. So on the Base chain, we monetize through sequencer fees. And we've talked historically about how we have direct monetization through sequencer fees, but we also monetize indirectly as those who are building apps on Base, often, will then incorporate USDC. They will often need to be able to buy other crypto. They may need custody solutions. And so we do monetize the other products and services by the growth of the overall ecosystem and the growth of on chain developers. What I would share, though, is the Base app that we are building that on Base we'll have other monetization opportunities. The Base app is monetizing through trading fees, it is monetizing through advertising. And while it's early days, we see opportunities to have revenue profiles that look similar, honestly, to the Coinbase main app in terms of transaction fees, maybe some subscription fees, maybe advertising fees, some various different ways that we can monetize in that app. But we'll talk more about that as that grows over time. Anil Gupta: All right. Thank you, both. So we'll now take questions from the research analysts. [Operator Instructions] Our first question comes from Craig Siegenthaler of Bank of America. Craig Siegenthaler: Our question is on Echo. So how will Echo help expand your network by making it more easy for crypto companies to raise and invest via private sales or public sales with Sonar. Brian Armstrong: Yes. I can start off and then Emilie, if you want to add anything, that would be great. Yes. I mean, one of our -- as I mentioned, we believe that every type of financial service is going to come on chain and crypto is this technology to update the financial system. And so capital formation is certainly a big piece of that, right? We think that it can be much more efficient, the fees can be reduced, people more around the world can have better access to it. This will just accelerate the economy. So Echo was a really innovative, I think, in a company that we decided to go acquire to get a foothold here. And we're trying to make it easy for anyone to raise money. And then the beauty of combining it with Coinbase is that, we have now over $500 billion of assets. We have a large number of retail institutional customers or credit investors that want to invest in unique assets. And so you can just see like the double -- the 2-sided marketplace coming together here in a really powerful way as we think more and more about capital formation and how crypto can update that. Emilie Choi: Yes, agreed. We're really excited about it. The management team for Echo has a great nose for what the most compelling companies will be to launch. And so if Echo launches these great companies and tokens and those are successful, it helps us deeply because we're moving up the stack. And where coins are issued before they graduate to the exchange. So it's kind of vertical integration that we think is quite powerful for the whole ecosystem of Coinbase products. Anil Gupta: Let's take our next question from Ken Worthington at JPMorgan. Kenneth Worthington: The pace of announced M&A seems to be rising for Coinbase versus what we may have seen in recent years. How is the more regulatory and political certainty in the U.S. impacting the pace of innovation? And would you expect this pace of innovation to drive Coinbase to be more active in M&A as we look forward? And then in terms of the innovation that we're seeing, are there certain themes that you are focused on trying to capture as we look forward? Emilie Choi: Thanks for the question. I'll start and then Brian, Alesia feel free to jump in. So to take a step back, we worked really, really hard to get to this place of regulatory clarity and we think that, that just generally provides more opportunities and key bets and more predictability with this type of M&A and these types of investments. So these companies just have more certainty than they did in an environment where there was regulation by enforcement. When we look to the spectrum of opportunities, we do look a lot to some of the best tech companies of all time and how they were able to use M&A to massively accelerate adoption and so we're very excited about some of the opportunities on the horizon. In terms of the areas that we're interested in, we're always kind of keying in on the priorities that the company has outlined whether those include trading and payments and these other areas that are very interesting to Coinbase. And then we also try to look ahead as there might be strategic opportunities that present themselves. So we're always on a lookout and when we think -- we always look at buy, build partner invest and then determine which is the right vehicle for us at that moment. Brian Armstrong: Yes. I'd just say, you're right. The pace has picked up. The political environment definitely helps with that. And all of this M&A is really in service of our core focus around trading and payments. So it's been great. Anil Gupta: Our next question is from Pete Christiansen at Citi. Peter Christiansen: And nice execution on a bunch of partnership deals signed in the quarter. I do want to ask about Coinbase's operational infrastructure. I mean we've had some really busy trading days in the last quarter. There's been cloud service providers, multiple have had issues this year. I know that Coinbase has spent a lot this year bulking up customer service. How would you assess where Coinbase is in terms of its operating infrastructure today? Redundancy? And how are you thinking about investments there going forward? That would be helpful. Brian Armstrong: Yes. I mean I can start off. Like many companies, we were impacted by AWS outages. I think it always raises this question of, should we be pursuing a more robust multi-cloud approach. We already do use multi-clouds in a variety of ways, but we haven't made what would be a substantial investment to make every service in the company redundant to a certain cloud outage. So it's always a trade-off. Now these clouds are also kind of working hard to build their own redundancy. And so you always have to factor that into other priorities and investments that you could make and look at the cost benefit analysis. Emilie Choi: And I would just say in terms of like some of the things we're really excited about as well, we're very invested in automation. Currently, 65% of our customer support interactions are fully automated. We're trying to push that number up rapidly. And then we're also rolling out deep reasoning LLM agents to automate the majority of compliance investigations in 2026. So there's a lot of really interesting areas for automation over the next several years as well. Brian Armstrong: Yes. And I guess your question maybe think of actually on October 10, there was also a record level of activity across crypto exchanges. And in that case, we actually operated very well without disruption. And we didn't have any downtime or degraded latency around market data or anything like that. So that was a result of a lot of investments we've made over the last year or 2 in doing load testing and making sure we didn't have any reversions as new software is being developed. Several major exchanges experienced extended outages during that time, and we didn't have any. And so I was really proud of how that part came to be? Anil Gupta: Next question is from Ben Budish at Barclays. Benjamin Budish: In your shareholder letter, I believe you talked about a new sort of white glove service for the advanced retail trader. Just curious if you could talk about that a little bit more. And is there anything to read in there regarding the state of competition among retail trading? It seems like there are newly listed crypto exchange competitors, other -- I guess you could say legacy competitors try to expand their offering and be more competitive. So is there anything to read into there? How would you describe the state of competition there? And can you talk a little bit about this service? Alesia Haas: Maybe I'll start and then feel free to add on, Brian. Our white glove service has been made available to some of our high-value advanced traders. So this is not a service available to all of our retail traders, but to our very specific high-value advanced traders. And it provides some concierge-level support, the personal account manager and really makes commitments around time to resolve the issues, making sure they can trade seamlessly that they don't run into any hiccups with our services. With regards to our broader retail program there, we are really pleased to have our trading volume exceed overall U.S. spot volume in the quarter. So we're really seeing strong adoption of our products and services. There's more to do there, as Brian said, which is why we are building towards the Everything Exchange to continue to meet our customers where they are and provide broader access to all assets they would like to trade. Brian Armstrong: Yes, not much to add. I would just say that, in trading, I mean, there are whales that are out there that drive a disproportionate amount of volume. And so it's important for them to have a dedicated relationship manager that can help them resolve any issue, but also it has partially a sales function. So I think it's just a good example of us maturing as a company and recording the best customers. Anil Gupta: Let's go now to Owen Lau from Clear Street. Owen Lau: Could you please talk about innovation in Coinbase business. It has global payout, I think it enables business to send and receive USDC with lower fees. You're also making an announcement with Citi to develop digital asset payment capabilities. I know it's still early here, but I'm wondering what you have heard from the banks and merchants so far about these deal capabilities? And have you started to see more merchants moving into blockchain or even considering moving into blockchain? Brian Armstrong: Yes. Well, I'll start off. So obviously, we have our first-party business with retail and businesses and institutions, which is growing really well. But I'm also really proud that Coinbase has built out infrastructure that can power other companies. And -- we call that product Coinbase developer platform or CDP. It's -- sometimes people think of it as crypto-as-a-service. And what's great is that we've been able to close 264 institutions now that are using that product, including large companies like JPMorgan, BlackRock, Citi, PNC, fintechs like Stripe, PayPal, Revolut, Webull. So I think that this is going to increasingly be an important part of our business. It just allows us to have different revenue streams and participate in the value creation as more and more companies come in to integrate with crypto. That's going to be all banks, all fintechs, all payment service providers, but it's also going to be nonfinancial services related companies. I mean we're also working with, for instance, Shopify on powering payments for them. So I think it's similar to what Amazon did with AWS. I think this third-party infrastructure can be a powerful business for us over time. Alesia Haas: Owen, maybe I could add on here for you, though. We've really been building the various infrastructure layers and are pleased to have a more vertically integrated payments product that we're bringing to market. It starts with Base, which is our Layer 2 solution, USDC and other stablecoins. We've now built out payments APIs. And we're now bringing those forward to our customers via Coinbase the Base app and then directly to businesses. So what we're seeing here is, one, we are a partner of choice. We continue to win mandates from large financial players, fintechs, as Brian shared. But we're also seeing small and medium-sized businesses really come to our platform as we enable them to more efficiently manage their capital and their liquidity through instant settlement via stablecoins, while we're earning rewards now on any idle funds that they hold in USDC. So we've seen great early traction with over 1,000 businesses onboarded, and we have a growing wait list. Anil Gupta: Let's go next to Devin Ryan at Citizens. Devin Ryan: Great. Just want to ask a question about Deribit. Obviously, you haven't had it on the platform for too long, but seems like it's doing well here out of the gate for Coinbase. So just love to kind of think about kind of the integration thus far, what that informs around potential future product development and cross-sell opportunities for Coinbase? And just more broadly, if you can just touch on kind of the scaling plan now that it's fully integrated or part of Coinbase. Alesia Haas: So it officially just closed in August, and we onboarded 100 employees in September. So they had record volume in the month of August. Their revenue has been growing. And where we are right now is we're really working to integrate their products seamlessly with our products. So we can bring together spot derivatives and derivatives meaning both perpetual futures, futures and options, all under one roof. We, in the quarter, had brought forward for our U.S. customers, spot and derivatives cross-margining, and it enables capital efficiency where our customers really value the ability to get better leverage, better margin on their trading products. And so we think that, that is a future that we can bring forward to options as well. So the goal is going to be integrated for the next few quarters, so we can bring everything under one roof and enable side-by-side trading of these products and services to our institutional clients. Anil Gupta: We'll take our next question from Patrick Moley at Piper Sandler. Patrick Moley: I just had one on the Everything Exchange. I was wondering if you could update us on the time line or some of the milestones we should be looking out for as you introduce new asset classes to that platform. Brian Armstrong: Yes. Well, some of them are already live, right? I mentioned the DEX integration, the U.S. style perps. And December 17 is going to be another milestone for us. We're hosting that H2 product event, where we'll be giving an update on everything we've been working on in the second half of this year. So that will be a good one to tune into on the live stream. Anil Gupta: Let's go next to James Yaro from Goldman Sachs. James Yaro: Could you help us think through the impacts of the crypto liquidations on October 10 on markets as well as on the various market participants? Do you see any medium-term ramifications? And are there any lessons learned that you think could improve market function going forward? Alesia Haas: I'll start and others can add on. So obviously, the events of October 10 led to some liquidation as folks had to delever to address the sharp sell-off in certain assets. We are really pleased that we did not see significant liquidations on our platform. And as Brian shared earlier, our platforms really withstood the volatility quite well during that window. In part, that's due to the design of our products and the approach that we've taken to leverage with our products. One of the observations that I would have broadly in the market is today, there's very few of us that are publicly traded that have as much transparency into our operations, our risk management, our balance sheets. And so we do have these risks and throughout the overall ecosystem of operational errors that then lead to deleveraging events. I think over time, you'll see more and more companies come into a regulatory framework, more and more companies go public. And so this risk will reduce over time because transparency then helps all risk, and the more sunlight the better in some of these areas. But I would say that the market rebounded quite nicely from this, and I don't see any systemic losses or any kind of continued fallout from that sell-off. Anil Gupta: We'll take our next question from Andrew Jeffrey at William Blair. Andrew Jeffrey: I appreciate the question. Brian, I definitely agree with your vision on stablecoins. I wonder if you can sort of dimensionalize for us sort of timing in your mind for more commercial adoption outside of crypto? And the role you think Coinbase plays in that cross-border commerce. And whether or not it changes -- whether or not your economics change with volume as USDC takes off. Brian Armstrong: Yes. Well, interesting. I mean, I think taking that last part first, I'm not seeing a change in economics yet. I think we're still super early in this, and it's growing really fast. And so it will be interesting to see how that plays out. I mean we have different ways to monetize it like with Base sequencer fees and with USDC, you could, of course, charge directly for the payments themselves. But I think just zooming out, I mean, payments are just very clearly the next big use case for crypto. I think it started with trading, payments are really -- are growing enormously now. And I would say just in general, it's a massive market, right? Like cross-border payments are something like $40 trillion in volume annually. B2B is 75% of that, which is an early use case for stablecoins. And we're now seeing about $100 billion in annual stablecoin volume, which is growing rapidly. So and we're going to keep participating in this space across a number of different areas. We're building payments for businesses. Coinbase businesses are account for small, medium-sized businesses. We're adding various products and services in there around invoices and how to pay contractors and vendors. A lot of it's cross border, but even within country, it's powerful. We had -- since we announced that product just recently, we've had about 1,000 businesses onboarded already. There's another 1,000 on the wait list. We're also integrating payments into our retail app for Coinbase and into the new Base app. So I think that will be powerful. And then we can be one of the -- I think we're really one of the only companies that can start to connect these businesses and consumers together, right, in the 2-sided market and Shopify is an example of that, where we're powering USDC checkout for their merchants. And when you're -- these merchants, it's a big deal because they're used to paying 2% to 3% in fees, for people to move money over the Internet. There's no reason that, that needs to exist, I don't think. I mean -- and when you can do it in less than a second, less than $0.01, flat fee regardless of the amount it just has a lot more of the value. You can give some of that back to the consumer. Like in Shopify's case, they're giving 1% back to the people who pay with USDC, but the merchant also saves money. So it's just kind of a win for everyone. And I think that when you lower friction in the economy like that, you see an order of magnitude more activity happening, it can really have a dramatic effect. So I guess -- just one other item to touch on in the payment space, which I think is really innovative that we're doing is there's a protocol we came out which is called x402. And what this is, it's a way to attach a stablecoin payment to any web request. You may be familiar with 404, which is on the Internet, like it's file not found, right, if you go to a page that doesn't exist. There's actually another code called 402 in the HTTP spec, which was originally put in there for payment required. Now it was never really implemented in most web browsers because the web browser never became a place where you put in your credit card, you put it into the website itself, not the browser. But anyway, we decided to go ahead and ship this, and it's attracted a lot of attention in the last month or so, partners like Cloudflare and Vercel and Google have started working with this. It's caused a lot of people to go sign up for Coinbase developer platform to start building these integrations. So it's still early days, but for payments happening over the Internet for AI agent payments, that's another big emerging area. We shipped an open source tool kit called AgentKit that lets any AI agent put a stablecoin wallet inside it. So we're starting to see a lot of things happen with payments on the frontier now. And yes, I think this is going to be a big area for crypto and for Coinbase. Anil Gupta: Our next question comes from Bo Pei at US Tiger. Bo Pei: In the shareholder letter, you mentioned scaling back rebates and incentives in derivatives. Could you quantify how that's affecting take rate and whether you expect this to help margin expansion in Q4 and 2026? Alesia Haas: Bo it's a great question. So we are -- we have scaled back those incentives, and you can see that in the overall institutional growth. We did not attribute out any change in take rate. And it's very difficult to look at take rate for the institutional business given the acquisition of Deribit, given the growth of the derivatives platform, which is not reported in underlying trading volume. So there's been no change to the overall pricing of any of the products and services in any material way quarter-over-quarter, but there has been a lot of mix shift and just change in the drivers of the total institutional platform. We are pleased to be able to change the incentives in derivatives because we've seen more liquidity and just more solid sticky organic open interest growth in that platform, which has enabled more profitable growth for our international derivatives business. Anil Gupta: Our next question is from Alex Markgraff at KeyBanc Capital Markets. Alexander Markgraff: Alesia, maybe one for you. Just as we think about the many new products and elements of the Coinbase platform, just hoping we could just sort of step back and maybe you could remind us how you're thinking about managing margins across these various products and platform elements? Any way to sort of frame the vision for contribution margin across these new items? Alesia Haas: So we do have a big mix of products and they do all monetize separately. And in some cases, we have launched products with the sole growth of retention and acquisition. In the case, for example, of the Coinbase card. So what we look to do is monetize the overall customer relationship. For example, on the institutional side, we have many of our customers who are now engaged with 3-plus products and services, and we look to the overall customer relationship and the customer economics versus single product economics. So we're focused on growing overall profits. We're focused on how do we drive total adjusted EBITDA growth at the company level. And that is how we think about it versus targeting a specific margin by product at this time. Anil Gupta: We'll take our next question from Dan Dolev at Mizuho. Dan Dolev: Guys, great results here. I got, I guess 2 quick questions. On the take rates, I appreciate you answering on the institutional take rates. Is there any way you can help us think about sort of how this looks a couple of quarters out? And then I have a very, very quick follow-up, if you don't mind. Alesia Haas: As we shared before, we don't focus on outlook that far in our public comments. We are focusing on meeting our customers where they are, engaging them with products and services. And we are constantly experimenting with our pricing on the retail side to understand how best our customers engage. Right now, we're really pleased to see the growth of the Coinbase One subscribers. We introduced the new basic tier last quarter and the basic tier along with Coinbase Card is showing a lot of traction. So over time, we anticipate more and more customers will monetize through many products and services, and we're reducing the overall reliance on trading fees as a single monetization as it was many years ago. But we will adjust fees as needed by the market, and that has been our long-standing approach. Anil Gupta: We'll go now to Ed Engel from Compass Point. Edward Engel: Alesia, in the past, you've talked about how 2025 was a bit of a reinvestment year just as you capitalize on the better political environment. I guess with the step-up in fourth quarter OpEx, I'm just kind of thinking, are you still ramping up hiring through the end of the year? Or is most of that headcount growth behind us? I guess I'm just trying to gauge whether this kind of 4Q guidance is a fully baked-in number for some of the reinvestment you made this year? Alesia Haas: Great question. So as we shared in my opening comments, the outlook for Q4 on our tech and dev and G&A combined is up roughly $100 million quarter-over-quarter. About half of that step-up in cost is due to the 2 acquisitions we made, one being Deribit, the second being Echo. And then the other half is due to headcount growth. So we are still growing headcount in the fourth quarter, although at a much slower rate than we did in the third quarter. Anil Gupta: Let's go now to Zach Gunn at FT Partners. Zachary Gunn: I just also wanted to ask on the payment side of things. Historically, when we think about driving adoption of the new payment modality or platform, it takes anywhere from 3% to 5% of overall transaction value incentivize either consumer or merchant or business switching. So can you just talk about what Coinbase is doing to incentivize adoption of its payments platform? Brian Armstrong: Yes. I mean, you're right. There are a lot of powerful network effects in payments. So we don't want to be flippant about the challenge of coming into these new markets. Luckily, it's not just one Coinbase -- or one company like Coinbase going up against the powers that be here. I think the beauty of crypto is that these are decentralized, open networks, with thousands of companies participating all over the world. So it's a little bit like the Internet going up against some kind of proprietary system, not just one company. Now that being said -- so lots of people -- I mean there's something like $500 billion of assets that we have on platform. There's a huge number of people around the world now who use crypto, that are holding crypto. So we're starting to get into those categories where it can be meaningful. Now it won't be for every type of merchant, right? I mean if you go to like a Starbucks on the corner, maybe that doesn't hit the threshold, but for a certain type of e-commerce category, it could be that a large enough number of people actually -- the only way they want to pay us was crypto. It opens up micro transactions or new international markets where credit card penetration is low. So we'll see it first take off in areas where people's unmet need is the highest. And then eventually, it will eat into more and more of it just because it's faster and cheaper and more global. But yes, this will take time for sure. And I guess I mentioned this earlier as well, but a lot of times when people think about payments, they think about buying the proverbial cup of coffee on the corner store. But like the majority of cross-border payments are really like B2B transactions, and that's the area where we're seeing higher adoption for crypto right now. I mean that's just it's growing like gangbusters frankly, because that's just a very underserved part of the market where businesses want to get their money faster, they want to not have -- be exposed to these FX risks. So those are some of the areas that will take off in first and I think eventually get to the majority of all payments. Anil Gupta: Let's go next to Joseph Vafi from Canaccord. Joseph Vafi: Just as a quick side note, just finishing lunch here on the West Coast that I bought with my Coinbase One card. So thanks for a great product. But just maybe double-click on Deribit here a little bit more. And Alesia, I appreciate the commentary on cross-product margin capability and efficiency there. But as you look forward, the distribution of the Coinbase platform is so big. Do you see this as a big share gain or share creator in option transactions? And then can you just remind us on margin structure on a transaction margin basis, how your options and derivatives compare to spot? Alesia Haas: All right. So Deribit is already the market leader in options. They had over 75% market share for options. Notably, this is all non-U.S. And so there is path to grow the market for options in the U.S.. That is going to be a multi-quarter road map of bringing both the regulatory licenses and product to bear in the U.S., but we think that's a huge opportunity for us. But more importantly, we believe that bringing these products to trade all under one umbrella will be able to grow overall trading volume on all of our products on our platform. And we've already seen, just by having Deribit closed for a few weeks on our platform, that existing clients have more confidence in the combined balance sheet and now bringing options to the Coinbase balance sheet, they are trading at higher volumes and trading and holding more assets on our platform. So the brand strength, the balance sheet strength that we're able to now put behind Deribit and their strong product and risk management is having outsized benefits to both of us. And we can follow up with you about the margin differential. Obviously, there's no margin on spot trading. We do offer leverage on those assets, but they're very customized by product. So the -- they look different in each market, and they look different to different customer groups. I don't have a simple way of answering that question for you. Anil Gupta: We'll take our final question from Gus Gala at Monness, Crespi and Hardt. Gustavo Gala: I wanted to talk a little bit about the competitive environment between September and October. September was a fantastic month in terms of outgrowing the market at spot in October seemed to reverse that. Just trying to parse out, is this competitive pressure, like present in the system, maybe seeing more aggressive pricing competition from peers in terms of promos, incentives stealing away? Or is it just a mix issue? Just trying to understand what's going on there. Alesia Haas: We've always faced competition. We are a platform that has multiple customer types, multiple products. And so we all have faced competition since we've been founded on different products, different customer groups within our portfolio. Our focus and our goal is always to deliver the most trusted and easiest to use products to our customers. And we've been really proud of our continued growth in market share, trading volumes, size, and scaling up these various product offerings. So when you think about the competitive pressures in the month of October, there's nothing specific to talk about generally, we are always looking for ways to continue to build and delight our customers. Brian Armstrong: Yes. I hope we answered your question on that. I was a little distracted because I was tracking the prediction market about what Coinbase will say on their next earnings call. And I just want to add here the words Bitcoin, Ethereum, blockchain, staking and Web3 to make sure we get those in before the end of the call. Anil Gupta: All right well, we've taken all of our questions. That's it for today. Thanks for joining us, and we'll talk to you again next quarter. Alesia Haas: Before we end, I just want to invite anybody to join us on our X Spaces call next week. And so please follow us on X. And Brian and I will be taking additional questions on Monday.
Operator: Good afternoon, ladies and gentlemen, and welcome to the Morguard Real Estate Investment Trust Conference Call. [Operator Instructions] This call is being recorded on Thursday, October 30, 2025. I would now like to turn the conference over to Andrew Tamlin. Please go ahead. Andrew Tamlin: Thank you, and good afternoon, everyone. My name is Andrew Tamlin, Chief Financial Officer of Morguard REIT. Welcome to the Morguard REIT's Third Quarter 2025 Earnings Conference Call. I am joined this afternoon by John Ginis, Vice President of Retail Asset Management; Tom Johnston, Senior VP of Western Office Asset Management; and Todd Febbo, Vice President of Office Asset Management in Eastern Canada. Thank you all for taking the time to join the call. Before we jump into the call, I would like to point out that our comments will mostly refer to the third quarter 2025 MD&A and financial statements, which have been posted to our website. I refer you specifically to the cautionary language at the front of the MD&A, which would also apply to any comments that we would make on this call. With one exception, our third quarter results were very consistent with the same trends that we saw in the first half of the year and were also very consistent with expectations for the quarter. The one exception to this was a large onetime net property tax refund received for one of the Trust's enclosed shopping malls in the amount of $3.2 million, which I will touch on in a minute. We have known for some time that 2025 was going to be a tough year due to the market rent resets at Penn West Plaza in Calgary, the impact of which has continued throughout the year and into this quarter. Further to that, we had some pockets of softness in the enclosed mall segment from some tenant failures in the first quarter, but we were also seeing some strong same-asset results from our strip segment, which are largely grocery-anchored. A further decline in interest expense from lower variable interest rates has also impacted the results. Our total net operating income for the third quarter declined from $32.2 million in 2024 to $31.3 million in 2025. This includes a $4.3 million decrease due to the Penn West Plaza lease reset, partially offset by the $3.2 million property tax refund previously mentioned. This tax refund related to 2021 to 2024 and relates to both vacant space and space vacated by bankrupt tenants. Our same-asset net operating income was flat for the third quarter, excluding the impact of these 2 items. The decline in income from Penn West Plaza is due to the expiration of the Obsidian head lease on February 1, 2025. This has resulted in a reset of rents for both Penn West Plaza tenants and subtenants to current market rates. Effectively, this building has transitioned from a single tenant building to a multi-tenant building. We are pleased with this transition, which has resulted in an occupancy of Penn West Plaza now at 81% a few months after this transition. Significant inducements of opening free rent and free operating costs to secure tenancies are also impacting the Penn West Plaza results for 2025 and in particular, the first 3 quarters of the year. Our estimate is that there will be a downturn of approximately $15 million in net operating income for this asset in 2025 with some bounce back to this number in 2026 after these inducements burn off and other lease inducements -- and other lease commitments kick in. As I mentioned, we are pleased with the 81% occupancy level of this building after coming off many years where the office market in Calgary has struggled. On Friday, March 7, 2025, the day filed for creditor protection under the Company's Creditors Arrangement Act, or CCAA. The Trust had 2 Bay locations comprising a total of 290,000 square feet of GLA, one at Cambridge Center in Cambridge and one at St. Laurent in Ottawa. The Trust's annualized gross rent earned from the Bay leases was approximately $1.5 million. In the second quarter, the Trust lease with the Bay at Cambridge was disclaimed. The remaining lease at St. Laurent was subject to a bid by Ruby Liu Commercial Investment Corporation. Rents on the St. Laurent lease is being paid while this process was ongoing. On Friday, October 24, the Ontario Superior Court rejected a proposal by Ruby Liu for the creation of a new Canadian department store chain. Subsequently, the St. Laurent lease disclaimer notice has now been received and is effective on November 27, 2025. Management is now looking at future opportunities for this location. Notwithstanding the temporary softness in the enclosed mall segment from the first part of the year, there are still lots of positives in this sector. We are seeing positive rental growth on lease renewals, and there remains lots of good conversations involving well-known national brands. It still remains quite expensive to construct new retail space, and hence, a lot of retailers are looking at existing space rather than building new space. With the exception of one location, our community strip centers are essentially full at 99%. Sales and traffic numbers at our enclosed malls also continue to be strong. The Trust's interest expense declined $1 million for the quarter due primarily to a decline in short-term variable interest rates on a year-over-year basis. Total interest expense is down over $3 million for the 9-month period. Turning to financing and liquidity. The Trust has $76 million in liquidity at the end of the quarter, which is up from $72 million at the end of the second quarter, but down slightly from $81 million at the end of 2024. As mentioned in previous quarters, the Trust's operating capital reserve increased from $25 million annually to $35 million in 2025 to account for both higher repair costs as well as leasing costs. This represents $8.750 million per quarter. Actual spending was approximately $10 million, which represented mainly repair and capital projects. Total spending for the 9 months approximates a $26.3 million reserve. So far this year, the Trust has renewed or extended 7 mortgages totaling $165 million, lowering the interest rate from an average of 5.4% on these mortgages to an average of 4.95% on renewal. The Trust has approximately 18% of its debt is variable at the end of the quarter, which has increased slightly from 15% at the end of the year. The Trust continues to focus on paying down its debt, which has declined by more than $100 million over the last 4 years. Looking at our accounting for real estate properties during the quarter, we had $10 million in fair value losses due primarily due to some minor changes across the assets in our office asset class. Our overall occupancy level of 86.6% at September 30, 2025, has increased from 85.9% at June 30, 2025. However, it has decreased from 91.2% at the end of '24 due to the increased vacancy at Penn West Plaza from the expiration of the Obsidian head lease in addition to the disclaimed Bay lease at Cambridge in June. The 70 basis point increase in the occupancy for the quarter was due to the increased leasing in our malls and our office assets. Our leasing teams have noticed increased -- increasing interest and tours for office space in major urban areas as companies continue to push their employees to get back in the office. We are cautiously optimistic that this will translate into future office leasing deals. As I previously mentioned, we are now embarking on a strategic merchandising program for St. Laurent, which will see the addition of some new nationally recognized brand names being added to the tenant roster, along with expansion plans for other tenants on the existing rent roll. The current budgeted capital commitment is $6.4 million and includes tenants such as Sephora and H&M. These are all now open, and we have received very positive reviews about their impact. We are currently working on some future phasing beyond this spend and as we look to ensure a stable, sustainable and traffic-generating mix of tenants to this asset. Discussions have previously stalled with the provincial government tenant at Petroleum Plaza in Edmonton, which came up for renewal on December 31, 2020, and is still in overhaul. At this point, there is still nothing to report in regards to these discussions or when the space will officially be renewed. Wrapping up, we recognize that 2025 will be a tough year, but we are expecting the downturn to be limited. We are especially pleased with the leasing efforts at Penn West Plaza to be able to have our most impactful office asset with an occupancy of 81% in this tough marketplace. Also, we continue to believe that there are strong fundamentals in the retail leasing environment. We are looking forward to continued positive leasing conversations for all of our assets. Most of our enclosed malls remain dominant in their geographical area and our strip malls, which are largely grocery-anchored, have performed steady. Beyond our retail assets, we have high-quality office buildings in Canada's largest markets with a high degree of government office tenants. We continue to be positive about our business and the objective of building value for our unitholders. We look forward to continuing to execute our strategy, and thank you for your continued support. We will now open the floor to questions. Operator: [Operator Instructions] The first question comes from Jonathan Kelcher at TD Cowen. Jonathan Kelcher: First question, just on the quarter, other than the rebate you got, was there any other onetime items in Q3, any lease termination income? Andrew Tamlin: No, it's all pretty steady and very predictable. So no other onetime items, Jonathan. Jonathan Kelcher: Okay. Secondly, on the 2 Bay locations, and I recognize it's early, but how has interest been in those? Have you guys had many inbounds on potential leasing there? Andrew Tamlin: Yes, I'll turn that over to John. John Ginis: Jonathan, John Ginis here. So as Andrew noted, the Cambridge location was displayed earlier this year in June, and we just got notification that we're going to get back to St. Laurent location in November. So with respect to Cambridge, we are exploring alternatives, both temporary and permanent options. So there has been interest, but obviously nothing to report as of yet. With respect to St. Laurent, we've had queries, but we really haven't advanced anything because we didn't know how this bid process [indiscernible] was going to transpire. So now that we know we're getting it back, we're going to accelerate efforts to reach out to tenants to see what potentially we can do with the space. Jonathan Kelcher: Okay. And you're doing remerchandising at that mall anyways, right? Like would that -- does that -- how does getting the Bay back fit into that, if you can talk about that? John Ginis: So we initiated a program a few years ago to kind of look at the entire rent roll of St. Laurent and kind of reenvision it in terms of more contemporary retailers that are traffic generated. So you're correct. And Andrew spoke about that in his opening remarks in terms of what we're trying to do, and we've had a lot of tangible success with respect to some recent openings that we mentioned as well. That program will continue. The Bay location here was always subject to Ruby Liu. It hasn't really come up in terms of inhibiting our leasing efforts. So we'll have hopefully more to announce in the coming quarters in terms of additional [ discriminatory ] retailers trying to introduce the rent roll irrespective of our anchored position. So -- but it hasn't hurt us in so far as retailers pulling back and not wanting to express an interest in terms of [indiscernible]. Andrew Tamlin: I would just add, we expect this to help St. Laurent, Jonathan. I mean, I think we all know that the -- sorry, can you hear me? Jonathan Kelcher: Yes. Yes. Andrew Tamlin: Okay. Yes. I think we would expect this news to help the mall. The key tenants that are focus these days are really not the Bay and tenants like that like it would have been 20 years ago. So we are looking to kind of reinvigorate the mall and having the Bay backs, back will certainly help with that. Jonathan Kelcher: Okay. And then lastly for me, you guys have about $100 million of maturities remaining this year. Can you remind us just on like what asset class those -- the majority of the properties in and how much you expect to get on up financing? Andrew Tamlin: I would expect that to be mostly flat, Jonathan. Maybe a bit of financing, but not anything -- I mean, I think for your purpose, it's probably the best to assume that it will be flat. And in rough terms, I think it's kind of 50-50 between retail and office. Jonathan Kelcher: Okay. And just -- do you expect sort of flat on both or maybe pay down the office a little bit and get a little extra from the retail? Or is it just kind of flat? Andrew Tamlin: I think it's both are going to be flat, yes. Operator: [Operator Instructions] There appear to be no further questions. I'll turn the call back over to Andrew Tamlin. Andrew Tamlin: Okay. Thank you, and thank you, everybody, for participating in the call and look forward to talking to everybody next quarter. Thank you. Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.
Operator: Good day, ladies and gentlemen, and thank you for standing by. Welcome to the El Pollo Loco Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded, October 30, 2025. And now, I would like to turn the conference over to Ira Fils, the company's Chief Financial Officer. Please go ahead, sir. Ira Fils: Thank you, operator, and good afternoon. By now, everyone should have access to our third quarter 2025 earnings release, which can be found at www.elpolloloco.com in the Investor Relations section. Before we begin our formal remarks, I need to remind everyone that our discussions today will include forward-looking statements, including statements related to our growth opportunities, strategic and operational initiatives, expectations regarding sales and margins, potential changes to our product platforms, capital expenditure plans, expectations regarding kiosk rollouts, the ability of our franchisees to drive growth, expectations regarding commodity and wage inflation, remodel plans and our 2025 guidance, among others. These forward-looking statements are not guarantees of future performance, and therefore, you should not put undue reliance on them. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we currently expect. We refer you to our recent SEC filings, including our Form 10-K for the year ended December 25, 2024, as well as our Form 10-Q for the third quarter to be filed, for a more detailed discussion of the risks that could impact our future operating results and financial condition. We expect to file our 10-Q for the third quarter of 2025 tomorrow and would encourage you to review that document at your earliest convenience. During today's call, we will discuss non-GAAP measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. And reconciliations to comparable GAAP measures are available in our earnings release, which is available in the Investor Relations section of our website. With respect to the restaurant contribution margin outlook we will be providing on today's call, please note that we have not provided a reconciliation to the most directly comparable forward-looking GAAP financial measure because without unreasonable efforts, we are unable to predict with reasonable certainty the amount of or timing of non-GAAP adjustments that are used to calculate income from operations and company-operated restaurant revenue on a forward-looking basis. Now, I would like to turn it over to our CEO, Liz Williams. Elizabeth Williams: Thank you, Ira, and good afternoon, everyone. I am excited about the momentum in our business and very proud of our team and franchise partners as I share third quarter results that clearly reinforce the strength of our strategy. Our third quarter results delivered across 3 of our core financial priorities, including positive traffic growth, accelerating unit growth and margin expansion at both the restaurant and corporate level. From menu innovations to improvements in operational excellence to our robust development pipeline, our team is executing across many strategic fronts as we continue to deliver sustainable, profitable growth. We are particularly pleased with our positive system-wide traffic growth during the third quarter as we implemented targeted innovation and value offerings, beginning with our $9.99 quesadilla combos, which have a good balance of innovation and value. Throughout the quarter, we also increased our app-only promotions, our targeted couponing and our third-party delivery promotions. Together, these actions successfully drove traffic, while also enhancing brand equity and importantly, without jeopardizing our margins. At the same time, our ongoing focus on operational excellence and efficiency optimization delivered year-over-year profitability improvement, both on a dollar and margin basis. These results only reinforce my confidence in the strategy that we've put in place. We remain laser-focused on executing against our 5 strategic pillars: brand that wins through marketing and menu innovation; hospitality mindset through operational excellence; our digital-first approach; our winning unit economics; and driving new unit growth. Now, let me provide more details on how these strategic pillars are driving our results, starting with our brand that wins pillar. Our marketing and menu innovation strategy continues to be anchored by what we believe makes El Pollo Loco truly differentiated, quality chicken served fast and easy. Chicken is our signature protein and the foundation that enables us to innovate across multiple platforms, while staying true to our brand promise. To capitalize on our positioning, we are accelerating our menu innovation strategy to address the evolving needs of today's consumers and expand our accessible customer [ size ]. We believe we have a unique opportunity to offer portable, flavorful, affordable and quality chicken that is in the bullseye of consumer demand. Building on the success of our Fresca wraps and salads from the second quarter, in late June, we launched our premium Creamy Chipotle and Salsa Verde quesadillas. Featuring our citrus-marinated all-white meat fire-grilled chicken with 100% Jack cheese and our signature sauces, they were served with handmade guacamole at no extra cost. Notably, these quesadillas continued to mix well within our menu even after the incremental media and marketing support has ended, as they have filled the gap and earned a spot on our permanent menu. We expect the category to continue to build over time. This sustained demand demonstrates that our menu innovation genuinely resonates with our customers, and it validates our strategic approach to creating products that deliver both value and quality. To build upon this momentum, we recently introduced our new Double Chicken Street Corn and Queso Crunch burrito bowls, both featuring a double portion of our citrus-marinated fire-grilled chopped chicken, layered with slow-simmered, seasoned rice, Jack cheese and freshly made guacamole and salsa. These hearty bowls are strategically priced below comparable offerings from our fast casual competitors, delivering superior value for a high-quality, big eat. They are also yet another example of how we're expanding our portable offerings, while maintaining the bold flavors and premium ingredients that differentiate El Pollo Loco. Looking ahead to 2026, we have an exciting pipeline of innovation and value that will further strengthen our competitive positioning. We will begin 2026 with a focus on our Double Pollo salads, including 2 new options, Mexican Caesar and Bacon Ranch, alongside the fan favorite, Street Corn. These salads feature double portions of our premium fire-grilled chicken, fresh super greens and are bursting with delicious flavor. These are salads that you will actually look forward to eating. In addition to these new salads, we have several flavor innovations planned across our signature tostadas, bowls, quesadillas that all leverage sauces and toppings to deliver unique flavor in 2026. We are also excited to bring more portable options through new forms of chicken to our menu in 2026. We are currently testing Loco Tenders, which are all-white meat, boldly-seasoned tenders with 2 new signature dipping sauces, Baja Ranch and Pollo sauce, as well as testing a new fire-fried chicken sandwich. This sandwich has all of the delicious crunch and flavor of a fried sandwich, but it is grilled, not fried. Both the Loco Tenders and the fire-fried chicken sandwich bring unique and differentiated twists to these growing categories. We look forward to sharing more in future calls. Beyond these innovative products, we are also supporting our core chicken on the bone. After popular demand, we are bringing back Mango Habanero just in time for the Big Game in February. And in the summer of 2026, we will launch our version of barbecue chicken to our family chicken lineup. Beyond chicken, we also look to capture additional sales occasions with our comprehensive beverages platform in 2026. We believe beverages represent a significant opportunity for El Pollo Loco as an add-on to increased check average and also to fulfill multiple daypart needs for our customers and drive relevance. We have several drinks in tests and look forward to sharing more in upcoming calls. In summary, we are excited about our menu and our innovation pipeline. We are using our core differentiator of quality chicken to expand into new consumer occasions and address specific market opportunities. Most importantly, as we execute this road map, we will remain focused on operational excellence to ensure consistent execution across our system. Turning to our brand transformation. It continues to gain momentum as we execute against our Let's Get Loco brand campaign that we launched in May. What began as an advertising campaign has fully evolved into a complete brand experience, both inside and outside our restaurants. As I've said in the past, at the core of our brand identity is our passion for quality, and this passion is at the center of the Let's Get Loco campaign. For us, passion is our commitment to quality, marinated and grilled in-house over an open flame. Beyond this emotional connection to passion, the Let's Get Loco message also acts as a functional call to action, which we believe is critical in driving sales overnight, while we build our brand over time. And the great news is that this framework, which guides our brand expression, is resonating with our customers. One example of this is our recent social media campaign, the AI Chicken Challenge. The AI Chicken Challenge invited fans to show us their Loco passion for chicken by submitting chicken-inspired AI-generated videos for a chance to win free chicken for life. This campaign created a tremendous buzz and engagement across social media, further amplified by social influencers, including Fluffie the Pom, an AI influencer, who has worked with major brands like FedEx and Sephora, as well as garnered recognition from [ Ad Age ], which named El Pollo Loco as one of the 8 marketing campaigns to watch. We have coupled our Let's Get Loco campaign with our iconic restaurant design, which is being executed on our new-builds and remodels. With our signature vibrant colors and our beloved logo, together with some modern updates, consumers are noticing the glow up of El Pollo Loco. Legacy brands have to strike a balance to honor the generation who put them on the map, while evolving to be relevant for the next one. I believe our approach has put us on the right track, and I'm excited for our future and look forward to sharing more on upcoming calls. Moving to operations. Our hospitality mindset pillar remains central to our transformation effort. Our goal is to have quality of service match that of our food quality at all times, which ultimately will allow us to build lasting customer loyalty. With this, we have several initiatives underway. These include reinforcing standards and accountability, deploying tools, systems and training to simplify operations for our team members, leveraging data to better listen and respond to customer feedback, and improving customer experience with our Loco Love service model. Our focus on standards and accountability over the past several quarters is beginning to pay off. This is demonstrated by our improved customer engagement metrics. Our customer complaints are at the lowest point in 3 years, and our overall satisfaction scores continue to rise. We are now utilizing an industry-leading customer feedback system with clear benchmarks, together with an AI tool that provides instant feedback from common review sites. We believe this data-driven approach, together with our Loco Love service recovery model, will be instrumental in identifying specific opportunities and providing actionable insights for our team members. While we acknowledge that our service consistency still has room to improve to reach the top tier, we are proud of the substantial progress we have made in the last few years. As we look forward, we have a talented team in place to help accelerate our next phase of operational improvement, and I look forward to working more closely with this team as we elevate our focus over the upcoming months. In terms of our digital-first pillar, I am thrilled with the continued momentum during the third quarter across our app, web, kiosk and loyalty. Loyalty transactions are up 28% year-over-year with frequency of this customer up 15%. For the quarter, our digital business, including kiosks, grew to 27% of system sales compared to 20% in the same period last year, which further validates our focus on meeting our customers where they are and how they want to engage with our brand. We've made meaningful improvements to our app and kiosk experiences, making it easier for Loco Rewards members to add points to their orders, to customize their meals and easily find add-ons that enhance check averages, all while providing more frequent and personalized offers to our most loyal guests. Our app remains the #1 place to find the best deals for El Pollo Loco, and the digital growth we're seeing validates our strategy. Beyond our owned digital channels, our third-party delivery business also continues to grow with all app, web and marketplace sales representing 15.1% of our business compared to 13.8% last year, or a 9% year-over-year increase. We believe that the third-party marketplace channel gives us the ability to reach new customers who aren't familiar with El Pollo Loco, and we aim to further drive this behavior through targeted offers for net new customers within the delivery platforms. We view marketplace delivery as a guest acquisition tool for our business, and we continue to test new offers within the various delivery platforms to further drive customer adoption. In addition, we have completed the kiosk rollout for company-owned restaurants. And together with our franchise partners, roughly 50% of our system have kiosks installed. All in all, we believe our robust digital infrastructure, growing loyalty base and innovative customer engagement creates a powerful foundation for sustainable growth. Turning to our winning unit economics pillar. We are pleased to have delivered 160 basis point growth year-over-year in restaurant-level operating profit margins to 18.3% during the third quarter. From our methodical approach to cost savings in our supply chain to our enhanced labor productivity through better use of technology and kitchen equipment, our team members are putting more into customer service, while also delivering cost efficiencies. We are proud to have delivered this expansion even as we offer more deals and value for our customers. For the full year 2025, we expect restaurant-level contribution margins of 17.5% to 17.75%. In the long term, we continue to expect that the brand will return to the 18% to 20% range over time. Lastly, as we continue to build momentum in our unit growth pillar, I'm excited to announce that we successfully opened our 500th El Pollo Loco restaurant in Colorado Springs earlier this month, a remarkable achievement that speaks to the strength and the enduring appeal of our brand and a testament to the hard work and dedication of our franchise partners and team members. After the end of the third quarter, we opened a new restaurant in El Paso, Texas, yet another new market for us, showing the expansion beyond our California roots. Roughly 3/4 of our new openings in 2025 will be outside of California. Importantly, we're not just opening new restaurants, we're opening successful ones. Our increased focus on standards, training and systems is making a difference from growth efforts in the past. Both our Colorado Springs and El Paso locations are off to extremely strong starts within the first few weeks. Volumes are well above the system average. In fact, all new restaurants we opened in 2024 and 2025 are averaging $2 million on an annualized basis. These successes have been driven by our strong franchise partners and our new restaurant training teams who bring our refined brand positioning to life for our customers every single day. In addition, approximately half of our recent openings are utilizing second-generation sites, allowing us and our franchise partners to achieve substantially lower investment costs and deliver an outsized return relative to a new ground-up build. We expect the second-generation sites will continue to be a significant part of our unit development going forward, aided by our flexible unit design. Together with the cost reduction we have achieved with our ground-up new builds, we believe that our formula for winning economics only gets stronger. For the remainder of the year, we plan to open 1 new restaurant in November with multiple openings in December to end the year with at least 10 new restaurants in 2025, all of which are already under construction. While we remain confident in achieving this milestone, the nature of construction projects means that permitting and other external factors could shift one of these openings into early 2026. Nevertheless, this continues to represent the largest system-wide unit growth since 2022. More importantly, we are positioned to almost double our development pace in 2026 with a strong pipeline that builds every week, reflecting both the strength of our franchise partnerships and the robust demand we're seeing for the El Pollo Loco brand in new markets. In addition to the investment from franchise partners, we will also be leveraging company capital to increase development in 2026 in the California, the Las Vegas markets where we currently operate, and also in the Dallas and Denver markets, alongside our franchise partners. Following the work we've completed over the past year on build costs, margin improvements and top line sales drivers, we are confident this is an efficient use of company capital. We believe these investments will allow us to accelerate brand awareness in these markets, creating a platform for system-wide unit growth and further cementing the brand's long-term opportunity. To complement our new unit growth, we continue to make progress in modernizing our existing restaurants through our remodeling program. Through the end of the third quarter, we've completed 34 system-wide remodels with a plan to complete at least 55 remodels for the full year. Looking ahead to 2026, we anticipate remodeling approximately 35 company-operated restaurants, putting us on track to meet our goal of updating approximately half of our total system over 4 years. The remodeled restaurants look fresh and modern, and our team has done a tremendous job balancing our nostalgia, our history and charm with an updated look and feel. The customer feedback we are getting on the remodels remains very positive with a mid-single-digit sales lift from these remodels on average. With significant demand for the remodels, the only constraint is team member bandwidth and being thoughtful about sequencing when the remodels are completed. There's a healthy battle internally with our company operators who are all jockeying to get to the front of the line for a remodel. Before I wrap up, I want to mention one other highlight from the quarter that embodies the progress we are making in transforming El Pollo Loco and our unique culture. In September, we held our franchise conference with the theme for this year, No Limits, Just Loco. In this meeting, we talked about the opportunities for growth ahead with our franchise partners and suppliers. And we also celebrated our 50th anniversary year, paying tribute to many employees that have had significant tenure with El Pollo Loco. Alongside our founder, we honored 36 employees that are still serving El Pollo Loco after 35-plus years. It was a true testament to the thousands of men and women in our restaurants that deliver for our customers every single day. It was also a reminder of why we have some of the lowest turnover in the industry. Our culture is special and something I have never seen in this industry. We have a passion that you can feel. It is this culture that is fueling results. In closing, our third quarter results demonstrate the progress we are making across all aspects of our business. We are innovating on food, innovating on our brand and our restaurants. We look forward to a strong finish in 2025 and furthering our position as the nation's favorite fire-grilled chicken restaurant. With that, let me turn the call over to Ira for a more detailed discussion of our third quarter financial results. Ira Fils: Thank you, Liz, and good afternoon, everyone. For the third quarter ended September 24, 2025, total revenue was $121.5 million compared to $120.4 million in the third quarter of 2024. Company-operated restaurant revenue decreased 0.5% to $100.7 million from $101.2 million in the same period last year. The $0.5 million decrease in company-operated restaurant sales was driven by a 1.1% decrease in company-operated comparable restaurant sales, partially offset by additional sales from the opening of 2 restaurants during or subsequent to the third quarter of 2024. The decrease in comparable restaurant sales included a 1.3% decrease in average check size, partially offset by a 0.1% increase in transactions. During the third quarter, our effective price increase versus 2024 was about 2.8%. Franchise revenue increased 13.5% to $12.9 million during the third quarter, driven by a $900,000 in IT pass-through revenue related to the franchisee rollout of our new point-of-sale system, which is offset by a corresponding increase in franchise expenses, combined with an increased revenue, driven by the opening of 5 new franchise-operated restaurants subsequent to the third quarter of 2024 and a true-up of royalty rates. The increase in franchise revenue was partially offset by comparable restaurant sales decrease of 0.6%. Nonetheless, we are very encouraged to see franchise traffic growth continue to accelerate with traffic up 2.5% in the third quarter for our franchise system, which drove the positive system-wide traffic of 1.6% that Liz alluded to earlier. We are extremely pleased with how the fourth quarter has started with sales turning positive on continued strength in transactions. System-wide comparable store sales for the fourth quarter to date through October 22, 2025 increased 2.2%, consisting of a 1.5% increase in company-operated restaurants and a 2.5% increase in franchise restaurants. While we are mindful that we are rolling over softer results in October of 2024 and the macro consumer environment remains challenged, we are pleased with the sales momentum that we are seeing in our business to start the fourth quarter of 2025 and our return to positive comparable sales growth. Turning to expenses. Food and paper costs as a percentage of company restaurant sales decreased 40 basis points year-over-year to 24.7% due to higher menu pricing and approximately 100 basis points of commodity deflation during the third quarter, which was partially offset by higher discounting. We expect commodity inflation to be flat for the full year 2025. As a reminder, our commodity base is largely domestic with chicken being the largest component. Internationally, our largest exposures include avocados, tomatoes and packaging. Labor and related expenses as a percentage of company restaurant sales decreased about 200 basis points year-over-year to 30.4% as we continue to benefit from improvements in operating efficiencies, primarily driven through enhancements in labor deployment and scheduling, combined with the continued use of technology and equipment to simplify team member roles, along with menu price increases and lower workers' compensation expense. Wage inflation for the third quarter was 0.6% for all our company-owned locations. For the full year 2025, we expect wage inflation of between 3% and 3.5% for all our company-owned locations. Occupancy and other operating expenses as a percentage of company restaurant sales increased 70 basis points year-over-year to 26.5%, primarily due to higher third-party delivery-related expenses, software maintenance fees related to our kiosk and new POS rollouts and higher rent and CAM, partially offset by lower repairs and maintenance expense. Our restaurant contribution margin for the third quarter improved to 18.3% compared to 16.7% in the year-ago period. As we continue our path of margin improvement, for the fourth quarter, we expect our restaurant-level margin to be in the 16.75% to 17.25% range as compared to 16.7% in the fourth quarter of 2024, which would bring our margin for the full year 2025 to between 17.5% to 17.75%. General and administrative expenses increased to $12.3 million compared to $11.4 million in the prior year. The increase was primarily due to an increase of $0.3 million in stock compensation expense, $0.2 million in legal and professional fees related to shareholder activism and related matters, and $0.2 million in restructuring and executive transition costs, as well as $0.2 million in expenses related to the implementation of a new ERP system and our corporate office relocation. As a percentage of sales, G&A increased to 10.2% or 70 basis points. During the third quarter, we recorded a provision for income taxes of $3 million for an effective tax rate of 28.8%. This compares to a provision for income taxes of $2.4 million and an effective tax rate of 28.1% in the prior year period. We reported GAAP net income of $7.4 million or $0.25 per diluted share in the third quarter compared to GAAP net income of $6.2 million or $0.21 per diluted share in the same prior year period. Adjusted income for the quarter was $7.8 million or $0.27 per diluted share compared to adjusted net income of $6.3 million or $0.21 per diluted share in the third quarter of last year. Please refer to our earnings release for a reconciliation of non-GAAP measures. In regard to our remodeling effort, during the third quarter, we completed 11 franchise restaurant remodels and 3 company remodels, bringing our total completed remodels for 2025 to 34 through the end of September. For the full year, we expect to remodel at least 55 restaurants, of which approximately 1/3 will be company-operated locations. As Liz mentioned earlier, we remain pleased with the results of our new iconic remodel image, and we continue to see, on average, a mid-single-digit uplift in sales, which is in line with our expectations. In terms of liquidity, as of September 24, 2025, we had $61 million of debt outstanding and $10.9 million in cash and cash equivalents. Subsequent to the end of the third quarter, we paid down an additional $6 million on our revolver, resulting in our debt outstanding of $55 million as of October 30, 2025. Finally, based on our results to date, we would like to provide you with the following guidance for 2025: the opening of at least 10 system-wide restaurants; capital spending of between $28 million to $30 million; G&A expenses of $47.5 million to $49.5 million, excluding onetime charges; and an estimated effective income tax rate of 29% to 29.25% before discrete items. This concludes our prepared remarks. We'd like to thank you again for joining us on the call today, and we are now happy to answer any questions that you may have. Operator, please open the line for questions. Operator: [Operator Instructions] The first question comes from Jake Bartlett with Truist Securities. Jake Bartlett: My first was about your performance relative to peers. And in terms of -- we can see what your same-store sales were in the quarter. My impression or I think it's been kind of known for a couple of quarters now that California, the markets that you're exposed to the most have been the weakest. So I imagine actually, with your results, you might be actually gaining some share, maybe outperforming peers. If you can give us any sense for that, that would be helpful. Elizabeth Williams: Thanks for the question. Yes. So when we do look at ourselves in the California market versus peers, we are pleased to see that we are indeed outperforming on both sales and transactions. So, that would indicate that we are taking some share, which I think is -- we can attribute to getting positioned right on value, on innovation and the brand positioning really starting to resonate. So nice to see. Also, I would add is operational, all of the enhancements we're making operationally. I think, consumers are seeing that better service. Jake Bartlett: Got it. And then, I think related to that question, your quarter-to-date nicely positive. And I think on a 2-year basis, it roughly holds the line at roughly about 2%. But we've heard from others in this earnings season so far, a real deceleration in October. So maybe the government shutdown impacts, or it's, I think, somewhat uncertain, but a pretty significant deceleration and you haven't seen it. So I think maybe building on that, what were your tactics near term to offset incremental pressure? Are you seeing those market share gains accelerate near term, and I guess, the level of confidence you have that, that will continue? Elizabeth Williams: Yes. So, as we look over the past year, we saw a lot of the customer softness. Really it was last year this time that we started to see that. We saw the customer pulling back and the consumer, for all the reasons, having some trepidation in terms of spending. And we made a lot of adjustments, and we've made them really throughout the year in terms of bringing more value to the menu, our positioning, getting our operations improved so that when they did come in, they had a really great experience. And so, as we sit here today, I would say that the consumer isn't any worse than they've been really all year. I think we're figuring out how to maneuver and how to just give a great experience, given that they are just so stretched. So, as Ira mentioned, as we have seen in October, it is an easier lap. So we will acknowledge that. But even on a 2-year basis, we're proud of what we're accomplishing. Jake Bartlett: Great. And then, the last question, you've had some -- your margins have been solid, especially relative to your same-store sales in '25. And you talked about the initiatives you've had in place and the efficiencies you're driving. My question is, how much you have left in the tank on those efficiencies? Should we expect incremental cost saves efficiencies in '26 as we kind of look forward? Ira Fils: Yes. Great question. We believe we're not done yet. We still have a lot of opportunity as we continue to gain efficiencies on the labor side. And we have multiple projects that we're working from an input side from COGS where we believe that these things will put us on our path as we move forward to that 18% to 20% target that we always mentioned. Operator: The next question comes from Andy Barish with Jefferies. Andrew Barish: It is nice to hear about some decent October numbers for a change. Can you sort of level set on sort of these more mainstream menu items that you're in test on with tenders and sandwiches? Sort of where -- what's the goal? Where in the testing process are you? Kind of how does that find its place on to the menu board as we look out to next year? Elizabeth Williams: Yes. So we have a lot in the pipeline. The culinary innovation team has been really busy and working together with operations, getting these in front of customers and in test. And this comes from -- a couple of years ago, we made the realization that as the consumer is gravitating to handheld, portable, also a lower ticket, so as much as consumers love our family chicken and chicken on the bone, they want to be able to take a burrito or a bowl. And so, we've migrated to making sure we have that. So these new products that we're excited about, things like the Loco Tenders and a sandwich, as an example, both of those now are in operations testing in the local markets here, and they're about to go into broader market testing so that they could be ready for next year. So, one, probably we're looking at where we would slot them in on the calendar, but could be as early as Q2 and then, of course, into Q3 and Q4. We also -- even though we are doing so much innovation around the more portable single customer, great delicious eats, we're also -- we love our chicken on the bone, and we are bringing new flavors there. I talked about the barbecue chicken that we're really excited about. That will be something -- there's no better season than summertime for barbecue chicken. So we're thinking that's probably a summer addition. And then, the most requested item that I hear about from consumers are our black beans. Years ago, we had black beans, and it does make sense to have barbecue chicken and black beans with our coleslaw, so again, something that we're about to test with so that we have it ready for the summer. Andrew Barish: Got it. And then just, Ira, over on the cost side, where are you on kind of chicken contracting for next year? Are you in pretty good shape? And is there anything sort of unusual we should be aware of in that market? Ira Fils: No. So we're in good shape. We are in the process actually this week of awarding our contracts for next year. And we're pleased with how it's come out. We -- there's a little pressure in the dark meat chicken, but we've been able to offset that in other areas of our chicken buy. So we are very -- we feel very good about our chicken buy for next year. Andrew Barish: Yes. And then, just finally, anything new sort of on supply chain with like pre-marinade as something you guys have looked at or anything we should be aware of like as next steps on the equipment side for '26 to continue to help the labor efficiencies? Elizabeth Williams: Yes. So we're testing on many different ideas. We love the cost improvement, but even more so, we love the consistency and the quality improvements that some of the work with our suppliers, our chicken partners have brought to us, so things like how we marinate our chicken so that it is the most juicy chicken in every single experience and really consistent. And we're seeing great results, and we'll have some of that as early as Q1. So in terms of supply chain and doing innovation, not only on bringing new things to the menu, also making the product better, the food better, the quality better and also realizing some cost savings. And really, like you said, the cost savings comes primarily with labor, just making the preparation in our restaurants easier so that our team members really can focus on the cooking that happens over our grill versus some of the activities that just aren't as necessary. Operator: [Operator Instructions] Our next question comes from Jeremy Hamblin with Craig-Hallum. Jeremy Hamblin: Congrats on good execution here in a pretty tough backdrop. I wanted to start with just kind of the margin outlook here in Q4. And just to get a sense, there is a little bit of pressure on food costs. But just in terms of -- I think what you indicated was a midpoint of about a 17% restaurant-level margin in Q4 versus the 18.3% in Q3. And I wanted to just see if you could kind of walk us through where you expect a little bit of that pressure in the fourth quarter. Ira Fils: Yes, a couple of things. I think when you look, first of all, quarter-to-quarter sequentially from Q3 to Q4, a lot of the variance there is driven by the sales volumes. Q2 is actually our highest sales volume quarter, but Q3 is the next highest sales volume and Q4 is the lowest. So just the sales volume difference puts a little pressure on the store-level margins. I think if you look back to where we finished Q4 of last year, our guidance shows us that we will be growing margins year-over-year in the fourth quarter. Jeremy Hamblin: Got it. And then, I just want to come back to your marketing efforts here. And in terms of how you feel like the new tagline is playing out, again, it's -- my peers have noted, it's been a bit of a tough couple of months here in the restaurant industry. You are holding in pretty nicely. But I wanted to get a sense for how you feel like that messaging is resonating in a predominantly value environment. And if you can give us a sense for how you're thinking about some of these new menu items to come here in '26 from a kind of a price point perspective of whether or not they're going to be adding to your average check or potentially lowering your average check? Elizabeth Williams: Yes. So we can see in our credit card data that the things we're doing are resonating and bringing in new and lapsed consumers. And I attribute that to not one thing, but many things. And starting with the repositioning with the Let's Get Loco campaign, that certainly has driven awareness and is reaching new consumers, coupled with even better when they can drive by and see a remodeled restaurant. And then, as we shift to the menu and just having things on our -- food on our menu that has a much wider aperture for all consumers, that's helping as well. When we look at the different price points, doing something like quesadilla this summer, that was an entry-level price point that we haven't seen in years. So $7.49 a la carte, $9.99 as a combo, and that combo and even a la carte had a side of guacamole with it. So, so many of our competitors, they charge extra, a couple of dollars for guacamole. So it was a great value. And we saw that in terms of growing transactions. It brought new consumers in that had a very limited price point. And what I love about that product, we've been able to find a way to keep it on our menu. So consumers that have found that can still enjoy it. But as we brought in the burrito bowl, the burrito bowl is at a higher price point. So we're $10 -- upper $10 in some restaurants, $11. And what that's doing, like you pointed out, it's really helping protect check. So what we saw in Q3 was, we drove a lot of transactions, but we did see a check decline. And it was one of those moments where we had to realize this check decline is not going to be forever. We're driving transactions, and it's healthy transactions. We also did do some discounting, which in this environment, we had to do, which also put pressure on check. But when we are able to combine it with something like the burrito bowls a couple of weeks later and still keep that quesadilla under it, together, it's a really powerful combination, and I think it's helping us. So, as we go into next year, we're looking for ways to balance both the value but also the check protection, which -- I'm excited about our beverages. That's a great check protector. Desserts: we launched flan earlier just in the last couple of months. We had so much innovation. We didn't even talk about flan, but we launched flan. It's a great check protector as well. And it reminds us we need to have additional desserts. Churros do well for us. There's a lot we can do to protect check all over the place. Jeremy Hamblin: And as a follow-up, just on the quesadilla, you noted it's now on the regular menu. How is it mixing today, let's say, over the last 3 or 4 weeks versus when you introduced it, in terms of percent of sales? Elizabeth Williams: Yes. So it's dropped down a couple of percentage points, which is typical, given that it was featured so prominently on the menu. So any time we have the main product of the marketing module, it gets the promotional panel, and that promotional panel always drives a lot of mix. And so quesadilla was right in line a little bit -- some weeks, a little bit over what a promotional panel would drive. And then, as we've taken it off, it drops, but it's still -- I'm pleased with how it's mixing. It is still an incremental product on our menu. And like I mentioned earlier, it's solving an entry-level price point that I think is so critical in this economic environment. Jeremy Hamblin: Got it. Last one for me real quick. You've probably had a bit of an outsized impact on kind of a hot button topic here in restaurant land of immigration policies. In particular, Southern California saw a bit of a bigger presence. I wanted to just get a sense from what you're seeing with traffic. Is that issue still a fairly significant obstacle for the business? Do you feel like it's settled down a little bit? Any color you might be able to share on that would be great. Elizabeth Williams: Yes. I think it still persists. We see it a little bit more in lunch than dinner. It still persists. Hard to quantify, but it's still there. Operator: Ladies and gentlemen, we have reached the end of today's question-and-answer session. I would like to turn the call back over to Liz Williams for closing remarks. Elizabeth Williams: Yes. Thank you again, everyone, for your interest in El Pollo Loco. We look forward to talking to you again next quarter. Have a wonderful evening. Operator: Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.
Operator: Greetings, and welcome to the Cognex Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Greer Aviv, Head of Investor Relations. Thank you. Please go ahead. Greer Aviv: Thank you, operator. Good morning, everyone, and thank you for joining us. Our earnings release was published yesterday after market close, and our 10-Q was filed this morning. The earnings materials are available on our Investor Relations website. I am joined here today by Matt Moschner, our CEO; and Dennis Fehr, our CFO. Today, we plan to share several key messages with you, including progress on our strategic objectives to be the AI leader in the industry, end market trends, our performance in the third quarter and our expectations for the fourth quarter. After prepared remarks, we'll open the lines for Q&A. Both our published materials and the call today will reference non-GAAP measures. You can find a reconciliation of certain items from GAAP to non-GAAP in our press release and earnings presentation. Today's earnings materials will cover forward-looking statements, including statements regarding our expectations. Our actual results may differ from our projections due to the risks and uncertainties that are described in our SEC filings, including our most recent Form 10-K. With that, I'll turn the call over to Matt. Matt Moschner: Thanks, Greer. Good morning, everyone, and thank you for joining us today. Q3 was another strong quarter for Cognex. We delivered outstanding financial results, which reflect our commitment to profitable growth and disciplined execution. At the same time, we remain focused on advancing our strategic objective to be the leading provider of AI technology for industrial machine vision. Turning to Page 3 of our earnings presentation, let's look at some highlights from the third quarter. I'm pleased to share that our third quarter key financial metrics all came in at the high end of our expectations. We delivered double-digit revenue growth and achieved our highest adjusted EBITDA margin since Q2 of 2023. In addition to the strong financial performance, we are making meaningful progress against our strategic objectives. First, we continue to execute our sales force transformation, acquiring new customers in underpenetrated verticals such as packaging, using easy-to-use AI-enabled products. I'm also very pleased with the progress we've made this year driving productivity in our sales organization by using new CRM tools and updated processes. Second, we are advancing our technology leadership in AI. This quarter, we're excited to announce the launch of our new solutions experience product line in logistics, which we are calling SLX. This release introduces our latest AI vision tools to solve novel applications in this fast-growing vertical. Turning to Page 4, you can see that the SLX epitomizes our mission to make advanced machine vision easy. By combining industry-leading AI with intuitive deployment workflows, we can solve critical logistics applications with minimal user training. Our initial rollout of SLX devices targets specific applications, including object classification and side-by-side detection, both of which complement barcode reading in mixed application workflows. Purolator, a leading freight, package and logistics provider, recently deployed SLX as the next step in their automation strategy, enabling advanced package detection within its sortation process. Since implementation, Purolator has significantly reduced costs tied to processors and seamlessly scaled the solution across its terminals and network. These new products extend our reach beyond traditional barcode reading into higher-value vision applications in logistics. They help accelerate automation adoption by offering customers scalable, easy-to-use solutions that improve efficiency. With SLX, we're also laying the foundation for other application-specific solutions. Next, let's review our current trends across key end markets, as shown on Page 5 of the earnings presentation. Please note that my discussion on end market performance excludes the onetime benefit from the commercial partnership in our Q3 2025 results and an additional month of Moritex revenue in Q3 2024 results. Although the macroeconomic backdrop remains uneven and geopolitical uncertainty persists, we continue to see momentum in consumer electronics, logistics and packaging, while automotive remains soft. Starting with logistics, this market remains a strong growth driver. Q3 marks our seventh consecutive quarter of double-digit year-over-year revenue growth, which was led by large e-commerce customers this quarter. The current cycle is being driven primarily by automation of existing facilities rather than new capacity expansion. We believe automation penetration is still low in this vertical and the ROI on our products is very strong. Next is automotive. As expected, automotive revenue continued to contract, although year-over-year declines moderated through the year. The market remains challenging, but we continue to anticipate less steep decline in 2025 relative to last year's 14% contraction, and we believe we are nearing the bottom. Looking ahead, we continue to see promising long-term opportunities in the automotive market as customers prioritize improving vehicle quality and driving down operating costs. Next, let's talk about packaging. The business delivered solid revenue growth across most geographies in Q3. Packaging remains a large underpenetrated market with less cyclicality than other verticals. We're making progress with new products and expanding sales coverage, positioning us to capture incremental opportunities and drive further penetration. We maintain a positive full year outlook for packaging. Turning now to consumer electronics. In Q3, revenue grew significantly year-over-year, driven by broad-based strength. This market is showing clear signs of recovery following a prolonged down cycle, and we are well positioned to benefit from ongoing supply chain diversification and evolving device form factors. We maintain a positive outlook for the full year as we expect consumer electronics to deliver its first year of revenue growth since 2022. Finally, turning to semiconductor. Q3 revenue increased modestly year-over-year against a very strong comparison, although we maintain a cautious full year outlook. Longer term, we expect semi growth to benefit from the AI-driven investment cycle, reinforcing our confidence in this market. Cognex's deep relationships with leading semi equipment manufacturers position us well for future growth. In summary, Q3 underscores the strength of our strategy and execution. We remain focused on being the #1 provider of AI technology for machine vision, delivering the best customer experience in our industry and doubling our customer base over the next 5 years. These strategic objectives supported by operational discipline and continued innovation position us to drive long-term profitable growth and create sustainable value for our shareholders. Let me now hand it over to Dennis to walk through the financial results and the outlook for the fourth quarter. Dennis? Dennis Fehr: Thank you, Matt. Before reviewing Q3 results, I'd like to address 2 items impacting comparability this quarter. As we discussed last quarter, we entered into a commercial partnership with a strategic channel partner to better serve OEM customers in the specialized field of medical lab automation, which contributed $30 million of revenue this quarter. In addition, our Q3 2024 results included an additional month of Moritex financials as we aligned accounting schedules, which added approximately $5 million of revenue to the prior year quarter. A detailed revenue bridge illustrating these factors is available on Page 6 of our presentation. Revenue growth, excluding the impact of both the commercial partnership and the additional months of Moritex a year ago was 13% on a constant currency basis. We believe this number provides the most transparent and accurate representation of our underlying top line performance for the quarter. Turning to the quarterly details, I'll begin with a discussion of reported financial results, followed by the financials adjusted to exclude these 2 items. Starting with the as-reported financials on Page 7, third quarter revenue of $277 million expanded by 18% year-over-year or by 16% on a constant currency basis. Looking at geographic revenue trends on a year-over-year constant currency basis, Americas revenue expanded by 27% in the quarter, led by continued strength in logistics and the onetime contribution of the commercial partnership. Europe grew 24%, driven primarily by certain consumer electronics customers shifting their ordering from China-based entities to those in Europe. As noted last quarter, this change in ordering entities does not indicate any underlying shift in business mix or customer demand. Excluding this procurement change, Europe grew modestly as strength in packaging and the onetime contribution of the commercial partnership were partially offset by continued weakness in automotive. Greater China revenue increased 9%. After adjusting for the shift in ordering entities and the additional month of Moritex included in last year's Q3, growth in Greater China was very strong with broad-based momentum across all end markets, except automotive. Other Asia revenue declined 5% in the quarter. After adjusting for the additional month of Moritex revenue last year, Other Asia grew 4%, driven by consumer electronics supply chain shift. Staying on Page 7, adjusted EBITDA margin expanded 730 basis points, driven by operating leverage, disciplined cost management and the onetime benefit from the commercial partnership. GAAP diluted earnings per share were $0.10, down 39% from a year ago, primarily due to a onetime discrete tax expense accrual of $33 million related to the One Big Beautiful Bill Act. Adjusted diluted EPS of $0.33 increased by $0.13 or 69%. I will now cover the underlying business performance, adjusted to exclude the 2 items impacting comparability. Starting with the financial highlights of the third quarter, Page 8 of our earnings presentation details our performance on 3 key financial metrics. One, adjusted EBITDA margin was 22.1%, representing an increase of 450 basis points year-over-year to our highest margin since Q2 of 2023. Two, adjusted EPS increased 47% year-over-year, the fifth consecutive quarter of double-digit EPS growth. And three, our trailing 12-month free cash flow conversion rate reached 133%, meeting our target of greater than 100% for the fourth consecutive quarter. Our focus on disciplined cost management and profitable growth ensured that this quarter's strong revenue performance translated into strong bottom line EPS growth and robust free cash flow. These financial results represent another key milestone towards the through-cycle financial framework we outlined at our Investor Day. Turning to the income statement, adjusted to exclude the 2 items impacting comparability on Page 9 of our earnings presentation. Revenue increased 15% year-over-year and 13% on a constant currency basis. Adjusted gross margin was 67.7%, down 170 basis points year-over-year, driven by unfavorable mix and the impact of tariffs. Adjusted operating expenses grew 1% year-over-year and declined 1% on a constant currency basis, driven by continuous cost management, partially offset by a meaningful headwind from incentive compensation in the quarter. We have now delivered the combination of revenue growth and adjusted OpEx reduction for 3 consecutive quarters. While we are pleased with these results, we continue to drive efficiency across the organization and incurred $3 million of reorganization charges in the quarter, which are excluded from adjusted operating expenses. Looking ahead, on an annual basis, we expect adjusted operating expenses to grow at a slower pace than revenue. The mentioned combination of revenue growth and continuous focus on cost management drove adjusted EBITDA margin to 22.1%, near the upper end of our guidance range. Adjusted diluted EPS was $0.28, representing 47% year-over-year growth. This strong EPS performance was driven by robust revenue growth, disciplined cost management and the lower diluted share count compared to last year. We generated $86 million in free cash flow in Q3, exceeding the total amount generated during the first 9 months of 2024 in a single quarter. Trailing 12 months free cash flow reached $214 million, surpassing the $200 million mark for the first time since Q1 of 2023 and increasing 132% compared to the 12-month period ending Q3 of 2024. Trailing 12-month free cash flow conversion was 133%, easily meeting our target of greater than 100%. We continued to drive working capital efficiencies in Q3, and our cash conversion cycle declined sequentially for the sixth straight quarter. Turning to capital allocation, we returned $37 million to shareholders this quarter through a combination of share repurchase and dividends. Over the past 12 months, we have returned $224 million to shareholders, more than 100% of our free cash flow. Over the long term, we remain committed to returning capital as an important component of the disciplined capital allocation strategy we outlined in June. We ended Q3 with $600 million in net cash and investments, providing flexibility to pursue M&A opportunities while continuing to return capital to shareholders. Moving to Page 10 of our earnings deck, I'll now review our financial guidance for the fourth quarter. In Q4, we expect revenue to be between $230 million and $245 million, representing growth of approximately 3% at the midpoint. The implied sequential decline is primarily driven by the seasonal step down in our consumer electronics business and is in line with our historical Q4 seasonality over the past decade. Adjusted EBITDA margin is expected to be between 17% and 20%, with the midpoint consistent with the level achieved in the prior year. Adjusted earnings per share are expected to be between $0.19 and $0.24, with the midpoint of this range representing approximately 7.5% year-over-year growth driven by revenue growth and the reduction in share count. We continue to expect no material impact on full year adjusted EBITDA margin and earnings per share from tariffs announced as of today. Our Q4 guidance implies mid-single-digit full year 2025 revenue growth, excluding the benefit from the commercial partnership. Looking ahead to 2026, average PMI readings in Q3 for major economies, including the U.S., Eurozone, China and Japan were between 48 and 51, signaling that industrial activity has yet to show sustained expansion. These conditions suggest we remain in the initial stage of the cycle. As we shared at Investor Day, this stage is characterized by moderate growth with similar growth dynamics in 2026 as we are experiencing in 2025, excluding the onetime benefit from the commercial partnership. To clarify, this outlook is not formal revenue guidance, nor does it reflect changes in business conditions or visibility. Rather, it represents our view of the cycle based on macroeconomic indicators and our through-cycle financial framework. In this early cycle environment, we remain committed to disciplined cost management while driving margin expansion and EPS growth, combined with strong cash generation. Now Matt and I are ready for your questions. Operator, please go ahead. Operator: [Operator Instructions] Today's first question is coming from Damian Karas of UBS. Damian Karas: I wanted to begin by asking you about the consumer electronics part of your business. How much of the current demand strength you're seeing is a result of rising customer output and product rollouts versus your customers migrating their footprint to other regions? And curious what you're hearing from some of your CE customers in terms of their plans to make further shifts of their supply chain and what that could mean for your business in 2026? Matt Moschner: Damian, this is Matt. Thanks for the question. Yes, we're very pleased with the performance of our consumer electronics business this year. And as we said in the comments, it being a growth year for us in consumer after several years of a down cycle. And so where is that coming from? I think you hinted at a few of them. I was actually in ASEAN and India a few weeks ago, observing some of the shifts in manufacturing from Mainland China, working with a lot of the machine builders that underpin this industry. And yes, I would say there is quite a bit of activity that we're participating in as supply chains diversify in this market. And whether that's countries like Vietnam, Malaysia, India, I think all are really trying to participate in that migration. But I wouldn't say that's the only growth driver, right? I think we've set our business, it's growing broad-based, right? It's not just a few customers, it's many customers that are seeing increased activity. I think we are seeing things like changes in device form factors and entirely new form factors, particularly as consumers are wanting to take advantage of advanced AI technology in different ways. At the same time, advanced AI vision for some of the more complex cosmetic inspections is also maturing, and we're seeing our ability to solve new applications that maybe historically weren't addressable. So I think you put all those things together, and yes, I think we feel very optimistic about where we are and how we can participate across multiple growth vectors. And as a global company, I think customers are looking to us to help them produce, whether it's in one geography or around the world. And so we're excited for how that could carry into 2026. Damian Karas: That's really helpful. And then I wanted to ask you about China, which I think if I heard correctly, you saw 9% growth. And so I guess if I just think about what we've heard from a lot of our other industrial companies that have reported third quarter so far, we seem to be bucking the trend there where I think a lot of others are experiencing some softness in China. So can you just elaborate on what you're seeing? What's driving the broader strength there? Matt Moschner: Yes, absolutely. No, thanks for noticing. In Q3, we saw strong year-over-year growth in Greater China, which, as a note, includes Taiwan for us. And I would say it is broad-based across verticals with perhaps the exception of automotive. Why? We've made great investments in China and the Greater China region. We have landed more localized distribution. We've invested in our sales channel. We have local engineering in country to try to be a more nimble company in that country and in that region. And I think you're starting to see some of those things pay off. As a reminder, a good portion of our business, I think in the past, we've said 3/4 roughly are multinationals operating in China and roughly 1/4 being domestic Chinese manufacturers. And so they like working with Cognex, not just because of our excellent technology, but also our global footprint, particularly as customers are -- our customers are thinking about potentially producing in China and other Asia regions, given some of the trade and tariff news of recent months. So yes, we're encouraged by the momentum. I would also say the competitive dynamic in China has stabilized in many ways, and we're seeing pricing stabilize as a result. And so you put those things together, and yes, we had a great quarter, and I remain pretty optimistic about how the investments we've made in China could pay off for us heading into next year. Operator: The next question is coming from Andrew Buscaglia of BNP Paribas. Andrew Buscaglia: I was hoping you could discuss some of the trends you're seeing in logistics. I mean, obviously, that's been very strong for some time now. But how much more of this existing capacity reinvestment from customers can you benefit from? And at what point do you need there to be another leg up in new warehouse build-outs to grow? Matt Moschner: Yes. No, it's a great question. I mean, as we said in the prepared remarks, most of our growth is driving productivity in existing facilities, and I still see room to grow there. I think we've also said we think this market is still in the early innings of its automation story, and I believe that to be true. You go into a modern warehouse today, you see a lot of vision systems. But today, they're mostly doing things like barcode reading and helping with the sortation process. I think the product release we had yesterday is a really exciting one for us, and I think for the industry because it really is the first meaningful step in bringing vision and visual inspection to warehouses. And it's good to remember why that hasn't happened yet because it's a really, really hard problem, right, given the variation that you see going through some of these facilities, millions of SKUs at very high rates that are very cost sensitive. So we're excited about how we can drive vision penetration in logistics. I think that is -- I almost characterize it as a white space. And I think one that really can only be addressed by advanced AI. And so I think we're well positioned for that. And the SLX is the first step in that journey for us. I think a lot of our customers are still -- have very much a productivity focus, right? So I don't think we're yet over the hump on how we can get more and how they can get more productivity from existing facilities. And then I would just say, right now, our strength is in retail distribution and e-commerce. I think we're relatively newer to areas like the parcel market and helping other areas like airports as they look to automate where we're seeing quite a bit of investment. So I think those are areas where we could grow as well. So I think we remain optimistic that the growth story of logistics is not yet over. But I would just say maybe a bit nonlinear, particularly as some of the larger customers that we serve, how many more years can they have outsized investments, and so over the medium term, I think we feel very good about the growth story. How we get there might be lumpy or nonlinear is how I would characterize it. Andrew Buscaglia: Yes. Interesting. Okay. And then I was surprised to see semis grew a little bit. I think we weren't expecting much, if any, growth at all this year, which you maintained your outlook in that space. I guess what are the -- what's driving that a little pick up there? And then can you talk about maybe your -- how you would benefit from the memory market? I would imagine you guys would have exposure there. That seems to be certainly benefiting from AI. If you talk about that a little bit, that would be great. Matt Moschner: Yes. And I think the underlying demand for chipsets, for memory, for other active components is growing, and I think will, given the demand for new devices and the underpinnings of advanced AI as we see a really exciting set of new computing capabilities being announced. And yes, we would participate in all of those things. It's useful just to remind ourselves how we participate in this market, which is really through selling vision to large equipment manufacturers that produce the machines that handle the wafers or the finished package products. So that's really how we address the market. And the sorts of applications that we solve are really traceability. These are very high-value pieces of silicon wafers that you want to make sure have good traceability, that have good quality. So we do visual inspection. And so that's -- those are primarily how we serve the market. The growth in this market, I would also characterize as somehow nonlinear, right? The ordering of those machines is very much dependent on the build-out of specific facilities. But right now, we're seeing good, healthy activity. And I think there's good underlying demand for chips, but also I think there is a bit of changes in where things get made and where the fabs are located, right? We see a build-out going back to the CHIPS Act and the last administration here in the U.S. We're seeing ambitions in countries like India to have domestic semiconductor production capacity. So I think there's also a geographic angle as more regions and countries participate in the manufacturing of advanced chipsets. So -- and I think Cognex will be there, and we'll serve that market as we do today through our large equipment manufacturing partners. Operator: The next question is coming from Tommy Moll of Stephens Inc. Thomas Moll: I wanted to ask about automotive, Matt, I think I heard you say it feels like you're nearing a bottom there. What details can you give us? What visibility do you have into next year? And to the extent you can distinguish what you're seeing in North America versus Europe, that would be appreciated as well. Matt Moschner: Yes. No, I think it is -- it remains a challenging market for us, although, yes, I think we are nearing a bottom. But I think you're right to point out the geographic differences in growth. And here in the U.S., we are seeing more activity, I would say, relatively more activity than Europe, which seems to be taking a longer time to recover. And it's not hard to imagine why, there's different geopolitical considerations around trade and tariffs for this industry. And so we're definitely seeing larger differences in relative growth rates in the Americas and Europe with relatively more strength in the Americas than Europe. We also serve large automotive manufacturers in Asia, in Japan, in Korea, Mainland China. And I think there, I think it's again mixed. I think it depends on specific OEMs, their transitions between powertrain types, the geopolitics of those things. And so yes, I think it's hard to call. I think we are nearing a bottom. I think this year is going to be better than last. And our teams are working with each of those OEMs on their automation plans, which we still see over the medium and long term as being healthy, right? This is an industry that is still struggling with quality escapes, right, and recalls. Vision helps with that. It's an industry that struggles with labor and qualified skilled labor. Automation helps with that. And generally speaking, mitigating the increase in costs associated with production and tariffs and things like this and automation helps with that. So in the near term, I'd say it's improving and stabilizing. And over the long term, I think we remain optimistic. Thomas Moll: Dennis, a question for you on margins. If we look at what you just reported in the third quarter, and this will be ex Moritex, ex the commercial partnership, you delivered teens top line growth with only 1 point of adjusted OpEx growth. Clearly, that's not repeatable over a long time horizon. And so if we take that as one bookend, the other bookend you gave us is basically a reminder of your long-term framework just that OpEx grows at a slower rate than sales. That's a pretty wide range for us to think about. If we're thinking next 12 months, is there anything you could do to situate us somewhere within that wide range in terms of what's reasonable? Dennis Fehr: Yes. No, fair question, Tommy. I would say maybe first clarifying on the quarter, right, if you take in constant currency, we would be down by 1 point. And that's considering that we had some incentive comp headwinds, right? So last year was an underperforming year, and this year looks a bit better in that regard. And in prior quarters, we have been talking about that we have been 2 or even 3 points down compared on the year-over-year comparison. And that's kind of -- if you think about like constant currency, excluding incentive comp, that's kind of the run rate which we are for this year. And we keep on driving that, right? So we talked about taking on additional reorganization charges in this quarter. And clearly, that's for us to set ourselves up for the future and to drive success, right? And that kind of put that a little bit also in context in my prepared remarks of how we think where we are in the cycle, right? So we talked about like in general, we are a short-cycle business. So we don't have a lot of visibility into 2026. So we use these macroeconomic indicators like PMI, and they tell us we're in the early stage of the cycle, that means moderate growth and then a moderate growth environment for us means to be -- keep on working on OpEx and drive efficiencies throughout the organization. And that basically then sets us up still for hopefully attractive EPS -- adjusted EPS growth, right? So if you look at this year, mid-single-digit growth on the top line, excluding the commercial partnership, but adjusted EPS, if you take the implied guidance, excluding the commercial partnership, that's a bit more than 20% of EPS growth, and that's kind of how we think the playbook could look like that shows attractive growth rates. I hope that helps a bit with narrowing it down to your question, Tommy. Operator: Our next question is coming from Jake Levinson of Melius Research. Jacob Levinson: Just wanted to go back to logistics for one second. I know you folks have seen some pretty nice growth there in the last couple of quarters, but it's been -- it's put some pressure on your gross margins, if I recall, just given the engineering resources that you need to use with implementing machine vision for some of those customers. So the question, I guess, is as you roll out some of these AI-enabled products, does that actually lower your cost to serve those customers going forward? Matt Moschner: Yes. Thanks, Jake. Absolutely. I mean SLX really strikes at the heart of really 2 pieces of the P&L. One is on the gross margin side. We see that the ROI on visual inspection is very strong. And so we're able to command better pricing for a given product cost. So we're excited about that. And you might even expect similar margins as we see in vision in our factory automation business for logistics. And then really, I think one of the special parts of that product is it was completely rebuilt with simplicity in mind, right, really a low-touch, no-touch deployment that maybe takes Cognex out of the loop entirely in terms of doing feasibilities, but also scale deployment. So yes, I fully expect we'll see benefits on the gross margin line as well as on the OpEx line as we can grow without having to grow our field service resources to deploy those systems in a similar way. Jacob Levinson: Okay. That's helpful. And just wanted to touch quickly on the commercial partnership that you announced. I think if memory serves, you've had more of a presence in sort of the medical device space as opposed to lab automation. But are there more opportunities like this to partner with some of these OEMs, whether it's the medical space or others? And kind of how does this fit into the larger strategy around expanding into some of these newer markets? Matt Moschner: I wouldn't say that. I think this is a more specialized case where we found an opportunity with a partner in a more niche area for us. So no, I wouldn't say, I'd want you to extrapolate that as any sort of new playbook for growth for Cognex. I wouldn't say that. Operator: Our next question is coming from Piyush Avasthy of Citi. Piyush Avasthy: Matt, maybe like on your Investor Day, you laid out a 6% to 7% growth contribution from increased machine vision penetration. It's just been like a couple of quarters, but maybe some early feedback on how that is progressing. I see you have been -- it has been associated more with packaging. Maybe comment on how you can see this supporting your other end markets. And then there is this reorganization, maybe just comment on like how you balance these cost actions while still being aggressive towards penetrating new markets. Matt Moschner: Yes. Thanks. Let me take the penetration question first. And you're right, we said there was 6% to 7% penetration growth on top of core growth of each of our industries that led us to a 10% to 11% through-cycle organic growth rate. So I think you had that right. Where are we seeing it? And a big part of that penetration, as we said, I think, was a lot -- that's very technology-driven, right? As we innovate, we are solving often for the first time, applications that haven't been solved before. I think I mentioned logistics as very much one of those. And I suspect and we're seeing that the SLX is solving new vision applications that haven't been solved before. So we're driving penetration in logistics with vision. Similarly, in consumer electronics, we're innovating with new tools today that are doing things around cosmetic defect inspection that were not possible in the past. We're driving penetration in consumer electronics. And then packaging, you're right. I think that is more about how do we educate the market and educate customers who are more regional, smaller manufacturers on the benefits of vision, and we're doing that through investments in our sales channel. So yes, those are just 3 areas I would point to where we're driving penetration through technology, through channel, through sales coverage, and I'm excited about each of those. Your second question is on cost and how we're thinking about cost management and cost reductions in the context of our growth story, right? We take, as we've said in the past, a very long-term view on growth and investment, and that's -- it's a technology company, we have to. But at the same time, we're many months into making sure that given the stage of the growth cycle that we're in, that we are managing our cost bases smartly. And so yes, over the last 6 months, we have moved quickly to rightsize our cost basis in a number of areas. I would say we really took a hard look at all areas of the company. We continue to, whether it be our sales capacity, our engineering capacity, our operations footprint, back-office functions and G&A. And it's been a -- I'd say it's been a very collaborative approach as a leadership team. And I think we've done it smartly. I think Cognoids are bought into the journey, and we're excited for how we can take that into next year and drive profitable growth over the medium and long term. Dennis Fehr: And maybe let me add to that, just kind of how we manage that. So we're taking a very programmatic approach. So it means we have clearly identified areas and work streams defined on which we work on. And then you can see that we're not coming out with like just the one big, whatever reduction in force type of approach, but we're really kind of looking at area by area. Looking for efficiencies, getting these efficiencies and moving on and revisiting after some time again to see like how has that worked and where can we improve further. So it's really -- think about it that we are driving a program, which is not looking like let's just kind of cut costs in the short term and maybe break a lot of things along the way, but it's really a well-balanced programmatic approach, which kind of brings the right balance between supporting the top line growth and at the same time, supporting also the bottom line. Piyush Avasthy: Very helpful. And I know you just gave guidance 1 quarter ahead, but you did spoil us last time with some incremental color on 4Q. So as we think of like 1Q '26, anything you want to remind us in terms of seasonality, any material deviation from the end market commentary that you just highlighted today? That would be helpful. Dennis Fehr: Yes, Piyush, great question. Certainly, as you mentioned, we typically don't give longer-term guidance. Keep in mind, we are a short-cycle business, but there's certainly some modeling comments I can provide. So first, keep in mind on the top line side is that from a seasonality point of view that Q1 often is like the lowest quarter in the year. So that means in that regard, you may want to look at really a year-over-year comparison, right? Don't look at a sequential comparison, look on top line and year-over-year. And then when we think about bottom line and here maybe particularly OpEx, maybe I can remind you that in Q1 this year, we had some favorability in OpEx from exchange rate as well as from stock comp. So these ones may not repeat in Q1 2026. So I think on the OpEx side, it's probably better for you to model sequentially and not on a year-over-year basis. So maybe, yes, 2 comments, top line look year-over-year on the seasonality and on the OpEx side and at the bottom line rather look sequentially and not year-over-year. I hope that's helpful. Operator: The next question is coming from Guy Hardwick of Barclays. Guy Drummond Hardwick: I would like to ask about automotive, which is obviously your softest market. There has been some maybe more slightly positive commentary with some major CapEx announcements by OEMs. And I guess, typically, if you're looking at 2026 and where the model launch cycle looks perhaps a little better in the second half of the year, you sure you have to put the CapEx in like 12 months ahead. So I was wondering whether there's any lead indicators from your customers in terms of models or product refreshes or CapEx plans, which may give you some cause for optimism for 2026 in auto. Matt Moschner: Yes. Thanks, Guy. Yes, I would say we engage with all the major OEMs on their automation plans and on their platform plans, if you want to call them that. And you're right, there have been some big announcements from large OEMs, I would say, in all regions in terms of how they plan to replatform for the future, whether that be hybrid powertrains or fully electric or really just, I would say, bringing a more software-defined customer experience to the car. And as they do that, you would expect a healthy dose of automation and significant retooling, I would say, in terms of how those vehicle platforms are made. But I wouldn't comment on specific expectations for auto next year. I think that would be premature. I would just echo the comments I made, which is we are seeing differences in business momentum across geographies, relatively stronger in the U.S., relatively weaker still in Europe and somewhere in the middle in Asia. So we work with them all. We're staying close to it, but I think a bit too early to call at this point. Operator: The next question is coming from Joe Giordano of Cowen. Joseph Giordano: Can you -- when you talk about like AI making things easier to deploy, like it's also, I guess, helping nontraditional players start to try to deliver solutions here. We're seeing that from like automation players, things like that. So can you maybe talk about the competitive environment, how it's like evolving, like who's trying to participate on the fringes and what that means for you? Matt Moschner: Yes, sure. Maybe I'll just talk about us for a minute. We're on our fourth generation of AI vision. We've been at this for almost 10 years, starting with the acquisition of ViDi Systems in early 2017. And we have great teams focused on taking some of the latest best open-source models and adding our customizations, if you want to call it that, to make them more relevant and run effectively in industrial vision applications. So think of that as very much our secret sauce and Reto, who leads our vision tools development, I think, talked at length at Investor Day about how we do that and why we think we do it in a differentiated way. So I'd call that out. And it's really about model performance on accuracy, on speed, on scalability, and I still see Cognex as leading in those areas. But you're not wrong to say AI is leading to somehow a democratization of folks that are trying visual inspection more and more within industrial environment. So in that context, I see it as actually a great growth engine for getting more users of vision within factories. And then it's on us to make sure that those vision tools are Cognex vision tools. So are we seeing significant changes in the competitive dynamic? We're not, but we keep a close eye on it. And I'm very happy with the progress we're making in AI. Joseph Giordano: And then since you guys have kind of evolved the strategy a little bit, the only part that we haven't really seen a ton of evidence of yet is on the M&A side. So can you maybe talk us through what you're seeing out there? I know valuations are challenging, but a lot of buzz out there on robotics now, humanoids, all these different things. Like where does it make sense for Cognex to participate going forward? Dennis Fehr: Joe, happy to take that question. I think as we outlined at Investor Day, certainly, M&A is part of our capital allocation strategy. And certainly, with the strong cash flow generation, which we have seen this year, we definitely have the potential to do M&A. But at the same time, it's also very clear that we are setting ourselves a very high bar in terms of a, strategic fit and then b, the financial profile of the potential target company. So in that regard, I think definitely, there are areas where we could bring in, especially like adding a broader product basket to our direct sales force where we can really create a lot of synergies from our perspective. But yes, at the same time, I really want to be mindful about that we don't feel like a pressure to have to do an M&A and that we will be very mindful about the financial metrics and financial framework around it, and that could mean that an M&A wouldn't be on the cards for the next 2 or 3 years. It will really depend on actionability and if we can find the right target. Operator: The next question is coming from Ken Newman of KeyBanc Capital Markets. Kenneth Newman: Dennis, I just wanted to kind of come back to those 2026 comments that you made at the end of your prepared remarks. I understand it's not a formal guide, but when you say similar growth trends ex the commercial partnership, is that comment relative to how you see the full year of 2025 playing out? Or is that more so relative to what you've seen in the last couple of quarters? I just asked because you do seem a bit more constructive on most of the end markets that you're operating in. You're even kind of calling out being close to a bottom in auto. I'm just trying to understand the thought process there. Dennis Fehr: It's really about coming back to -- I think I talked about it before, short-cycle business and in the largest part of our business, in factory automation, we have limited visibility. It's 3 months visibility. And certainly, we think about the end markets and Matt provided some of the voice over there, and there's some areas which we really like to see like consumer electronics looks good. And Matt talked about in logistics, like how -- is there the linear growth trend on large-scale customers or not and automotive may be finding its bottom. So there are definitely different aspects there. But sometimes we're trying just not to get too much into the details in each of the markets and take a broader view on like what is macro telling us. And just on that macro side, if you look at that, it just doesn't point to that at the moment from the PMI as of today, the 2026 will look very different than 2025. And that's just another data point which we're taking in consideration. I think mostly important, why are we doing that, right? We want to think about like how do we manage the company also in terms of on the OpEx side and where do we invest and where not. And so we provided that more as a framework in the sense of like how do we think and how do we do management decisions right now and wanting to give you a guidance, right? And I was trying to be very clear about to say this is not a guidance. Kenneth Newman: Yes. No, that makes sense. I appreciate that. And then maybe for the follow-up here, sorry if I missed it, but did you provide an update on the OneVision platform? And just any color on when that becomes more commercially available? Matt Moschner: Yes. Thanks, Ken. Yes. No, we did not in the prepared remarks, but I'm happy to now. It's one of the more exciting things we're working on. And yes, just to remind the group, so we launched OneVision or we announced OneVision, I would say, in June, just before the Investor Day, and we said that it was in a limited release. What does that mean that the technology is still under active development. We're working with select customers, and it can be deployed against specific Cognex embedded systems today. And I would say 4, 6 months on from that announcement, we continue to make very good progress, progress with customers. I think they like it quite a bit. We're seeing it drive great penetration in new applications that previously weren't solved or keeping customers within our In-Sight Vision Suite ecosystem longer. I think both of those are great things. I think the usability of the technology is excellent. It offers customers great ways to collaborate on model training and great ways to track the efficacy of those models after they're deployed. So we're getting great feedback on that. What comes next? Well, we will continue to engage with customers. You can think of us engaging with hundreds of our tens of thousands of customers. So they're still quite targeted, and we are targeting a full-scale launch in the first half of next year. And that would open up the product line to more customers in more geographies that would have broader support of more of our embedded systems. So we're really focused on that, and we're excited with the momentum today. I don't have any updates for you in terms of the commercial model for the product, but just to say, it is performing well against the metrics that we set for it. Operator: The next question is coming from Tomo Sano of JPMorgan. Unknown Analyst: This is Brendan [indiscernible] on for Tomo. Just with the launch of the SLX portfolio, can you talk to the pipeline for the new AI-enabled use cases that you see and sort of how you see that impacting both your TAM and competitive positioning over the next year or 2? Matt Moschner: Yes. So we see ourselves as a first mover in this style of AI vision for logistics, and I highlighted 2 applications, really object classification, right? So telling the system what it's observing as well as side-by-side detection, which is a very common application particularly in high-speed sortation and warehouses where you really want to make sure that when you're identifying an object, it could be a box or a singulated item that it's one of them, not multiples of them. And so that really is helpful so that as those things get sorted and diverted and shipped, you're not shipping multiples of something. And so those are the 2 applications that we're really focused on. And I would say every week and month that goes by, we find new applications for the underlying AI detection algorithms. And so how that affects our total market, we have an estimate for that. And we think it is large and growing substantially faster than, let's say, the traditional barcode reading portion of that market. So yes, let's see how it goes. We've engaged with customers well ahead of yesterday's release and the feedback has been very positive. I'm excited to get to a full release status and update you on the future on how that product line is going. Operator: The next question is coming from Jamie Cook of Truist Securities. Kevin Wilson: This is actually Kevin Wilson on for Jamie. I want to ask on Europe. I think you said grew modestly, excluding the procurement shifts in consumer electronics. Sorry if I missed it, was that modest growth also excluding the onetime partnership in the quarter? And then just more broadly, excluding the onetime and excluding the procurement shifts, how are you thinking about demand trends, organic growth and your visibility in Europe? And maybe if it's possible to strip out auto, think about how that market is performing. Dennis Fehr: Yes. Maybe let me start here and then perhaps Matt will add. So I think if you look at Europe, right, so first of all, where did we saw strength? So we saw strength in the packaging market, thanks to our sales force transformation and kind of increased outreach there and penetration with our AI easy-to-use products. But then at the same time, we see stronger weakness still in the automotive side. So Matt talked about that before. That's the one market in the automotive, which is really still down. So that's kind of balanced itself out a little bit. And in general, I would say Europe, clearly, if you look back to the PMI numbers, PMIs have been improving over the last couple of months. But really from, I would say, almost depressed level more to like maybe close to a neutral level. In that regard, I would say we remain still a bit cautious about Europe and wouldn't call that there is some large growth coming somewhere in the near term, at least that's not what is suggested by the macro data, which we're looking at. Kevin Wilson: That's helpful. And then for my follow-up, now that I think we're about 1 year into your sales reorganization, I wonder if you can update on your assessment of that change in strategy. I know we've long stopped talking about emerging customer in those terms. But with one vision and your broader expanding the customer base into less sophisticated customers, I guess, what inning are we in for Cognex market penetration there? And any specific goals you have for 2026 on your path to doubling the number of customers served? Matt Moschner: Yes, sure. No, I think you have it roughly right. And just to remind the group, we started on this journey of really substantially broadening our sales channel several years ago, really in 2023. And as we expanded our sales force and brought on many new sales noise, as we call them, sales engineers, we made the decision to combine what was really 2 sales organizations into one earlier this year in January. And I would say that was the right decision, and it's going very well, where we've really formed new territories and new teams focused on different missions and those missions are between finding new customers, driving penetration in existing customers, working with more sophisticated customers like machine builders and other OEMs. So I would say I'm very pleased with where we are in terms of our sales strategy and sales organizational structure. I'd say, as we look forward into the new year, it's less about significant substantial change, and it's more about continuous improvement. We made big investments over the years in modern business systems and tools, primarily in the area of CRM. And I would say we're starting to use those tools quite effectively in terms of how we identify new sales opportunities. We get those leads to our sales noids to qualify and consult. And so what inning we're in, I wouldn't say, but I'm very encouraged by the progress we've made since the first of this year. And really, the focus right now is on continuous improvement, driving efficiency and less about any substantial changes heading into next year. Operator: That is all the time we have for questions today. I will now turn the call back over to Mr. Moschner for closing comments. Matt Moschner: Thank you for joining us this morning and for your continued support. We look forward to updating you on our progress heading into the fourth quarter.
Cary Savas: Good afternoon, everyone. Welcome to Grid Dynamics Third Quarter 2025 Earnings Conference Call. I'm Cary Savas, Director of Branding and Communications. [Operator Instructions] Joining us on the call today are CEO, Leonard Livschitz; CFO, Anil Doradla; SVP, Head of Americas, Vasily Sizov; and SVP, Global Head of Partnerships and Marketing, Rahul Bindlish. Following the prepared remarks, we will open the call to your questions. Please note that today's conference call is being recorded. Before we begin, I would like to remind everyone that today's discussion will contain forward-looking statements. This includes our business and financial outlook and the answers to some of your questions. Such statements are subject to the risks and uncertainty as described in the company's earnings release and other filings with the SEC. During this call, we will discuss certain non-GAAP measures of our performance. GAAP to non-GAAP financial reconciliations and supplemental financial information are provided in the earnings press release and the 8-K filed with the SEC. You can find all the information I just described in the Investor Relations section of our website. I now turn the call over to Leonard, our CEO. Leonard Livschitz: Thank you, Cary. Good afternoon, everyone, and thank you for joining us today. Our third quarter revenue of $104.2 million was another all-time high, fueled by AI demand. AI grew 10% on a sequential basis and contributed to over 25% of our third quarter organic revenue. New business resulted in the highest engineering billing headcount. We remain committed to disciplined capital allocation. I'm happy to report that the Board has authorized $50 million share repurchase program, which we announced in today's press release. This represents about 15% of our company's cash. The buyback reflects our confidence in the long-term prospects of the business and commitment to investing in ourselves. We believe Grid Dynamics shares are undervalued at current market prices, making the repurchase an attractive use of capital. In Q3, we have the strongest pipeline of new large enterprise logos since the beginning of the year. Customers are regaining confidence and beginning to accelerate their strategic initiatives. We're encouraged by the quality and duration of the new engagements. New programs are multi-quarter in nature and with budget extending well into 2026. This is a substantial improvement from the first half of 2025. Our partnership influence revenue continued to grow and exceeded 18% of our third quarter revenue. Investments into partnerships are driving faster growth, stronger opportunity pipeline and deeper engagement with new and existing clients. Grid Dynamics helps customers to build advanced AI and digital capabilities. In addition to the hyperscalers, we are also enhancing our efforts around AI-centric independent vendors or ISVs. In the third quarter, we added 5x more billable engineers than we added in the second quarter. In the fourth quarter, we expect net billable engineers added to be at the similar levels as in the third quarter. This is indeed a remarkable achievement given year-end seasonal trends. We also grew our average revenue per person by 4% on a sequential basis in third quarter. We continue to rationalize our overall headcount as we align our skill sets and geographies. And this will result in greater efficiencies and higher utilization. As a result of the strong momentum in the second half of the year, we expect to end the year with a materially higher billable run rate, positioning us well for the growth in 2026. Our 2026 revenue growth will build on the top of this higher baseline, providing a strong foundation for the continued expansion and operating leverage. I'm also happy to share that we're in the midst of a company-wide initiative to expand our profitability and margins. Over the next 12 months, we expect to improve our margins by at least 300 basis points. We'll achieve our goals through several initiatives that we are currently operationalizing. This includes efficiency improvements with a focus on higher-margin geographies, leveraging enhanced pricing with our AI offering, rebalancing our portfolio of lower-margin business and embracing technologies with our AI-first initiatives. In particular, we found that the AI tools and frameworks used by our engineers in software development life cycle, or in other words, SDLC are making them materially more productive. In short, they're able to produce more code of better quality in less time. We now have an opportunity to monetize this boost in productivity. AI is the fastest-growing practice in our company, acting as a powerful flywheel for our business. I'm delighted to share our progress as Grid Dynamics advances its transformation into AI-first company. Our technology vision is clear and structured across 3 horizons: AI-first delivery, Agentic AI at scale and physical AI. This framework guides how we embedded AI into every facet of our operations and service delivery, ensuring our clients receive the most advanced production-ready solutions. AI First delivery is centered on transforming our engineering and delivery capabilities. This is about operationalizing AI in our core processes. The adoption of AI in SDLC has exploded and our Grid Dynamics AI native service offering known as GAIN is at the heart of this transformation. We're seeing strong adoption of AI First SDLC methodologies with active pilots at major clients, including a leading home goods retailer, a major financial technology company, a prominent health care revenue management provider, a global food distributor and a multi-brand restaurant company. AI First SDLC fundamentally changes project economics and delivery time lines. It enables us to take on labor-intensive legacy modernization projects that were previously inaccessible, substituting extensive parallel human efforts with specialized teams equipped with AI agents. The impact on our presales process is equally transformable. Our ability to create full-fledged proof of concepts in hours instead of weeks provides a game-changing advantage, improving conversion rates and accelerate sales cycles. As we deploy these solutions, we see leaders emerging across industries verticals who are driving measurable ROI through new AI capabilities. While some enterprises are finding success, the vast majority are waiting for commercial off-the-shelf software solutions to become available. It's evident that to achieve meaningful ROI, custom solutions must be engineered for specific business processes, leveraging the foundational capabilities provided by AI leaders such as NVIDIA, Google, Anthropic and OpenAI. This has been the core strength and DNA of Grid Dynamics. We're a trusted engineering partner that builds from AI-first principles, and this positions us perfectly to help the clients to succeed in this new era. Our second horizon focuses on deployment of Agentic AI platforms for customers and our employees. We are partnering with large enterprises to build bespoke Agentic platforms. This platform-first approach creates significant expansion opportunities. Our clients engage Grid Dynamics to architect their foundational platform and leverage the expertise to develop sophisticated AI agents for customers and employees, including automated operations with human in the loop. These initiatives drive Agentic customer engagement and enhance decision-making across enterprises. Our third horizon is Physical AI. It involves integrating AI with the physical world through technologies like digital twins, collaborative robotics and edge computing. The rise of Physical AI is fundamentally transforming the industrial robotics landscape, leading to the replacement of the legacy robotics platform with modern AI-enabled solution. We're advancing our Physical AI initiative through new partnership with selected robotics platform providers. Our recently announced SmartRay software for robotics world inspection marks an important step forward in our strategy to combine AI with robots. We plan to expand these capabilities further in the coming quarters. The key to success in enterprise AI programs is not just deploying new technologies. It's about having a deep understanding of the business and leveraging technology to solve real-world high-impact problems. Many companies are realizing that the value of AI comes from rethinking processes, data flows and decision logic around business outcomes rather than pure technology capabilities. This is precisely where Grid Dynamics excels. Our teams combine strong technical expertise with domain influence, enabling us to translate complex business challenges into scalable AI-driven solutions that deliver measurable financial results. AI projects and engagements serve as a critical entry point for the clients opening the door for larger, high-value platforms and modernization programs. We are seeing a familiar pattern where initial AI engagement such as search or personalization, expands into a broader work across data platform and cloud modernization. We're capturing a higher share of these initiatives, high-margin projects as clients deploy ROI-driven AI initiatives. We're also capitalizing as the market shifts from experimental proof of concepts to enterprise scale implementations that deliver measurable ROI. Our game framework continues to gain strong traction with the clients. The model goes well beyond simply layering tools like OpenAI's Codex or Anthropic's Claude Code for the existing engineering teams. The framework rethinks team composition, engineering workflows and best practices to maximize the productivity impact of AI. The goal is to bring substantially higher efficiency gains than just utilizing stand-alone tools. Over the past quarter, we scaled our expert team dedicated to advancing gain, further strengthening our competitive edge in the AI native engineering space. And now, I will turn the call over to Vasily Sizov, our Senior Vice President of Americas, to discuss some notable projects highlights from this quarter. Vasily Sizov: Thank you, Leonard. Good afternoon, everyone. As Leonard highlighted, we are seeing a clear change in customer tone compared to the beginning of the year. Clients who were previously focused on near-term risk management are now taking a more constructive and strategic view, thinking about how to position themselves for growth in 2026 and beyond. This shift from caution to controlled optimism gives us confidence that the current demand recovery is structural, not temporary. In fact, several of our key customers begin their fiscal year on October 1. Contract renewals we observed and new committed budgets at or above prior year levels indicate maintenance of the momentum. A significant portion of this activity is centered around AI business cases, initiatives designed to drive tangible operational and financial outcomes. As we mentioned in prior quarters, we are already executing on 2 large-scale platform programs with Fortune 500 clients that are implementing Agentic AI across the enterprise. We are now seeing a much broader wave of discussions of similar nature and the results to date have been very encouraging. The ROI profile of these AI initiatives looks more attractive than that of traditional digital transformation programs. Unlike gradual multiyear modernization efforts, these AI business cases often target specific pain points with measurable improvements, revenue uplift, cost reduction or conversion rate gains that become visible within quarters, not years. This creates a strong feedback loop as clients see real results, their interest accelerates and demand begins to snowball, which we observe in our pipeline. With that, I would like to highlight some notable projects from the quarter that illustrate these trends. First, we are developing an AI-driven bug triage solution for a leading multinational technology company. Our approach integrates advanced noise reduction, deduplication and intelligent routing with deep analytical models, custom lock processing and robust domain knowledge base. This combination directly addresses the challenges of engineering operations in bug triage and routing. By automating complex analysis and decision-making, the solution is expected to reduce triage time by up to 70% triage, while significantly improving accuracy and replacing the traditional manual approach for bug triaging. Second, for a leading technology company, we've developed a system to support compliance with the Digital Markets Act by shifting data processing from server site to on device. Using modern mobileto-edge data processing workflows, the system delivers server source data to user devices for local transformation, a critical requirement under DMA, which prohibits certain server side joints and aggregations. The platform processes billions of records daily across a wide range of business domains and data sets. This initiative has significantly strengthened compliance by enabling privacy preserving non-identifiable consumer data collection at scale. Third, a leading financial and investment services firm is modernizing its advanced search platform used daily by over 10,000 financial advisers for efficient search of the client data. The legacy interface required navigating nearly 500 filters and understanding of SQL queries and logical expressions, creating complexity and inefficiencies. The enhanced solution leverages AI and natural language processing to enable advisers to query the firm's databases using simple conversational language. This AI-driven search experience delivers faster insights and an estimated 10% boost of financial advisers' productivity. And the fourth example, a leading U.S. automotive parts provider had a plan to replace an outdated solar-based search engine with a goal of improving online revenues by at least 3% without disrupting operations. Great Dynamics partnered with them to implement a Google Verdicx AI search solution and successfully accomplished the project with results exceeding the expectations, a 3.33% uplift in revenue per search, generating over $600,000 in just 2 weeks at 50% traffic, outperforming their legacy system by 5%. Looking ahead, we plan to expand Vertex AI search to B2C and in-store channels with content enrichment and cloud migration. Now, let me turn the call to SVP Global Head of Partnerships and Marketing, Rahul Bindlish. Rahul? Rahul Bindlish: Thank you, Vasily. Our partner influence revenue has grown to over 18% of total company revenue, underscoring the value of our ecosystem-driven approach. Our partnership framework is purpose-built to advance our mission of enabling enterprises to develop world-class AI and digital solutions. As AI continues to redefine enterprise transformation, we expect these partnerships to play an even more central role in our growth, driving continued expansion in both our pipeline and market opportunities. We organize our partners into 2 primary categories. First, platform partners. This group includes the hyperscalers, our core cloud partners as well as leading data and analytics platforms like Snowflake and Databricks. These collaborations keep us at the forefront of modern enterprise infrastructure, ensuring we deliver cutting-edge cloud, data and AI capabilities to our clients. With the hyperscalers, we are strengthening relationships through targeted investments in AI and Agentic platform capabilities. This includes expanding certifications, earning specialized badges and building new joint solutions, complemented by coordinated go-to-market initiatives such as joint marketing and sales campaigns. We are expanding these initiatives from the U.S. to other regions, including Europe, LatAm and South Africa. Second, ISV partners. These partners bring deep domain-specific capabilities essential for enterprise transformation. Through these specialized ISVs, we deliver tailored best-in-class solutions aligned with specific business needs. Within the ISV ecosystem, we have expanded our partnership with leaders in middleware and workflow orchestration that underpins reliable, durable execution for Agentic platforms. Our blueprints for Agentic AI platform, incorporating such middleware developed from real-world enterprise deployments address critical challenges in scaling and managing AI workflows. We have also expanded our platform partnerships to include NVIDIA. We are actively developing solutions on NVIDIA's advanced software stack, including Omniverse to deliver high fidelity industrial-grade digital twins and simulations. For example, earlier this year, we launched the Interalogistics optimization starter kit on NVIDIA, enabling retailers, manufacturers and logistics companies to optimize facility layouts and picking paths, boosting warehouse efficiency and reducing labor costs. With that, let me turn the call to Anil, who will talk about our financials. Thank you. Anil Doradla: Thanks, Rahul. Good afternoon, everyone. We recorded the third quarter revenues of $104.2 million, slightly higher than the midpoint of our $103 million to $105 million guidance. On a year-over-year basis, this represents a growth of 19.1%. On a year-over-year basis, there were roughly 40 bps of FX-related tailwinds. Non-GAAP EBITDA came in at $12.7 million within the higher end of our guidance range of $12 million to $13 million. In the third quarter of 2025, there was a negative impact from FX fluctuations on our costs, both on a quarterly and year-over-year basis. Grid Dynamics is exposed to a currency basket across Europe, Latin America and India. While we have a natural hedge against some of the currencies and a hedging program with other currencies, the net impact on our EBITDA was approximately $0.6 million or $1.3 million on a quarter-over-quarter and year-over-year basis, respectively. Looking at performance of our verticals. Retail remained our largest vertical, contributing to $27.8 million of our total revenues in the third quarter of 2025. Revenues in this vertical decreased by 2.1% and 2.9% sequentially and year-over-year basis, respectively. The sequential decline came primarily from a handful of large retail customers, while some of them have returned to growth. TMT, our second largest vertical accounted for 27.4% of total revenues for the quarter with growth of 13.5% and 18.2% on a quarter-over-quarter basis and year-over-year basis. This growth was primarily driven by our largest technology customers. Finance vertical accounted for 24.6% of total revenues in the quarter. Revenues were slightly up sequentially and grew 81% on a year-over-year basis. The substantial year-over-year growth was primarily driven by increased demand from our fintech customers, along with contributions from our 2024 acquisitions that brought in global banking customers. Turning to the remaining verticals. CPG and Manufacturing represented 10.5% of quarterly revenues and grew by 3% on a sequential basis and grew by 11.3% on a year-over-year basis, primarily due to contributions from our recent acquisition. Other vertical contributed 7.4% of total revenues, reflecting sequential decline of 1.6% and 10.5% increase compared to the third quarter of 2024. The year-over-year increase primarily came from customers tied to delivery, service providers and acquisitions. And finally, health care and pharma made up 2.3% of our revenues for the quarter. We ended the third quarter with a total headcount of 4,971, down from 5,013 employees in the second quarter of 2025 and up from 4,298 in the third quarter of 2024. During the quarter, we increased our billable headcount meaningfully. That said, we rationalized our overall headcount as we aligned our skill sets and geographic mix. At the end of the third quarter of 2025, our total US headcount was 370 or 7.4% of the company's total headcount versus 8% in the year ago quarter. Our non-U.S. headcount located in Europe, Americas and India was 4,601 or 92.6%. In the third quarter, revenues from our top 5 and top 10 customers were 40.1% and 58.3%, respectively, compared to 39.8% and 59.2% in the same period a year ago, respectively. During the third quarter, we had a total of 186 customers, down from 194 in the second quarter of 2025 and 201 in the year ago quarter. The decline in the number of customers was primarily driven by our continued efforts to rationalize our portfolio of nonstrategic customers. Moving to the income statement. Our GAAP gross profit during the quarter was $34.7 million, or 33.3% compared to $34.5 million or 34.1% in the second quarter of 2025 and $32.7 million or 37.4% in the year ago quarter. On a non-GAAP basis, our gross profit was $35.2 million or 33.8% compared to $35.1 million or 34.7% in the second quarter of 2025 and $33.3 million or 38% in the year ago quarter. On a year-over-year basis, the decline in gross margin was from a combination of factors that included FX headwinds, higher utilization, lower working time and mix shift from our U.K.-based acquisition. Non-GAAP EBITDA during the third quarter that excluded interest income expense provision for income taxes, depreciation and amortization, stock-based compensation, restructuring, expenses related to geographic reorganization and transaction and other related costs was $12.7 million or 12.2% of revenues versus $12.7 million or 12.6% of revenues in the second quarter of 2025 and was down from $14.8 million or 16.9% in the year ago quarter. The decrease of $2.1 million on a year-over-year basis was largely due to higher operating expenses and FX headwinds. Our GAAP net income in the third quarter was $1.2 million or $0.01 per share based on diluted share count of 85.8 million shares compared to the second quarter net income of $5.3 million or $0.06 per share based on a diluted share count of 86.4 million and a net income of $4.3 million or $0.05 per share based on 78.8 million diluted shares in the year ago quarter. On a non-GAAP basis, in the third quarter, our non-GAAP net income was $8.2 million or $0.09 per share based on 85.8 million diluted shares compared to the second quarter non-GAAP net income of $8.3 million or $0.10 per share based on 86.4 million diluted shares and $10.8 million or $0.14 per share based on 78.8 million diluted shares in the year ago quarter. On September 30, 2025, our cash and cash equivalents totaled $338.6 million, up from $336.8 million on June 30, 2025. As Leonard mentioned, the Board has authorized a $50 million share buyback, which we announced in today's press release. This represents roughly 15% of our cash. M&A continues to take priority in our capital allocation strategy. We are committed to augmenting our business organically through our acquisitions that strategically enhance our capabilities, geographic presence and industry verticals. Coming to the fourth quarter guidance, we expect revenues to be in the range of $105 million to $107 million. In the fourth quarter, all our business will be considered organic in nature. We expect our fourth quarter non-GAAP EBITDA to be in the range of $13 million to $14 million. For the fourth quarter of 2025, we expect our basic share count to be in the range of 85 million to 86 million and our diluted share count to be in the range of 86 million to 87 million. Based on our fourth quarter revenue outlook, we expect our full year revenue outlook to be between $410.7 million to $412.7 million. This would represent a 17.1% to 17.7% growth on a year-over-year basis. That concludes my prepared remarks. We're now ready to take questions. Cary Savas: Thank you, Anil. [Operator Instructions] The first question comes from Puneet Jain of JPMorgan. Puneet Jain: So, it was good to see increase in number of billable headcount this quarter, which you also expect to continue into 4Q. Talk to us like about the trends you are seeing for 2026? Like can growth rates next year meaningfully accelerate from like the broad set of clients compared to what you are guiding for 2025? Leonard Livschitz: Thank you, Puneet. It's good to talk at the time when we can be comfortable to discuss the growth. First and foremost, we are the highest billable headcount in the history of the company. The rate of growth has also picked up quite a bit, and we see that going into the Q4. But why we're comfortable looking forward for the next year at this point? First and foremost, the programs we have recently renewed or we signed for are longer in nature. They're not going on a short duration. They're going on multi-quarters. The second part of that is that the programs are related to the AI initiatives, a lot of technology application, which brings the core of us bread and butter of our business. The other part, which is important is that we don't get only stuck with the traditional renewals in the beginning of the year because some of our clients now have the sliding schedule for the new fiscal year. So notable clients had their fiscal year starting in October, which means that we are very comfortable to see the growth coming through, again, longer duration. And finally, as we have told you guys before, we have a number of our top 10 clients who elect Grid Dynamics to be a preferred vendor. It wasn't as evident in the last few quarters because they were a little bit slow on expanding their technology investments. Now they're full swing, and we're taking advantage of that benefiting from being a preferred partner. Puneet Jain: Understood. And then a question on Agentic AI, like the benefits to clients from transitioning to Agentic AI-based solutions, it's clear. But perhaps talk to us about the constraints that are limiting adoption? And what will change that? Like could that unlock higher level of discretionary spend among clients for the overall IT services companies next year? Leonard Livschitz: Very good. I would let Vasili talk about some specific cases because obviously, we're in the midst of the big transformation. And there are a lot of talks about what agentic AI can do. And cannot remember, it's our Phase 2 of horizon, the AgenticI is at scale. So, Vasily? Vasily Sizov: Yes. Thank you, Puneet, for the question. Yes. So Agentic AI and AI in general is the fastest-growing practice for us. So -- and we definitely see the expansion with the business cases, which we already kind of applied during the last few quarters. But the technology doesn't stay on where it is and it continuous evolving. And we are expanding our capabilities to a broader spectrum of business problems to solve. And there are a few notable examples, which we already mentioned during the prepared remarks. And some of them, for example, apply to the cases where lower skilled employees can be replaced with higher skilled employees in a lower number of, I would say, people augmented by sophisticated AI solutions. And for one of the core clients of us, we are implementing right now the Bug Triage Solution, which is basically assumes a small number of highly expert team augmented by AI, replacing hundreds of engineers of low skilled who are basically don't possess enough skills to requalify and can be really replaced by the more sophisticated processes and solutions. Cary Savas: The next question comes from Bryan Bergin of TD Cowen. Bryan Bergin: I wanted to follow up actually a little bit on that last question as it relates to the Agentic work and some of the TAM expansion. So particularly this Agentic managed services activity that seems like it's brand new as far as an opportunity for you versus the custom build activity that you're known for. When you think about the work, the Agentic work that you're doing for clients, is there a way to segment how much of it is in this kind of new managed services area versus what would be kind of just SDLC-enhanced Agentic activity? Because I think, obviously, that's a huge market, the IT managed services industry that you could penetrate here in a new way. Vasily Sizov: Yes. So, thank you so much, Bryan, for the question. I would say, currently, majority of the revenue, which we see are actually related to solving the business cases. As SDLC, I would say, expansion of existing programs and helps to open new accounts, but this is broad in nature. So, it's actually -- it goes through majority of our engagement. So, it's very difficult to discern what exactly would be the incremental gain, I would say. It just fuels overall growth, which we saw in Q3 and was significant. Leonard Livschitz: Yes. So just to comment more specifically, the complexity of scaling the business with the Agentic AI lays in the fact that we cannot just take off-the-shelf program and apply it to the client. When we talk about AI first deployments or more commonly known as forward deployed engineers, it's more or less straightforward. The Agentic AI unveils a very strong combination of the traditional hyperscalers, with their tools, solutions, their ISVs or some specialty tools and there are -- tools created in-house by Grid Dynamics. And mind you, quite a few initiatives are actually driven by Grid Dynamics to be the client zero, which is now very popular within the company. So, we train the programs within the company on a business process as an example, and then we carry out to the clients. So, we're expanding rapidly the market because it's a combination of our traditional kind of open sourcing world, but with embracing the partnership and a big players. That's, by the way, one of the reasons I brought Rahul to the call because the success of enrollment into broader base and Gen AI application is driven by how many cable solutions are developed by our partners in conjunction with us doing something in the middle of their preparation for releases. Bryan Bergin: Okay. That's helpful. That's clear. My follow-up, I'll touch on the numbers here. So just help us with reconciling the 4Q growth view that comes in here a little bit below versus what the prior implied would have been on the fiscal '25 outlook. With all the optimism you're conveying here on billable base on client behavior, is there -- is it just some of the signed work is not immediately starting and it's kind of '26 and thereafter? Is it any client-specific issues? Just anything just on the near-term numbers set up. Anil Doradla: Yes. So Bryan, very simple. It's a timing thing. So, there are three layers of this timing. The pickup in ramp, right? We thought it would be a little earlier. It just was a little delayed, but we're getting to the same point. Second thing is that in the year, we had 2 significant clients that had an impact on us. That was about, what, $25 million, $26 million roughly there. And these 2 things -- and the third thing was that if you look at the high end, there was certain M&A also plugged in. So, when you look at these 3 things, there's nothing structural. As a matter of fact, one of the client, a top 10 client that gave us a little bit of a headache early in the year, that's coming back strong. So, it's all about timing. And that's why when Leonard started off with his opening question, what we are seeing right now going into the fourth quarter sets up very well as we get into '26. Leonard Livschitz: But just to clarify, Bryan, even when we were meeting with you a quarter ago, we could not pinpoint exactly the time of the inflection point. We were reliant first on some time during Q2, then we were not sure. And then finally, the second half of Q3, it happened. So, when Anil refers to the timing difference, if you trace the rate of growth, not from Q1 to Q1, but from Q2 to Q2, you will see significant upside. And what's very important, again, what Anil said, taking away these 2 clients and some delays we had with them, we're in a fantastic organic rate of growth. Now there always something happens. So, we can't say it will never happen with anyone again. Of course, it happens. But what really carried us out into the more success rate of growth is a broader base of clients. With the application of technology tools we were less dependent on certain variations, especially from our traditional legacy retail and the service business around retail customers as a total. Bryan Bergin: Okay. Just one clarification. Did you scale that engineering base, the billable base that's up? I know you've got some things flowing through the net headcount from 3Q. Did you scale the engineering side? Leonard Livschitz: So this is very, very simple because when we do reporting, we're trying to follow the same numerical disclosures, right? So, if you look at the number of the billable headcount, it's significantly higher. So, what happened? -- there are 2 things happen. Number one, we're much more aggressive of optimizing the OpEx, right? The other -- so OpEx is really a big thing. So, we're reducing the bench or anything like that. The second part is it's a small variance of our internship programs. We continue to hire interns, but it happens in the beginning of the quarter. So, when they come to the end of the quarter, it's really not less meaningful, but we really have a robust pipeline of projects and also trained engineers, both from the internship program, Grid Dynamics University, et cetera. But it really -- it looks a bit weird because how you can grow when you have overall headcount. But when you see our engineering headcount, building headcount, utilization, we're extremely positive going forward. Cary Savas: The next questions come from Surinder Thind of Jefferies. Surinder Thind: I'd like to start off with a question about the partnership program. Can you talk a little bit about -- when you think about the future of where those numbers could get to, I feel like we've been kind of stuck in the 16%, 17%, 18% range as a contribution or a percentage of revenues. Can you talk about where we are in that process and where you think you can ultimately get to and why the numbers are what they are today? Rahul Bindlish: Thank you for that question, Surinder. A little bit about myself. I was the first salesperson who joined the company more than a decade ago, and we started the partnership program about 4 years ago with the intention to grow our business, increase pipeline, accelerate the sales cycle. And we are doing pretty well on all those parameters. Now, specifically in terms of percentage of revenues influenced by partnership, we have grown pretty nicely to about 18%. We started off with a goal of getting to about 21-odd percent. But given the growth we have had, I do expect in the long term, we'll end up somewhere between 25% and 30%. Now, you did make a statement that we have been stuck between the 16%, 18%. In fact, if you look at the trajectory, we are growing from 16% to 18%. If you look at we have also done acquisitions. And a lot of our acquisitions, when they come in, they don't come with partner influence revenues. So, our overall percentage is still growing on a total basis, including acquisitions. Effectively on a dollar basis, our rates are significantly higher. Surinder Thind: And then maybe a question on the decision to go with the share repurchase program. Any color there in terms of -- I realize it's not a very large percentage of the cash. But for a growth company, just can you talk about that and what you're trying to signal there? Obviously, I think people recognize valuations are generally depressed, but what's the benefit here? Anil Doradla: So Surinder, I think the first and foremost thing is a signal that we're sending to the markets. We believe that we -- our deployment of this capital at these levels is a clear good return on investment. You're absolutely right. We are a growth-oriented company. So, there is a second aspect of our whole story, which is M&A. And we're fully committed towards M&A. This year, we thought we'd close 1 or 2 deals. It took a little longer. But the second aspect of our capital allocation is definitely M&A. Leonard Livschitz: Just to add on this point, I think it's very important. We believe we really passed from the trough. We're in a clear growth inflection point. And we listen to our investors. We understand the market trends, and we believe it's a value which we will coordinately bring to the market, to our shareholders while maintain a very good position on the cash. And also, there's another added factor. We believe we'll generate more cash as the business grows. And those questions are related to how we're going to improve our EBITDA margin. Why is it important? Why we specifically said something in our commentaries about how actively we're going to do that because we're not just giving away cash. We're making a business-wise decision while demonstrating ability that we'll replenish the cash as we grow with the M&A process forward. Surinder Thind: The final quick question here. Just on the margins and the idea of generating 300 basis points of expansion over maybe the next 12 months. I understand this was a year of investment, but can you put that into context why now? Why not continue to invest given all of the change? And is that kind of a onetime step function change that we should then build off of? Or how do we think about the decision to kind of focus on margins at this point in the cycle? Anil Doradla: Yes. No, no, great question, Surinder, and that's a perfect question. Look, there are a couple of things that are going on here. The first thing is the timing of it. So, on that one, we believe that the macro is going to be what it is. And we're assuming that we're taking a little bit of a conservative outlook on the macro front and saying that given what it is right now, let's look at the way the business is. We've also reorganized our headcount. There was many non-repeatable one-off things, whether it is a sudden expansion of geographies, whether one-off discounts as we went through vendor consolidation with some of our big clients and nonrepeatable events, which we've landed with. So, we're taking a look at that. And the final thing is that, we're embracing these new technologies. So, as we embrace many of these new technologies, we believe that we could get some of the returns. So, where we are on the macro front, on almost like now we are in this new world where we're at 19 countries. Remember, about 3 years ago, we're at 7. We rapidly expanded. So, we're now taking a look at, okay, how should the company look like? What is the optimal model. And we're looking at it on an account-by-account level or region-by-region level. Leonard Livschitz: Let me just add more strategic comment on that. So, there are 3 ways you can manage cost. Number one is on the pricing side. Number two, on the cost. And in this case, Anil alluded to specific regions, which have been affected by the unfavorable exchange rate, and also the transition we had to India as an example. And the third one is a technology investment. And I think you alluded to make sure that we understand how to balance it. So, answering that question. We are definitely bringing the value to the clients, which is reflected in our new contracts. We're bringing our game model, which helps us to identify the business solutions, which is giving us a bit more run rate on the favorable pricing. The cost is what priority is for Anil to work on. We're not slowing down on a technology investment. Had we slowed down technology investments, it will be a significantly higher number. But my goal in life to bring in Grid Dynamics in the future of the growth with the same or better technology improvements as we had before. So out of those 3 elements, we pursue first 2. Cary Savas: The next question comes from Mayank Tandon of Needham. Mayank Tandon: Great. I had a couple of quick ones. First is, are you getting any indication from your clients around a potential budget flush in 4Q? If there is upside to your numbers, would that be the main driver? Or are there other factors that could also be potential upside catalysts based on your guidance? Anil Doradla: So, Mayank, this is a question that I challenge our teams internally, right, in the timing of it. So, some very interesting things are happening here. Number one is that -- and the gentlemen have alluded to, but let me rehash it. Number one, if you look at all our new deals that we're signing, we're signing at levels, the pricing at that level or higher. Second thing is that all these fiscal lending deals, we're now talking about 2026. So, people who are starting the new fiscal year, that's a very fundamental thing. And the third thing, which Leonard pointed out, see, the year of 2024 going into '25 was all about vendor consolidation. And in some many cases, we went from several to a handful and we've succeeded. We had to give one-off discount. But now they are looking at ramping us, and we're talking about 2026. So, if you look at my top 10, top 15, which is what, 50% to 80% of my revenues, we're now talking about 2026. That is a fundamental thing. But you're absolutely right, this is something I challenge the team. At this stage, we do not believe it's a budget flush. I'm sure there might be some marginal things, but our fundamental tone here is driven by what we're seeing in '26. Leonard Livschitz: And what's more important from the business standpoint, this is a financial -- very good financial from the business support, we open new programs. When you have traditional what you define as a budget flush, it's unused funds, which are used for some existing projects. This is not the case. We're opening big multi-quarter programs now, which tells you that it would be very difficult for people to appropriate sums just related to the end of the year. So, we're very bullish that this is not a just budget for short term. Mayank Tandon: Got it. That's very helpful. And then just a quick follow-up on margins. I wanted to just clarify. So, the 300 basis point expansion that you're calling for in 2026, is that gross margins? Or is that EBITDA margins? And then, Leonard, you did go through the levers. Could you just go through them again? I think you went through them a little bit quickly for me, at least. So, I would love to get a little bit more granularity on what the drivers are. Leonard Livschitz: All right. So, I'll let Anil first talk about his favorite topic. Gross margins with EBITDA margin. He loves to talk about it. I'm the one who needs to make it happen. Let him talk about. Anil Doradla: All right. Well, look, at the end of the day, Mayank, EBITDA margin -- the gross margin is part of the EBITDA margin, right? So, look, we are looking at the whole P&L holistically, including the cash generation. So, we're looking at the costs. We're looking at the OpEx. We're looking at capitalization. We're looking at every aspect of it. We have at least 300 bps that we're talking about, so by the fourth quarter of next year. We have some aggressive internal targets, and we're balancing that with some of our investments in technologies. So, I don't want to say it's coming from this, this and this. It's coming from everywhere. And the bottom line is that you'll see expansion. The bottom line, I'm hoping that expansion both on gross margin and EBITDA margin, but we'll see the final numbers. Leonard Livschitz: So now I'm going to repeat what I tried to say to Surinder with a little bit more granularity. So be a little bit patient with me. So, there are 3 elements. One of the pricing increase. The second is a cost optimization. And the third one is the technology investment, okay? So on the pricing side, there are a couple of elements which are critical. One of the main one is application of our game model. game model for us as we talked about it before. It's all about Grid Dynamics AI application solution enhancements. We talked with Brian about ageentic AI and other elements. So ,some of the programs we're signing now become more favorable. It's not because we're just hammering on the dollars per employee. I mean, that happens or some renewals, but it's not the most effective way. You actually need to make sure that ROI plays a huge role. And ROI was a bit up term for a long time because when you have a traditional T&M business, what is ROI. Now when you start applying the business solutions and business practices and eliminating a lot of waste on the client side, it becomes tangible. So that's on increasing the profitability of the pricing side. On the cost side, you asked a very important question. And on the 2 parts, on the gross margin part, Obviously, with -- especially with the dollar versus euro swing, some of the European locations, particularly in European Union zone, become less favorable. So, we're looking at that, how we're going to improve our gross marginality. Of course, you increase the price, but you also look at some of those less favorable locations of the business. That's one of the part. The second part is, if I mentioned before, if you recall, Grid Dynamics is a client 0. For a lot of internal initiatives, we're testing efficiency on our own business process, and then we transfer to the clients. It would be unreasonable for us to just investigate them and don't take advantage of it. So that's an operational efficiency. that operational efficiency in HR, recruiting, hiring, finance and all these elements of the business, which don't fit traditionally into the COGS, it's all OpEx. So that's an element. The second big part of element of the cost efficiency. We are putting a lot of effort here because we see that the trend for Grid Dynamics in recent months and quarters after the start of the war, 3 years has been there already, has not been favorable. And it's time for us to tighten the balance from the operational efficiency, but more importantly, the tools. We have a lot more tools. So, it's not just say, okay, you just get rid of this group of people and hire this group. It's a lot of more intelligence. The third part, we're not touching. -- actually, we're increasing the investment. And again, Surinder asked this question. He wanted to make sure we are not stopping deployment of cash into our technology area. For one way or another, there is -- it's a full P&L. So, whatever we invest in technology is a part of the same EBITDA margin, right? And we invest into all 3 horizons, including the third horizon, which is the physical AI, robotics automation. We work with on the proof of concept and some first project with a very large industrial companies that all takes investments. The partnership work takes investments. So, we are investing in technology, partnership, 3 horizons of AI, maintaining a strong focus on innovation while looking at the efficiency, both on our COGS and OpEx, and we're pushing the game model to improve the rates on the client side. If I'm still slow, I think we need to talk offline. Cary Savas: The next question comes from Matt Dezort from JPMorgan. Anil Doradla: No, no, from William Blair. Cary Savas: Sorry, from William Blair. Anil Doradla: William Blair. Matt, you just got bumped up to JPMorgan. Is that an insult or is that a complement? Matt Dezort: It's Matt on for Maggie Nolan over at William Blair. I guess to ask another one on margins, Anil, maybe a slightly different way. I guess it doesn't sound like it, but is it -- is that 300 basis points of expansion dependent on your growth reaccelerating next year? Or can you guys expand margins even if budgets and growth remain constrained into next year? Anil Doradla: Look, there is some leverage that you get and benefit from a top line growth, right? But as I said in the opening comments, we're not assuming anything much on the macro, not a big positive, not a big help, so to speak. So even if the macro -- even if the demand environment stays the way it was in 2025, we think we -- yes, we are going to expand at least 300 bps. Leonard Livschitz: Right. And I think what's important, again, and you mentioned it before, Matt, we have actually stated this is kind of a bare minimum. So, the market favorable conditions should lift it further. The technology optimization lifted further. It's -- we look with Anil today, it's our 24th earnings call together. It's the first time we're so specific on the margin part because we believe that Grid Dynamics kind of been looked a bit on a negative front from the margins and kind of a little bit tuned down our technology excellence. And we'll look at that and we say, look, we want to make sure that investors truly understand from the granularity how we're going to move forward with a growing business, improving our technology and become really rigorous on our cost-effective initiatives. Matt Dezort: Makes sense. Congrats on 24 calls together. Maybe as a follow-up, can I ask about your guys' AI advantaged? I guess, within AI, where does your competitive advantage come from versus your peers? Is it gain? And I guess, is that helping drive the outsized traction and pipeline within any specific verticals where you guys have historical expertise like e-commerce, for instance? Vasily Sizov: Thank you, Matt. Our history of utilizing AI and in the past, everyone was talking about data analytics, predictive analytics and machine learning. The story started from 2012 when we first started implementing natural language processing for the search engines for the biggest e-commerce and retail companies in the United States. In 2017, we wrote the first book on AI called Marketing. And we have a long story and a lot of investment into building this expertise, and that's what creates a differentiation for us. So, when the truly AI boom started, we were ready. We had business cases. We had accelerators, blueprints, understanding on how to implement that technology on scale. And essentially, with utilizing LLMs, it's just another tool in our toolbox, which helped us to tackle things which were not possible to tackle before. So, I would say that, that's the key differentiation. Right now, we are embracing more and more different business cases, different verticals with specific solutions, specific applications of the technology, I would say. And right now, it's difficult to say which industry benefits the most. I would say, everywhere where we are present, we understand how the technology can help and help with figuring out the strategy and the road map for the implementation of AI technology and going more and more into implementing AI platforms, which can help to implement AI technology on the scale of the enterprise. Leonard Livschitz: So just to also look at the bigger picture, Vasily was very good to define some of the application part. You're absolutely right, you have to start from something. And e-commerce and foundational part of the retail business drove us to expansion into the other areas like CPGs, which is very similar in the application side. But if you look at the recent -- more recent growth, where the applications of AI are becoming more and more prudent, we'll start looking at our growth in a technology TMT segment. We're looking at definitely in fintech. That's been a very successful endeavor for us to expand. And now it's picking up on the industrial side. So, it started from the foundations, but now it expands in the area. And the second part to your question, look, everybody tells that they have the best position for AI. You can talk to the company which is now valued $5 trillion, or you can call a company which values very little today from what it's supposed to value, which is Grid Dynamics. And everybody tells you almost the same thing, maybe not the jacketed the leather. But the thing is we are very, very laser-focused on the key technology foundational elements, which, as you alluded, was built in the past 12 years, 13 years. So, we're not going for the super broad-based clients. We're always on a top 1,000 clients in the world. And you can see that, we are tailoring to the programs with the scale in our past experience can benefit the most to the client. So, you have somewhat narrower band at some of the bigger guys who we're competing with. But where we get into the business, we are getting an excellent job and partnering. And that's where the partnership program also expand us, because we started with Google, Microsoft, AWS and NVIDIA. We have those fantastic partners. And when they see the value of Grid Dynamics, then it really speaks for what we are. But the time will tell who is going to be better. So, we're very bullish, but thank you for checking on this point because you need to be us and everybody else honest how good we and others are at AI. Cary Savas: Thank you to our analysts for all your insightful questions. With that said, this concludes the Q&A session for today. I will now pass it over to Leonard, our CEO, for closing comments. Leonard Livschitz: Thank you for joining us today. Our results highlight the strength of Grid Dynamics business expansion and formidable position in AI-driven industry. We have many reasons to be optimistic about our outlook. A meaningful increase in billable headcount in the second half of 2025 positions us well for the growth in 2026. We focused on double-digit growth in our AI business, scaling our partnership ecosystem, implement margin expansion. All of these underscore our confidence in the long-term potential. Grid Dynamics will continue to deepen its differentiation through technological leadership in the quarters ahead. I look forward to updating you on the next earnings call.
Operator: Good afternoon, and thank you for standing by. Welcome to Forrester's Third Quarter 2025 Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the conference over to Vice President of Corporate Development and Investor Relations, Ed Bryce Morris. Please go ahead. Edward Morris: Thank you, and hello, everyone. Thanks for joining today's call. Earlier this afternoon, we issued our press release for the third quarter of 2025. If you need a copy, you can find one on our website in the Investors section. Here with us today to discuss our results are George Colony, Forrester's Chief Executive Officer and Chairman; and Chris Finn, Chief Financial Officer. Carrie Johnson, our Chief Product Officer; and Nate Swan, our Chief Sales Officer, are also here with us for the Q&A section of the call. Before we begin, I'd like to remind you that this call will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as expects, believes, anticipates, intends, plans, estimates or similar expressions are intended to identify these forward-looking statements. These statements are based on the company's current plans and expectations and involve risks and uncertainties that could cause future activities and results of operations to be materially different from those set forth in the forward-looking statements. Factors that could cause actual results to differ are discussed in our reports and filings with the Securities and Exchange Commission, and the company undertakes no obligations to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. Lastly, consistent with our previous calls, today, we will be discussing our performance on an adjusted basis, which excludes items affecting comparability. While reporting on an adjusted basis is not in accordance with GAAP, we believe that reporting numbers on this adjusted basis provides a meaningful comparison and an appropriate basis for our discussion. You can find a detailed list of items excluded from these adjusted results in our press release. And with that, I'll hand it over to George. George Colony: Good afternoon, and thank you for joining Forrester's 2025 Q3 Investor Call. Today, I'd like to cover the following topics: one, our Q3 performance; two, an update on our go-to-market approach; three, the launch of the new AI access product; four, the research business in the age of AI; and five, feedback from our Board of clients. The macroeconomic environment continued to be challenging in Q3, highlighted by the rolling U.S. federal government pullback from consulting. Q3 is historically the largest bookings quarter for our government consulting business. We were well below our target and overall consulting revenue declined 8% from the prior year. In addition, research revenue declined 6% in the quarter, driven by bookings and challenges from previous quarters. Total revenue declined 8% from the prior year. Wallet retention was up 1 point to 86% and client retention held at 74% compared to Q2. Chris will give more detail on the quarter in a few moments. In the Q1 and Q2 calls, I noted that the final step in the product transition is transforming our sales engine to consistently sign new Forrester Decisions clients and grow existing accounts. We made progress in the quarter on several fronts. One, average time to hire reps is running at 55 days, improving on our goal of 60 days, and there's very good sales talent available in the market. Two, the sales force continues to adopt the Forrester Agile Sales Technique or FAST sales methodology. We ended the quarter with the highest percentage of reps certified and with all managers now qualified to run fast deal clinics. And three, our demand marketing engine continues to improve, driven by stronger alignment between our sales and marketing teams. The result has been increased prospect follow-up and a higher rate of opportunity creation from marketing efforts. Areas where we are focused in Q4 are: one, maintaining consistent sales activities; two, improving execution of our retention life cycle; and three, maintaining a rolling pipe of $550,000 per quota-bearing headcount. Moving now to product changes. We announced AI Access, a self-service AI offering on September 9. As you know, Izola, our generative AI model, launched over 2 years ago. Clients use Izola on the Forrester Decisions platform as an alternative to search, enabling them to quickly get answers and to create custom content from Forrester's proprietary model. Izola has become one of the primary ways that clients use our research. For clarity sake, Izola is a model built by Forrester that yields answers based on Forrester's research. This content is not available in any other generative model, including the public LLMs such as Claude from Anthropic, ChatGPT from OpenAI, and Gemini from Google. Unlike the public models, Forrester's private model is based on tens of thousands of Forrester Research artifacts, which include exclusive frameworks, ideas, data, product evaluations, best practices and benchmarks. The Forrester model yields answers that are proprietary and trusted. So where does AI access fit in our product portfolio? The current Forrester Decisions portfolio includes three levels of research access: VIP, which is research plus a dedicated advisor; leader seats, which is research plus the ability to have unlimited guidance sessions with analysts; and team seats, which offer research plus the ability to attend leaders' guidance and inquiry sessions. Clients have told us that in addition to VIP leader and team users, they want more executives using Forrester's research without access to advisers, customer success or analysts. These executives are often part of the VIP or leaders' teams, but they don't yet need continuous guidance. So AI Access provides an entry level for executives within our client companies to use our research, accessing Forrester through an AI prompt and Izola homepage. We introduced the product for three reasons: one, to attract new clients. AI Access will widen our client base and enable more executives to use Forrester; two, enrichment, AI Access provides streamlined self-service in a fast, trusted way for clients to get answers; and three, win backs. We will use AI Access to reintroduce former clients to Forrester Decisions. With the advent of AI Access, we have widened the Forrester Decisions portfolio, enabling us to land and expand with a wider group of executives and helping them align their initiatives and thinking. We are democratizing access to our research, making it easier for larger teams to get the answers they need to make collective decisions. AI Access is our entry-level research product. Volume pricing is available based on the number of seats acquired. Since the mid-September launch, we have seen significant interest with a multimillion dollar fast-growing sales pipeline. In Q3, we secured one of the largest research deals in Forrester's history with a large government agency that is modernizing their organization and is pushing toward fully AI-enabled decision-making. Our ability to offer this client an enterprise-wide pricing model via AI Access was a key differentiator, enabling thousands of users to gain access to our research in that account. We are off to a great start with AI Access and believe that the product will quickly become an important part of the Forrester Decisions portfolio. Now before I leave the topic of AI, I want to say a few words about Forrester's place in the AI future. I know that there have been many questions about the value of research in a world in which public large language models are becoming more adept at answering questions. In that future, what will Forrester's role be? Generative AI is good at enabling people to converse with broad data sets. In the case of the public language models like ChatGPT, that data set is built from what is called the common crawl, publicly available information scraped from websites. But as you know, that information does not include private data from sources like Bloomberg, Dun & Bradstreet, FactSet or Forrester. And of course, the public models do not include information like your bank account. To converse with that data in the future, you'll have to go to a private AI model built by Bank of America or Barclays as examples. Public AI will never be able to construct trusted data from thin air, just as it will not be able to conjure your bank balances without access to your bank. So in the age of AI, Forrester will be akin to a private research bank, creating and curating four proprietary assets: one, data. We will construct protected data sets and analyze them against longitudinal studies that the company has built over the last 3 decades; two, original ideas and frameworks like our Zero Trust security model; three, complex analysis that combines ideas and data. An example would be our total experience score that marries customer experience data with brand data; and four, proprietary information that forms the basis of the client Forrester relationship. Client priorities and initiatives would be an example. Of course, Forrester will leverage AI as we do with Izola to help our clients use these assets, but this information will not be available in public models. Also, while we believe that the future will be driven by AI, there will continue to be HI, human intelligence, driving knowledge and thought in society. This is not a robot moment when the Androids arrived to take all of our jobs. It is rather an Ironman moment when humans will put on suits of Generative and Agentic AI and become more powerful for their customers. Yes, there's a lot of AI at work, but inside the suit, it's still a human being that is able to channel AI to deliver the highest value. That's exactly what Forrester is doing with Izola and AI access, using AI to become more powerful and more useful to its clients and to the world, while also offering access to the analysts that created the research in our model. The word hovering over any discussion of AI is the word trust. When executives are making important business and public policy decisions, they must trust the information to train the AI model and that the model yields accurate answers backed by trusted data and trusted people. Forrester serves executives at some of the world's largest companies and government agencies. These clients are making decisions that will have long-term impact on the futures of their organizations. Yes, they will use AI to make those decisions, but they will rely on trusted AI, and that is what Forrester provides. Forrester executive team met with the company's Board of Clients in September. For many years, this Board has advised us on strategy, product and research direction. The members are trusted advisors to Forrester and Forrester is a trusted advisor to their companies. The Board is comprised of client executives who serve for 3 years. Current companies represented include Air France, AG Insurance, Ameritas, IBM, Nationwide, Travelers and SAP Concur. I'm not going to go through a full summary of the Board meeting, but I wanted to give you a few quotes in the members when we ask them, why do you use Forrester? Here are a few responses that I thought were illustrative of our value to clients. You challenge my thinking and help me define a new strategy. I use you for two things: knowledge of technical intricacies and bold advice. You give me backup and justification to move forward on projects. I love the benchmarks and associated future data mapping strategies that helps me develop. You're in it with us, setting us up for success, helping us pressure test solutions, breaking down our company silos. As a final quote, "I don't make a major decision without checking in with Forrester. It's a privilege to work with you. The Board of clients was very supportive of the launch of AI Access, and much of the meeting was devoted to Board members guiding us on pricing, positioning and packaging of the new product. So to conclude, we continue to work through the economic moment by: one, staying focused on improving our go-to-market motion; two, improving the Forrester Decisions platform; and three, carefully controlling expenses. We are very excited to be introducing AI Access. And we look forward to using AI to democratize access to our research and to further establish Forrester as the AI research company. Thank you for listening to the call. And I'd now like to hand it over to Chris. Chris? Chris Finn: Thanks, George, and good afternoon, everyone. The third quarter saw an exciting product launch with AI Access. We experienced immediate market validation with bookings and a landmark large enterprise deal incorporating this new product just weeks after its release. Although the ongoing dynamics in the marketplace continue to negatively impact all three lines of business, we delivered operating margin and EPS above consensus. And we continue to see stabilization in the research business with research revenue down 4%, excluding the divestiture of FeedbackNow, an improvement on the last quarter's performance. It is early in the sales cycle, but we are anticipating our new AI Access product to have a positive impact on Q4 and 2026 CV performance. Our Consulting and Events businesses continue to face headwinds in a tough selling environment. The consulting business has been meaningfully impacted by the cost-cutting measures enacted in the U.S. federal government, and we see these challenges continuing next year. The shift in the timing of one of our larger events negatively impacted results this quarter, and we see ongoing impediments for that business over the medium term as new leadership is evolving our offering and go-to-market motion. The fourth quarter is our largest bookings period, and we are positive of our pipeline. However, we are downward adjusting our revenue guidance based on the performance of Consulting and Events. This revenue adjustment flows through to a modestly lower margin and EPS guide for the year. Q3 saw a 7% CV decline. This is a continuation of the last 2 quarters' performance. We anticipate improved performance in the fourth quarter to come from the growing pipeline for the new AI access product. Therefore, even with the continuing uncertainty in the market, we are expecting CV to improve to a low single-digit decline for the year. For the total company, we generated $94.3 million in revenue for the quarter compared to $102.5 million in the prior year period, which is an overall revenue decrease of 8%. In terms of our revenue breakdown for the quarter, research revenue was $72.7 million, down from $77.1 million in 2024. This was a decrease of 6% compared to the third quarter of 2024, with revenue from our subscription research products down 5%. Excluding the impact of FeedbackNow, which we divested last year, research revenue declined by 4% year-over-year. Client retention of 74% was flat from the prior quarter. However, wallet retention was up 1 point to 86%. As discussed in recent quarters, wallet retention is being affected by enrichment challenges. This trend directly reflects the uncertain budgetary and macroeconomic environment we are experiencing. Our Consulting business posted revenues of $21.5 million, which was down 8% compared to the prior year. We are continuing to see uneven performance in the business by each product line. This year, Strategy Consulting has been negatively impacted by its degrading government business, but advisory grew double digits this quarter. We are expecting this mixed performance to continue for the remainder of the year and into next year. And finally, regarding our events business, we shifted one of our three major North American events, technology innovation into Q4, which resulted in insignificant events revenue this quarter. As noted last quarter, the outlook for the events business remains challenged, specifically the outlook for sponsorship revenues. The events team continues its work in addressing these issues. Continuing down our P&L on an adjusted basis, operating expenses for the third quarter decreased by 11%, primarily driven by lower compensation and related costs. Specifically on headcount for the third quarter, we were down 8% compared to the same period in 2024. We continue to monitor costs very closely with particular attention focused on headcount, hiring, and attrition. Operating income increased by 21% to $9.9 million or 10.5% of revenue in the current quarter compared to $8.2 million or 8% of revenue in the third quarter of 2024. Higher operating income and margin were in part driven by the shift in event timing and also by very careful cost management in the quarter. Interest expense for the quarter was $0.7 million, down slightly from the $0.8 million in the third quarter of 2024. Finally, net income and earnings per share increased 30% and 28%, respectively, compared to Q3 of last year, with net income at $7.2 million and earnings per share of $0.37 for the current quarter compared with net income of $5.6 million and earnings per share of $0.29 in the third quarter of 2024. Looking at our capital structure, year-to-date cash flow from operating activities was $24.3 million and capital expenditures were $1.9 million. We did not pay down any debt in the quarter. We did repurchase approximately $2.4 million worth of shares in the period. We have over $77 million of our stock repurchase authorization intact. Our balance sheet remains strong with cash at the end of the quarter of approximately $132 million and debt of only $35 million. As mentioned earlier, we are modestly lowering our guidance range for the year. For 2025, we now expect revenue to be $395 million to $405 million or down 6% to 9% versus 2024. The reduction in the range by $5 million is driven by ongoing headwinds in the consulting and events businesses. The outlook for the Research business remains a mid-single-digit decline for the year. The consulting business is now a high single-digit to low double-digit decline and the Events business is now a decline in the high 20% range. We now expect our operating margins to be in the range of 7.5% to 8.5% for 2025, and interest expense is expected to be $2.7 million for the year, and we are guiding to a full year tax rate of 29%. Taking all of this into account, we now expect EPS to be in the range of $1.15 to $1.25 for the full year. This quarter, we took a significant step on our continuing journey with the AI research company. The release of the AI Access product and the first major contract win associated with the new offering has shown we have a differentiated product in the marketplace. As George discussed, we continue to believe Forrester will play a key role in the age of AI. Our research and analysts will offer trusted, proprietary, strategic and actionable advice. This type of trusted guidance is now ever more important in both an uncertain world and a world impacted by AI. Thank you all for taking the time to join us today. And with that, I will hand the call back to George. George Colony: Thank you, Chris. To summarize, the company is excited to be introducing the AI Access product, and we are pleased with the early market reaction. It widens the Forrester Decisions portfolio, makes it easier for our clients to get trusted advice fast and it democratizes access to our research. Thank you for joining the call, and we will now take questions. Operator: [Operator Instructions] And I show our first question comes from the line of Andrew Nicholas from William Blair. Thomas Roesch: This is Tom Roesch on for Andrew Nicholas. I really appreciate the color you guys gave on AI during the prepared remarks. But I was just wondering if you could expand on your thoughts on the perceived disruption from AI, specifically as it relates to the -- just the research part of the business of like without the guide access like those type of licenses. And also, I'm just curious like what is the typical customer demographic that chooses to go with just the research access and not the guide level? Or like what's the reasoning usually behind it when that's kind of like the sale that you do? Nate Swan: It's probably a little bit too early, Tom, to make that call. I mean AI Access has only been available for a couple of weeks. So I would expect the demographic to be lower, to be a younger demographic for AI Access, but it's really too early if that was your question. What I would say is if you don't have AI Access to your product, you're going to have a hard time attracting that younger demographic. So another good reason why we like having the product. Thomas Roesch: Got you. And then switching gears, I was wondering if you could kind of expand on what you're seeing in the sales pipeline in the fourth quarter. And then also, I believe last quarter, you had mentioned kind of underperforming on conversion rates. So it sounds like you guys have been making strides in your go-to-market strategy. So I was wondering if you've seen any improvement on conversion as well. Nate Swan: Yes. Great question, Tom. So we are seeing some improvement, specifically our emerging tech team. We just did a global call with our sales organization today where we called out their conversion rates dropping by 27% year-over-year -- sorry, their time to conversion. That was a misstatement on there, time to conversion dropping 27%. So they are seeing really good conversion. And what they're doing is what we call a social contract, where they are confirming with the buyer early on in the sales cycle that they would like to be evaluating Forrester. It's an opportunity to hold the client accountable, hold ourselves accountable to the steps to walk through a sales process and seeing really, really good process -- progress with that. Time to close one for that team in particular, dropped from roughly 80 days down to about 59 days, so a significant decrease. And the rest of our teams are also in that rough 80 days. Now they are working with some larger clients typically in some other teams. So we don't expect to have those type of dramatic results, but we do expect to see some pipeline acceleration as our teams are really coaching in this type of methodology to drive faster conversion. As far as size of pipeline, we are roughly the same size year-over-year, so plus about a couple of percent on there. But we're seeing a better conversion. So we're very hopeful that in Q4, we will see continued improvement in conversion, one, speed; two, and I think to echo both George and Chris' comments on AI Access. AI Access is opening doors for us. So we're seeing more clients respond. They want alternatives out there. They want to be able to spread research out to larger parts of the organization. Not every person in an organization needs to have the guidance that we give. But if they have guidance at the top of the organization and access to the same research throughout, that really creates alignment for our clients and has been really well received. So not just on our large government deal, we're seeing it around the world. The international team has done a fantastic job securing winbacks from clients that like this model. And so we think there's a lot of momentum from that. We're very hopeful that Q4 will drive some more business. Thomas Roesch: If I could just slip in one quick follow-up. Just on like the large language models, have they come up at all in customer conversations you guys have had? Or have you gotten any pushbacks from clients that have tried to use maybe one of the public -- switch the public one or a different type of large language model? Nate Swan: Yes, absolutely. I think a lot of customers bring it up and say, I can use things like ChatGPT or Claude, et cetera, and I get really good answers. And while I say they get really good answers, do you really trust where they're coming from? I am certainly not an analyst. I'd let George and Carrie probably answer more on that. But a lot of that information is not coming from reliable sources that have models, data and research that Forrester has. In fact, none of them have what Forrester has. So just to be clear about that, they're not backed by those things. And so if you're going to make million dollar, multimillion or $100 million decisions, going out there and trusting ChatGPT or other sources, while that is good information to get, I really don't think that's a reliable way to make a decision for your business model. And so you're going to need a trusted source like Forrester to be able to do that. Carrie Fanlo: If I could -- this is Carrie. If I could add one thing on to Nate's comments. For every pushback or client or prospect conversation that we have asking to compare us to the public models, we have more than that asking to actually put our data and insights into their employee environment where they're getting trusted insights to empower their employees. That's actually where most of our conversations are happening, where they're seeing this opportunity to say, "Hey, we've been tasked with providing a world-class set of insights to our employees to make decisions, to go win deals. How can we make sure that Forrester data and insights are in our protected environments because we don't want our employees relying on the public models to make business decisions. So more opportunity than threat on this front because we think that companies understand the impact and the importance of trusted data sources. Nate Swan: Just to add on to Carrie, as she brings up an excellent point. I've been involved in several conversations. I know Carrie has, I know George has with clients that are looking to do exactly that, and they're very excited when they see what the previous Izola feature and now AI Access does and allows them to do. The reaction has been incredible. I mean, I've sat in a meeting with a Chief Digital Officer from a large brand agency and they were -- they wanted to go to commercials almost immediately as they saw this. So we are seeing some very good response from clients. So we're excited about that. I mean, there's going to be a lot of AI used just as there's a lot -- the moment reminds me a little bit of 2002 when people would say, well, we don't need Forrester anymore. We're going to use Google. And my come back with that was always great, glad that's your plan. You're going to make a $100 million technology decision. Tell me how that board meeting is going to go. When you tell them the research I did to make this decision was made on Google. So obviously, Internet search helps a lot. AI search will help a lot. But at the end of the day, when these are critical decisions which will require critical data and trusted data, and that's where Forrester, as I described, that will be our place in this future. Operator: And I show our next question comes from the line of Michael Mathison from Sidoti & Company. Michael Mathison: My first question is whether there are any particular verticals or industries where you're seeing better success at gaining new clients or deepening client relationships? Nate Swan: Well, yes, absolutely. So number one, while it's been a challenging opportunity in the government, we actually think there's a massive opportunity in the U.S. federal government. So retention challenges this year as agencies were having those come in and cut budgets. But the response to how Forrester is making our offerings available to people and the support that we've gotten from Forrester to go out in front of the government and talk about what we're doing specifically with AI Access, we've had a number of agencies very interested in what we're doing. So we've seen really good success there in the U.S. Again, coming back to the international markets, we're seeing really good success in the international markets on the end user side. So growing that end user business, which is really our goal is to grow the end user business even stronger. We're seeing great success in the international markets, capturing clients from the CPG industry, manufacturing, financial services. So lots of success there. And we're starting to see some breakthroughs as well as some manufacturing opportunities in North America as well. Our end user new business team really struggled for about 6 months, starting to see some raise of sunshine from them as they go into the fourth quarter. We're seeing some net new logo opportunities in financial services as well as manufacturing and CPG. Michael Mathison: Okay. Great. Second question, your effort to increase the contract value per client is a major strategic goal. You were still down here a couple of percent this quarter. Can you comment on when you feel like that effort would bear a little bit more fruit? Chris Finn: Yes. Thanks for the question. This is Chris. Yes, look, I think as we move forward here, we're seeing some traction, obviously, with the new product in AI Access and a stabilization of retention rates. And so I think as we move forward, our expectation is we've got a big quarter in front of us in Q4. But as we get into next year, we should start to see some improvement there in the first half, especially as the new product gains traction, and we continue to see stabilization on retention. Nate Swan: Average CV per client has -- just looking at up 5% in the year. Did you get that, Michael? So average CV per client up 5% in the year. Michael Mathison: I'm sorry, I didn't have it in front of me, but I'll take your correction. Nate Swan: Yes. So we're up to $162,000 per client. Operator: And I show our next question comes from the line of Vincent Colicchio from Barrington Research. Vincent Colicchio: Yes, Nate, on the better conversion this quarter, can you attribute that to something in particular? Or is that too difficult to do? Nate Swan: No. As I was mentioning, this emerging tech team has been working what we call our social contract for the better part of 9 months, and they're really starting to see some success. And I think the team is gaining confidence in it, Vince. When you first started, it might feel a little bit awkward to you as you go through a sales process. But now that team is really clicking and they're doing it every single time. Anytime they get engaged with a new prospect, they are saying, "Hey, it seems like there's genuine interest. I think we can help you." This is what this process looks like over the next 6 to 8 weeks. Is this something you're interested in doing? This will be something that would cost money, clearly to invest in Forrester. Typically, the budgets would be between X and Y for something like this, although we don't want to predetermine what it would be. And is this something that you're interested in and can provide access to your team who has the initiatives to execute that are part of your priorities for the business. If you are interested in doing that, we are interested in working with you to see if that works. You can disengage at any time. That it's not a commitment to buy. And I think they've gotten really good at that talk track. And we had, as I said, a global call earlier today, really encouraging the rest of the team that you need to do this. This is working. They are having success. They are seeing their -- not just their close won get better, but they're closed lost. Even when a client agrees to go through a social contract, you still don't have the 100% conversion of your Stage 1 opportunities. You're just entering the pipeline. It's just a commitment to look and view and it allows the sales rep to hold the client accountable and the client to hold the sales rep accountable and hold Forrester accountable. So we've seen really good luck in it. And I think that we'll start seeing more of that. When you marry that with our Forrester Agile selling technique, I think it's calling high, making sure that we understand the value sweet spot that we are looking for from our -- for our clients, making sure that there is alignment. And that -- at the end of the day, they don't want to waste their time. We don't want to waste their time. And we believe that we can really drive a better conversion. So dropping our close loss from -- in that group from 130 days to about 105 days is significant. You're not wasting time on opportunities that are never going to close. Vincent Colicchio: And then, George, one for you. Any -- what are your thoughts on the Carahsoft partnership? When do you expect it to start contributing? And what makes you optimistic? Nate Swan: Yes. George -- sorry, Vince, I'll jump in for George because that is part of a sales play. One of my sales leader for the government team, Dana Barnes has done a really nice job. So he has worked with Carahsoft in the past with the government teams. What that allows us to do is in previous software companies that he was with. And what that allows us to do is open up markets. They help with marketing and opening doors and contract vehicles that we might not be able to get on. So we've just gotten started with them. We're starting to see a lot of traction in the government space. And so while it's been really tough sledding in the government market, we had a big win, number one. We've been in front of over 200 buyers at one of the -- I can't remember. Chris Finn: I think through Carahsoft. Nate Swan: Not through Carahsoft, but through a event called FedTalk that we were at when our CTO was there. And Carahsoft is getting us into states that we haven't been doing business in and agencies that we haven't been doing business in. So we haven't seen a return yet, but I expect that we will relatively soon. That was signed in the middle of Q3. Vincent Colicchio: Are there other partnerships like this that may be useful to other parts of your business? Nate Swan: It's a great question. I think we want to see what success looks like. We have our -- where Forrester doesn't have a direct presence, we have our IVD model, and we have gone through partners there. And that business has been really successful. That's been in markets that Forrester is not in, in Latin America and other countries, Middle East, et cetera. So pretty successful on that side. I'm sure that we could explore other partnerships. To start, we thought Carahsoft was a good place for us to go. And they've been really responsive to us. Operator: That concludes our Q&A session. At this time, I would like to turn the conference back to Chris Finn, Chief Financial Officer, for closing remarks. Chris Finn: Yes. Thanks, everyone, for joining today. As always, if you have any questions or follow-up, please reach out to Ed or myself. Thank you. Nate Swan: Thank you very much. Operator: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Ladies and gentlemen, welcome to TotalEnergies' Third Quarter 2025 Results Conference Call. I now hand over to Patrick Pouyanne, Chairman and CEO; and Jean-Pierre Sbraire, CFO, who will lead you through this call. Sir, please go ahead. Patrick Pouyanné: Good afternoon, good morning, everyone. Before Jean-Pierre goes through the details of the third quarter results, I would like to make a few opening comments. Almost exactly 1 month ago, we updated you our strategy during our Capital Markets Day in New York, and we had 4 key messages: consistency and resilience of our 2-pillar strategy, strong and secure production growth in our Oil and Gas business, accretive cash flow generation and capital discipline. I believe that this company strong results -- for third quarter results, but again, Jean-Pierre will detail with you, perfectly illustrates these key catalysts and highlights the value proposition of our consistent and profitable growth model. Strategy is clearly in motion and is translating into more cash flow even in a more challenging environment. Indeed, despite oil pricing dropping by more than $10 per barrel year-on-year, the cash flow for the third quarter increased by 4% and adjusted net income for the third quarter held steady. Why? Primarily for 2 reasons. First, the hydrocarbon growth -- production growth is a reality and is highly accretive. The new project barrels coming online, such as Mero Fields in Brazil, deepwater projects in the U.S. offshore, going for oil, Tura and Phoenix for gas have an average cash flow margin, which is roughly twice higher than the base portfolio, and they have contributed 170,000 barrels per day during the first 9 months of 2025 compared to 2024. These new barrels have generated around $400 million of additional cash flow year-on-year. So growth volume around $200 million and higher margin, another $200 million. And so they have contributed to absorb the equivalent of $6 per barrel of decrease in the Brent in terms of cash flow. So that's, I think, a strong demonstration that of disciplined investment framework that includes strict sanctioning criteria, less than $20 per barrel, technical cost of $30 per barrel breakeven for E&P projects is delivering its fruits. And we expect, of course, that this cash flow tailwind from new high-margin barrels will continue as we work our way through our deep project queue. As a reminder, starting from '25, continuing in '26, the company is growing upstream production by 3% per year through 2030. And what is the differentiation factor that the standout of our business model is clearly that more than 95% of this production by 2030 is already either online or under construction and largely under lump sum EPC contracts, which seems to significantly derisks the cost. So our projects are in hand, and we are executing them. And again, this year and this last quarter demonstrate that we are well in the delivery mode. Some people think we are borrowing, but we are borrowing for the good. Cash is growing. The second pillar of these good results have been the recovery of the downstream, which contributed to the company's resiliency with cash flow up by almost $500 million. It is true that the refining margin were better. It's also true that we managed to capture them, thanks to a good availability of our assets. We -- and in particular, there were several turnarounds during the quarter, but they were executed in time, in schedule and in budget, and it allows us to reach our objective. And of course, Marketing and Services continue to deliver consistent results and demonstrated by the priority given to value over volume in this segment is the right approach. In addition to highlighting the strength of our consistent strategy, this third quarter demonstrates as well that we are delivering in the short term, specifically on the second half of 2025 plan that we laid out during the July earnings call, which included 4 key elements. Again, the accretive production growth, giving more cash flows, the downward inflection in our net investments coming back to the capital discipline, which decreased by $3.5 billion quarter-over-quarter, a reversal of the seasonal working capital as we have released this quarter of $1.3 billion. And lastly, of course, all these elements improved the gearing that is now close to 17% compared to next to 18%. So the end result is that during the third quarter at $69 per barrel, the company generated excess free cash flow. With cash flow, including working capital variation, more than covering net investment plus $4.5 billion of shareholder returns in the form of dividends and buyback. It's leading me to shareholder returns. The company, of course, continues its strong track record of dividend growth. The Board of Directors decided to increase the first interim dividend of close to 8% in euro and more than 10% in dollars as compared to 2024. On the buyback side, as announced on September 24, the Board of Directors authorized up to $1.5 billion of share buyback for the fourth quarter of 2025. And therefore, assuming annual cash flow between $27.5 billion and $28 billion, in particular, supported by the better refining margin that we observe currently, the 2025 payout ratio is expected to remain around 56%. Looking forward, we expect to maintain a strong momentum for the fourth quarter. Upstream production is anticipated to grow more than 4% year-on-year like this quarter. The net investments are expected to decrease quarter-over-quarter, in particular, because we will deliver the disposal proceeds, $2 billion are expected. And at the end, the net of acquisition will represent $1.5 billion of inflow -- cash inflow in the balance sheet. And that with another anticipated positive contribution from the seasonal working capital, we anticipate to continue to strengthen the balance sheet with gearing forecasted further decline to 15%, 16% at year-end. Last but not least, we have -- Board of Directors has approved the road map to transform our ADRs into ordinary shares. And we're happy to announce that we ordered today, JPMorgan, to launch the termination process of the ADR program with the objective that ordinary shares are expected to begin trading on the New York Stock Exchange from December 8. This is, of course, an important milestone for the company as it will allow for a single class of TotalEnergies shares to trade with extended hours. It will be essentially a continuous listing from Paris 9:00 a.m. to New York 4 p.m., 10:00 p.m. Paris time. And we hope that this ordinary shares listing will be a clear catalyst for the stock in 2026 in both Paris and New York markets, and we intend to market these ordinary shares on the U.S. market even more actively than today. I will now turn the call over to Jean-Pierre, who will go through the details of the third quarter financials. Jean-Pierre Sbraire: Thank you, Patrick. I will start by commenting on the price environment in the third quarter versus the second quarter. Brent averaged $69 per barrel during the third quarter versus $68 per barrel in the second quarter, up 2%, but down more than $10 per barrel compared to the third quarter of '24. ETF averaged $11.3 per MMBtu versus $11.9 per MMBtu, down 5% and the average LNG price decreased to $8.9 per MMBtu versus $9.1 per MMBtu, down 2%. On the other side, for refining, the European refining margin significantly improved to $63 per ton compared to $35 per ton during the second quarter, up close to 80%. In this price environment, the company reported strong financial results with third quarter '25 cash flow increasing by 7% compared to the second quarter and adjusted net income increasing by 11%, thanks to the continued positive impact of the new attractive upstream barriers and strong downstream results that reflect the company's ability to capture higher refining margins in Europe. Overall, profitability remains strong with return on equity for the 12 months ending September 30 at 14.2% and ROACE close to 12.5%. Moving now to the business segments, starting with hydrocarbons. On a year-on-year basis, third quarter hydrocarbons production exceeded expectations and increased by more than 4%, making it the company's highest growth quarter so far this year. We anticipate that this trend will continue with fourth quarter hydrocarbon production expected to grow more than 4% compared to the fourth quarter of '24, notably benefiting from the restart of Ichthys LNG in Australia. Turning to the quarterly results and starting with Exploration and Production. This segment generated during the third quarter of '25, an adjusted net income of $2.2 billion, up 10% quarter-over-quarter in a similar price environment and outpacing quarter-over-quarter E&P production growth of around 4%. Similarly, cash flow growth was strong at $4 billion, up 6% quarter-over-quarter. Importantly, our project portfolio is delivering new low-cost, low-emission oil and gas production that is accretive with an average upstream CFFO per barrel that is roughly 2x the base portfolio. Regarding the E&P projects, we are progressing on all fronts. On the project side, we achieved first oil at the Begonia and CLOV 3 offshore fields in Angola, and we sanctioned Phase 2 of the redevelopment of the Ratawi oil field in Iraq, which is part of the GGIP project. As we have now launched all phases of GGIP, we are looking forward to the first oil for Phase 1 of the redevelopment early '26. On M&A, the company is consistently high-grading its portfolio. During the last earnings call, we mentioned that we are expecting several E&P divestments in the second half of the year. And during the third quarter, we divested 2 international blocks in Vaca Muerta in Argentina, which closed this quarter and 3 satellite fields in Ekofisk in Norway, out of our strict investment criteria, which is expected to close in the fourth quarter. And lastly, on exploration, we continue to reload the hopper to complement existing opportunities. And this quarter, we announced new license awards in Nigeria, in Republic of the Congo and in Liberia. Moving to integrated LNGs. Third quarter LNG sales of 10.4 million tons were essentially flat quarter-over-quarter as third-party purchases offset lower sales from equity production. Cash flow of $1.1 billion was in line with the second quarter in a stable price environment with an average LNG price of around $9 per MMBtu. Adjusted net operating income of $0.9 billion was down 18% quarter-over-quarter, primarily due to the planned turnarounds at Ichthys LNG in Australia that impacted production by around 50,000 barrels of oil equivalent per day for the quarter. On the price outlook, forward European gas prices continue to be sustained at around $11 per MMBtu for the first quarter of '25 and winter of '25, '26 due to anticipated winter demand. Given the evolution of oil and gas prices in the recent months and the lag effect on pricing formulas, the company anticipates an average LNG selling price of around $8.5 per MMBtu for the first quarter of '25. On the advancement of our LNG strategy, we are pleased to continue to grow our U.S. presence with the recent FID on Rio Grande LNG Train 4 in South Texas, and we enhanced resilience in our LNG and gas to power strategy by acquiring interest in shale gas assets from Continental Resources in the Anadarko Basin in the U.S. Turning to Integrated Power. Net power generation increased 9% quarter-over-quarter to 12.6 terawatt hour due to increased output from flexible generation capacity in Europe. The value of TotalEnergies unique integrated model is illustrated in the third quarter financials. Total cash flow from operations was $0.6 billion, up 9% quarter-over-quarter and in line with annual guidance. To provide more granularity in the Integrated Power financial performance, this quarter, we disclosed the split in cash flow between production assets, renewable and gas-fired power plants on one side and sales activity, B2B, B2C and trading on the other side, showing that each contributed equally this quarter. During Q3, Q4, sorry, sorry, during the third quarter, the company has executed well on the farm-down side of its integrated power business model, which contributes capital recycling and will generate a tailwind for free cash flow in the fourth quarter. The company signed an agreement for the sale of 50% of the 1.4 gigawatt renewable portfolio in North America and closed the sale of 50% of 270 megawatts renewable portfolio in France. These deals have a combined cash impact of around $1.5 billion. And in this deal, TotalEnergies retains a 50% stake in the assets and will continue to be the operator after closing and to offtake 100% of the [indiscernible]. This is in line with our business model. As an important reminder, our attractive upstream growth is not the only contributor to the company's resilience. Integrated Power will take the key role in this too, since it is differentiated and growing cash flow stream that is outside of crude cycles and with strong demand fundamentals. Moving to Downstream. As Patrick mentioned, during the third quarter, Downstream efficiently captured the high refining margins in Europe and contributed to the company's resilient financials. Third quarter adjusted net operating income of $1.1 billion, was up more than 30% quarter-over-quarter. Cash flow of $1.7 billion was up 11% quarter-over-quarter, thanks to good availability of assets that allowed us to successfully capture improved European margins. In terms of free cash flow during the third quarter, downstream cash flow from operating activities exceeded net investment by over $2.5 billion. In Refining, the European Refining Margin Marker strengthened during the third quarter due to the tension on the diesel supply chain in the context of low inventories. Utilization was 84%, which was towards the high end of the guidance range of 80% to 85%, and it reflects efficient operations and planned turnarounds at Port Arthur in the U.S. and HTC in Korea. In Marketing & Services, results remain consistently strong with high-margin activities, offsetting lower volumes. Looking ahead, we anticipate refining utilization of 80% to 84% in the fourth quarter, which accounts for scheduled turnarounds at Antwerp and SATORP. Moving now to the company level and starting with working capital. As expected, we benefited from the working cap release during the third quarter, which was a $1.3 billion positive contribution to cash. Furthermore, for the fourth quarter, we anticipate another positive contribution. On net investments, they meaningfully decreased to $3.1 billion in the third quarter, which includes $0.4 billion of divestments, net of acquisitions. In the fourth quarter, as mentioned by Patrick, disposal are estimated to total $2 billion, including the closing of Nigeria and Norway divestment for exploration and production as well as farm-down of renewable assets in North America and Greece for Integrated Power, and we reiterate full year of '25 net investment guidance of $17 billion to $17.5 billion. Based on anticipated net investments and working cap, we expect gearing to decrease to 15% to 16% at year-end compared to 17.3% at the end of the third quarter. With that, Patrick and I are now available to answer your questions. And the operator, so please open up the line for questions. Operator: [Operator Instructions] The first question is from Lydia Rainforth, Barclays. Lydia Rainforth: Two questions, if I could. The first one, can I just get your clarification on where we are on the tax issues in France. I've seen headlines this morning about tax on share buybacks, what that actually means? And then the second one, I think, Patrick, this comes back to your point around the growth in production is obviously doing quite well, but also the growth in cash flow numbers. So when you're thinking about 2026, can you just -- can you give us an indication as to how much more cash flow might grow than production for next year? And just remind us of that. Patrick Pouyanné: Okay. Good morning, good afternoon, Lydia. Well, first, as you observed, there is quite a huge -- quite a big fiscal creativity in the French parliament these last days. And clearly, the full recipe will not work, and we don't know, and so be careful not to overreact to the night news. There was a super tax on multinationals, which is completely out of the rule of law. France has signed 125 fiscal agreements with many countries. The principle is no double taxation, and this is very anchored, and as the government reminded to the parliament, this is the right rule. So we will not be touched by that. And there is also in the constitution some already decision when you want to tax above what is reasonable, then there is this type of taxations are not approved or canceled. So honestly, the situation -- political situation in France is not very stable. There is a huge debate, making a lot of noise. But I trust that at the end of the day, we will land to a reasonable avenue. And as you all know as well, we -- TotalEnergies does not make a lot of benefit in France, so I would say we'll follow this debate. But again, I'm comfortable with the fact that at the end of the day, government will take the right decisions to maintain, in fact, which is fundamental, what we call the supply policy to you know if you want -- before you redistribute in a country, you need to create wealth. You need to produce. You need to create results, revenues and then you can speak about distribution, and we will come back to that. So I understand that -- and I think, by the way, that this situation in France is weighing on the share price of TotalEnergies, but I remind you as well that we are a global company. And that again, largely 90%, 95%, I think, of our cash flows and our results are not coming from our country where we have the headquarters. So again, I think we -- from this perspective, the profile of TotalEnergies is quite different from other French companies, and that market should integrate it. For 2026, honestly, Lydia, you are asking me a question to which I will answer more precisely in February. As we know, we have a meeting for annual results, and what is the plan for '26. So I mean, my -- as I told you, in New York, we anticipate a growth of 3%, more than 3% for '26 again. For the cash flows, I don't have all figures. Of course, it's related to the new production coming on stream. But part of the, I would say, new production of '25 like the Brazilian production will have the full effect in '26. So I anticipate another accretive effect on our -- accretive effect, the size of it, I mean, you have to be a little patient. But again, clearly, we are in a delivery mode. We delivered the production growth more than 3, then this year, probably it will be next to 4, in fact, at the end of the year 3, 3.5 to 4 for '25, next year, at least 3. And then let's deliver the, okay, the accretive cash. But this is a road map, not only '25, '26 for the next 5 years. And if they miss, we reminded you and we, I think, gave you comfort during the New York presentation that we will deliver this $10 billion of additional free cash from all our segments from -- in the next 5 years. Operator: The next question is Michele Della Vigna, Goldman Sachs. Michele Della Vigna: Congratulations on the strong growth. Two questions, if I may. First, I was wondering if you feel like you're able at the moment to capture the extraordinary refining margins we are seeing, and how the improvements to your Port Arthur and Donges refineries are progressing? And then secondly, I was just wondering what you're seeing in terms of disruptions of the Russian volumes following the latest sanctions and if you start to see an impact on the physical market through your trading and optimization division? Patrick Pouyanné: Thank you for this question, Michele. To be honest, when I read again our press release, I think we are a little bearish on the oil price and the refining margins. The refining margins that we captured since the beginning of October for the last month is around $75 per ton. So when we guided you it's above $50, I think we are a little shy. And in fact, it's fundamentally linked because we begin to see real impact in the market of these last Russian sanctions. I think the market is underestimating what it means when you have U.S. sanctions, 2 large Russian company, which are at the core of trading Russian oil, by the way. And when Europe say that we are targeting countries which are considered, I would say, dangerous like India, Turkey and China. But if you trade oil or products from these countries, you could be under sanction. The reaction today in the market, and I shared some views with some of my colleagues, including in -- I was in Riyadh last 2 days, I can -- clearly today, trading hours as well are more cautious. And we see that everybody is taking this risk very seriously, including secondary sanctions, which might become. And so I see some impact. And I think clearly, the refining margins today instantly is more around $100 per ton than the $75 as an average. And it is linked clearly to, in fact, this sanction will oblige to reroute some volumes and to find a way to bring, I would say, products and crude oil more expensively to the different locations of the planet. So I think this is clear. That also could have an impact, by the way, on the oil price. I mean, the crude oil price. We've seen a reaction whatever announced today, it's still $65, but $65, I think, is a good assumption for this quarter, maybe a little more. So I would say, more bullish, that's what we wrote a few days ago because I begin to realize that these sanctions will have a real impact in this market. And most of the players are becoming -- are taking them seriously, which is good, by the way. TotalEnergies, we stopped trading any Russian oil for -- since end of '22, somewhere we penalized ourselves compared to other practice. But I think it was the right way to comply and to be strict on the Russian sanctions. So capturing the refining margins, for sure, the good news of the third quarter is that we managed to do it. We had a turnaround in Port Arthur, which is done. So it's fully back online now. Donges as well is running. So let's not fully -- not the last equipment we are waiting for by the end of the year, but it's running. So we deliver results. The third quarter -- fourth quarter, we have 2 turnarounds, one in Antwerp, one in SATORP, which are 2 big machines in our results. But I expect -- I would -- I expect that this will be, I would say, compensated again by the other assets and by the fact that the margins are higher. So I'm positive. And when I gave you a guidance of $27.5 billion or $28 billion, I was maybe too bearish by stating $27 billion in New York. It's because as well, I integrate these elements, which again and the duty and all the organization of refining chemicals and rest of Total are dedicated to capture these margins, which are good. So this is where we are, and I'm bullish on that. Operator: The next question is from Doug Leggate of Wolfe. Douglas George Blyth Leggate: I wonder if I could start with your upstream margin. The volume guidance is, again, pretty strong for Q4. But what we're -- I guess what we're observing is that your upstream margin seems to be moving up as well as the volumes. And I'm trying to understand what happens as the mix changes going forward. So for example, Iraq never historically had great margins. So how do you see the margin mix continuing as the growth trajectory sustains over the next several years? That's my first question. And my second question, if I may, is a quick one. Oil appears still to be in a very technical market. So we all see the oversupply, but it seems to keep bouncing around that 60 level. I guess my question is, if you ended up with better cash flow than you thought when you reset the buyback, what would be the first call on cash? Would it go to the balance sheet to continue deleveraging? Or would it go to the higher end of the buybacks? Patrick Pouyanné: The second question is clear. It will go to the balance sheet. So the second answer, I would say, is clear, will go to balance sheet. It will go to the balance sheet because I observed that -- and I have spent quite a lot of time with investors in the last month and clearly, I would say, long-term investor, deleveraging balance sheet is important for all of us. And if you want to be -- the best buyback policy would be to countercyclical. To be countercyclical, you need to have a strong balance sheet. So that's the position I would take and give you. So consider the guidance we gave you, we gave you quite a good guidance, and we told you [ $0.75 billion to $1.5 billion ] between $60 and $70, $2 billion at $80. But -- and I'm answering for '26, to be clear. If we continue and we see the plan to deliver more and more free cash on the road map to $10 billion, then we might revisit this scheme. But today, in '26, if it's coming, in your case, if we are above $60 in '26 or above $70, then we will continue to deleverage. Upstream margins, no, Iraq is a good contract. So I know historically, but it's not at all the case. As we always -- I mean, as I told you, we are far away from the historical service contract. We have -- when we came back in Iraq, it was clear that either we had a good contract, a strong contract, it was a matter of risk and reward and in particular, the Iraqi contract is quite reactive to the oil price. We capture some upside on it, which, of course, is important. We benefit in Iraq from quite low-cost production. So the breakeven is low. And so it will contribute. The Iraqi barrels, don't make a mistake, are contributing to the increase, are accretive. And again, I can give you -- but I think we gave you in New York and in fact, the base barrels at an average around $19, $20 per barrel. And today, these new barrels are more between $30 and $40 per barrel. So it's why we have an excessive growth in upstream. So I think you will continue to see, again, the free cash flow from upstream will move quicker than the growth of production. Operator: The next question is Biraj Borkhataria, RBC. Biraj Borkhataria: Firstly, nice to see that production growth being -- the accretion coming through. That really is a differentiator. Two questions. The first one is on the divestments for the year. I know you mentioned Nigeria in the $2 billion. I believe there was -- there were 2 deals that you're planning to do, one of which wasn't approved. So could you just outline whether the SPDC side, that sale was -- is that in the $2 billion, or is that on top of the $2 billion? And then secondly, recently, you signed a letter with a number of other CEOs around European competitiveness. I was just wondering if you could talk about whether that letter has actually catalyzed any kind of response on the policy front? Any color there would be helpful. Patrick Pouyanné: What is the second question? Sorry, I didn't catch it well. Oh, okay, I understood. I know, I know, I know. Okay, understood. European competitiveness. Okay. First, on divestments, I will be very precise with you. The $2 billion, I will give you where it's coming from. We intend to close, and we have already closed some of them, but we are intending to close. And all I think we have signed, and we are in the process, and it's a matter of closure. The Bonga divestment in Nigeria, Norway, the satellite Ekofisk field, some renewable assets in the U.S., renewable assets, which we announced in Greece and as well, we have another project where we will -- but I cannot yet disclose to you guys, another $300 million, which will be announced soon. So it's a $2 billion. This but does not include to be precise, the SPDC JV divestment, not only because of what was approved, but because we -- in fact, we were not able to close. There were some conditions precedent on our side. And we consider that it was not reasonable to close with, I would say, the supposed buyer. So we have relaunched -- not relaunch, we are discussing today. We have advanced discussions with 2 additional -- 2 new buyers, which are, I think, serious ones. And so -- but we will not be able to be clear to answer your question, to close it before this quarter. So it's for next year. By the way, it's good because it's part of the plan for next year. So from this perspective, what we have observed is that divestments of E&P assets generally takes time. It takes more time even if we have demonstrated with our divestment in Argentina that we were able to sign and to close in the same quarter. So sometimes it's going quicker. But -- so the plan is clear. We will -- and we have some interested buyers and serious buyers on it. So we are working on this one. There are others, like I mentioned to you, other IDs for this year and next year that I mentioned in New York on which we work as well. On the European Competition letter, the answer you probably follow that some tweets are linked in. European leaders are not really -- I mean, are listening to our request. They have been, I would say, we had some calls, we had some discussions with some European commissioners who took the letter seriously from 40 CEOs, to say, look, probably understood. I think we are maybe asking them too much, but I think it's a sort of wake-up call from these 40 CEOs. We, myself and the Siemens CEO, we are the spokesperson. Let's be clear, we were just reflecting what people expressed during our meetings between French and German CEOs. I've seen that on some topics, which are, I would say, more -- giving some more poly mix. There have been some calls that were not only from European CEOs, but from U.S. Energy Secretary and Qatar Energy Minister to call to revisit some of this legislation, which seems to be, in fact, against competitiveness. And again, for some of them putting at stake the security of supply of Europe. So I think this is something which is serious. And we are European CEOs, and we, of course, want to continue to contribute to Europe development and growth. But to do it, I think it's also our job to speak up when we consider that conditions are changing and it might be difficult for us to contribute to European prosperity. So it's a moving -- it's a continuous, I would say, fight, but let's contribute to it. Operator: The next question is from Martijn Rats, Morgan Stanley. Martijn Rats: I've got 2, if I may. First of all, what I thought has been sort of really surprising this year is the strength of new LNG FIDs. Already 1 year, 1.5 years ago, many of us were writing reports about the surplus in the LNG market in the second half of the decade, and yet 2025 has been a near-record year of new LNG capacity to be commissioned. And Total still has a few projects that needs to decide on. I was wondering if you perhaps could share with us your thoughts on despite the outlook, the number of new FIDs being as strong as they are and also how it impacts your own decisions in terms of future LNG FIDs? And the second one I wanted to ask is about the shares and the equivalence between sort of the Paris shares and sort of U.S. shares and so consolidating this into one single class of shares. I was wondering if this could impact the execution of your buyback program in the sense that I was wondering if this is in place from December 8 onwards, as I now understand it, if some of the buyback program could be executed in sort of New York listed shares. And of course, the context behind the question is then also like if that could then be a way to avoid some of the proposals that have creatively been floated as I think you put it in the French parliament over the last couple of days. Patrick Pouyanné: Okay. The second question on ADR. No, it does not impact at all the execution of the buyback program. I remind you that the ADR conversion is about around 9%, 10% of our shares. So obviously, the buyback program will be executed on the Paris Stock Market to be clear and so -- and not on the New York listed because it will be strange for us to buy back from New York where we want on the contrary to give more life to the New York market. So I prefer more activity and finding more -- we will buy back shares in New York when we will see we'll have much more active shares on this side of the Atlantic, I would say, so first point. And honestly, no, it will not -- by the way, it would not avoid in any way tax proposals. And again, the tax proposals are funny proposals. Again, there are some principles. When the President, Aurelien tried to impose -- by the way, he tried to impose a 3% tax -- extra tax on dividend, which was canceled by the European Union and by the French Constitutional Group. And all of us have recouped the money they took during 3, 4 years. So again, there are some principles. We are in a rule of blue continent and a rule of blue country. And this is the reality. So you must make a split between the political debates which are quite vigorous, I would say, and very creative and the reality of the rule of law, and we know that there is some limit. And when I see the figures, and I will tell you what I'm thinking, the higher it is, the better it is because then I'm sure it will not go through the system. So I mean I'm -- that's the reality. And there is -- you can -- in the constitution of -- French constitution, you cannot deprive people unreasonably to their -- rest of their profits and the results. And buybacks are not at all a profit. Buyback, it's just a matter of distribution. And by the way of investment in the company. We invest in the company. So I mean, I'm ready -- again, I think it's a topic on which I'm ready to continue to explain to parliament members with our buybacks. But I think we'll -- again, don't overreact to this type of, I would say, news. And I'm afraid we'll have all the news during the next 30 days coming from the parliament. At the end of the day, I trust the government. Martijn Rats: And on FID? Patrick Pouyanné: First question, FID, sorry, FIDs. Okay. I mean I'm not sure. I mean, there was a lot of announcements. I'm not sure about how many FIDs exactly because between the announcements and you have a flows of news of projects being revived because they get the permitting, or they get the approvals for non-FDA countries export from the U.S. administration. So you have a news flow coming. Then FID, I know Train 4 and 5 in next decade, yes, I know them. I know that 1 or 2 competitors are serious and are progressing because as I said in New York, all these projects, they need to find the financing. To find the financing -- and again, an acceptable -- a good financing, a good financing, not an expensive one. Otherwise, you will destroy the value on Train 4. We managed to put in place a project financing at Rio Grande 6.4% around 6.5%, which was good -- good project financing, which has the leverage on it. Other projects does not have the same good finance, I would say, Rio Grande and Rio Grande LNG. So then, of course, I agree that we need to take that into consideration. We have a strong policy, a clear view. We decided to transfer most of our exposure on the GKM, I would say, LNG spot market to the Brent formulas, and we have been active. I think we are very right to do it. I'm more bullish on the oil price, as I explained that on this one by the end of the decade. So of course, then we need to assess and to take into account that we postponed Cameron '24 because the CapEx were too high. It's not the time to run again on Cameron '24. And the other decision we have, in fact, in our portfolio is Papua and New Guinea. You know that we are working on the CapEx, to lower the CapEx. And it's clear that lowering the CapEx is of utmost importance in a market which could be from this perspective, weaker when we launch the project. So that's a topic on which we will have to work. And we have demonstrated already that we now have to be disciplined in that market, giving priority to, I would say, first and second quartile projects in our portfolio. And that's an element of -- which will have to be taken in consideration. By the way, we have announced that we lifted the force majeure on Mozambique. There is a funny figure, which is in some press news agencies, which speak about $25 billion. We are not at all, and I want to be clear and strong on this news, I don't know people are playing games, which is not acceptable. They have access to -- some people have relinquished a letter that I sent to the President of Mozambique. It's clear, it's written $20 billion in the letter, out of which $4.5 billion came from the -- what we spent in the last 4 years. So the budget in '20, when we left in 2021 was around, it was approved $15 billion, $16 billion. You add $4.5 billion, you are down to $20 billion, $20.5 billion. That's the reality of this budget. And by the way, this cost -- real cost, what we've done is that we spent -- we've done all the detailed engineering and all the procurement has been done. And so today, when we -- as soon as we fully remobilize everybody, we are purely in a construction mode. And that's why we said we are able to deliver the project by 2029. And so I've discovered some people were surprised. But in fact, we spent some money in order to, I would say, recapture part of the time, which was under force majeure. So the budget is not a total $25 billion, and I want to be strong, it's $20 billion, $20.5 billion as we will restart. And again, I can confirm it because we had long discussions, of course, with contractors. And so we have put all these figures together with them. And so -- and including on the delivery in '29, we have strong commitment. So we have realigned the whole system in order to be able to execute properly this project. Operator: Our next question is from Kim Fustier, HSBC. Kim Fustier: A couple of weeks ago at an industry conference, you mentioned that the LNG market is getting more competitive and it's harder to make money in trading. I guess that's not exactly a secret, but I was wondering if you could provide any more color on this. And I was wondering how much of the decline in LNG trading profits would you ascribe to heightened competition versus the more normalized conditions, lower volatility, lower spreads, et cetera? And then I also wanted to come back to the EU sustainability rules. I mean, I suppose let's see if the EU rules could be amended, but if they broadly stick, then how would you ensure compliance with the CSDDD rules in practice? And then hypothetically, what would be your options if some LNG supply is deemed to be noncompliant, would you be able to redirect it? Patrick Pouyanné: Okay. First question. I mean, to be clear, I think we made a demonstration in New York, the message is not that we have a decline of LNG trading. We told you that there were exceptional trading profits in '21, '22, '23 and that we are back to a normal environment with lower volatility. And that by the way, the results of '25 on integrated LNG are in line with '24. So I'm just that we don't benefit from the growth on this part at this stage. Later, we'll have a growth of volume, but this stage is stable. And in fact, they are quite related to the results of 2019 before this crisis. So I cannot -- what is also true is that you have observed, like me, that there are more trading hours, which came to this LNG business because maybe we were considering we were making good money. But today, answering your question, no, it's just -- my view is that today, we have to -- we came back to, I would say, more standard revenues. And I hope, of course, the main growth for LNG trading profits from TotalEnergies will come from the growth of volume of assets. So we have a volume impact on our trading business, which will generate additional profits. And we made a mistake when we were planning 2025 because we were thinking that we could replicate the last quarter '24 in full '25, which is not the case. So I have to -- and again, because that's clear that the volatility in '25 from the gas, the European gas price moved between $11 and $12 MMBtu. So it's not a big volatility. By the way, I'm not unhappy because $11 or $12 per MMBtu from my Norwegian gas and my British gas and my Danish gas, it's a very good price. So I'm maybe -- so I mean, people -- we should not give an overweight to the trading business. Trading business is adding value, but the base business is in fact, our upstream and our production. So I'm happy to -- I prefer to gain $12 per MMBtu of profits on my North Sea gas and maybe a little lower volatility on the trading. So let's be -- we never -- we -- maybe because there was exceptional years, incredible years, '22, '23, again, '21, '23, you consider it was the new normal. We never said it was a new normal. We even told you, be careful. There are exceptional results each time we -- exceptional means exceptional. So that's what I want to comment. And again, I remind you and why I'm linking back to our growth volume is that the trading within TotalEnergies is trading around assets. It's an asset-based trading. It's not -- we don't take casino. No, it's not the case. So that's the base of what we do. There are more competitors. But again, we have more assets than others. So it will help our trading business. And I think this is the idea. This is fundamental idea of integration. It's because we have more assets, more volumes, but we have more medium and long-term contracts with Asia. This -- what we signed in the last year, these brand-related medium- and long-term contracts offer some optionalities to our traders. And the optionalities that we included in these contracts have a value. And this is why I'm linking that to my assets and my business. This is the base of it. And some competitors do not have the same assets and contracts. Then about the competitive sustainability rules, I mean, the question is not to have energy noncompliant has not been -- the CS3D does not define the compliance. The CS3D is a matter of putting in place some rules, but you have to have a duty of vigilance on the way on the supply chain. Some countries have been strong in the letter. I invite you to read the letter of the Secretary, Wright and Minister, Al-Kaabi, if you didn't read it, they sent a letter to the European leaders telling them if you keep that in place, we will not deliver -- we will not take the risk to deliver LNG to Europe. I would say, it's -- if we don't have LNG coming neither from the U.S. nor from Qatar, we have -- my European North Sea assets are taking a lot of value. So I'd say it's not. I mean -- so it's not a matter of compliance, a matter of legal risk because, in fact, while you may be compliant is that in this CS3D if you were found guilty by a judge, your penalty could be up to 5% of your worldwide turnover, which is just crazy. So the sanction size is completely disproportionate to, in fact, a rule which is against, of course, basically, we are all -- we are for human rights, but you can ask efforts to company to control the supply chain, but we don't control everything. But if you transform, supposed not enough vigilance in such penalty risk, then it's completely disproportionate. And this is a call coming from these 2 countries. So for me, so again, we'll -- and I consider to be honest, that what we -- when we produce LNG in the U.S. as we are the largest exporter of U.S. LNG, we are fully compliant with the duty of vigilance law with all what we produce in the U.S., in Qatar as well, by the way. Operator: The next question is from Matt Lofting, JPMorgan. Matthew Lofting: I wanted to follow up on your earlier comments on the refining portfolio, 80% to 84% utilization in the fourth quarter looks towards the lower half of the historical range. Obviously, from a near-term perspective, planned turnarounds and maintenance need to be done and undertaken. But when you look forward into 2026, how do you see the normalized throughput of the business now? And has there been any deterioration in that normalized level versus what you saw and how you saw it, say, 2, 3 years ago? Patrick Pouyanné: Yes. I think -- so maybe we are cautious. Again, we were cautious on the $50 per ton. Maybe the 80%, 84% is just as I told you, we have Antwerp and SATORP, which are 2 big machines we have entered into a large planned turnaround, so they execute. But of course, it has an impact on the global, I would say, delivery from our portfolio. Let's say, you can keep -- if you take 82% this quarter, I think we were at 84%. Maybe the 82% is probably the mid average of the guidance, probably the right one to take into account. But I told you that it will be more than compensated with capturing better margins on all the other assets. For next year, we are more in the range of 84%, 86%, I think, for our budget. But again, I don't -- I didn't begin to look to what our colleagues are planning. So I'm waiting to see, but I think there are less turnarounds next year. So we should have -- from this perspective, it should be a better year. And as well -- and again, as we mentioned to you, there were some, I would say, difficulties before the turnaround on Port Arthur, turnaround is done. So we expect to have a better survivability. And on Donges again, we intend to put into service these new units, which will enhance the margins on Donges by beginning of 2026. So from this perspective, the perspective, if the refining margins remain at quite a good level, we will be able to capture even more than this year. Operator: The next question is from Irene Himona, Bernstein. Irene Himona: My first question is on marketing, if I may, because your unit margins were up this quarter. And I wonder if you can talk around the drivers of that margin improvement, whether it is structural or temporary? And then my second question, I noted this quarter, you signed some partnerships on the deployment of AI and a global data platform. I obviously don't have the context of your ongoing digitalization effort. I wanted to ask whether it is correct to look at these partnerships perhaps as an effort to speed up and widen the digitalization you have been working on for a number of years. Patrick Pouyanné: Yes. I'll take the second question, first. As I told you -- we told you, yes, we have -- and I think it will be a topic on which we could focus more on what we are doing. In fact, since 2020, we put in place a digital factory in a bottom-up approach with 300, I would say, data experts or data scientists and at a very high level, a good team. But what we observed is that if we want to deploy these new technologies, which are speeding up on a worldwide basis, going from a bottom-up to scale up is difficult. So we decided that it's time now to have a broad effort, a worldwide effort on organizing all these data because there are plenty of data on platforms in refineries, but all that is not connected. And if you want to really, for example, enhance your linear program in refineries, it's the best would be to have access to all these data to develop new tools in order to enhance another additional percent of, I would say, use of the refinery and better margins. So we have engaged with 2 large programs, which are quite an investment, an investment on the platform with Emerson, which is called, I don't remember the name now -- with Emerson in order to -- Inmation - in order to connect all these physical data to, I would say, a large database all physically, and it will take 2.5 years, 3 years to deploy because we need to go on all the sites. We know where the data is, but we need to connect them and then they will be available. And we have also engaged in a very large worldwide program on the E&P side with Cognite, which is, in advance, I would say, from digitalization, and we have made some different pilots with them. Now we are all convinced. So another big program to equip, to deploy this Cognite software, which obviously will help us to really accelerate the use of AI. So for me, 2025 will be the year where we have really decided to scale and to go from a scale and to take some large worldwide program to give us the capacity to take the most of these new AI tools. It will take a few years to install all of that. But if we want to be efficient, and I'm sure -- and it's not cost cutting in our case. It's more additional revenues. If we -- if I can with advanced process control tools, thanks to AI, produce 1% more of all my oil fields and my refineries, I can tell you, it's quite a lot of free cash. So it's worth making the investments, and this is where -- what we have done. On marketing, so I think there is different drivers. But again, fundamentally, the strategy which is put in place in marketing is value over volume, which means not chasing the additional growth, even it's difficult for marketers. They love to show you more tons. But what we discovered is that it's quite mature markets. They are mature markets. Whatever in European market, it is mature, the lubricant market is mature. So it's very difficult to gain market share. The only way to do it is to do it at the expense of margins. And what we have decided is to enter into a policy, which is a bit higher margins and not less volumes, but not to sacrifice, I would say, the margins at the expense of the volume. And this is why, by the way, if you observe our results, we have sold our network in Germany and Netherlands and half of Belgium. There is not much impact. In fact, because we have managed to absorb it, I would say -- so it's also because fundamentally, in marketing, we have decided to divest or to stop when -- not divest, but to stop a business, which was very low margin, which was, I would say, sharing some logistics assets with which we were creating a lot of pass-through volumes, but with a minimum margin. So this has been reduced because it was not really adding money. It was quite using a lot of people. So structurally -- so answer to your question is that structurally, we are in a mode to enhance the margin on Marketing and Services. That's where we are. And this will continue. I hope I am clear. Operator: The next question is from Christopher Kuplent, Bank of America. Christopher Kuplent: Patrick, I wonder whether we could talk about another area of French creativity. There is an idea floating around that we should remunerate electricity or wholesale power prices differently. What can you tell us, is current appetite for signing new PPAs? How has that market evolved considering that rather interesting regulatory backdrop? You've recently signed a project deal with RWE in France, but also have some considerable CapEx left to go in Germany on the offshore wind front. So maybe you can put things into context and give us the risk reward behind taking that regulatory risk. And then you've mentioned it already. I just wondered whether you could give us an update on how quickly we should expect news from Mozambique on the ground now that the force majeure has been lifted. Patrick Pouyanné: On Mozambique, as you -- again, we have lifted the force majeure. We are now expecting the government to approve our new plan and budget, and we are remobilizing the contractors in order to be able to execute the project within this schedule with time work -- time table of 2029, and that's where we are. So I think, consider we are moving on. On the first question, it's a complex question because I'm not sure to have fully understood. Let me be clear, I'm not in favor of regulations and regulatory approach. We are more merchant people. We like the market. So for us, that means that signing PPAs is the best way to commercialize, I would say, our assets. And so -- and we know that we need -- in Europe, you need to sign when you develop, I think you were referring to offshore wind. We signed a contract in France at $65 or $66 kilowatt or megawatt hour, which is a contract, by the way, which the price can be adapted if the CapEx are higher. So the price, the CapEx risk is, in fact, covered because we could -- we have -- not only we have given the price, but the CapEx linked to the price. So that's a protection. It's also partly inflated through the OpEx. So -- and at this level, honestly, we can develop an offshore wind project in Europe because it is projects where, in fact, the connection is developed and paid by the TSO, not by us. So we are only in charge of the plant itself. But again, we follow that. I think today, there are many creativity there again in different circles. All that we are in a European market, European market, is a unique European market, which are some -- fundamentally driven by some market rules, in fact, -- and when I discuss with European authorities, I see little appetite from -- in the commission to put into, I would say, even in some countries like Germany, we believe in the market to change the rule of this, I would say, electricity market. So again, that's a debate. But I'm -- and you know, by the way, in France, the same people who were complaining about the famous system of nuclear commercialization, which was called RN 2 years ago, now are complaining of the new system. So people will never be happy. What they want is electricity for free, but that's difficult. At the end, we need to invest. And if everything is too much regulated, it will be against investment and Europe desperately needs to invest more in renewable gas-fired power plants, grids if we want to ensure security of supply, but the reality, so you cannot get both. So I think I would say I trust there again the political leaders, which are spending a lot of time on this energy story to take the right decision and not to be complacent. Operator: The next question is from Lucas Herrmann, BNP. Lucas Herrmann: And another slightly generic question, but I just wanted to ask for your sort of thoughts on the one part of the complex, which is really having a difficult time, chemicals and the extent to which when you talk within -- when you look at the industry, look at where margins are, you're starting to see better signs of movement to try and restructure not necessarily your own business, but business across the industry so that we might actually move to a place where profits start to improve. And as ever, I mean, if you could give us some indication of the extent to which the associates line within -- well, the profit within the Refining and Chemicals business, what proportion of profit actually comes from chemicals now given just how difficult the environment is? Patrick Pouyanné: Okay. I'm not a chemical company. We are refining and petrochemical company, and we make crack ethylene and polyethylene basics of... Lucas Herrmann: Sorry Patrick, that's what I'm referring to. Patrick Pouyanné: No, no. But just to tell you, the truth is that you know the situation. The situation is that, in fact, in terms of cracking capacity, ethylene capacity, China in the last 5 years went from 50 million tons of cracker to 100 million tons of cracker. And so they have, in fact, almost self-sufficient. So if they were moving from a large importing country to almost self-sufficient, even exporting. So of course, that changed the world patterns. By the way, Chinese companies also suffer from the situation, but other places suffer from the situation. For me, I've always been very clear with you. If you want to invest in petrochemicals, you have the fundamental matter or fundamental competitive factor is feedstock. Either you are an ethane, cheap LPGs in the U.S. or in the Middle East, or you will face difficulties. So that's the situation. So we know that our naphtha crackers in Europe are facing competition, which is super difficult, either from the U.S. crackers or from Middle East. By the way, TotalEnergies, since I'm CEO, we have invested in 2 crackers, one in Port Arthur, with [indiscernible] one with Amiral in Saudi Arabia. So consistent with that's what we -- I think fundamentally. And we are shutting down some crackers like the one we have just decided in Hamburg. So that's my view. To come back on the proportion, I don't know, it's not big. It's not good. I have no miracle recipe compared to my competitors on this one. But again, it's not a major part of our downstream results and cash flow. So most is coming from refining and trading rather than -- more than chemicals. But again, it's part of the integration. When the margins are good, we are happy to capture them. But again, the fundamentals, let's invest in the U.S. and in the Middle East. That's all. Operator: The next question is from Peter Low, Rothschild & Co. Redburn. Peter Low: The first was just on integrated power. The ROACE has been below 10% for a few quarters now. How confident are you of hitting your 12% target? And really, what are the steps to get it kind of up to that level over the coming years? And then perhaps just a follow-up on the kind of proposed EU ban on Russian LNG imports from 2027. I think you said in the past, you'd expect, you'd be able to divert your Yamal cargoes to alternative markets outside of the EU. Is that still the base case? And what you expect to happen? Patrick Pouyanné: First question, I think Stephane Michele in New York gave you some answers to that. We never told you we will hit 12% tomorrow, we told you it's a 5-year plan going by the way, from 10% to 11% from 11% to 12%. Part of it, as I told you, is that today, we have a sort of burden on our capital employed because we have, I mean, acquired a large pipeline of projects, which are, of course, nonproductive, I would say, capital employed assets, which will be because we continue to grow. We have a growth of 20% per year, and we will execute, which will, of course, as we don't intend to make large M&A on this part, not which will transform, I would say, nonproductive assets into productive assets. So part of it is that. Then the second part, that's 1%, the other percent will come from, I would say, rationalization, better use of the assets, industrialization, and this is what we are doing. We also, I think, framed, in New York, a clear road map by concentrating most of the investments of Integrated Power on some major markets, the oil and gas countries, which are in E&P. And then the rest, we are clear, but where we don't see potential to contribute above 12%, there is no future for them in the portfolio. I mean, so that's -- I would say, in a way, what we told you, it is a recipe to go to 12%. So honestly, today, we are a little lower than 10%, but we will recover from it. And don't forget that the contribution from farm-downs, they will come in fourth quarter. So all that will give you color. But I would say I'm there for -- we will raise the 10%, and it's a 5-year journey, but I'm happy with the development of this business. The next target is to be for me net cash positive. As soon as we are net cash positive, I'm sure that the valuation of this part of the business will be better because when I will tell you, this business is contributing to your dividend, it's a way to have a better leverage on this business. And we plan 28. If we can do 27, we are working on that. EU ban on Russian LNG, honestly, there have been a new regulation, which needs to have some clarification because there is some language there we need to understand what it means exactly. Like by the way, when EU banned oil in 2022, '23, it was the exact situation. There was a regulation and the LNG regulation is copy-paste of the old one. There was what they call FAQ where you need to have answers to clarify what is the real scope of ban. For sure, the ban is not going any more Russian LNG in Europe, but we want to be sure that the ban is not larger than that. So before to answer your question. And otherwise, yes, in this case, we have a commitment. If there is no further, I would say, ban, I cannot choose a force majeure to cancel the contract. If I don't have force majeure, I am committed to offtake some cargoes. We are looking to that, precisely today, our lawyers are working, to be honest. We have -- which -- because, of course, for us, the rule is to be sanction-compliant to be clear. So our lawyers are working on it. It's a fresh regulation, so I don't have the full clarity. And I don't want to make more answering longer because I could say something which could become wrong if the lawyers -- and again, if we have to be -- we are always at the Executive Committee on the cautiousness side, I would say, from this perspective. And so I'm waiting to see the report and to understand exactly the scope of the new EU regulatory. Operator: The next question is from Paul Cheng of Scotiabank. Paul Cheng: Two questions. I want to go back, Patrick, in your answer to the question of adoption of AI, you think that is fairly sizable investment. Can you quantify how big is the investment over the next couple of years and whether you have sufficient talent within your organization to really adopt or that you need to go out to hire? And at this point, it seems like it's pretty difficult to get the good talent in the AI adoption area. And what is your target in that what you aim to get from AI over the next, say, call it, 5 years? The second question is Yes. The second question is on Iraq. Patrick Pouyanné: Move on with your second question, sorry. Paul Cheng: Okay. Sorry, Patrick. Second question is Iraq. Can you tell us that how is the situation on the ground? I suppose that the security is good enough for you to deploy your people. So what's the bottleneck or the barrier for Iraq to significantly increase their production at this point? You and some of your peers that are rushing in and signing contracts. And if you think that those contracts, the terms are good. Is there a concern that Iraq could turn into a major production growth area, which in turn is going to depress oil prices over the next several years. So just want to hear how you think about that. Patrick Pouyanné: First question, AI is the program I mentioned when I -- represent more or less EUR 300 million, so $350 million, I would say, worldwide. So it's quite an investment in these data platforms at the worldwide level, first comment. Second comment in terms of people, we have some assistance from the Emerson guys, AspenTech or from Cognite. But remember that we have 300 -- digital factory with 300 people. And of course, we are using part of these people to help to deploy the program. They are there, they are available. They know about it. We have built these competencies in the last 5 years, the second answer. The third answer is that there is a nice country in order to get access to good, very high competencies with not so high cost, which is called India. So it's also a way for us to, in fact, grow in the digital. For us, we are looking today to -- we need to grow, I would say, our technical competencies and in terms of people to have more resources in the side of electricity of power and in the area of digital. And today, we are seriously thinking to enhance or to grow our presence there, and we speak about -- we are discussing about competence center in India. It's part, by the way, of our way as well to contribute to the, I would say, cash saving program that we mentioned. So this is the area. So I know it's a point. But in fact, what I've observed is that we have been able to attract people in this field with a reasonable price. We are -- because we offer them some real, I would say, use case. We have very interesting use case. In the field of energy, you can use AI in many areas, so it's good. Iraq on the ground, it's okay. Otherwise, I mean, we just signed the full contract -- EPC contracts. If we were in doubt, we will not have done it. honestly, in the Basra area, the situation is good. I don't -- I can speak only for the areas where we are. And we have deliberately located our teams in the south of the country, in the Basra area because it's a more, I would say, united area, unified area from, I would say, in terms of Iraq. There are other areas that I would be more careful to be clear. But in our area, we are fine and no barrier. But the barrier partly is still security because you cannot -- what I say for Basra is maybe not true for the whole country, to be honest, and it's not true. And second, in fact, you need investment. And investments, you know the issue for Iraq, and again, I'm happy to have been the big company which came back first. But we went there in '21. We finalized the contract in '23. We will FID all the phases in '25, and we'll produce in '28, '29. So the cycle is 8 years. So I think we are maybe a little slow. I'm not sure because I can tell you it's -- all that is, in fact, from my point of view as a CEO, quite a remarkable journey in a new country. So I'm very happy with all the work the teams have done. I contributed myself by supporting them many times there. And I can -- but -- so when people think today that, yes, there is a potential in Iraq, it's clear, but it will not depress oil prices before many years. So it's good for the country. And again, the country -- and I know what will happen if there is more companies to come, the temptation will be to decrease the margins. And then again, it will not work. So that's the history. I hope the country has taken some lessons of what happened from 2010 to 2020. If we don't have the right reward for the risk we take, there is no investment. So that's a question of capital allocation. So yes, and that's why, by the way, to answer to your question, to be clear, if we decided to move to come back in Iraq in 2021, but we see quite a long perspective. And in my plan, in my view, Iraq will be a growth area for TotalEnergies beyond 2030, and we will work on other projects. So that's what I'm thinking. So I don't see an impact on the short term or short medium term. Thus potentially... Operator: The next question is from Henri Patricot, UBS. Henri Patricot: Just 2 on the topic of exploration. I think you have a new Head of Exploration since the start of the month. And I was wondering if we should expect any changes in your approach, exploration? And also on that topic, can you give us an update on the latest plans for exploration in Namibia and South Africa in the next few months? Patrick Pouyanné: Okay. Exploration. I've been consistent since I'm CEO, I think there is one thing which did not change, which is the budget for exploration. It was $800 million to $1 billion. I put it as a sort of rule of the game when I became CEO because strongly, I think it was -- it's not because you spend more but you find more. At a certain point, you need to be efficient and oblige your exploration team to take searching. I'm happy, by the way, that the way Kevin has led this team during the last 10 years. He became Exploration Team Manager and Vice President almost the same time. He has, I would say, developed some ideas. The thing is, it is a long cycle in exploration. So when he told us one year ago that he has tried to do something else, it was fine for us because we thought it was the right time to renew, in fact, having the proper approach because, again, exploration is different business. Again, it's not a matter of dollars, it's a matter of IDs of which to approach. I'm very happy to have welcome in a company, Nicolas Mavilla, which is coming from a successful exploration company. He has, of course, had different -- himself has been educating in different environments of new ideas. He will have -- I told him that he's free to do and to let the team. It's not a one-man show exploration. It's a team building, quite a lot of people. You need to take the risk to explore, you need to build some consensus, but you can drive your people in different, I would say, directions in terms of concepts and being creative. So I think it's very good. I hope and I'm convinced that Nicolas will be able to have the same success that we had with Kevin in the last 10 years. But it's not a matter of money. It's a matter of ideas and then to make choices. And by the way, you noticed that in the last quarter, we have been active on taking some licenses back in Nigeria, which has been unexplored for more than 10 years. It's a pity. It's probably the most potential delta, it's probably the most prolific Delta in Africa. So no license were awarded. We are happy to have the first ones, 2 IOCs. We went as well to a country like Liberia. It's a new one. Congo is more mature, but we managed to get a license on which our explorers were excited. I hope they were fine. We'll have a nice gift for Christmas, we'll see. And again, we'll continue to explore in other countries. And so exploration, I heard during the [indiscernible] that it seems that some companies are rediscovering exploration. For Total, we never give up on exploration. I always consider it as part of the value creation. And again, listen to my colleague, not because you spend more, when you will find more. If you spend more, you actually take more risk. And if you take more risk, you have more disappointing wells. So it's a question of finding the right metrics. And I think it's good for an IOC, a major like us when we can drill 20, 25 wells per year, that's good. That's enough to find some nice wells. Namibia, South Africa; Namibia, that we have some exploration to continue to do, and we look to priorities also to develop business. And South Africa, you follow, like me, the news. There is a legal context, which seems to be more complex than in other countries. Each time we want to drill, we need to go to court. It's a little difficult. So we want -- but I think that the South African government has made some public statements that they want to find a way to go to ease the exploration. So we hope we will manage because, of course, for us, it's important. We cannot explore, we cannot spend money in a geography, if we have to face permanently courts and being -- and the permitting become really too complex. And because it's not only drilling 1 or 2 or 3 exploration wells, when it will be to develop. And we explore to develop. We don't explore just to find oil. So we need honestly, on the South Africa side, I hope the government will take the right decision as soon as possible. Operator: The next question is from Jason Gabelman at TD Cowen. Jason Gabelman: I wanted to ask firstly on CapEx trajectory. And it looks like organic CapEx has been a bit volatile the past few quarters. I'm wondering what's driving that quarter-to-quarter volatility. We've seen some other peers that have more stable CapEx that kind of peaks in 4Q. So wondering, moving forward, is this level that you're at now a better go-forward pace to consider? Or should we expect more volatility quarter-to-quarter? And then my second one is just on the ramp-up in production next year. You've previously guided to a reduction in reinvestment rates in 2027, which I suppose, implies higher cash flow ramping at some point next year along with new production coming online. So how should we think about that production and cash flow ramp next year and into '27? Is it back half weighted? Is it 4Q weighted? Just looking for kind of the arc of that growth. Patrick Pouyanné: Jason, you are very quarterly driven there in your questions. But my commitment to you is the commitment of the company is the annual budget of CapEx. And by the way, it's an annual budget of net CapEx. It's organic CapEx plus acquisition minus sales, minus divestments. I think we have a long strong track record of being complying -- compliant with our budget -- annual budget of CapEx. I think since I've been CEO, I think, 10 years in a row, you don't see that we have not respected the CapEx budget, the annual CapEx budget. And again, what we told you today, and what we said at the beginning of the year, it will be $17 billion, $17.5 billion. And I can tell you, we'll land in $17 billion, $17.5 billion. As we told you that the net acquisition is expected to be at $1.5 billion. You can calculate yourself the organic CapEx for the fourth quarter. I don't follow honestly the stability of the organic CapEx 2 quarters. It depends on some projects when you put into production as we have done this year, all Mero in Brazil, Tura in Denmark, Ballymore in the U.S. Ballymore -- yes, Ballymore. That this means that this quarter, there was a lot of CapEx and then it's decreasing because you have put into production and some of our CapEx, some of our projects are ramping up. So it just -- so I'm not at all -- I have no KPIs to have a stable quarterly organic CapEx, to be honest. At the end of the day, my KPI is to be sure that we are within the annual budget. And if we can be a little lower, I'm happy. But it's -- but not so much I'm not happy because sometimes it means that some projects are late. So I prefer to really be in our budget. So first point. So sorry to disappoint, but it's not a major issue. I'm not in a -- I mean, to be clear, we are not in a company which makes short-cycle CapEx permanently, where you make -- you can maybe make more -- less volatility. The second one, I think the same answer to Lydia, if I remember the first -- beginning of the first question I have. You have to wait for 2026. Let's keep -- you have to be a little patient until February. We'll give you more color. It's clear that, again, we gave you a point, I think, in the chart of 2027 when we speak about reinvestment rate. So we told you that in '27, yes, I remember, the reinvestment rate will go down from 70% to something like 50%. It was a chart which was in the New York package and slide deck, sorry. And that's the reality. So that's -- and it's coming from whom? It's coming from, on one side, higher cash flows because we are delivering along the 3 years. So let's be clear, the figure of '27 means by end of '27. So it's a 3-year decrease. It's not beginning, I don't know which quarter. And it's an annual one. So it's at the end, to be clear. It doesn't mean that all the growth is backloaded. It just means that it's an average of the year '27. And it's coming as well from the discipline of the CapEx because we have your guidance is $16 billion. So it's both, will contribute to this reinvestment rate, which is lower by 20%. So if you have 20% -- if you are lowering reinvestment rate, it's good and it's consistent with the free cash flow per share increase that we have announced. So that's a way to explain why we will be able to increase the free cash flow per share because we have more cash and less CapEx. And that's what we want to -- where we want to embark all our investors who trust TotalEnergies. I think it was the last question. Yes? Operator: There are no more questions registered at this time. Patrick Pouyanné: Okay. So thank you to all of you for your attendance. I hope that all the analysis you've done will be reflected in the stock price. It was not the case this morning. But again, we are delivering. This is the message. We are delivering. We have a consistent strategy. We are just executing in. We deliver. And frankly, Board of Directors and myself as CEO, we are quite pleased with the results of this quarter because that demonstrates and again, that all what we explained you quarter and year after year is on the delivery mode and that free cash flow will increase. Thank you for your attendance. Operator: Ladies and gentlemen, this concludes the conference call. Thank you for your participation. You may now disconnect.
Operator: Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Liberty Global's Third Quarter 2025 Investor Call. This call and the associated webcast are the property of Liberty Global, and any redistribution, retransmission or rebroadcast of this call or webcast in any form without the express written consent of Liberty Global is strictly prohibited. [Operator Instructions] Today's formal presentation materials can be found under the Investor Relations section of Liberty Global's website at libertyglobal.com. [Operator Instructions] Page 2 of the slides details the company's safe harbor statement regarding forward-looking statements. Today's presentation may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including the company's expectations with respect to its outlook and future growth prospects and other information and statements that are not historical fact. These forward-looking statements involve certain risks that could cause actual results to differ materially from those expressed or implied by these statements. These risks include those detailed in Liberty Global's filings with the Securities and Exchange Commission, including its most recently filed Forms 10-Q and 10-K as amended. Liberty Global disclaims any obligation to update any of these forward-looking statements to reflect any change in its expectations or in the conditions on which any such statement is based. I would now like to turn the call over to Mr. Mike Fries. Michael Fries: All right. Welcome, everyone, and thanks for dialing in to our Q3 results call today. After Charlie and I run through our prepared remarks, we'll open it up for what we hope is a lively Q&A. And as usual, I've got my core leadership team on the call with me. And before I jump into the presentation, I just want to acknowledge and be sure that everybody has seen the press release we put out yesterday regarding John Malone, who has decided to step off the Board and move to a Chairman Emeritus role at the end of the year. Of course, he's making a similar move at Liberty Media. I won't repeat all the key messages that we put in the public statement, you can read that, and I encourage you to do that, except perhaps to emphasize how important, impactful and enjoyable my relationship with John has been over the last 25 to 30 years and how pleased I am that as he implies in the release, he intends to stay very engaged with me and the Board as we execute our strategic plans. And knowing John as I do, he will surely do just that. Of course, I'm happy to take any questions on this as well at the end. Now getting back to our results, let me kick it off with some key highlights from the quarter. If you're going to breeze through these slides later, these first 2 are perhaps the most critical in my opinion. I believe everyone is familiar with how we're organized today in order to create greater transparency around strategy, capital allocation and value creation, everything we do falls into 1 of 3 core platforms at Liberty Global. These include, of course, Liberty Telecom, where we're focused on driving commercial momentum in our broadband and mobile businesses and most importantly, finding ways to unlock the intrinsic value of these companies for the benefit of shareholders, and I'll get into that a bit more in the next slide. Of course, that starts with operating performance. And as you'll see, despite intense competition, we had a strong third quarter with sequential improvement in broadband net adds across all 4 markets, for example. Importantly, our networks are proving to be critical sources of both competitive differentiation like our 5G expansion in the U.K. that's being fueled by the recent spectrum purchases and value creation, like our agreement with Proximus to rationalize fixed networks in Belgium, which I'll cover off in just a moment. Now a theme you will hear a few times today is lowering leverage and strengthening our balance sheet at Liberty Telecom. And Charlie and his team have worked tirelessly this year to strengthen the balance sheet, beginning with refinancing over $9 billion of 2028 maturities, particularly in the U.K. and NL at very reasonable credit spreads. And that includes the debt financing we just announced that funds the fiber rollout in Belgium while deleveraging Telenet, our serveco in the market, and Charlie will dig into that. Now turning to Liberty Growth, which includes our investments in media, infrastructure and tech that today totaled $3.4 billion and by the way, provide a source of capital to drive future value creation. This is a highly concentrated portfolio where the top 6 investments comprise over 80% of the value. We're still targeting $500 million to $750 million of noncore asset sales from the portfolio. And as I mentioned on our last call, we're not going to rush this and price bad deals in the process, but we have generated proceeds of $300 million year-to-date when you include the partial sale of our ITV stake last week. So we are well on our way. Of course, one of the bigger portfolio companies is Formula E, which heads into season 12 in December with significant tailwinds, including double-digit growth in revenue, fans and viewers last year, a knockout calendar of 18 races and the public reveal of the Gen 4 car, which debuts a year from now and doubles the max power of what is rapidly becoming the coolest car in racing. And we'll highlight in just a few slides our data center investments. With the boom in AI infrastructure, we believe we have a tiger by the tail, as I say, with over $1 billion in assets today and growing. And finally, the quarter brought some great progress at Liberty Services, where we manage large and profitable tech and financial platforms and at our corporate level, where we are in the midst of reshaping the operating model. I think the big news here is that we are improving for the second time this year our guidance for net corporate costs in 2025. We started the year forecasting around $200 million of net corporate cost. In the second quarter, we improved that to $175 million, and now we're improving it further to $150 million for this year. Perhaps even more importantly, we see visibility in 2026 to just $100 million of net corporate costs. Now this is a hot button for us as most analysts reduced their target price for our stock by, I think, $8 to $10 per share, just related to that $200 million net corporate spend. These announcements today should dramatically improve our valuation narrative, and you can bet we'll be pounding the table on it starting right after this call. I think Charlie will also address it. Lastly, on this slide, we note that we're forecasting $2.2 billion of cash at the holding company at year-end, assuming just the $300 million of asset sales year-to-date. Now the next slide provides an update on our strategic plan to unlock value for shareholders. And I guess this is the key takeaway today. First, let me reiterate what we laid out on our second quarter call back in August. Following the continued success of the Sunrise spin-off about a year ago, we remain committed to pursuing similar transactions that would further unlock value for shareholders. This may include the separation of one or a combination of core operating businesses you see on this slide actually through a spin-off, tracking stock, listing or similar equity capital markets transaction. I imagine many of you still own or follow Sunrise. The stock has performed well and trades around 8x EBITDA with an 8% dividend yield today. And looking back on that deal, I think 4 key factors laid the groundwork for its success. Number one, Switzerland is a largely rational telecom market. Number two, Sunrise had a less levered balance sheet, thanks to our capital contribution at around 4.5x on the date of the spin-off. Number three, Sunrise has a clear network strategy and CapEx profile. And number four, Sunrise has a solid free cash flow story that supports a progressive dividend policy. That was the formula. Strong balance sheet, a rational market and a predictable path to stable or growing free cash flow. I won't surprise you to learn that this looks a lot like the things we are working on in the Benelux. For example, at VodafoneZiggo, we've installed a new team with a winning plan that is built around generating long-term free cash flow in a largely 3-player market. We have now refinanced something like 80% of the 2028 maturities with the remainder targeted for this quarter or early next year. In Belgium, we are even further along. Our recently announced agreement with Proximus, which is currently being market tested by the regulator, rationalizes the build-out and wholesale monetization of fiber in a large part of Flanders with really only one network in 65% of the market. On the back of this, we just announced a EUR 4.35 billion financing for our netco there, which we call Wyre, which fully funds the build-out of fiber and allows us to reduce leverage at the Telenet servco, including all 2028 maturities. Even more exciting, we're in the early marketing stages of selling a significant stake in Wyre. This is an increasingly common value creation strategy in Europe, as you know, with the proceeds used to further deleverage our Telenet servco to about 4.5x. That's going to take a quarter or 2 to finalize all of these steps, but we're feeling more and more encouraged about the possibilities in this region for a value unlock in the time frame that we articulated. Now of course, we continue to work on other ideas, which we'll update you on in time. And as I said last quarter, all of the operating businesses or assets you see on this slide and some that aren't even shown can be singled out or combined with one another to achieve a value unlock transaction. So stay tuned. Now as I said, a key enabler of that strategic road map is ensuring that our operating companies are driving commercial momentum in what are increasingly competitive markets, right? And the long-term goal here is generating meaningful free cash flow. Now towards that end, each OpCo has been implementing a series of commercial initiatives and network improvements that are starting to impact results positively. This next slide summarizes a handful of those initiatives, which provide important context for the results that follow. Starting in the U.K., where Lutz and the team have been busy across a number of fronts, including the recent rollout of our new pay TV and broadband bundles, which now include Netflix for free that further differentiates us from the competition, in particular, AltNets. VMO2 is also redefining the flanker brand segment with the introduction of Giffgaff broadband services that complement Giffgaff mobile leadership. And we're rapidly transforming the O2 mobile network using the recently acquired spectrum to launch our first 5G gigabyte, plus we announced the U.K.'s first direct-to-cell satellite service with Starlink for what we call rural hotspot. So a lot happening in the U.K. Stephen and the VodafoneZiggo team have completely reversed trend in the Dutch market, delivering the lowest broadband churn we've seen since early 2023 and positive mobile net adds in the quarter. Lots of things are working right here, including being the first to roll out 2 gigabit speeds nationwide with upgrades underway for a DOCSIS 4.8 gig launch next year. We're also investing in the Vodafone brand on the back of the iPhone 17 launch. So the how we will win plan that Stephen has developed is quickly becoming the why we are winning plan, which is exactly what we needed in this otherwise rational telecom market. John Porter and the Telenet team have gone from strength to strength in Belgium in the last 3 quarters, supported by doubling of broadband speeds for nearly 1 million customers, their rollout in the South and a multi-brand strategy in mobile. And the fiber upgrade in Ireland is proceeding at pace with over 650,000 premises built now, and Tony and the Virgin team are ramping up our wholesale business with Vodafone and Sky and expanding their own reach to new off-footprint territories with fiber. And just to put a marker out there, with CapEx set to fall by 50% in the coming 2 years, we're planning for significant free cash flow out of the Irish business as well. Now the results on the following slide illustrate this improvement. Don't get me wrong, we are in a dog fight everywhere, but we are fighting right back and differentiating our products and services, attacking vulnerable competitors and driving better results each quarter. In fact, 3 out of our 4 markets, we've demonstrated improved sequential fixed and mobile subscriber results throughout the year and in Holland over the last 2 quarters. Again, at VMO2, our fixed churn initiatives, things like proactive management of the base and one-touch switching activity are gaining traction and improving broadband performance in a very competitive market. Meanwhile, postpaid mobile subscriber performance has consistently improved quarter-after-quarter this year, including ARPU growth supported by pre to postpaid migrations and our loyalty plans. VodafoneZiggo reported its third straight quarterly improvement in broadband losses with another strong ARPU result and postpaid mobile adds were positive again, driven by the initiative described just a moment ago. Telenet maintained positive broadband net add momentum for the second quarter running, driven by successful cross-sell campaigns, including back-to-school, while fixed ARPU growth was supported by price adjustments that they implemented during the second quarter. Postpaid net adds in Belgium were negative despite a strong performance on the base brand, while mobile postpaid ARPU continues to show pressure from the competitive environment. And in Ireland, Virgin Media's broadband base was largely flat with aggressive fiber offers in the market driving higher churn and impacting fixed ARPU. Postpaid net adds on the other hand, remained strong, and that's supported by a EUR 15 for life offer launched in May, boosting gross adds. So Charlie will walk through our financial results that are tied to these numbers in just a moment. Let me first turn to Liberty Growth. And by now, you're hopefully more familiar with the components of our portfolio, which, as I mentioned, increased in value to $3.4 billion at Q3. That's around $10 per share. As you can see here, 45% of the value or about $1.5 billion consists of premium media, sports and live events businesses, which we and most everyone else these days see as great long-term investment strategies. Another 40% is in digital infrastructure, which I'll dig into a bit more on the next slide. And then most of the balance resides in our tech portfolio, which consists largely of venture capital investments in companies, many that are leading the way in AI, cloud and cybersecurity. Now while it might appear like a complicated and diversified mix of investments from the outside, as I said earlier, it's important to remember that 6 of these deals comprise over 80% of the portfolio's value today. You can see them listed at the bottom of the page. Things like a controlling interest in Formula E, which I spoke about, and our remaining 5% of ITV, for example, and the 2 largest assets in our digital infrastructure vertical, which I'm going to highlight on the next slide. Now both of these infrastructure investments are substantial, adding up to over $1 billion of value for us today, and they performed extremely well, especially in the current environment where the development of AI infrastructure seems to have exploded. We're thrilled to own a minority interest in Edgeconnex. It's a global data center platform controlled by EQT and focused on hyperscalers across over 60 Tier 1 markets in 20 countries around the world. And we first invested in this company back in 2015. It was much smaller, and we have a net $150 million invested today. And the good news is that we've already taken $50 million off the table and our residual stake is conservatively valued at over $500 million. That equates to a 30% IRR over the last decade. On the right, you'll see our 50-50 JV called AtlasEdge, which is a regional data center provider focused on Tier 2 markets. The company has strong positions in Germany, Austria and Iberia and is seeking to expand capacity to 180 megawatts. We have a net investment here of about $345 million, and we've had our interest valued by third parties at around $600 million today. Again, both of these companies find themselves in the middle of multiple AI infrastructure and data sovereignty projects, and we are focused on driving continued growth right now in what is an increasingly hot space. So I look forward to your questions on all of this, but let me first turn it over to Charlie to walk through Liberty Services and our numbers. Charlie? Charles Bracken: Thanks, Mike. Turning now to Liberty Services and Corporate. On the left-hand side of the slide is an overview of our central services, which focus on 3 core activities: our corporate group provides strategic management and advisory services in operating and managing financial and human capital as well as technology strategies and investment. Liberty Tech focuses on the delivery of scaled tech solutions, particularly in entertainment and connectivity platforms as well as cybersecurity for our telecoms companies. And Liberty Blume develops and provides tech-enabled back-office solutions, not just to companies within the Liberty Global family, but also increasingly to third parties. We are reinvesting these tech-enabled efficiencies within Liberty Blume to drive 20% plus organic revenue growth in 2025. During the third quarter, we undertook a significant reshaping exercise around both Liberty Corporate and Liberty Tech to drive cost efficiencies going forward and make both organizations more agile and well positioned for the future. Starting with Liberty Corporate, we undertook both voluntary and involuntary redundancy schemes, which have reduced headcount by around 40%, with 90% of those leaving by year-end. And in Liberty Tech, we can continue to leverage our successful Infosys partnership with 4 years of proven track record to help secure additional efficiencies and simplification savings. We expect both the corporate and Liberty Tech initiatives to drive around $100 million of annualized cost savings. Bringing all this together, you will recall that we began the year guiding to less than $200 million of negative adjusted EBITDA, and we've already upgraded this to around $175 million of EBITDA at Q2. Now we're pleased to reduce this further for 2025 to around $150 million of negative adjusted EBITDA, supported by the in-year benefits of our corporate reshaping programs. Now perhaps more importantly, turning to the fully annualized impact. Once we see the benefits of this reshaping annualized from 2026, we expect our corporate adjusted EBITDA to broadly halve to around $100 million. And from there, we still see scope for further improvement as we evolve our operating model through additional third-party revenues, advisory fees and management services agreements alongside the scope for further cost optimization. So to put this in context, at the beginning of the year and the average analyst sum of the parts valuation, there was around $10 per share negative impact based on the capitalization of these corporate costs, which was typically at around 12x to 14x enterprise value to operating free cash flow. We now expect the run rate of negative corporate costs to essentially halve versus the start of the year going forward, which would drive a significant reduction around half of this discount in our analyst valuation. And we would also argue that an EBITDA multiple more in line with the telco comparables, which is much lower, is the right way to value these costs, which would further reduce the impact. Moving to the treasury slide. We've been extremely proactive year-to-date and through Q3 in dealing with our 2028 maturities in what has been a favorable overall high-yield market, in particular in the bond market. Overall, we've successfully refinanced close to $6 billion across our credit silos year-to-date, and this actually increases to $9 billion if you include the underwritten Wyre financing that Mike has already discussed. At Virgin Media O2, using existing benchmark financings, we were able to complete mainly private tap transactions amounting to $1.4 billion, bringing to total refinancing year-to-date at Virgin Media O2 to over $3 billion, which leaves us only with around $100 million of outstanding 2028 maturities. VodafoneZiggo, we issued just under $1 billion of senior secured notes during Q3, leaving us with around $500 million of outstanding 2028 maturities. And at Telenet, we've already completed $600 million of financings year-to-date and have recently secured a EUR 4.35 billion underwritten facility for Wyre. Now this will allow us to significantly refinance Telenet overall and formally separate the Wyre and Telenet servco capital structures and in the process, repay all the 2028 maturities. Now all of this proactive refinancing activity has significantly reduced our 2028 maturities and has actually maintained our average life of our debt at close to 5 years and broadly comparable credit spreads versus our historic levels. Turning to the next slide. We remain committed to our capital allocation model and strategy to both replenish our cash balance while also rotating capital into higher growth investments and strategic transactions. Starting with cash generation, we continue to see free cash flow in line with our expectations as set out for the year across our opcos and JVs. As has been the case in previous years, we expect the JV dividends to be largely paid in Q4 given the free cash flow phasing of Virgin Media O2 and VodafoneZiggo. Across all the OpCos, CapEx remains elevated, primarily driven by extensive 5G rollouts in the U.K., Belgium and Holland. And also fiber investment is ramping in Belgium, and we continue to invest in Virgin Media O2's fiber up and Virgin Media Islands fiber-to-the-home program. And this is along with our DOCSIS upgrade path in Holland. Turning to our cash walk on the bottom right. Our consolidated cash balance was $1.8 billion at the end of Q3 with an additional $180 million received since then with a partial ITV stake disposal in October. During Q3, we saw modest investments into Liberty Growth of $77 million, which was primarily Formula E and AtlasEdge and spent $56 million on our buyback program. We're currently tracking towards a buyback of around 5% of shares outstanding for 2025. Moving to the Liberty Growth walk. The fair market value of our Liberty Growth portfolio remained stable versus Q2 at $3.4 billion. This was primarily driven by the investments in Formula E and AtlasEdge, offset by the partial disposal of our Airalo stake and a small fair market value reduction in our Liberty Tech portfolio. Turning to the key financials on the next slide. Virgin Media O2 delivered a modest revenue decline of 1%, excluding the impact of handset sales, nexfibre construction revenues and 2 months of Daisy contribution. This was driven by declines in our B2B revenues, which were offset by growth in our consumer businesses. Adjusted EBITDA at Virgin Media O2 continued to grow at 2.7%, supported by cost discipline and lower cost to capture year-on-year. Moving to VodafoneZiggo. We saw a revenue decline of 4%, largely driven by the decline in ongoing repricing of our fixed customer base. Adjusted EBITDA was impacted by the revenue declines and commercial initiatives supporting the new strategic plan. Telenet revenue and adjusted EBITDA growth were both impacted by a positive deferred revenue benefit in the prior year of $18 million. In addition, revenue growth was also impacted by the decision not to renew Belgium sports rights, which was more than offset by associated lower programming costs. Turning to our guidance slide. We're updating 2 items of guidance. Firstly, Virgin Media O2 revenue guidance, where we are confirming growth in the consumer and wholesale revenues. But given the Daisy transaction, which completed during the third quarter and the creation of O2 Daisy, we're currently reviewing the impact of Daisy on B2B reporting, but can confirm our previous guided M&A impact from Daisy of around GBP 125 million of revenue in 2025. And secondly, as discussed previously, we're improving our Liberty Global Services and Corporate adjusted EBITDA guide to $150 million in 2025. All other OpCo guidance remains unchanged. Now that concludes our prepared remarks for Q3, and I'd like to hand over to the operator for the questions and answers. Operator: [Operator Instructions] The first question comes from the line of Maurice Patrick with Barclays. Maurice Patrick: Congrats Mike, on the new role. Just maybe a question given the topical FC article this morning around [indiscernible] in the U.K. I wouldn't expect you to comment on that transaction. But maybe a good opportunity, Mike, ahead of Telefonica's CMD next week to talk a little bit about your outlook and view on investments in the U.K., specifically around the fiber side, whether you -- the NetCo sale plan could still be resurrected,our view around buy versus build and the cost. You've always said you'd consider buying if the cost was comparable to your own build cost. How your thoughts are evolving there would be very helpful. Michael Fries: Sure. And we're not sure what Telefonica will be addressing next week, obviously. We'll all find out. But I think we've been consistent on the fiber point, at least through the course of this year, which is that we'll continue to upgrade our own fiber, and we're now reaching Lutz and his team have access to 8 million fiber homes through a combination of our own upgrade of the Virgin Media network and, of course, the next fiber footprint. So we continue to, at least with our own homes at the Virgin Media side, continue to upgrade fiber and increase the footprint and the reach of that technology. That's point one. Point two is we've always stated and if you -- we are actually now deal down with the up deal we did about a year or so ago, we've always stated that the market requires rationalization that AltNets, most of them will find it difficult to continue doing what they're doing in the manner in which they're doing it, and we're supportive of opportunities to consolidate and rationalize the fixed network environment, period. So I'm not commenting, as you suggested, on any particular deal. I would simply say, if you look at our history, where we used nexfibre in the case of up to begin the process of rationalizing, we're open-minded and open for business, if you will, for opportunities that would achieve just that. So I think it's still a bit of a moving target everywhere, but we're hopeful that in the next 6 months, things will start to settle, and we may or may not be part of those transactions that precipitate that settling. Operator: The next question is from the line of Polo Tang with UBS. Polo Tang: I've got a question about the Dutch market and the improvement in terms of broadband that you're seeing there. So can you maybe just talk about competitive dynamics, both in the broadband market, but also in terms of mobile? And how confident are you that you can stabilize the broadband base in 2026? And will this come at the expense of further declines in terms of ARPU? And can you maybe also comment in terms of whether FWA is having any impact on the broadband market? Michael Fries: Sure. That's a great question for you, Stephen. Stephen van Rooyen: Yes. Thank you, Mike. So like 3 questions. Can you hear me. Michael Fries: Yes. Stephen van Rooyen: Yes, can you hear me? So I think 3 questions. So first is stabilizing broadband adds. We see the market is pretty competitive, although rational. We've set out a plan, which we've spoken to you about at length over the last 12 months, which is working. The heart of the plan is to get us back to broadband growth. That will take us, I think, the balance of next year, but that's what we're pushing towards. It's an uncertain journey because we can't predict what the competition will do, but certainly, we are pushing our plan forward. The heart of that plan is bringing down churn. You'll have seen and we are pleased with how much we've been able to deal with the churn in our base, and we'll continue to push on with that through the next year. In mobile, I think it actually was. I think there's a lot of activity like most European markets in the value segment. We're well positioned there with hollandsnieuwe, which has done pretty well for us. We think that there's more we can do in that space, and we'll continue to pursue that through 2026. And then on fixed wireless, look, I think it's a variable in the marketplace. It's probably a question more for Odido than for us. We're focusing on our plan, reducing our broadband losses, getting our broadband back to growth, and we've accommodated for that within our plan. So I don't really have much to say about what's happening on fixed wireless there. Operator: The next question is from the line of Joshua Mills with BNP Paribas. Joshua Mills: My question is on the U.K. market and the competitiveness we're seeing. So wondering if you could give us a bit more color on what you're seeing on the ground. I note that the ARPU development this quarter for fixed line was negative, which may be expected, but perhaps disappointing following the 7.5% price increase in April. And then on B2B, I understand that there's some moving parts with the Daisy acquisition. But could you just give us an idea of what the underlying B2B growth would have been this quarter and whether that's running ahead, below, in line with expectations, that would be great. Michael Fries: Lutz, why don't you take the broadband and ARPU question and Charlie, you can address the B2B question. Lutz Schüler: Yes. I mean the market is -- the broadband market is very competitive as we speak. On one hand side, you see offers already around GBP 20 for 1 gig from AltNets in the market per month. And then Openreach came with 2 promotions. I don't know if you're aware, but for copper to fiber migrated customer, you are paying to Openreach for the next 24 months, GBP 16 for 1 gig. So this one promotion, the other one is you don't pay anything when you migrate a fixed wireless access customer onto the fiber network of Openreach, which leads to the fact that you see a very price-driven market. You see in the affiliate market, which is the most price-sensitive market prices from Sky also in Vodafone around GBP 21 for 1 gig. How are we doing in this? I think we are doing pretty well here because as you all know, we have the highest ARPU in the market. We have the customers who have the demand for the highest speed in the market. And yes, on one hand side, to now lower churn of our customers, we have offered prevention offers with some dip on ARPU. And also, obviously, we have to get our fair share of acquisition, which leads to lower ARPU. But in the scheme of things, losing only 28,000 customers and having only a dip of 1% of ARPU, we personally think it's pretty good outcome within a pretty competitive market. But let's wait for the announcements of our competitors. Michael Fries: Charlie, do you want to address the B2B. Charles Bracken: Yes. So look, as you know, we closed those O2 Daisy in the quarter, we've got a lot of work to do to try and reconcile accounting policies, the revised plans because things like a clean room. So what we've been trying to do is say, look, the businesses that remain outside that perimeter, we still expect to see growth and have had growth year-to-date. The business that we've actually contributed into O2 Daisy, which is our fixed and mobile B2B connectivity business, that has declined this year. You're right. We haven't actually broken that out and how we take that offline. But I think what we need to do is now we've got this not a joint venture, but a partnership. But in the Q4 results, we'll give you the separate financials and obviously explain how the impact of that business is and how we think it's going to grow in the future as we finalize the integration plans. Operator: The next question is from the line of Robert Grindle with Deutsche Bank. Robert Grindle: Congratulations, John, as well as Mike for his new position. I'd like to pick up on the central costs and valuation point, if I may. I suppose that's for Charlie. What would you say the costs are to drive the EUR 100 million annualized savings at the center? Do you reckon it's like a 1-year payback period or longer? Is there any stock impact at all from all these redundancies and any CapEx which goes to offset the savings? Or is effectively the EUR 100 million a straight drop through? Charles Bracken: Sorry, it's a pretty good payback. I mean it's de minimis CapEx. Yes, sorry, it's a pretty good payback. There's de minimis CapEx, which is one of the reasons why I think an EBITDA multiple is perhaps a more appropriate way to look at it. If you do take the view that these are costs necessary to run a telco and we just scale them across the portfolio and indeed across our growth assets. So I think whether it's the telco multiple, what that is, but it's certainly along those lines in my mind. In terms of the cost to achieve it, there is some degree of restructuring, but broadly speaking, pays back within, I would say, less than 12 months. So very little frictional cost. Operator: The next question is from the line of Nick Lyall with Berenberg. Nicholas Lyall: Just a very quick one, please, Mike. On Slide 4, I'm just interested why you picked the Benelux markets first and maybe not VMO 2 in the U.K. market. Is it simply just because of size? Or are there any one of those 4 criteria that you just don't think it ticks the box on yet and maybe others are far closer to? Could you just maybe describe why that might be, please? Michael Fries: Sure. Yes, I think we're -- we want to trend towards a Sunrise type framework everywhere we operate. And I think there is a pathway to do that everywhere we operate. We seem to be making and are making meaningful progress in the Benelux for all kinds of reasons, both Dutch market and the Belgian market are highly rational markets, closer to Switzerland than anything else, I would say. They have their own unique peculiarities around competition, but largely rational 3-player markets. We've been able to attack the balance sheet, specifically in Belgium, where we've successfully created a netco and the servco there and have done the -- are in the process of executing the classic move of putting more debt on the netco as it builds out. It's a higher quality credit. I'm not allowed to tell you what the credit rating is of this EUR 4.35 billion financing, but it's the first time we've ever seen one. I can promise you that. And using the proceeds and the financing capabilities of a netco to delever the servco, which is the remaining core commercial business. And those combination of steps have been in the works for quite some time. And now we did and have attempted to do similar things in the U.K. as somebody mentioned just a moment ago and not suggesting we can't get to the same place in the U.K. at some point. But it does appear like, in particular, in Belgium, we are on our way to executing on those 4 key measures. And so that, to us, is worthy of highlighting and letting you know we're busy, very busy in this part of the platform and the portfolio and that if we made a commitment to make some decisions around these things, and I think more likely than not, we'll be making some decisions around this part of our business in the relatively near term, certainly within the time frame that we've outlined. We hope in all of these markets. Ireland, I mentioned, is going to have a massive reduction in CapEx. It's going to start generating free cash, but it's small. But certainly, Virgin Media Ireland looks and will tick the box on many of these particular metrics. The U.K. is -- look at a trophy business for us, certainly something we are committed to for the long term and is an increasingly important investment. And we are by no means suggesting that we can't achieve similar results or benefits in the U.K. We're simply saying there, we have a partner, and we have to align with our partner on the best next move. We have a market that's a bit fragmented today. And as we discussed a moment ago, it's going to require some form of rationalization. And so these are things that we work on with our partner. So I'm not suggesting for a second, we can't achieve similar things in the other assets or markets identified on that slide. I'm simply saying we're making good progress here. We'd like you to know about it. Operator: The next question is from the line of David Wright with Bank of America. David Wright: Congratulations, Mike, on the new role. It's obviously quite a significant event to see John stepping away after such a significant impact on the industry. A couple of questions, please. And the first is just on the U.K. guidance and maybe my colleagues are better at this than me, but I'm trying to understand whether there seems to be a change in perimeter here. And I'm looking at the numbers, I'm inclined to think that the same perimeter with the shift in B2B could have forced you to possibly push the revenue guidance lower. This is like-for-like without Daisy. It does feel like you could have had to push the revenue guidance lower. I'm just wondering if that's the case. I'm just struggling to reconcile that. And then the second question I had, it's just your language you used before, Mike, which I just found a little surprising, which was you sort of said we'll have to see what Telefonica wants to do. Now I might have expected you to sort of say we'll announce our plans jointly next week. Does Telefonica have any sort of strategic rights or priority around the U.K. business in the shareholder agreement? Maybe I've just read this incorrectly, that might be the case. I appreciate that. Michael Fries: No, David, I'm glad you asked that question. Yes. I appreciate that second question because as I spoke those words, I occurred to me those probably didn't come out very clearly. No, first of all, no, this is a 50-50 joint venture. We make decisions jointly, and I have a very good dialogue and working relationship with Mark, we are 100% aligned on everything that's happening in the U.K. So that is not what I intended to say. There was a reference to their Capital Markets Day and I'm just pointing out that we're not part of that. They have a lot of things to talk about to the market, and they will surely talk about those. But we don't expect any surprises, if you will, around the U.K. market. We're aligned and talk every week about what we're going to do together. So thank you for asking that. I'm glad I could clarify that. On the guidance, listen, I'll let Charlie dig into it. The way I see it is we're providing greater transparency at a time where it's probably needed for analysts to understand what's growing and what's not and what are we getting our arms around. So Charlie, do you want to address that? Charles Bracken: Yes. So look, I'm sorry if it's confusing. And you're right. The difficulty is that we've now got this company called O2 Daisy, and we own 70% of it. 30% of it we don't own. And therefore, at some point, hopefully very soon at the end of Q4, we're going to give you the key financials of that. And as we align that company, it is tricky because there's different accounting policies, as I'm sure you'd d and blah blah. So we're trying to do is confirm what we can't tell you. So we can tell you that the businesses, excluding the ones that went in there are growing and we expect to grow. And we have told you that to date, the B2B connectivity business, mobile and fixed that we have put into O2 Daisy is in decline. Now if that means you would interpret that as the combination of O2 Daisy would have meant that the business would have not been growing, maybe that's right. But it's somewhat academic because we've got to work through what the O2 Daisy combination is going to develop. And the whole idea was the 2 companies are very synergistic and not just in costs, there's a material cost saving there but also with some revenue growth. So I mean, I apologize if that's not clear enough and having to take it offline, but certainly how we see it. David Wright: Super, Charlie. Could I just add a quick one? Are there any puts and calls around that 30%? Or is that just the ownership at Infinite right now? Andrea Salvato: Charlie, do you want me to take that. It's Andrea. Charles Bracken: Yes. Yes, Andrea. Sorry, yes, you should answer. Andrea Salvato: Yes. No, there are no puts and calls, David. Operator: The next question is from the line of Ulrich Rathe with Bernstein Societe Generale Group. Ulrich Rathe: My question is about the refinancing, obviously very impressive. Question to Charlie. Are all of these financings, can you confirm fully swapped in the usual policies that you used to have in terms of into the local currencies of the operating units and also in terms of fixed rate swaps? Because I do think -- I do remember you did some refinancings where you actually didn't implement these older policies. So just wanted to confirm that the refis now are back to the old policies? Charles Bracken: Yes. To be honest, I don't think we've changed our policies. The bonds, we've all swapped at our fixed rate at the rate we issued at, which in some cases is actually higher. So just to confirm the 2 questions. One is all currencies are matched. So everything in the U.K. is sterling. We're not taking dollar or euro risk. So that's a tick on all the policies. On the interest rates, all bonds are fixed by nature. And on any bank debt, we haven't done a ton of bank debt because the bond market has been so strong, to be honest. We have maintained the swaps. Remember, the swaps are independent of the original bank financings. So we are monetizing or riding those low interest rates until '28, '29, '30. But thereafter, we would have to come in at higher rates, and we are gradually pushing out those hedges. So we are maintaining a pretty good 3-, 4-, 5-year sort of fixed profile depending on which market it is. I hope that sort of answers the question. Operator: The next question is from the line of James Ratzer with New Street Research. James Ratzer: I was going to ask one question. I mean tough to keep it to one. But on Virgin Media, in their release, they are saying they're planning to bring to 4x to 5x in the medium term. I was wondering if you can kind of talk us through the plans to get there. I mean does that require some inorganic steps like a kind of dividend removal, you in Telefonica injecting capital into VMO2? Or do you expect to get there organically through EBITDA growth? Michael Fries: James, that was a little hard to hear. I want to be sure we got the question right. I think you're asking about leverage expectations at VMO2 staying within the 4x to 5x range. And I think that is our objective, and I think that is achieved in a number of ways. But one you didn't mention, which is organic EBITDA growth, which Lutz and the team have been able to deliver consistently. So organically, the business should delever over time. I don't think we're in a position today to talk about dividends or asset sales or things of that nature, although we do have tower -- residual tower interests that could be used in that regard, and we're always open-minded about it. But getting within the range that we've maintained historically is always our underlying goal. Charlie, I don't think there's much to add to that, but go ahead if you think there is. Charles Bracken: No, no, I think that's absolutely right. Look, listen, we are 4x to 5x levered. We're definitely through that in the U.K. So some good synergies potentially from the O2 Daisy deal, which we've talked quite a bit about today. And as Mike said, we expect some organic growth, and let's see how we go. Operator: The next question is from the line of Matthew Harrigan with The Benchmark Company. Matthew Harrigan: I'll just ask one question right out of the blocks. I mean I think when you look at the U.S. and the U.K., it's kind of competing dysfunction on the political side. But that look was recently quoted on Starmer's infrastructure tax. And I don't think there'll be any implications this year, but what might be the longer-term implications? I was on the comcast Q&A, so I apologize if you talked about this in the main discussion, but I'd rather suspect you didn't get to the topic. Michael Fries: Matt, you're asking -- that's a big question, politics in Europe vis-a-vis our business. I mean, I'll step back a minute to say that I think we are approaching -- hopefully approaching a bit of an inflection point here where our industry, for example, the mobile industry just put a letter out to Von der Leyen, I think, 2 days ago, 3 days ago, making it clear to her that change is critical, necessary, needed if Europe is to maintain any sort of path to leadership in digital, industrially, really any category productivity. So we continue to make our case as an industry, as a sector that we're not just critical infrastructure. We are necessary for pretty much every aspect of growth and productivity that regulators and politicians are searching for. So maybe get off our throats. And that is, I think, being received positively. In the U.K., in particular, I think the government has had a growth initiative, a growth-minded approach to regulation. Recent changes at the CMA, for example, the Competition Commission there are positive in that they seem to be reflecting a much more growth-minded approach to M&A and to industry consolidation. So I think there's green shoots across the markets we operate in. There are still pain points, broadband taxes and things of this nature that are unnecessary, and we continue to fight those on a regular basis. But I think more broadly, I would say it's more of a tailwind these days than not. And whether it's sovereignty, where governments are realizing that their -- the critical infrastructure of telco is part of the solution for broader sovereignty and independence or whether it's just good economics that you need healthy telecom infrastructure to compete in the global marketplace. All of those things, I think, are coming together a bit, and I'm more encouraged now than I've been in a long time. Operator: This will conclude the question-and-answer portion of today's call. And I would like to hand back to Mr. Mike Fries for any additional remarks. Michael Fries: Great. Well, thanks, everybody. I appreciate you joining as always, and we look forward to getting back on the phone for our year-end call probably in the February time frame, hopefully, with updates on the strategic road map on how we're driving commercial momentum and more importantly, also how we're reshaping or continuing to reshape our corporate operating model. So I appreciate your listening in today, and we'll speak to you all very soon. Take care. Operator: Ladies and gentlemen, this concludes Liberty Global's Third Quarter 2025 Investor Call. As a reminder, a replay of the call will be available in the Investor Relations section of Liberty Global's website. There, you can also find a copy of today's presentation materials.
Operator: Good afternoon, and thank you for joining at Atlassian Earnings Conference Call for the First Quarter of Fiscal Year 2026. As a reminder, this conference call is being recorded and will be available for replay on the Investor Relations section of Atlassian's website following this call. I will now hand the call over to Martin Lam, Atlassian's Head of Investor Relations. Martin Lam: Welcome to Atlassian's First Quarter Fiscal Year 2026 Earnings Call. Thank you for joining us today. On the call with me today, we have Atlassian's CEO and Co-Founder, Mike Cannon-Brookes; and Chief Financial Officer, Joe Binz. Earlier today, we published a shareholder letter and press release with our financial results and commentary for our first quarter of fiscal year 2026. The shareholder letter is available on the Investor Relations section of our website where you will also find other earnings-related materials, including the earnings press release and supplemental investor data sheet. As always, our shareholder letter contains management's insight and commentary for the quarter. So during the call today, we'll have brief opening remarks, and then focus our time on Q&A. This call will include forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and assumptions. If any such risks or uncertainties materialize or if any of the assumptions prove incorrect, our results could differ materially from the results expressed or implied by the forward-looking statements we make. You should not rely upon forward-looking statements as predictions of future events. Forward-looking statements represent our management's beliefs and assumptions only as of the date such statements are made, and we undertake no obligation to update or revise such statements should they change or cease to be current. Further information on these and other factors that could affect our business performance and financial results is included in filings we make with the Securities and Exchange Commission from time to time. including the section titled Risk Factors in our most recent filed annual and quarterly reports. During the call today, we will also discuss non-GAAP financial measures. These non-GAAP financial measures are in addition to and are not a substitute for or superior to measures of financial performance prepared in accordance with GAAP. Reconciliation between GAAP and non-GAAP financial measures is available in our shareholder letter earnings release and investor data sheet on the Investor Relations section of our website. We'd like to allow as many of you to participate in Q&A as possible. Out of respect for others on the call, we'll take 1 question at a time. With that, I'll turn the call over to Mike for opening remarks. Michael Cannon-Brookes: Thank you all for joining us today. As you've already read in our shareholder letter, we're off to an incredible start to FY '26 with total revenue in Q1 growing 21% year-over-year to $1.4 billion. Our strong execution fueled cloud revenue growth of 26% year-over-year to $998 million and accelerated growth in RPO to 42% year-over-year to $3.3 billion. We continue to make great strides across our strategic priorities of enterprise, AI and the system of work. Not only do our results reflect this, but our customers are taking notice. All up over 300,000 customers, including Databricks, Expedia, Ford and Wells Fargo rely on Atlassian's AI-enabled cloud platform to power their business processes and mission-critical workflows. We're proud of our ability to continue to deliver AI into the hands of those customers to use today. We've amassed over 3.5 million monthly active users of our AI capabilities across the platform, once again, up over 50% since last quarter. This usage is widespread across both business teams as well as technical teams. I'll repeat what you've heard me say in the past, AI is one of the best things that's ever happened to Atlassian. They need to track, plan and manage work while harnessing your organizational knowledge are things that don't change in this era. And I'd argue those things become even more important as more software is created and more people have the ability to create amazing technology that changes our lives. AI is also directly driving demand for our cloud offerings. Customers are choosing to migrate to the cloud and they're upgrading to the Teamwork collection to take advantage of our AI-powered cloud platform. In fact, in less than 2 quarters since we launched Teamwork collection, we've seen it drive a double-digit percentage increase in users as well as upgrades to higher value additions and the consolidation of competitive tools as our customers standardize on Atlassian. We're putting world-class AI at the center of our platform and throughout our entire set of collections and apps. We've showcased our relentless pace of innovation just a few weeks back at our sold out Team '25 Europe event in Barcelona with AI still in the show. Of course, you can read more about all these announcements in our shareholder letter. I want to take a moment to thank Atlassians for their tremendous execution and dedication this quarter. Without them, none of these exciting opportunities would be possible. I've talked to hundreds of customers this past quarter from all over the world, small to the biggest enterprises on the planet. And what I'm most proud of is how they're turning to us as a strategic partner to help them transform how work gets done, during a time when AI is changing their world. Collaboration becomes even more important as more creation is enabled, as work evolves and as new opportunities are created for their businesses. And our customers are looking for our help. I feel incredibly bullish about how we're partnering with them and helping their businesses thrive. With that, I'll pass the call to the operator for Q&A. Operator: [Operator Instructions] Your first question comes from Keith Weiss from Morgan Stanley. Keith Weiss: Congratulations on a really strong start to Q1. A lot of really impressive product innovation, a lot of impressive numbers. I was hoping we could drill into the total revenue guide for the full year. And just to better understand the moving parts in this, and I'm looking at the chart that you guys put forward in terms of total revenue guidance going from 18% to 20.8%, but 3.2% of that coming from data center end of life, which means you're effectively lowering the non sort of end-of-life impact by 50 basis points. So given all of the strength that you're talking about in the letter, the product momentum, why is the full year absent the data center end of life coming down by 50 bps? Joe Binz: Keith, this is Joe. I'll go first, and Mike will follow on with additional context. I'd say the key development that we saw in Q1 was that we had significantly stronger-than-expected cloud migrations from data center, which is a great thing for our business. As you know, this has been a big area of investment for us. It's a key strategic priority. It allows us the opportunity to provide more value to customers in ways that we simply can't on data center, and we can offer capabilities such as automation, analytics and AI, and so basically, it's definitely the most valuable and secure experience we can offer to our customers. So it's a great thing for the business. Cloud migrations also, however, have an impact on the timing of revenue recognition because cloud revenue is recognized ratably and data center has a combination of upfront recognition and some ratable. And then lastly, the move to cloud also impacts marketplace revenue because we have a lower take rate on cloud app sales than we do on data center apps. All other organic growth drivers in our business in Q1 were either slightly better or in line with our expectations. And we've maintained that same guidance approach on those factors that we held 3 months ago. So we continue to hold a very conservative and risk-adjusted outlook for all the other variables in the growth equation outside of migrations. So with that Q1 performance and momentum, we've adjusted our full year outlook for a greater cloud migration forecast. And we've left all other organic driver assumptions in place. And because of those revenue recognition timing differences between cloud and data center and the impact to Marketplace, this drives the 0.5 point decline in our organic revenue growth outlook for the rest of the year. And so that's the math underneath the guidance that we're giving for the full year on the organic part of the business. Mike? Michael Cannon-Brookes: Keith, I just wanted to follow on. Joe has laid out the math for you and how it pencils out. I just want to reiterate, this is a really good thing. Increased migrations is good for Atlassian, and it's great for our customers. And you can see that coming through in our results, 26% cloud growth rate this quarter, 42% RPO growth rate and an increase -- significant increase in cloud guidance, right? All while reiterating our long-term 20% CAGR growth rate that we gave out at the end of FY '24. We feel just incredible confidence in our ability to deliver against that. And I think all of the movements that Joe laid out are incredibly positive for Atlassian as a business. Operator: Your next question comes from Kasthuri Rangan from Goldman Sachs. Kasthuri Rangan: I have to applaud you on your decision to do data center end of life. I think this is likely to accelerate the cloud transition, something that personally I have been waiting for, for a few years now. So kudos on that on pulling the plug there. So the strategic question is, given that we've got line of sight into cloud migration, we're not fighting multiple good battles. I wonder if, Mike, you can talk about the playbook -- the clean playbook for cloud migration in the years ahead. What are the things that you have learned from the last quarter or so in terms of tactics, especially with the new CRO coming on board? How are you tackling the field engagements and partnerships with the systems integrators to take this full on because I do think it's pretty exciting what you're on to. Michael Cannon-Brookes: Thanks, Kash. Look, I always appreciate the applause, I guess. Let me say a few things about Ascend and cloud migrations. Firstly, the partner and customer reaction has been fantastic. I think that's because we have well telegraphed to our customers, our partners, the entire community, that cloud is the future. It's the best experience for our customers. So we had very little surprise. We're very thoughtful and long term about how we've managed the transition, I think, and the reaction has been very positive as a result. I think the removal of technical barriers and the delivery of innovation in the cloud has been a combination of effects that's really bringing that through. You see that in the number of customers that mentioned to me, for example, AI is one of the big reasons that they are moving to the cloud. We've learned an awful lot about how to help those customers manage that upgrade through the fast shift program, through our amazing partner network, through a lot of different things over the last 5-plus years. And you see that in doubling the number of migrations -- seats that were upgraded in the last quarter that doubled year-on-year. That's a huge achievement for us. And it is thanks to those partners that you talked about and everybody else, and you see it in us raising the cloud revenue outlook. So I think cloud is ready for our customers. You see that in FedRAMP Moderate in government cloud, isolated cloud, multi-cloud strategy. So we feel incredibly bullish that we have the experience to do this. We feel that it's the right experience for our customers, and we are thoughtfully managing that migration as you pointed out. So I don't think the playbook has necessarily changed as much as every year and every quarter that goes by, we get better at it. We did lots and lots of large migrations last quarter across different geographies, different industries, pretty much any country that I go to, any city, I can point to a large customer in that geography in their industry that has already moved. So that's what gives us a lot of that confidence going forward, and allows us to reiterate those long-term targets that we laid out. Operator: Your next question comes from Arjun Bhatia from William Blair. Arjun Bhatia: Yes. Perfect. I'll add my congrats on a great quarter here. Mike, maybe I'm curious just -- obviously, we kind of knew the end-of-life on data center was coming at some point. I'm curious kind of what made you decide to do that now? Or is it just sort of the technical advancements in cloud that you've talked about comfortable -- more comfortable customers with cloud. And then just -- you're seeing the -- maybe the second part of this question, you're seeing the migration impact already, but I'm curious how you think it impacts cloud migrations for the rest of this year and through 2027. When do you think we start to see the next step of acceleration in data center to cloud migration? Is it still going to take some time? Or is that more immediate? Michael Cannon-Brookes: Look, thanks. Look, I would say that we've -- it's a continuum. So we've been investing in building an enterprise-grade cloud platform with AI and all the compliance and governance and scalability and data residency and government cloud. All of the amazing technical achievements that we've invested in over the last 5-plus years are a continuum. We will continue to invest in those. But we feel like good about the ability we have right now to accommodate the vast majority of remaining data center customers in the cloud that we have today. We feel great about our execution of the cloud road map that we've laid out in front of us in things like isolated cloud. And we fundamentally spend a lot of time with our customers. We feel like now is the right time for that, that we have prepared. They are ready, that our partners are ready. We've said many times on calls, we no longer get the -- if we're moving to cloud. It's a when conversation with every single customer that I deal with. So I would say we just feel very good about the delivery we've had, and so now is a good time for that. In terms of the expectation of migration, look, I would say that's all -- obviously, we've -- open company [indiscernible] is a core customer value. So we've laid out what we see in front of us for those customers. The multiyear period of that EOL giving them time to migrate, giving them the partnerships and everything else that we need. And we have included that into our guidance and into our results. So the confidence that we feel is included in the guidance that we've given out. Joe Binz: And then Arjun, I'd just ask -- I'd add one other point that while we expect more momentum on migrations in the short term, there is going to be variability in the pace of these migrations quarter-to-quarter, and they will take time to move, and we expect most customers will migrate as we get closer to the data center end-of-life date in March 2029. So we expect migrations to accelerate in the '28, '29 time frame. Operator: Your next question comes from Ryan MacWilliams from Wells Fargo. Ryan MacWilliams: Mike, this is kind of like a high-level question, but there's been a lot of investor conversation around like a super app world where AI interacts with multiple different parts of your software stack from 1 pane of glass. But Atlassian has always made it easy to integrate Jira with some of the other software solutions. And I thought the browser company acquisition was interesting that it also makes it easier to use Atlassian and some other tools. So how do you think about a future where you try to use AI across a bunch of different software solutions and how Atlassian fits in that world? Michael Cannon-Brookes: Thanks, Ryan. Great question. Firstly, I would say we are making amazing progress in our AI capabilities and delivery to customers. I think the company broadly should be incredibly proud of shipping AI to our customers. It turns up as one of the reasons that they are migrating to the cloud when you talk to them. It shows up as one of the reasons that they're moving to the Teamwork collection. It shows up as one of the reasons they are deepening their relationship as a strategic partner with Atlassian is our core investment in AI, which is world-class. We are doing an incredibly good job at delivering AI to customers to give them the benefits today and giving the confidence that we will continue to deliver that into the future. Jira has always been an incredibly integrated tool. We're very proud of that. The Atlassian platform is incredibly integrated. You can see that there are a number of partnerships that we've signed up in the last quarter, a lot of which are listed in the letter to integrate our platform with other offerings that customers have. It's a core part of our customer value proposition is we believe that your best technology world, your best software world, is a deeply integrated and deeply connected world. You can see that in the ability to use Atlassian's AI off Atlassian from within other tools. and vice versa to use other tools from within the Atlassian world. And I think that will depend on where the customer workflows are and where they are working. Most prominently, recently, you can see that in Jira's ability to assign work items to agents. Whether those are technical agents from GitHub or Cursor or whether those are nontechnical agents from Canva or Box or someone else. This is about taking your Jira workflows and business processes, assigning parts of them off to AI or agents as that world evolves and then bringing it back in for collaboration with further users. So I think we will continue to be integrated. I think that's the best outcome for our customers. And I think that our -- everything from the Teamwork graph to the design expertise that we're putting into our AI offerings to just a world-class set of capabilities that come with Rovo is showing up in our customers, and it is a reason that they are more deeply partnering with us. So incredibly proud of the delivery we've had there and a lot of work to do every single quarter as we go forward. We're rolling. Operator: Your next question comes from Alex Zukin from Wolfe Research. Aleksandr Zukin: Sorry about that. I was just having some voice issues. Maybe guys, just -- some of the most interesting commentary from the letter, I think, was your commentary about looking at your cohort of customers that are also using some of these AI coding tools and how they're up. Those customers are adding seats to the tune of 5%. What other anecdotes do you have to share in terms of other product attainment and adoption trends that you're seeing from that kind of super user cohort? And then maybe just a quick one on DX, specifically, how you maybe see that accelerating some of the uptake in expansion with respect to the cloud portfolio. Michael Cannon-Brookes: Thanks, Alex. Look, I'm well on record at this point as saying, I firmly believe there will be more developers in 5 years' time. There'll be far more people creating software and a far greater amount of technology in the world, which is great for all of us. And that significantly expands Atlassian's opportunities. Why do I have such conviction? Maybe important to note. We have the best data. We have amazing visibility right now, 300,000 customers, 80% of the Fortune 500, 60% of the Forbes AI 50 Atlassian customers, right? We're mission-critical and central to their business processes. We have tens of millions of developers, engineers, product managers, designers that use our applications across millions of teams. So we have some pretty phenomenal insights into how customers get work done, how they build software and how they build technology. And as we said in the shareholder letter, we continue to see really healthy user growth. The statistic you gave. We look at a cohort of our customers that were using co-generation tools, GitHub Copilot, [indiscernible], Cursor. We excluded Rovo Dev on purpose, so as to remove bias of our own sort of customer base. And those customers using those cogeneration tools were expanding their paid seats on Jira at a rate 5% faster than those who didn't. They were managing more than 20% more projects than those that didn't. And importantly, all of those 3 and others are working with us in partnership to bring their agents into Jira, into the business processes and workflows that they are using because that's where customers are doing work. The other anecdotes that we might have. Look, we've given a lot of statistics here, right? The Teamwork graph is phenomenal. It's up over 100 billion objects in connections and continuing to grow at a really incredible clip. Our AI interactions are up. I think it's almost 150% in the last 6 months. We've tripled the number of tokens we processed quarter-on-quarter. So millions of workflows, which involve automation and agents. We are doing a really good job in AI. AI is a fantastic thing for Atlassian's business. And for our customers. It creates lots of great opportunities for us. You mentioned DX. I think as customers are changing the way they build technology and software, they want to make sure that they are getting the right amount of productivity, where their investment is going and where they're getting back from this increasing engineering force that they have. Every business is becoming a software company at some point. And hence, DX doing a fantastic job at explaining the customers their developer productivity, where they can improve and how they can take actions on that. And especially when it comes to bringing in all of the AI coding tools we have today and the ones that are coming tomorrow and to show those customers how that is working. I think it will be a really great part of our portfolio. It's a fantastic team. So we're incredibly bullish about that when the deal closes, and we can move forward. Operator: Your next question comes from Gregg Moskowitz from Mizuho. Gregg Moskowitz: Congratulations on a really good performance. Mike, I also, like Alex, was pretty fascinated by the data you provided that you just spoke to a moment ago. And I'm wondering if it's possible to give us a rough sense of the size of this cohort that might shed some light on if these data would, in fact, be a fair representation of what your customers may be doing, again, particularly the ones who are utilizing vibe coding. And then secondly, for Joe, just to clarify, because the guidance puts and takes are a bit confusing. Is your fundamental growth outlook stronger, weaker or unchanged as compared with 90 days ago? Michael Cannon-Brookes: Thanks, Gregg. Look, we wouldn't give out any statistics that we didn't feel were statistically relevant in terms of the size of the cohort that we are going through. Obviously, we are very invested in making sure that this is the case. And I think it's a fair representation of what the best companies in the world are doing, and we believe there will be many more companies that following those parts over the years ahead. As do we believe that AI will continue to improve those abilities and processes. We saw that in our Rovo Dev going GA this quarter, which is doing a fantastic job at a lot of different things, right? I believe, over half of the security incidents that occur at Atlassian, the findings are coming from Rovo Dev, right? So there are a lot of abilities for AI to continue to improve technical business processes in building software, but also in the service collection, and in AI Ops and the ability to run and operate software. There is a lot of work to be done, a lot of amazing things to be built. But we do think it's going to be great for Atlassian's business. And we think that human-AI collaboration, whether that's in a software team, whether it's in a business team, whether it's in a service team, is right at the heart of what we do for our customers. And at the same time, I will point out there's a lot of enterprise concerns when I talk to customers around governance, controls, auditability, traceability, permissions. There's a lot of new issues coming up with a lot of this AI technology. And we're right at the forefront of giving enterprises as we've shown in Rovo and in our AI cloud platform, the ability to have the right level of controls and governance that they need and the right level of those change and movement. So incredibly bullish from my point of view on what AI is doing for Atlassian's business, as I've said, and how our 3 big transformations, AI, enterprise and the system of work are delivering today in the cloud growth rates that you see, in our RPO growth rates and our commitment to our long-term targets. So I'll let Joe answer on the financial question. Joe Binz: Yes. Thanks, Mike, and thanks, Gregg. Gregg, we fundamentally believe our business in FY '26 will be stronger today than we did 90 days ago. That will show up in better bookings. That will show up in better CRPO, and it's driven by the Q1 outperformance and the fact we expect greater volume of cloud migrations through the rest of the year. Hope that helps. Operator: Your next question comes from Fatima Boolani from Citi. Fatima Boolani: Mike, you have A/B tested effectively this concept of consumption pricing. There was some of that introduced last year under the confines of JSM. I'm wondering if you can share an update on how pervasive that modality is in terms of monetizing some of your innovation that's come down the pike in the last 12 to 18 months. And maybe more specifically, how does vibe coding and coding assistant related code generation that is poised to absolutely load software code generation. How do you get to capitalize on that as all of that gets shipped inside Jira environment and is held captive and worked out of a Jira environment. I'd love to get your perspective on how you can capitalize on that trend by way of consumption pricing. And again, how pervasive that is generally within the base today? Michael Cannon-Brookes: Thanks Fatima. Look, we have a series of different consumption-based pricing offerings as we have announced and shown from the Rovo and AI credit world to the service collection world of agents and assets to Bitbucket pipelines to Rovo Dev to Forge, CDP, that is certainly something that we have as an option set for our customers. It's one of our elements of monetization. I think it is certainly, something customers are interested in. It's certainly something that they're also cautious about. I think the most important thing for us when it comes to your question about AI monetization, I would say we are already seeing it, our 3 strategic priorities, right? We reiterate them because they are so important to us, delivering a world-class AI platform, continuing to grow our enterprise capabilities and the system of work across our customers' teams and enterprise. We're making amazing progress in all 3, and I will say that it's directly driving the results we see in Q1. It's directly driving the cloud growth rate of 26%. It's behind accelerating our RPO to over 40%. So we are already seeing that in everything from cloud migrations to the AI stats we have to the addition upgrades. So this question of monetization -- Teamwork collection, right? Customers that move there, talk about AI. Every customer I talk to mentions AI is one of the reasons that they're moving to the Teamwork collection to the cloud, et cetera. And we have a huge number of customers that presented at Team '25 a couple of weeks ago in Barcelona from Mercedes Benz to Sonos to FanDuel to 24-hour Fitness, all giving amazing feedback on our AI capabilities across business teams and technical teams and our ability to connect both of these is at the core of the system of work. I think this question of cogen and capitalizing, we've a lot of stats on how it improves Jira. And I think the fundamentals there are about human and AI collaboration you will still need and you will have work items that are assigned to various AI agents that come from probably a lot of different platforms, ours and others. We solve human problems. We always have. And at the core of those human problems is collaboration and that's why we're putting that at the core of our AI platform and making sure we deliver world-class capabilities in all of these ways. And I think we're already seeing that flow through in our monetization and bullishness as we head into the future on our ability to continue to build the R&D to do the world-class work and hence, have greater customer partnership is very strong right now. Operator: Your next question comes from Raimo Lenschow from Barclays. Raimo Lenschow: Congrats from me as well. Mike, one question as we kind of evolve in this new AI world, how do you think about M&A or build versus buy in this for you. I'm thinking about the browser company. I got a lot of questions of people how that would fit into the new world, et cetera. Can you just speak to that, please? Michael Cannon-Brookes: Raimo, sure. I can talk to that question. Let me say firstly, I would say that there's no change in our M&A philosophy when it comes to AI or anything else. That's a really important point. We've had the same philosophy for well over a decade now. We look for companies with a great strategic fit to Atlassian. We look for great teams that feel like they belong in our tribe, an opportunity that fits both sides. We have to have the capital to execute. And the timing has to be right. That philosophy hasn't changed. We don't believe all the innovations outside of Atlassian. We don't believe all the innovations inside Atlassian, we take a very pragmatic and long-term view. I think you can see in some of the stats we gave in the shareholder letter from the Loom acquisition, it's just lapsed 2 years, and it's built a fantastic business north of $100 million ARR already. That's stand-alone. That's with no contribution from Teamwork collection, driven by AI, and the AI SKU, right, which is growing over 100% year-on-year. Why is that well? If you go back 2 years ago and have a look at what we said at the time of that acquisition, younger people joining your workforce, video becoming a bigger part of how they want to communicate and collaborate, remote work, distributed companies and AI changing the nature of how video collaboration can work for both consumption and creation. I think we've done a pretty good job of paying out all of those trends and movements as we've navigated through the last couple of years. And Loom is a fantastic part. It's a huge reason why customers are also talking about moving to the Teamwork collection in terms of media reportings and the team has done an amazing job to continue to deliver on innovation. So we continue to think about that when it comes to our acquisitions. The browser company and DX, look 2 very different acquisitions with different strategic rationales as we've tried to communicate. On the browser company specifically that you mentioned, I think our belief is that AI is going to continue to reshape how and where knowledge workers get their work done, that technical disruptions and changes if you look back at history, have tended to change and shift the interface layers, the points of interaction. And today's browsers were built before we had this explosion of SaaS apps and well before we had any of this AI era, and they weren't really built for knowledge workers. And we think that by optimizing for knowledge workers and the SaaS apps they use and building an amazing product that fits into today's world and the enterprise world, packing it with AI skills and agents and the Teamwork graph and all the things that we have as well as enterprise-grade security, compliance, governance, especially when it comes to AI, there is a fantastic opportunity for us and that browser company fits all of those criteria I gave earlier in terms of M&A. They're doing an amazing job. And we think between the 2 companies, we can really make an impact here. So just closed, we'll get cracking on doing some amazing work and hope to have some similar results to report to you in 2 years' time. Operator: Your next question comes from Robert Oliver from Baird. Robert Oliver: Great. Mike, you guys have done a lot of preparation for this cloud move. And it seems like projects like Ascend are working really well, fast shift team. When you think about your extended partner network, how well developed is the cloud motion with them currently? From our checks, a lot of them have been out kind of early on that. But as you guys really accelerate in end of life on D.C., how prepared is your extended partner network to help you guys manage this transition? Michael Cannon-Brookes: Thanks, Rob. Yes. Look, I would say we continue to be a long-term thinking company that makes these changes over the multiyear period. I think we've seen that play out over the last 5 years in this cloud migration and I expect it to play out over the next 5 years. The partner program and our channel broadly play a critical role in that transition. I spend a lot of time with lots of different partners all over the world. We have continued to communicate openly with that partner network. It's been well telegraphed to them. and they have continued to evolve their businesses to understand both how to help customers migrate to the cloud. Fast Shift is an additive element to those partners, and how to explain to customers the benefits of AI, for example, in their business, which is a positivity of moving to the cloud, but again, one of the areas where our partners can really excel and are starting to hit some real wins in terms of delivering those workflow improvements to customers on our cloud platform, which further incentivizes other parts of those large customers to move to the cloud. So a very thoughtful and measured approach, long-term thinking from Atlassian at the same time with execution. I think the channel touching about 50% of our revenues, you can look at it that way are well mature in how to handle this over the last few years. And I believe that as I said, we are at the right point for the Ascend program to help continue that momentum in the channel. Operator: Your next question comes from Brent Thill from Jefferies. Brent Thill: I know Brian Duffy is about 10 months in, but I think everyone's curious just to get an update on the go-to-market, some of the changes he's making, what's starting to resonate well and what's ahead. And Joe, if I can sneak one in for you, it's been a great couple of decades working with you. Just maybe the question of why now? Michael Cannon-Brookes: Brent, sure. Let me talk a few things about maybe go-to-market and the movement we have there. Brian, it's amazing to think he only arrived 9 months ago. I have to remind myself of that quite often. He obviously brings vast experience and to say he's hit the ground running is an understatement. Huge impact in continuing to evolve our go-to-market motions. It's not revolutionary, as I said. We've been on an enterprise journey for a decade. We continue to strive to be a better and better strategic partner to the largest organizations on the planet. And this is a part of our continued evolution. We obviously have a massive serviceable -- addressable market, as we've talked to, right, a $14 billion opportunity in our existing customer base along with our existing products, 80% of the Fortune 500, representing just sort of 10% of our business between DC to cloud migrations with Ascend and the Teamwork collection, service collection, software collection, we have a lot of opportunities in our base. And I think Brian has done a fantastic job, along with all of the sales and marketing teams and go-to-market motions on continuing to execute this quarter, right? We've made great progress with large enterprises. We have signed some of our largest deals in the quarter in almost every sector, industry vertical and geography, right? Some of the world's largest technology companies, huge global financial institutions, large telecommunications companies have all come on board this quarter, multiples in each category. Moving to the cloud, moving to the Atlassian platform, consolidating on multiple tools into the Atlassian world and at the same time, excited by AI opportunities. And that's up to Brian and team to continue to explain to our customers and help them on that journey over a multiyear period. So I'd say the entire go-to-market team is executing extremely well this quarter, and we should be incredibly happy, and our customers are the beneficiaries of that. I'll pass to Joe for the second half. Joe Binz: Great. Thanks, Mike. And thanks, Brent. It's been great working with you as well. I would make one clarification, as Mike reminds me, it's announced now but transition later. So I wouldn't say the timing is now. In terms of why the announcement now and the transition timing, Just -- I've got a lot of big life events coming up, and I really want to be fully present for those. And I'd say this is something my wife and I have been discussing pretty intensely over the last year. And from a work perspective, I feel like the finance team is in good shape. I'm a big believer in new energy and new ideas and those being a good thing. And I think that applies to me as it applies to just about anybody else. So that's sort of the logic behind it. And right now, I'm really focused on making sure there's a clean transition and a lot of work to do around that. And I'll be able to update you on what's going to happen next after that when we get down the road and I get a little bit closer to the transition date. Operator: Your next question is from DJ Hynes from Canaccord. David Hynes: Joe, one of the questions I've been getting is whether you're raising the cloud revenue guide only on the back of better than forecast data center to cloud migration. Can you just talk about what you're seeing with the non-migration cloud business? How you're feeling there? And what's actually contributing to the increased cloud outlook? Joe Binz: Yes. Great question. Thanks. And I'll try and clarify. So we are raising our cloud revenue outlook by 1.5 points to 22.5% year-over-year. That is only to reflect the stronger migrations performance and the outperformance in Q1. So we now expect migrations to make a mid- to high single-digit contribution to cloud revenue growth in FY '26. And for that migration upside to land in the back half of the year, just given the data center expiration base. And to your question directly, it's important to note we haven't made any changes to our other organic drivers of cloud revenue growth in our guidance. So we continue to maintain a conservative and risk-adjusted approach on all those other variables in the cloud and from a cloud revenue growth driver perspective for the rest of the year. Michael Cannon-Brookes: I can probably jump on DJ, just to say 1 or 2 things, if I might. Firstly, it's worth reiterating that our expansion rates 120% NER, et cetera, aren't changing. So when Joe says, we are continuing with our cloud, the guidance in other areas I think those are really strong numbers, and we should reiterate that. We feel great strength in the cloud, right? Teamwork collection going very, very well, only 2 quarters in. Our AI delivering our enterprise platform. All of these things lead to a very strong cloud business in and of itself that continues to grow. And the Ascend program and migrations are additive to that, which is really great. When I talk to our customers that are already in the cloud at scale, they are bullish about their continued adoption of more apps and collections of more areas that they will move to Atlassian. And you can see that showing up in both our paid seat expansion rates, our cloud growth rate in and of itself, our RPO growth rate and our recommitment to our 3-year 20% CAGR that we gave out. So incredibly bullish about the cloud business as a whole as a result of AI enterprise and the system of work. All the things that we've been saying for a while now continue to come due with our customers. And I'll tell you, having spent a lot of time with them. they're all incredibly excited about what we are delivering to them every single day, and it's a credit to the entire Atlassian team. Operator: Thank you. That's all the questions we have time for today. I will now turn the call over to Mike for closing remarks. Michael Cannon-Brookes: Thanks, everyone, for joining the call today. As always, thank you to all of the Atlassian team for an amazing quarter. To all of those on the call, we appreciate your thoughtful questions and continue to support and have a kick ass day, and let's go.
Operator: Good afternoon, everyone, and welcome to Data I/O's Third Quarter 2025 Financial Results Conference Call. Please note, today's event is being recorded. At this time, I'd like to turn the conference over to Mr. Jordan Darrow, Investor Relations. Please go ahead, sir. Jordan Darrow: Thank you, operator, and welcome to the Data I/O Corporation Third Quarter 2025 Financial Results Conference Call. With me today are the company's President and CEO, Bill Wentworth; and Chief Financial Officer, Charlie DiBona. Before we begin, I'd like to remind you that statements made in this conference call concerning future events, results from operations, financial position, markets, economic conditions, supply chain expectations, estimated impact of tax and other regulatory reform, product releases, new industry participants and any other statements that may be construed as a prediction of future performance or events are forward-looking statements, which involve known and unknown risks, uncertainties and other factors, which may cause actual results to differ materially from those expressed or implied in such statements. These factors also include uncertainties as to the impact of global and geopolitical events, international tariff and trade regulations, order levels for the company and the activity level of the automotive and semiconductor industry overall, ability to record revenues based on the timing of product deliveries and installations, market acceptance of new products, changes in economic conditions and market demand, part shortages, pricing and other activities by competitors and other risks, including those described from time to time in the company's filings on Form 10-K and 10-Q with the Securities and Exchange Commission in our press releases and other communications. The company may also reference GAAP and non-GAAP financial performance measures, including onetime items, which are intended to provide listeners with a means to better understand the company's performance. Please refer to reconciliations in our third quarter earnings press release issued today after market close. Finally, the accuracy and completeness of all discussions on this call, including forward-looking statements should not be unduly relied upon. Data I/O is under no duty to update any forward-looking statements. And now I'll turn the call over to Bill Wentworth, President and CEO of Data I/O. William Wentworth: Thank you, Jordan, for that introduction. I want to thank the people that have taken the time to -- out of their day to listen to our earnings call and look forward to the conversation and specifically the Q&A after. I spent the last week thinking about the last year since this month marks the year that I started as CEO of Data I/O. And one of the things that I noticed as a Board member that the company was certainly doing well in the automotive industry, but it was also a fairly high concentration in that business. And it's still a great business for Data I/O and has continued even in this softness, it's still driving quite a bit of our revenue, but it's also one of the things that needs to drive us to get to new markets, but also new businesses. So what we've done and I look back at the year and look at where we've invested in the first couple of months of discovery, was looking at the team and kind of what the members brought to the party and really where were the strengths and weaknesses of the company from a people standpoint. We brought in a new Director of Engineering, John Duffy, who's done a phenomenal job. He started in January, getting our refresh of our manual product line and getting the development of our next-generation program, which will be introduced at productronica at the end of this month, which I'm very excited about. We've won a couple of awards already at some shows with the new reskinned LumenX, which has made the ability for us to really go out and pitch the platform and really get back into the engineering communities, which has been exciting and started to drive some ramp in our manual systems and started to look at some preorders as well, which will really start to kick off in Q1. Rounding out the product portfolio is probably the most important thing we had to do this year outside of the people. Without the people, you have to have the right people to design the products and bring these things to life. And I have to say, if you look at our product portfolio from a year-ago and look at it today, it's night and day. It's really what Data I/O stands for, and that's what we're excited to bring to market. We are starting the next generation already of our long-term platform, which started its design cycle this quarter. I would kind of call it Data I/O's AI moment at the end of next year when that product gets released. That doesn't preclude us from driving revenues and new revenues this year with the reskinning of the LumenX and getting to the new platform that we're launching at productronica. We're also starting the refresh cycle of our automation. We've also noticed some gaps in the solutions area of automation for processing programmable technology. So we're pretty excited about rolling out some new automation platforms sometime around the middle of next year. And that leads to kind of process. And Charlie is going to get into some of that process and how we're going to be managing margins and look for margin expansion throughout next year quarter-over-quarter, there are some areas that we can definitely improve there. But really, the exciting part is getting into these new businesses in adjacent markets. The market we serve today is $100 million to $200 million at best. Services definitely needs to be a pillar of this company, and we are starting those conversations now. But that's a $1 billion-plus market that really brings in recurring revenue, not necessarily always contractual, but you're always managing a supply chain and those consistencies take out a lot of the lumpiness of the CapEx business, but it's a directed case at play. It allows us to drive very competitive pricing in the market. It puts us in a position to really drive that business, both for partners that we may partner with to provide them services or OEMs that decide that they don't want to buy CapEx and they need a service for Gartner instead. So it gives us an opportunity to have both conversations. We are in conversations now about embedding our technology in testers, which is a big part of the market. That's probably a multibillion-dollar market. Now we're opening up a market that used to be 10% to 15% that we could play in upwards of 60% to 65% of where data gets provisioned. And that's where Data I/O is going to be able to finally grow. These activities are going to have traction next year. I can't tell you when these revenues will start. I just know that we're in conversations, and we're actually in them earlier than I thought. I really didn't think that we would -- the company would be engaged in these conversations until Q1. So the great thing is that we're out of the gate pretty quick. And then there's some vertical integration that we're going to be doing. People on the phone know the company, Cohu, they invested in sockets years ago. It's a big part of how they go to market with their technology with testers and handlers. It's a big part of -- and a very important part of our business because the second most important thing to a programmer is being able to make contact with the device. And it's something that Data I/O should have expertise in. It's a $7 billion market. And so it's a business where we can make a small entry into a small player here in the U.S. or even abroad, have that expertise internally, lowers our operating costs, but also gives us a secondary offering, but also as a lead generator as well. All three of these new business units do drive revenue for the other. And that's the great part about being in adjacent markets, you can leverage your core, which is exactly what we'll be able to do next year. So I'm excited about 2026 because we can finally start to drive the growth engine. We're going to have the products and the people and the services to be able to go do that. And that's what we're investing in between now and the end of the year, and we'll continue to make those investments next year. We've invested also in the engineering department. We've brought in some additional algo writers to drive our algo migration from our older platforms to the new platforms. So we're getting ready for that growth. I'd like to -- that's all I have for now. I look forward to the Q&A session. I know there's some coming. So I look forward to this Q&A. I'll hand the rest of it over to Charlie. Charlie? Charles DiBona: Thank you, Bill, and good day to everyone. It's a pleasure to speak with you all today, which is my first call as a CFO of Data I/O, and I'm excited about the prospects of this company and of this role in particular. In my remarks, I'll address our recent financial performance in more detail. My comments today will focus on key points of interest for the third quarter of 2025, recent trends and our outlook. Net sales in the third quarter of 2025 were $5.4 million, down from $5.9 million in Q2 '25 and flat from the prior year period. Bill mentioned some of the pressures that continue to drag on our current performance, revenue performance. These include the temporary realignment of tech spending related to AI and the changes in the global EV landscape for manufacturers and the impact on automotive electronics generally. Global trade and tariff negotiations, which had been a gating factor earlier this year, remain but are now tertiary concerns. Automotive electronics as a primary business segment represented 78% of our third quarter of '25 bookings compared to 59% for all of 2024. For the third quarter of 2025, consumable adapters and services represented 24% of total revenue, providing a base of reoccurring revenue, while capital equipment sales represented 76% of total revenue. Similar to the second quarter, Asia was led by customers in China and Korea for a relatively strong third quarter in the region, particularly within the EV sector of automotive electronics. Europe, however, remains pressured with capital equipment spending impacted by tariff and trade uncertainties as well as EV disruptions in the regional market. The Americas bolstered by systems to be deployed in Mexico has been relatively flat. Global bookings for the quarter were $5.2 million, up over 7% from $4.7 million in the third quarter of 2024. New bookings activities were driven by demand for the PSV7000 automated programming system. A total of 8 of PSV7000 systems complete with LumenX programmers were booked in the third quarter of 2025. Backlog on September -- as of September 30, 2025, was $2.7 million, down slightly from $2.8 million as of June 30, 2025. Three systems were booked and shipped within the third quarter with 7 systems remaining in the backlog. Gross margin as a percentage of sales was 50.7% in the third quarter of 2025 as compared with 49.8% in the second quarter and 53.9% in the prior year period. A higher margin product mix and configuration of automated systems driven by demand for the PSV7000s led to the improved margins on a sequential quarter comparison. Direct material costs remained steady and consistent with prior periods as supply chain planning and other actions have mitigated the impact of new tariffs, trade and inflationary pressures. The third quarter gross margin benefited from this positive product mix and configuration of automated systems, as I mentioned. We've begun a thorough review of gross margin enhancement strategies. Some of these initiatives are already underway and should support our gross margins this year. We expect other aspects of this plan will lead to higher sustainable gross margins in the longer term, meaning next year and thereafter. These strategies are likely to include pricing modifications and new pricing models, labor and costing efficiencies, supply chain optimization and a focus on more direct sales engagements with key customers, particularly in the Americas and Europe. Moving back to my review of third quarter performance. Operating expenses for the third quarter were $4.1 million, up from $3.8 million in the second quarter of 2025 and $3.3 million in the prior year period. Third quarter 2025 spending tracks closely with the company's operating expenses early in the year after excluding approximately $585,000 in onetime expenses. $200,000 of these expenses were related to the investigation and remediation of the cybersecurity incident first identified on August 16, 2025. $130,000 are related to executive transitions and another $130,000 are onetime expenses tied to technology and IT-related growth initiatives. For comparison, total second quarter 2025 onetime expenses amounted to $480,000. As with cost of goods, we are undertaking a thorough review of operating expenses to find opportunities for savings and efficiencies. Q3 '25 onetime investments and expenses reduced our profits, adjusted EBITDA and cash in the period. Backing out those onetime expenses in the third quarter of 2025 would have left us with an operating loss of $808,000 versus the reported third quarter operating loss of $1.393 million and the third quarter operating loss of '24 of $325,000. Again, backing out onetime expenses, adjusted EBITDA would have been $563,000 versus a reported adjusted EBITDA loss of $1.15 million and a positive adjusted EBITDA of $37,000 in the prior year period. Our cash balance, absent the onetime expenses would have been approximately $600,000 higher or just over $10.2 million as of September 30 versus the reported amount of $9.7 million and the $10.3 million as of December 31, 2024. The company's continued discipline in spending and cash management reflect an improving -- constant cost structure as well as investing in our Unified Program platform and other new products and fortified our IT systems, both of which allow for greater top line growth and scaling of the business. Data I/O's net working capital of 14 -- just over $14.4 million as of September 30 was slightly lower than $16.1 million as of the end of last year, in part reflecting onetime spending through the three quarters of the year. Finally, the company continues to have no debt. This concludes the remarks for the third quarter of 2025. Operator, would you please start the Q&A portion of the call? Operator: [Operator Instructions] The first question comes from David Williams with Benchmark. David Williams: Congratulations on the progress here and just the confidence in the tone. Certainly good to hear. Yeah, so lots of exciting things going on. And I guess maybe first, I wanted to touch on, Bill, you and I have talked before about just the technology and progressing that and taking it into the future. And outside of maybe what you discussed just now, what do you think if you look out maybe two years or three years from now, how do you envision just the platform overall? Do you think that all of the growth and the areas of growth that you have that you're looking towards, can you do that, I guess, and still maintain kind of your focus on the core business? William Wentworth: Yeah. It's a great question, David, because I know it sounds like we have a lot going on, which we do, which is great. But it all revolves around the platform. That's the beauty of it, right? So when you think about the platform that we're building that we're in design now, that's really going to be a platform that will last a good 10 years. We had to kind of round out the existing portfolio of platform that we had and just kind of filled some small gaps until we could build this next gen. But that platform will be the platform we move algos on to and they'll be forward compatible to the new real -- our long-term platform, which will be released at the end of this year. So it kind of fills a gap, but then gets that product. And it also in the design of this will be designed for the things such as the embedded opportunities we have with some very large test companies, global test companies. Can't disclose any names or really describe what they do, but it's certainly a large opportunity for Data I/O. And it's a part of the data provisioning market that represents probably 25% to 30% or 35% of the overall data provisioning. And then there's the services piece where we would also use our platform. And the great thing about providing services is you get to test your technologies on these services. So instead of the customer finding some of the problems, we get to find them upfront as a service provider. But that's also a market that's $1 billion-plus market and really hits all domains, right? And the great thing about some of the partners that we're -- we will be talking to about providing these services and generating these services for is that they serve multiple markets. So it does insulate the company in the future from any domain concentration like we're dealing with now. And then thirdly is the automation that we have today. We need to be a little more specific because we do program various different types of technologies, from microcontrollers to programmable clocks to sensors all the way up to large density UFS flash. And the platform has to be able to handle all of that. But the solutions you provide need to be a little more specific to the technology, such as microcontrollers typically be programmed in less than a few seconds. So it doesn't make much sense to program a lot of microcontrollers on a huge 7000, right? So we're looking at providing and generating newer handler technology that is faster -- it's more functional. It's made for very fast programming times, and it's more economical. You get a lot more value. So we're getting very specific. And then there's also been a gap in the services space, whether it's an OEM that wants to do their own programming in-house or a services provider that needs to provide services for their OEM customers is like a tabletop automation, something that can go tray to tray or tray to tape. It's been a huge gap in our industry for many years. It's never really been addressed very well. Data I/O did try to address this back in 2008 with what they call the FLX500. It was a great machine. It was just overengineered. And so we're kind of -- the good thing is we still have a lot of the specs and the drawings and software for it. So we're digging that out of engineering, and we're going to rebirth that machine. We do believe that's going to be a great seller for the company. And it's also something we'll consume internally as a service provider. I hope that answers your question. David Williams: No, that was fantastic color. And then maybe secondly, just thinking about your customers and how they're viewing some of these changes, obviously, in a positive way. But do you feel like you're gaining traction there? And I'm assuming that your customers are really leading the way in some of these new technologies. But just anything on the feedback or traction you're seeing, I think, would be very helpful. William Wentworth: Yeah, sure. As a customer myself, these are some of the gaps I've seen for years. So it's easy for me to look through their lens. But we've got a customer here this week that's been a long-term customer of Data I/O. And the great thing about having them on site is you get to share a lot of information. They can share with us. We share with them what we're thinking and they kind of like say [ and they nod ] and say, yeah, that's a great idea. And so customer has been here all week. It's a customer that's in the automotive space. Meetings are going great and getting that feedback directly from customers is nothing better. So yeah, I think we're building the things, the products that they need today going forward. When we introduce them to our new manual program, they were like, oh, yeah, I need that. So I think there's no doubt in my mind, we're building what customers do want to consume in the coming years. And there's nothing better than getting direct customer feedback. Operator: The next question is from David Marsh with Singular Research. David Marsh: Bill, I mean, obviously, you're still -- I hate to say new to Data I/O, it has been a year. But I mean, given all the changes you've made, I mean, the product suite is pretty new, but you're certainly not new to the industry. So I mean, I would first offer congrats on the awards that you're receiving at the trade shows. But my question is, just given your history in this business, I mean, what have you seen as typical kind of sales cycles from getting kind of critical acclaim at trade shows and getting -- generating that kind of customer interest and then actually getting the pull-through on the orders? William Wentworth: Yes. A lot will depend on the technology event. And the reason why I say that is that technology events, meaning silicon, right? A big change in silicon usually drives big spend. You reach certain technology hurdles. UFS has been one of those. The industry has -- our industry has struggled with getting to the yields that are necessary. We -- I thought we'd be past that for this quarter, and we're not. And I mean Q3. We made some pretty big strides in the last four weeks. So I think we can announce some really good yield rates on UFS. That's a technology that's -- it's very high-density flash. It has to be programmed offline. You can't do it in line. It's just something that we need to do a better job of perfecting. And I think that would be an example of a pull-through, David, is that when you get that you get that technology conquered, they come to you. The thing is that UFS was mainly used in automotive, which is fine, but that's also a market that's still relatively depressed. But at the same time, when that market picks up, they're going to be in a position plus a few years have gone by, they'll be refreshing and looking to advance that UFS technology with a company such as Data I/O that has a solution that can solve the problem. And then you've got in the next year or two, 2027, you've got 1 terabyte flash coming out. And that's across UFS and NVMe will -- is capped out, but UFS will be driving those. We will have the technology available to program those high-dense flash. And it's one of the things when we look at our product portfolio, we're going to refresh the 7000, but that's mainly going to be a system, an automation system that's going to be made for programming high volumes of high-density memory. The new system will be focused on microcontrollers. You can do both on both machines. They'll have the flexibility, but there'll be a main purpose for those solutions, which will drag our platform in with it. Does that make sense? So I see these -- our PSV line is over 10 years old now. So we are focused this quarter of driving a target list of accounts that have these systems that are 8, 9, 10 years old and going out and being very proactive to get them to refresh. And the good thing is that we'll have the new platform for them to be able to refresh on. So there'll be a couple of reasons for them to really take a serious consideration of refreshing now even when times are a little slow because, look, this is the best time to invest, right? It's easy to adopt, adapt change or adopt a new platform when things are slow. David Marsh: That's a great lead-in for my next question, which is as rates are starting to come down a little bit in the U.S., and we're starting to hopefully get some clarity on global trade. William Wentworth: I love your hope. David Marsh: We got the President now making a lot of deals, hopefully. William Wentworth: That's right. Well, deal away. Good for all of us. David Marsh: I mean, I guess it is kind of a real-time question. I mean, are you seeing any kind of optimism, particularly outside of the country in terms of the trade partners with some of the -- hopefully, some of this tariff stuff clearing up and giving us a little bit more clearer path forward? William Wentworth: Yeah. I'd say -- and I'd say this cautiously because this is not just the trade issues. I don't know if you read recently, there was a passive supplier that was technically owned by a Netherlands company that became Chinese-owned and the rare earth minerals were getting shut off to them, and they're in about 40% of the automotive products. We had a call with one of our larger automotive customers early this week, and they said we're shutting our factory for three weeks. Now that can change quickly, right? Just like trade talks can change the tide pretty quickly so can things like turning that back up, right? And so you hope that these trade agreements that are evolving include things like rare earth minerals. I know that's a hot subject, but it's one that does cause huge ripple effects through the supply chain. So with your hope, I'm hoping that, that's part of these negotiations. But for right now, it's still pretty shaky. Operator: The next question is from [ George Marima with Pareto Ventures ]. Unknown Analyst: Welcome aboard, Charles. A lot there. So let's pull on the partnerships and accretive acquisitions thread. What -- like what kind of hurdle rates are you looking at for that? And what sort of like categorically speaking, what sort of acquisitions we would be looking at in partnerships? What would that look like? William Wentworth: Well, partnerships, those are mostly going to be around the embedding of our technology, right, where our technology can fit inside somebody else's solution that gives them added capability for their customers and their customers are asking for that, such as app test. So those -- we've had some pretty significant conversations with one of the larger test companies in the world. Those conversations are going to continue at productronica and will probably result in a contract that will start to drive our building of that technology for their platform. So I can't say when that's going to drive revenue. They're looking for a second half of next year release to give you an idea. So this is -- it's real. They have like a scoped release time second half of next year. A lot will depend, George, on how much they put us in the driver's seat. We're pushing to be the actual provider of the technology from the ground up, meaning developing the whole product versus co-developing. You know how big companies can be. They're not going to work as fast as a small company can. We would like to have this early in the second half, not later in the second half. So that's why we're pushing our own agenda. We'll see how that goes. They're open to it. There's just a couple of conditions that I need to make sure that our intellectual property is protected. That's the most important thing. As far as things like services, we're in some communication now with some potential opportunities that are really a carve-out. There's not a huge cash need to bring that business over, could add some good revenue to the business, but get us more importantly into services, which we need to be in. So there's a couple of different methodologies. There are some smaller acquisitions we can do to get there, small acquisitions versus large acquisitions. They're both the same amount of work. I prefer to do a larger one. So we're opening as many doors. We did hire a boutique advisory firm, by the way, last week, we had our first kickoff call. I've given them 25 targets. We've gone through that pick list, and that is an ongoing activity was just launched last Thursday. Unknown Analyst: On the services, are we talking about just programming services or beyond that? William Wentworth: No programming services. Unknown Analyst: And would this be -- kind of explore this a little bit. So let's say, a company hired you, what would this look like? William Wentworth: Well, it depends on the relationship, right? I mean some of it would be -- I mean, right now, because we don't have a programming services division, they wouldn't really be able to hire us right now. So we're going to get the programming services in there with the expertise and the software control system and things, which would come from an acquisition or a carve-out. Once we get that, yeah, that's kind of the first domino that has to follow, George, because then at that point, then I can open up in somebody's warehouse, I could open up on the production floor, I could open up. Once I have that software control, I can parachute that thing anywhere. The advantage of being the equipment manufacturer is, certainly, we make the equipment that needed to process the programmable parts. So that's the advantage we have. And that's why I've always thought services should be a cornerstone of a company such as Data I/O, if not the other way around. It's a bigger market. Unknown Analyst: So as we look out to next year, it sounds like the cadence of things would be your internal new product launches and then embedded applications and socket manufacturing and then later services kind of roll in. William Wentworth: Yeah. I would see services coming first, actually. Unknown Analyst: Oh really? Okay. And then when you talk about leading the semiconductor road maps, are we talking about just UFS flash or is there other things you're talking about as well? William Wentworth: No. I mean the important part is just staying connected to them because they're rolling out new silicon all the time and sharing road map. So it's more just engaging the semi houses. Like I said, we signed 6 or 7 information sharing agreements with various semi houses. We need to do a better job though there and really engaging. I think at that point when we could start growing again, I'd certainly like to allocate a resource or two to be calling on the semi houses on a regular basis because they can also help generate leads, too. Unknown Analyst: Yeah. Okay. Well, I really like to start energy guys, keep it going. William Wentworth: No, pretty excited. It's finally, George, it's been a long year, as you know. So it's nice to start looking at execution of plans instead of just dreaming about them. Operator: [Operator Instructions] The next question is from Casey Ryan with WestPark Capital. Casey Ryan: Interesting conversation. So I'd like to ask about the EV, I guess, disruptions. I don't know if that's the word that was used in the press release, but you did sort of suggest Asia was sort of okay and then talked about Europe a little bit and maybe the U.S. and like kind of two things I'm interested in around EVs. Is it kind of the headline thing where we see credits going away and there's some policy stuff impacting it or are there fundamental things with what the OEMs are thinking about those types of platforms, I guess? William Wentworth: Yeah. Well, I think, obviously, it's no secret that the Asian manufacturers are doing very, very well across the globe. I mean you've seen BYD move up the ladder in Europe as far as share. Domestically, they're doing very well, self-consuming their EVs. That's where we received a bunch of orders. South Korea, some of their automotive kind of parts manufacturers are doing well. There's a company there called Bobis, who actually feeds into a lot of the different supply chains. So it's -- there's different pockets, I guess, is the best way to say that are pretty strong, and we play in not all of them, but some of them, which has helped this year. The European auto manufacturers are in a lot of hurt. I mean we had a big call with all our reps. We had 95 of them on the phone last week and really talking about next year and where we're going. Just to get them all kind of geared up and excited about the new products coming, which they are. I will say they applauded the call. They were like, finally, we have products that you're going to make that we can sell in our own geographical areas, which if you're not in heavy manufacturing, what are you going to sell, right? If you're in engineering and development communities, you need things like manual systems, tabletop systems to do low-volume medium production. We need to help fill the gaps for them so they can address a bigger market that we haven't been addressing in the past. So they were pretty excited about that. So still, again, automotive is -- it's a little -- it's still -- it's fragmented in the way of the revenue is still in pieces across the globe. And some of it's just not buying anything. I mean some of these reps came back from their August break, and they said it was -- their business was down 50%, 60%. This is Europe talking. U.S. has been -- and we had a good friend of mine that had a chance to talk to the VP of Supply -- Technology Supply Chain for BMW. And his comment was, look, the loss of films, kind of inventory is kind of cleared out, but end demand is slow. And it's not -- if you take out the AI spend in the U.S., we don't really have much of an economy after that. Casey Ryan: Well, and so I appreciate that, too. Is there some delineation between auto overall and EVs in particular? And does that distinction matter, I guess, from where you guys sit? William Wentworth: Not really because you've got so much technology in cars, honestly, as those markets tune back up, where we have customers that deal in all aspects of that, EV, hybrid and pure petrol, but -- and then a mix. So no, it's across the board. It's just right now, the EV makers are doing -- and some of the key component manufacturers are still shipping a decent amount of product. Now automotive numbers could stay flat. Content will still be up 10% this year. So you're still seeing that content still drive. You can still have down years [ in that ] but the problem is that when they're not clicking on all 8 cylinders, [ excuse the pun ], but they have excess capacity of our equipment, too. So when that fills up is when the next buy signal will happen. And I think next-generation products that are using high density flash is going to require more capacity. So as these things start to turn up their new revs, I think the sweet spot right now is 128 gigabyte on UFS for automotive. Those go to 256, 512, you're going to see a spend cycle. Casey Ryan: Right. Okay. And then it looks like systems are pretty good in the quarter actually. I think if I just took 76% of revs number, it's like $4 million, $4.1 million. And so it's really consumables that were kind of challenged. And I guess consumable kind of related to units? And is that sort of how we're sort of seeing that inside of the numbers, I guess? William Wentworth: Yeah. We had some pretty good socket spends in the first two quarters. I wasn't surprised to see a little softness in Q3 in that. Always like it to continue. But as things slow down, people aren't processing as many parts, which means they don't have to replace as many sockets. So again, as volumes tune up, you should start to see that number come back. It's off to a decent start this quarter. I wouldn't say it's flying off. But sometimes you've got CapEx budgets and they may start placing some orders at the end of the quarter. I don't know. I mean we don't get a lot of forecast in that. It's because -- it's not a long lead time item, we pretty much can spend those once they come in within 3, 4, 5 weeks and usually have some inventory going. So it's -- look, the more you get your platform out there, the more that number goes up. And that's the reason why having the new product portfolio, driving that platform out to market, getting more sites out there means more sockets. Casey Ryan: Yeah. Okay. Then three quick margin questions, I guess. Overall margins were pretty steady even though your mix changed quite a bit. So where do -- do systems and consumables carry the same margin? I guess in my mind, I was thinking consumables might be. William Wentworth: No, margins are much higher in consumables, probably 60% to 70%, sometimes a little bit more. But margins, look, we're carrying a little extra expense because we're trying to, again, scale the business, get the business in the right position. We've got some consultants that will probably take off the P&L during the first half of next year for sure. But where margins are going to get better are going to be better pricing. I mean, honestly, we've just done a -- the company historically on the custom systems has gone off of a list price methodology. Every system we do is custom. I don't know why you go off a list. You should just custom build from the ground up. We've done this a couple of times already in a couple of orders, and we've come out with not only capturing our costs better, but improved margins on top of it. And now we're getting the reps to do more -- add more value. I mean I'll give you 5 points, but go earn the rest. Why am I protecting your margin? I need to protect. Casey Ryan: Well, right, sure. I mean, sort of what I'm drilling into here is that there is really good margin expansion opportunity that you guys are going through. William Wentworth: Absolutely. Yes. Casey Ryan: Because mix was sort of off this quarter from a margin preference standpoint and you guys still were flat to up, I think, on gross margins versus last quarter. Charles DiBona: Yes. We’re up sequentially. We do expect -- look, we're focused on opportunities, both of the -- on the cost of goods side and as well on the operating expense side, not just -- rooting out some efficiencies, but then as Bill mentioned, I mean, the opportunities on the pricing side for gross margin improvement are -- we believe, significant. We're exploring them. We have -- we still have to understand a little bit better what those dynamics look like. But there's opportunity there that's worth exploring in some depth. William Wentworth: And so Charlie and I and [ Monty ] are going to be digging into that pretty deep this quarter. Casey Ryan: Okay. So at some point in the future, we'll say in the far distant future, if revs were split evenly, could you see 55% gross margins or something like that? In your imagination, you guys aren't guiding. Charles DiBona: That's theoretically possible, yeah. William Wentworth: We've done that before so I don't see any reason why we couldn't get back there with better rigor around everything we do, expense control, but also more importantly, how we price our products. Casey Ryan: Right. Well, like it sounds like pricing, understanding how to price better has a lot of leverage to it. And then as you say, as you grow systems and consumables go up and that's a margin adder to the overall. Just to refresh the last margin question, services, I'm thinking sort of range-wise is sort of a 30% business, but like tell me what you're thinking about its contribution to your margin. William Wentworth: I can tell you from my experience, we ran between 52% and 58%. Casey Ryan: On services? William Wentworth: Yes. That's historically. Now obviously, with making the equipment, we have an advantage a little bit because, obviously, we have the margin in that. And we don't want to penalize the core business, right? So we'll sell it obviously at a competitive price. But we have the advantage there for service sockets, things like that. So no, I expect the services business to run pretty healthy margins, definitely not [ 30% ]. Operator: Ladies and gentlemen, at this time, we've reached the end of the question-and-answer session. I'd like to turn the floor back over to management for any closing remarks. William Wentworth: No, I just want to thank the people on the phone. Great questions. Always love the questions. It's always great to dig into the business. And it's been an interesting year, I have to say. The great thing about it is we -- I think we really have a great team now that we can build from, but we are more importantly, building out the products and the product portfolio. I think we've got a great focus for next year to grow and grow into these new businesses. And we're initiating discussions with, I think, some really great future partners for our technology. So I want to thank everybody for logging on to the call today and those who are listening in and look forward to updating you next quarter. Operator: Ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.
Operator: Good afternoon, ladies and gentlemen, and welcome to the Rimini Street, Inc. Q3 2025 Earnings Conference Call. [Operator Instructions] This call is being recorded on Thursday, October 30, 2025. I would now like to turn the conference over to Dean Pohl, VP, Treasurer and Investor Relations. Please go ahead. Dean Pohl: Thank you, operator. I'd like to welcome everyone to Rimini Street's Fiscal Third Quarter 2025 Earnings Conference Call. On the call with me today is Seth Ravin, our CEO and President; and Michael Perica, our CFO. Today, we issued our earnings press release for the third quarter ended September 30, 2025, a copy of which can be found on our website under the Investor Relations section. A reconciliation of GAAP to non-GAAP financial measures has been provided in the tables following the financial statements in the press release. An explanation of these measures and why we believe they are meaningful is also included in the press release and our website under the heading About Non-GAAP Financial Measures and Certain Key Metrics. As a reminder, today's discussion will include forward-looking statements about our operations that reflect our current outlook. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from statements made today. We encourage you to review our most recent SEC filings, including our Form 10-Q filed today for a discussion of risks that may affect our future results or stock price. Now before taking questions, we'll begin with prepared remarks. With that, I'd like to turn the call over to Seth. Seth Ravin: Thank you, Dean, and thank you, everyone, for joining us. In the third quarter, we continued to simplify and refine our go-to-market strategy and messaging around Rimini Street's 3 core service pillars: support, optimize and innovate and our SmartPath methodology that allows clients to capture cost savings with their existing ERP software, enabling them to invest in and leverage the benefits of AI innovation without spending above the current IT budget. To this end, Rimini Street has staked out its position as the software support and agentic AI ERP company, a specialized partner in ERP that can extend the useful life of current ERP system assets while also delivering the latest next generation of ERP technology to clients. We also continued our focus on methodical, predictable sales execution in both new logo acquisition and cross-sales to existing clients. Third quarter results. Overall, sales bookings and billings continued to improve, and we delivered strong ARR subscription renewals as well. We closed 17 new client sales transactions in the quarter with TCV of over $1 million each for an aggregate TCV of $63.1 million compared year-over-year to 19 new client sales transactions for an aggregate TCV of $48.7 million. We also added 79 new logos and achieved a record RPO backlog of $611.2 million, up 6.4% year-over-year. New logo sales include major global and regional brands. Sales to new clients and cross-sales to existing clients span the mix of our products, services and solutions and a broad set of industries and geographies. Achievements included record third quarter SAP support sales, surpassing the key milestone of more than 100 VMware support contracts signed to date and closing more than 2 dozen client engagements around our new agentic AI ERP innovation solution powered by the ServiceNow AI platform. We plan to provide more insight and information on our agentic AI ERP solutions at our upcoming Analyst and Investor Day on December 3, 2025. While the majority of our sales in the quarter were completed by our direct sales force, we also achieved sales transactions through our maturing indirect channel. As the indirect channel matures globally, we see building sales opportunity pipelines. Billings growth was driven by a mix of new ARR subscriptions and project-based professional services and the combined ASP for Oracle support services, SAP support services and all managed services grew year-over-year. In the third quarter, we had more global quota-carrying sellers, a greater number of sellers participating in the total quarterly sales attainment and a greater number of sellers achieving or exceeding quota when compared to the first half of 2025. Exiting the quarter, we had 82 quota-carrying sellers globally compared to 73 during the prior year third quarter. Also during the third quarter, we continued upgrading sales leadership talent with new leaders in EMEA and Southeast Asia and Greater China and materially expanded sales opportunity pipelines for future quarters, along with broad progression of many pipeline opportunities. Growth drivers. We continue to pursue growth drivers that leverage direct and indirect sales channels. We continue to hone the skills and capabilities of our direct seller team, continuing to build our partnerships that provide expanded sales reach and sales cost leverage. Additionally, we continue to build our go-to-market execution by industry, which will give us the opportunity to sell more deeply into clients with industry-based knowledge, insights and Rimini solutions that solve specific industry challenges. Two notable achievements were announced in the third quarter. First, we were added to the United States GSA Multiple Award Schedule as an approved supplier of support and security services for Oracle, SAP and VMware software. United States federal, state, local and tribal government agencies can now procure Rimini Street services directly from the GSA schedule without a need for competitive procurement. To leverage the GSA contract opportunity as well as our new management sales partnership with Merlin Cyber, Rimini Street has launched a U.S. federal and state local education sales team. Second, we entered into a strategic partnership with American Digital, a leading IT solutions provider specializing in custom data center solutions based on HPE infrastructure to provide a full stack solution with Rimini Street providing the enterprise software support and managed services. The partnership includes working together to help clients fund modernization with AI solutions and implement workflow and task automation on top of their current SAP and Oracle applications without any pressured, expensive or low ROI vendor upgrades or necessary migrations. Oracle litigation update. On July 7, 2025, the company and I entered into a confidential settlement agreement with Oracle. The parties entered into the settlement agreement to provide a full final complete and global settlement, the U.S. federal case known as Oracle International Corporation and Oracle America, Inc. versus Rimini Street, Inc. and Seth Ravin filed in 2014. As reflected in the settlement agreement, the company intends to complete its previously announced wind down of its support and services for Oracle's PeopleSoft software no later than July 31, 2028. The company has continued to make progress towards achieving this requirement. As the Oracle litigation noted above has now been settled, this is the last Oracle litigation update we plan to provide during earnings calls. We will, however, continue to provide financial disclosures around the Oracle PeopleSoft wind down until the wind down is complete. For additional information and disclosures regarding the company's settled litigation with Oracle, please see our disclosures in our Form 8-K filed on July 9, 2025, our second quarter Form 10-Q filed July 31, 2025, and our third quarter Form 10-Q filed today, October 30, 2025, with the U.S. Securities and Exchange Commission. Summary. We continue to focus on our support, optimize and innovate solutions, including our new agentic AI ERP solutions powered by ServiceNow's AI platform, executing the right go-to-market strategy to fuel sales growth, increase profitability and enhance shareholder value. Now over to you, Michael. Michael Perica: Thank you, Seth, and thank you for joining us, everyone. Q3 2025 results. Revenue for the third quarter was $103.4 million, a year-over-year decrease of 1.2%, with the United States representing 45% and international representing 55% of total revenue for the quarter. Excluding revenue derived from support and services provided solely for Oracle PeopleSoft products, revenue increased 2.5% versus the previous year. Annualized recurring revenue was $391 million for the third quarter, a year-over-year decrease of 2.6%. Revenue retention rate for service subscriptions, which makes up 95% of our revenue, was 89%, with approximately 85% of subscription revenue noncancelable for at least 12 months. FX movements for the quarter were minor, impacting total revenues positively by 0.2% during the quarter compared to a negative impact of 1% for the prior year third quarter. Billings, as defined in our press release, for the third quarter were $66.5 million, up 2% year-over-year. Adjusted billings, which exclude the PeopleSoft associated billings, were $63.9 million, an increase of 6.7% on a year-over-year basis. Gross margin for the third quarter was 59.9% of revenue compared to 60.7% of revenue for the prior year third quarter. On a non-GAAP basis, which excludes stock-based compensation expense, gross margin was 60.4% of revenue for the third quarter compared to 61.1% of revenue for the prior year third quarter. The year-over-year reduction was largely the result of decline in revenue, primarily revenue associated with PeopleSoft services. Excluding PeopleSoft associated revenue and related cost of goods sold, gross margin was also 60.4%. We continue to focus on driving operational leverage through improved systems, analytics, processes and global staffing models across all of our offerings with the focus of continuous improvement of our best-in-class support. Operating expenses. Reorganization charges associated with our continuous cost optimization plan for the third quarter was $752,000 and totaled $7.7 million since we instituted this plan. Our focus moving forward will be to continue the momentum we are building in our core business and allocating our investments to fund incremental skill sets that will help drive growth across our 3 pillars. Nonetheless, we do expect to incur additional reorganization costs during the remainder of 2025 as we optimize our model to capitalize on the existing opportunities ahead. Sales and marketing expenses as a percentage of revenue were 36.7% of revenue for the third quarter compared to 34.2% of revenue for the prior year third quarter. On a non-GAAP basis, which excludes stock-based compensation expense, sales and marketing expenses as a percentage of revenue was 35.7% of revenue for the third quarter compared to 33.6% of revenue for the prior year third quarter. General and administrative expenses as a percentage of revenue, excluding outside litigation costs, was 17.6% of revenue for the third quarter compared to 15.8% of revenue for the prior year third quarter. On a non-GAAP basis, which excludes stock-based compensation expense, G&A was 16.5% of revenue for the third quarter compared to 14.6% of revenue for the prior year third quarter. G&A expenses in the quarter were negatively impacted by slightly over $1 million due to nonrecurring international transaction tax associated costs. Professional fees and other costs of litigation were $621,000 for the third quarter compared to $879,000 for the prior year third quarter. The net income attributable to shareholders for the third quarter was $2.8 million or $0.03 per diluted share compared to the prior year third quarter net loss of $0.47 per diluted share. On a non-GAAP basis, we had a net income for the third quarter of $6.9 million or $0.07 per diluted share compared to the prior year third quarter of $0.22 per diluted share. Our non-GAAP operating income, which excludes outside litigation income and spend, stock-based compensation, reorganization expense and litigation settlement expense was $8.5 million or 8.3% of revenue for the third quarter compared to 12.8% for the prior year third quarter. Adjusted EBITDA, as defined in our press release, was $10.1 million for the third quarter or 9.8% of revenue compared to the prior year third quarter of 13.1% of revenue. Balance sheet. We ended the third quarter September 30, 2025, with a cash balance and short-term investments of $108.7 million compared to $119.5 million for the prior year third quarter. On a cash flow basis, for the third quarter, operating cash flow increased $24.7 million compared to the prior year third quarter decrease of $18.5 million. The operating cash flow was positively impacted by the receipt of the litigation settlement proceeds during the quarter of $37.9 million. When excluding this payment, cash used during the period was approximately $13 million. In the quarter, operating cash flow was negatively impacted by the effect of foreign currency, which was unfavorable by $1.3 million. Deferred revenue as of September 30, 2025, was $226 million compared to deferred revenue of $223 million for prior year third quarter. Backlog also referred to as remaining performance obligation, RPO, which includes the sum of billed deferred revenue and noncancelable future revenue, was a record $611 million as of September 30, 2025, compared to $575 million for prior year third quarter, a year-over-year increase of 6.4%. When excluding the PeopleSoft associated backlog, RPO expanded 9.3%, underscoring the momentum we are building in our core underlying business. PeopleSoft update. In 2024, we announced the wind down of our services for Oracle's PeopleSoft products and have now agreed as part of the Oracle settlement that we will wind down all PeopleSoft service revenue by July 31, 2028. We have made progress in reducing both the number of PeopleSoft clients and related revenue since announcing the wind down. PeopleSoft revenue was approximately 5% of revenue for the 3 months ended September 30, 2025, compared to approximately 8% of revenue for the prior year third quarter. PeopleSoft calculated billings were $2.5 million during the quarter compared to $5.3 million for the prior year third quarter and year-to-date Q3 2025 billings were $9.7 million compared to $19.7 million for the same prior year period. Business outlook. The company plans to provide forward-looking guidance at its Analyst and Investor Day to be held on December 3, 2025, where the executive team plans to outline the company's market opportunity, solutions, go-to-market strategy and financial goals. This event will be open to attendance by the public via online registration and a live webcast link available on our website. This concludes our prepared remarks. Operator, we'll now take questions. Operator: [Operator Instructions] Your first question comes from the line of Jeff Van Rhee from Craig-Hallum. Jeff Van Rhee: Can you hear me all right, Seth? Seth Ravin: Yes. Got it. Jeff Van Rhee: Okay. Good stuff, having some phone difficulties here. So a couple. I heard -- I believe I heard the mention of 24 agentic AI wins with ServiceNow. I think I might have missed some of the context there, but expand on that. I mean it's been relatively quiet since you announced that relationship a year ago, and this is a notable call out. I mean what are these wins? What's an average deal size on these wins? How many of these you have prior quarter versus this quarter? And then kind of what does the pipeline look like? It sounds like maybe you're really starting to see some traction here. Seth Ravin: Yes, Jeff, it's a great first start for us. As you know, we announced the partnership with ServiceNow when Bill McDermott launched that in his earnings call a year ago. And it's taken about a year just to get the organizations aligned to work on a full global rollout. As you know, they've got over 6,000 sellers that we're going to leverage to move the Rimini Street and ServiceNow combo. And what we've accomplished, as we said, it's taken a while. We've got 26 customers on their way with a ServiceNow component, and we're building agentic AI ERP first transactions over those systems. So more to come. Our goal is that by the end of this year, we will have 26 great use cases, all different types of ERP transactions, different customers around the world and different industries. And as you know, the whole challenge with AI isn't the technology. It's everybody trying to figure out use cases that are really leverageable, and that's what we're going to deliver to the market. Jeff Van Rhee: And so how does that impact the P&L in terms of deal size? Seth Ravin: I think right now, it's negligible to P&L in terms of materiality. I think we always said '26 was going to be the time that we really start to monetize because we needed to get these use cases done first so that the sales teams for ServiceNow and Rimini Street can take these out into the marketplace and show other customers how AI in this agentic ERP model is going to be deployed, the value and the creation that we're able to bring to the market with it. So really look for this to be a '26 number. Jeff Van Rhee: Got it. And then I guess, again, maybe a very high-level question, but coming into the really difficult initial decisions from the court as it related to the Oracle case, the company was a solid double-digit grower. It's been a tough couple of years. You certainly seem to be putting in a bottom and showing some acceleration on a bunch of metrics. What do you think it takes to get this company back to double-digit top line growth? How do we get there? What are the components that get us there? Seth Ravin: Well, I think, again, we'll go over this nicely in the Investor Day coming up on December 3. But generally, we're looking at 2 components. I mean we're becoming the support and agentic AI ERP company because we're uniquely positioned to extend the life of the existing systems, driving a huge amount of our higher-margin support business. And at the same time, we're building the next generation of technology over it and helping customers avoid these big upgrades. So we expect this to be an acceleration to our core business, and we expect to see that grow nicely because whether a company is looking to save money or immediately leverage the AI technology, and we hope they will. The combination starts off with them moving to Rimini Street on a wider variety of their platforms for support in order to save that money and reinvest it in technology. So I think, again, we're on the right track. I think all of the things we've been putting in place in terms of the products we built out over the last few years are all coming to play now in this new agentic AI ERP model and the combination of what we're able to do to continue support on a wider variety of platforms. Jeff Van Rhee: Okay. And maybe 2 last quick ones, if I could. Just indirect and channel, I love it. I think there's so many potential ways to increase sales efficiency in terms of what you're working on there. Where is it now as a percent of revenues? Where do you think it's going? And then my last one is also a numbers question. Just thoughts on retention rates over the next few quarters. Seth Ravin: Sure. The first one, in terms of where we think this is going to go, again, I think we're going to follow the plan that we've laid out. We'll get the numbers to you in the Investor Day. So I think we want to just be careful about getting to any kind of numbers in this particular call. But the other side of this, I just think, again, we're going to lay out exactly the model that's going forward. The retention, I think, becomes extremely sticky, especially when you're taking systems and now you're able to put the agentic AI ERP over the top of the existing system, no upgrades required, no reason to switch to other ERP systems. We've declared ERP software is officially dead. It will be usable for the next 20, 30 years as a core transaction system. We're going to do that for customers, but all future changes we believe, as you'll see with the software vendors, all believe will be done outside the system, and we're going to use AI to deliver it. Operator: Your next question comes from the line of Brian Kinstlinger from AGP. Brian Kinstlinger: If you could just help remind us your role in that partnership with ServiceNow. Are you providing support services on top of the technology that ServiceNow is bringing? Is there an application development piece? Just remind us broadly what you're bringing to the table in this partnership. Seth Ravin: Sure, Brian. They are producing a tool. And we are using that tool to create solutions, and we're calling them the agentic AI ERP solutions that we then layer on top of the existing ERP system. So what they get out of it is they get the licenses for the tool, the AI platform, and Rimini Street does all the work. So we have all the consulting labor to install the system, to design these agentic AI ERP components and install them, then we will run the system underneath the ERP component. We will also run the ServiceNow piece. So we pick up most of the revenue in that entire picture. Brian Kinstlinger: Now are these 24 to customers or POCs, whatever they are, are they with your existing client base? Are they generally new customers? Seth Ravin: They are, I believe, most of them, if not all of them, are existing customers who were very excited about the offering, and we engaged with them to deploy this first set for them. Brian Kinstlinger: Great. And then you spoke of a higher number of new client wins in TCV year-over-year. What was the split between the U.S. and international? Seth Ravin: That's a good question. I don't have the answer on the exact split. I don't believe we published that particular number. But if you look at the... Brian Kinstlinger: How about a high level with -- I guess the key question for the last several years, obviously, is U.S. versus international. So is U.S. beginning to make any material impact on the bookings side to replace what is usually 10% attrition? I'm just trying to understand the bookings in the U.S. mostly. Seth Ravin: Sure. Well, the bookings in the U.S., I can tell you, if you look for the first 3 quarters of 2025, bookings are up 6%, and it's actually up higher if you take out the PeopleSoft component. But we are absolutely seeing a bookings growth in the U.S. and you saw that the bookings growth was strong outside of the U.S. on the international. So yes, I do think what we're seeing is a turn in the ship. I do believe when we look at the logos, we look at the size of the transactions, the ASP, we even had on top of a record SAP quarter across the world, we had a record bookings for Oracle in the quarter as well, which was, again, another important piece of business that moved forward, and we, of course, want to highlight that as well. Brian Kinstlinger: Now if bookings are up 6% in the first 3 quarters, year-over-year ex PeopleSoft U.S. is down about 4.4% you highlighted. And while that number wasn't given last quarter, I'm sure it was a stronger comp. It was -- it declined less than 4.4% based on what you did provide. So what's behind the accelerated decline in the U.S. unless I'm wrong? Seth Ravin: Well, remember, you've got accumulation of some prior quarters where we did have some losses and those have carried forward. But the new bookings aren't going to be reflected, obviously, in revenue on a ratable basis for a while. So we're saying -- what we're seeing is current. We're seeing the bookings coming up, which, of course, is a great precursor to understand where we're going. We're watching the RPO come up. All these numbers are coming in, again, sort of in this mid-single digits. And then you look, if you take out the PeopleSoft, your revenue growth was actually positive over 2%, 2.5%. And so I think when you look at those numbers, Brian, you're really looking at metrics that are all supporting the idea that the business is turning around. We're starting to return to growth on the top line. And I think that's the key indicator for this quarter. Brian Kinstlinger: Great. On the international side, we've seen an acceleration of growth. Can you just kind of point to where that is? Is there a specific solution like SAP, Oracle or VMware? Is it a new service? Is it geographic specific? Maybe you can point to 1 or 2 things that are driving that accelerated pace of growth. Seth Ravin: Sure. Internationally, as you know, SAP is a bigger product than Oracle, except on the technology side for database. And so this represents a significant amount of SAP business done on the international side. Operator: Your next question comes from the line of Richard Baldry from ROTH Capital. Richard Baldry: I know it's kind of early, but when you look at the very top of the funnel sort of prospects at the highest end, has there been any change in the engagement levels with those people you've been willing -- who've been willing to return calls, whatever, post the Oracle settlement? Or do you think it's too soon to really gauge that? Seth Ravin: No. I think we're roughly, what, 90 days or so after the settlement announcement. So from that point of view, do we see a change in the business relative to that? I would say, Rich, that we definitely have real cases where prospects came back to us that were off the table before because they were concerned about litigation for the company. So I think that's a great measure that we're seeing. We've also had partners come back. Some rather large tech companies have come back to us who didn't want to do formal partnerships before because of the litigation where they cited it specifically. And now they've come back to us because the litigation has been settled and they're anxious to have conversations to move forward. So I think there's evidence building that as we suspected, there would be customers, there would be partners, people who didn't want to do business with a company that was involved in litigation, and now we're seeing that clear. Richard Baldry: Got it. One sort of small one and then one a little bit bigger. Will litigation costs pretty much trend towards 0 near term? And would there be any in 2026? And then more importantly, can generative AI materially lower your cost of service delivery? I'm sort of curious where it could fit inside of your dealing with customers, if there's head count that either would go steady or you could pull out, how do you think about using that in terms of your own business? Seth Ravin: Sure. So question number one, we will continue to have some litigation costs because we associate that with the wind down of PeopleSoft and there's compliance components related to litigation, things like that. So there will be some continuing costs. But as we've said, we used to talk about $10 million a year in litigation costs. We would expect to see substantial reductions, and we already are in terms of the wind down of the litigation process. So that will absolutely inure to the benefit of shareholders and the financials in the years ahead. Second question, we are absolutely focused on deploying AI across our entire company. We are looking at ways to reduce cost. We already use AI to improve service to customers, and we've been doing that for several years. We have an internal team dedicated just to looking at ways to improve systems and processes, using technology for leverage and reducing the amount of labor that we require as a business. We brought in a new global CIO, Joe Locandro, who has previously been the global CIO for Cathay Pacific Airlines, Emirates Airlines, China Light & Power and has deployed a significant amount of AI in those businesses and including being a Rimini Street customer as part of this portfolio. And we intend to aggressively pursue reducing internal costs with AI. Operator: Your next question comes from the line of Derrick Wood from TD Cowen. Jared Jungjohann: This is Jared on for Derrick. For the new GSA schedule, how do you expect this to impact your ability to do business with the U.S. government? Have you seen any initial proof points along these lines, of course, understanding the current circumstances? Seth Ravin: Sure. We, of course, have sought GSA for a long time. It's a complicated agreement to get through with all of Rimini Street's different products, and we got approved for Oracle, SAP, VMware support as well as security products. So obviously, a great win for us. We see this as a very important purchase vehicle, not only for the federal government, but for the local and state government and education institutions that look to the GSA. And if you're on the GSA, just like our framework agreements with many governments around the world, you're able to buy off that agreement without a procurement process. So that is a big one for us, considering public sector is our second to third largest group of customers globally. So that's number one. Number two, on the federal side, we are engaged with different federal agencies. Again, this is a new team. This is a new motion for us. But in addition to the work we're doing directly, we are partners with Merlin Cyber, who is a well-known player in the federal space and also some local government, and we've done deals together already. And so we're going to be working together both through with Merlin's capabilities and experience in the federal government and along with our direct work under the GSA. Jared Jungjohann: Awesome. Appreciate all that color. And then just a follow-up on the government topic. Should we be expecting any impact in your next quarter's results from the current shutdown? Seth Ravin: No, I don't think we would expect to see any impact based on the shutdown. Jared Jungjohann: Appreciate that. Last one from me, 100-plus organizations on VMware, great to hear. Similar to the prior ServiceNow question, could you break out sort of the mix of net new customers, new clients landing on the solution versus your cross-sell motion into your existing base? Seth Ravin: Yes. We haven't broken that out as far as I'm aware. I'll have to go back and take a look, and we can certainly follow up with you on a couple of these questions with the other breakouts. I think that from what I can tell you in looking at the deals, there are a good number that are in the existing client base. But I will tell you, I believe the majority of those customers are net new logos. Operator: Your last question comes from the line of Alex Fuhrman from Lucid Capital Markets. Alex Fuhrman: I was wondering if you can talk a little bit more about the partnership with American Digital. Is the goal here to be able to leverage the full stack solution in order to be able to go after more customers? Or is this something your existing clients have been asking for in order to better leverage cost-effective AI tools? Any color there would be very helpful. Seth Ravin: Sure. And welcome, and thanks for picking up coverage of Rimini Street. One of the things that we've been looking at is there has been a big change in the way that VMware and other software suppliers have been working with various partners. And these are companies, especially in the hosting space, as you saw with our T-Systems announcement in North America as well as American Digital, these are hosting providers. And what's happened is, for example, if you were to upgrade your systems with SAP and you went with their -- what was formerly known as RISE, you would have to be moved over to Azure, which, of course, means that the customer would no longer be their customer. So you have a lot of these providers who are in a pickle because their customers don't want to upgrade and Rimini Street provides a great solution. But if the customer does upgrade, they could wind up leaving and having to go to a different provider for hosting service. So that's the kind of situation that's happening. And so this is one where we can come in, in a big win-win and help them with their customers who don't want to move forward, don't want to upgrade, provide a great solution and keep them on their platform, which, again, is a win-win for us in American Digital and HPE. Operator: We don't have any other questions at this time. I will now turn the call over back to Mr. Seth Ravin, CEO. Please continue. Seth Ravin: Thank you very much, and thanks, everyone, for joining us. We hope you join us for our Analyst Day 2025 on December 3. You can get registration right off our website on the Investor Relations page. And again, looking for a good health for everyone, and thank you for attending, and we look forward to seeing you at the Analyst Day and future calls. Thank you very much, everybody. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the LendingTree Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Andrew Wessel, Investor Relations and Corporate Development. Please go ahead. Andrew Wessel: Thank you, Brittany, and hello to everyone joining us on the call to discuss LendingTree's Third Quarter 2025 Financial Results. On with us today are Scott Peyree, CEO; and Jason Bengel, CFO. This morning, we posted a detailed letter to shareholders on our Investor Relations website. And for the purposes of today's discussion, we will assume that listeners have read that letter and we'll focus on Q&A. Before I hand the call over to Scott for his remarks, I remind everyone that during this call, we may discuss LendingTree's expectations for future performance. Any forward-looking statements that we make are subject to risks and uncertainties, and LendingTree's actual results could differ materially from the views expressed today. Many but not all of the risks we face are described in our periodic reports filed with the SEC. We will also discuss a variety of non-GAAP measures on the call. And I refer you to today's press release and shareholder letter, both available on our website for the comparable GAAP definitions and full reconciliations of non-GAAP measures to GAAP. And with that, Scott, please go ahead. Scott Peyree: Thank you, Andrew, and thanks to everyone for joining us today as we discuss our third quarter results. First off, all of us here at LendingTree are deeply saddened by our Founder, Doug Lebda's sudden passing a few weeks ago. Doug was a visionary leader who had an impact on every part of our company. He was truly passionate, creating a marketplace where consumers can find the best financial product for them at the most competitive price. He coined our long-standing and well-known marketing tagline, "when banks compete, you win". Personally, I came to know Doug as he explored buying the company I founded, QuoteWizard, back in 2018. At that time, I appreciated his entrepreneurial spirit that we both shared, his deep passion for the business, and the strong and similar culture he had at LendingTree compared to QuoteWizard. After LendingTree ultimately bought my company, I was able to know him more closely, especially in the last 2 years I served as President and Chief Operating Officer. I viewed him as a great boss, great business partner and a great friend. I also came to appreciate how much he cared about all of the employees at LendingTree. For example, he insisted that full-time employees receive stock as part of their compensation, so they would think like owners. He was present at all kinds of internal company events. Of course, him seeing every quarterly all-hands meeting, but also showing up at small internal meetings or celebrations, always offering encouraging words and pushing all of us to achieve more. The outpouring of condolences we have received since his passing from people across the country and within our industry has been truly overwhelming. All of us at LendingTree mourn him and keep his wife, daughters, parents and family in our thoughts as we carry on with his legacy. I'm honored to become the second CEO in the company's history and carry the mantle of what Doug founded nearly 30 years ago. Doug and I were aligned on driving continuous improvement in the consumer shopping experience, optimizing our business through operational excellence initiatives, which I started to implement 2 years ago upon being appointed as COO. We also share the belief that improvements in AI technology will greatly benefit the consumer experience when they come to LendingTree shopping for financial products. I'm very excited as to how Agentic AI, LLMs and other AI tools can transform the shopping experience of our products over the next few years. Finally, we both agreed we needed to ensure our balance sheet was equipped not just to survive future periods of economic stress, but to thrive in them, allowing us to go on the offense when competitors are pulling back and our customers need us more than ever. Reflecting on the incredible business Doug created, it seems appropriate that in the third quarter this year, our revenue of $308 million was our second highest in company's history, barely missing our high point when the Fed rates were essentially 0. Each of our three segments recorded double-digit year-over-year revenue and VMD growth. This is the sixth consecutive quarter we have reported revenue growth from the prior period. The company's diversification across industries is allowing us to lean into areas of high demand, most notably from our insurance carrier partners looking for new auto customers. We have retaken a leadership position in the insurance marketplace. We will continue matching carriers with quality, high-intent consumers to capture an increasing share of those insurance companies' marketing budgets as we move into next year. This is a similar strategy we employed during the downturn in carrier demand in '23, which led us to being well positioned with leading market share in the industry -- when the industry recovered and then boomed in '24. Importantly, we've begun to see a strong ramp in spend outside of our top three carriers, an important indicator of the health and duration of this cycle. Specifically in Q3, if you look at our 4 through 10 largest carriers in our network, so take out our top 3 carriers, those next 7 spend with us increased by nearly 60% compared to a year ago. Our Consumer segment is also producing fantastic results. Segment VMD grew 26% on the quarter and 11% revenue growth. Our small business team has just been spectacular and it's benefited from our investment in the concierge sales strategy. These high-touch customer service models helped us drive a 30% increase in the number of loans we closed for partners in this quarter versus last year, and driving overall 50% year-over-year increase in revenue. It has propelled growth in our high-margin bonus and revenue referral revenue streams as well. The personal loans business continues to grow nicely as lenders are steadily and cautiously widening their credit criteria for borrowers. Notably, close rates for both prime and mid-prime loans for debt consolidation grew by double digits in the quarter compared to the prior year. Record consumer credit card balances and the forecast for lower short-term interest rates should help accelerate the growth of this vertical in the next year. The Home segment is also doing quite well. And despite persistent high mortgage rates and a sluggish housing market, revenue from our home equity product increased 35% in the third quarter as lenders continue to target this product given the lack of demand for first mortgages. Existing home sales remain stuck around the 4 million annual unit level. You'd have to look back to the financial crisis period of '08, '09 to find similarly low activity. Before we take your questions, I want to let the investor community know that we are extremely well positioned to grow our business. Doug created a revolutionary company, the first true online comparison shopping site, and I'm honored to lead it going forward and continue executing on its original vision. I would also like to thank all of the employees at LendingTree for putting up such strong performance and positioning us well for continued growth in 2026. We are happy to open the line to your questions. Operator: [Operator Instructions] Our first question comes from the line of Jed Kelly with Oppenheimer & Company Inc. Jed Kelly: Just digging into the Consumer segment, in the shareholder letter, you said your credit cards are getting back to your historical margins. And then if I look -- it looks like consumer VMM is going to be at record annualized margins this year. So can you just talk about how we should think about all the moving puts and takes in that segment and the margin profile and what we should look at going out into next year? Scott Peyree: Yes, sure. Thanks, Jed. First off, I would say, I'd probably say the consumer VMM being at the highest levels overall is largely driven by our small business -- just because our small business is generally a high-margin category, and it has grown spectacularly. Small business was our biggest lending business in consumer in the third quarter. And we -- with the concierge sales staff, our lead growth, our positioning in that market, we do expect that to be continued strong growth for the indefinite future. And so we're very excited about that business and where it's going. And honestly, I'd also say we have some other businesses for proprietary reasons. I won't say specifically which ones, but we think we can move that similar concierge sales model into, and we will be actively engaging that in '26, and starting to build a direct concierge sales team, which is both great for the customer -- consumer experience as well as the monetization of the traffic. To hit on credit cards briefly, yes, we were -- the combination of rolling out TreeQual and just pulling back the margins in that business had gotten really low. So there was a real focus. Over the past 12 to 16 months of just like, all right, let's get the business back in good, healthy shape, running at solid margins. And we have done that, and it's been a great -- it's a smaller piece of the overall consumer business, but it's much healthier today than it was a year or 2 ago. And I think that is positioned for -- to get back into top level growth mode next year. Jed Kelly: Okay. And then obviously, I think to the other real good point about the quarter is just where the balance sheet is. So a great job on your part, getting it down to 2.5x leverage. Can you just talk about where you're going to prioritize capital returns, buybacks, paying down debt or investing in the business? Jason Bengel: Yes, Jed, this is Jason. I can take that one. Yes, we're very happy with the completed refinancing this quarter. We think that's a great event that's going to allow us much more flexibility going forward, like you said. Our leverage has continued to come down 2.6x. It was 4.4x a year ago, and it was much higher than that even before that. And so when it comes to capital allocation, I think our first priority, our default is going to be paying down debt. That's a risk-free return of north of 8%. But now because we have a cov-lite term loan, we do have the option to start thinking about buying back shares and doing selective M&A. So we're certainly going to look at those things. And if we do see the stock trading at an attractive price, we're certainly going to consider it. If we do see an acquisition out there that's going to be beneficial to us, we'll consider it. But I would say the default is generally going to be paying down debt. Operator: Our next question comes from the line of Ryan Tomasello with KBW. Ryan Tomasello: My sincerest condolences for the loss of Doug. In your insurance business, Scott, if you can just elaborate on what gives you confidence that this cycle has legs into next year? And then just remind us the typical composition of revenue between the top and low end of the funnel. It sounds like variability in that mix is a main driver of the margin volatility. And just how you're thinking about what a reasonable trajectory is for segment margins in the insurance business from here? Scott Peyree: Okay. Yes. I mean just starting at the sustainability of the industry levels, I mean, I would just open with the insurance industry as a whole on a macro level remains in a very, very profitable position. These companies are -- after the deep downturn that they're in a very healthy position now, a healthy position to the level of where a number of companies are starting to look at rate reductions for their policies, I mean they're that profitable. So I think we're just in a good position where all of the major clients that are spending marketing dollars with us are in very healthy positions. So there's no reason to think that they won't continue to aggressively pursue market share in the upcoming year plus, which obviously is -- we're a major place to go if you're looking to increase your market share. Talking about the product lines within insurance and how it affects margins, that's a very true statement you're just making. We've got clicks, leads and calls are our main product lines in insurance. And if you -- the clicks is generally by far the lowest margin product where leads and calls are much larger margin products, but they all work together. So -- but what happens when you have some of our major clients that are click buyers, it drives your revenue way up, but at a lower margin profile. But what that does is by -- it allows us to go out and buy and secure way more traffic, that means we can sell more leads and calls at the end of the day. So your overall margin profile goes down, but you're generating so much revenue and you're selling off so many more leads and calls that your overall VMD goes up quite a bit. So that's just kind of the wave of the up and down as those click budgets may go up and down a lot. But I would say we're a total VMD dollar company. We will -- we want to drive as much high-quality traffic as possible and make as much total VMD while we're doing that. And I think Q3 is very reflective of that strategy, over $200 million of revenue with just under $50 million of VMD, our second biggest VMD quarter of all time there outside of Q4 last year, which was just abnormally high as we've discussed on previous earnings calls. And I think that this business, we are well positioned, especially the first six months of next year to see very strong VMD growth in the insurance segment. Jason Bengel: Yes. And I'll just tack on to that. Just to Scott's point, if you look sequentially, Q2 to Q3, insurance VMD went up $8 million. $8 million that are largely going to fall to EBITDA. And so that's what we're focused on, driving operating leverage, keeping expenses under control and dropping VMD dollars to EBITDA. When it comes to expenses, we're happy to invest in variable expenses that are going to drive VMD and then focus on efficiency everywhere else, just so we can really focus on driving operating leverage into 2026. Ryan Tomasello: And then consumer credit has come under more scrutiny of late. So I'm curious what the latest is you're hearing from your lending partners on appetite and credit boxes. And this is obviously with respect to your -- mainly your personal loans business. Have you noticed any signs of tightening more recently? Or do you think that there's still room to run on the conversion rates, which sounds like they improved pretty nicely here in the quarter? Scott Peyree: Yes. I mean, I would say, overall, at a macro level, and I've seen the same things that you're seeing and referring to. I would say when you actually get to our clients, they're not really saying the same -- their credit boxes and their delinquency rates and all are generally well within acceptable ratios for them at a high level. We've seen a few of our clients on the more deep subprime side of it pull back a little bit. So maybe there's a bit more concern when you get down towards the more deep subprime. But I mean -- but I would say for the most part, at a macro level, we're seeing more expansion than contraction for credit boxes. Operator: Our next question comes from the line of Mike Grondahl with Northland. Mike Grondahl: Condolences and prayers for Doug's family and the LendingTree family. Two questions. One, could you talk at a high level about the SEO, the GenAI sort of environment and how that's changing and kind of the quality of leads you're seeing overall and the conversion trends. And then secondly, I'd be curious just overall visibility in the business today vis-a-vis or as compared to a couple of the previous quarters. Scott Peyree: Can you be a little bit more specific with your second question there? Mike Grondahl: Yes. Just we debate from time to time revenue visibility that you guys have. Can you see out 60 days, 90 days? Just sort of how you feel about your revenue visibility today versus prior quarters? Scott Peyree: Okay. I would -- okay. So starting on the SEO front, along with LLM, AIO strategy around there. So LLM and AIO type traffic is going up. We have -- like from a conversion perspective, it's night and day when you get traffic from the LLMs or AIOs. I mean it's literally like 4 to 5x the conversion rate. And I think that's just because they've gotten so many answers at that point, we feel like these people are ready to transact by the time they come to you. So -- but that said, the traffic is way lower than the SEO. And it's way lower on 2 levels of just obviously, the consumer uptick of it. There's still vastly more consumers going to the traditional like Google-type search results versus the vLLMs. And then it's just the newness of placement within the LLMs and the SEO strategy of getting that place in the LLM. So SEO is one of those categories. It's been very -- I mean, I'll be honest, it's been very turbulent in Q3 as traffic has shifted and changed in legacy SEO. The entire financial services industry has been hit pretty hard by it. I would not want to be a company that's highly dependent on legacy SEO traffic. I'll make that statement. I think it's fair to say the era of [ "free rein" ] on Google is coming to an end. But then at the same time, the paid search traffic, which we are very, very good at ourselves is continuing to be very strong and growing. So we're happy with that. So yes, it's definitely a turbulent market, and it's definitely a transitional period where there is still legacy SEO and that is still important to be participating in, but it's also very important to be focusing on building your content and tools and data openness around LLMs and AIOs. And then getting -- and then moving to your second question, just about revenue outlook. I would say after -- starting with insurance, after that's been so turbulent over the past few years, I would say we're probably -- it's a little bit more steady and predictive now going forward after that hyper growth era. And I think it will still grow at some level, but not in the hyper growth area. Consumer and mortgage -- mortgage is a little trickier because mortgage is really about when do we get that inflection point where the refinance snowball starts to grow, right? We were looking at some stats here, and you look at about 5.75% mortgage rates, that is about 3x as many mortgage borrowers are in the money at that rate versus what the rate has been most of this year. So if you trend down to that level, that's probably where you really see the snowball start to happen. Now I'm not a soothsayer. Like, I can't tell you at what exact point we trend to that level. But that -- when you hit that inflection point and it gets 5.75% and it keeps fading down below that, that snowball could build really fast, and revenue could blow up and VMD could blow up really fast there. And it will be hockey stick growth for a while. There might even be a little bit of an upfront wave that comes through when it happens. But you just -- I think you kind of got to get down to that 5.75% level for enough people to be in the money there. Consumer, I think consumer is probably the most steady where like we can look at just like our media practices growing our media traffic, growing our direct sales force. That's just a bit more predictive on what the revenue will generate there. So I hope that answers your question. Mike Grondahl: Yes. No, it does. And maybe just one quick follow-up. On the mortgage side, are you seeing lenders engage more and get potentially ready for that refi environment at 5.75%. Are they moving today to be in a position to capture that? Scott Peyree: Yes, I think so. And I think what you see is like our home equity business has grown so much. I mean home equity is not near as profitable for these lenders as refi is. But the reason they're so staffed up and want to buy so much of that home equity traffic, a big part of that is they want to be ready for -- when the refi boom comes around and be staffed up for that. Another thing we're doing in the more control your own destiny mode, we're really actively pursuing a small lender growth strategy, and we're really ramping up now pretty quickly just our total distribution network. So not just the major direct-to-consumer players, but I mean, when we hit that inflection point, we would like to have 1,000-plus clients on the network to really soak up that demand when it explodes. Operator: Our next question comes from the line of Melissa Wedel with JPMorgan. Melissa Wedel: Most of mine have already been asked and answered. I thought it would be helpful, though, to follow up on a reference earlier to potentially considering some M&A with the balance sheet flexibility that you now have. I think in the past, most of the acquisition activity that LendingTree has done has been sort of bolt-on type acquisitions with the exception of QuoteWizard of course. So as you think about that going forward, do you expect that to continue? Or would you consider larger potential deals? Scott Peyree: Yes. I mean, at this point in our cycle, I don't think we're looking at any sort of larger, like QuoteWizard size deals, to be bluntly honest. But I mean, yes, if there's -- if you think about and you look at our network, I mean, like one way you can look at it is what are the products and services -- financial products and services we are not offering right now. And is there a small company out there that's built something good that helps round out our services that we can like use the power of our remarketing and e-mail and SMS and call center like to really drive a lot of growth on one of those products. That is the type of thing we would be interested in. You look at something, hey, if someone has come up with something that is really unique on really improving the consumer shopping experience, that's probably something we would look at and be interested in. But yes, that's just kind of a high level of the types of companies we look at. Melissa Wedel: Okay. Appreciate that. And then finally, this is a small point. I think in the shareholder letter, there was a reference to some homeowner type insurance policies and also health. Just wondering if you could give us an update on where those categories fall in terms of sort of contribution to revenue. Obviously, auto is going to be the dominant one in insurance. I'm just curious where those have grown to. Scott Peyree: Yes. I'm actually glad you asked that because I actually made some notes because those are -- they kind of get hidden in the numbers, but those are really good stories for us as a company. And I'll take this opportunity to give a lot of credit to the teams at LendingTree that are working on those product lines. Our home insurance VMD is up 80% year-over-year. Home insurance is a hot, hot product for us. That's probably the biggest growth product we have in the company. And it's about 20%. I think it's just under 20% of our insurance business. So it's not a tiny piece. Health insurance is another great story. It's up 41% year-over-year VMD, and it's just over 10% of our insurance business. So that just hopefully gives you a high level of where those products are at. Operator: [Operator Instructions] I am showing no further questions at this time. I would now like to turn it back to Scott Peyree for closing remarks. Scott Peyree: Thank you, operator, and thank you, everyone, for your questions today. I look forward to speaking with you all on follow-up calls and in person at investor conferences in the near future. Have a great day. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Good afternoon, and welcome to First Solar's Third Quarter 2025 Earnings Call. This call is being webcast live on the Investors section of First Solar's website at investor.firstsolar.com. [Operator Instructions] And please note that today's call is being recorded. I would now like to turn the conference over to your host, Byron Jeffers, Head of Investor Relations. Please go ahead, sir. Byron Jeffers: Good afternoon and thank you for joining us on today's earnings call. Joining me are our Chief Executive Officer, Mark Widmar; and our Chief Financial Officer, Alex Bradley. During this call, we will review our quarterly results and share our outlook for the remainder of the year. After our prepared remarks, we'll open the line for questions. Before we begin, please note that some statements made today are forward-looking and involve risks and uncertainties that could cause actual results to differ materially from management's current expectations. We undertake no obligation to update these statements due to new information or future events. For a discussion of factors that could cause these results to differ materially, please refer to today's earnings press release and our most recent annual report on Form 10-K as supplemented by our other filings with the SEC, including our most recent quarterly report on Form 10-Q. You can find these documents on our website at investor.firstsolar.com. With that, I'll turn it over to Mark. Mark Widmar: All right. Good afternoon and thank you for joining us today. Beginning on Slide 3, I will share some key highlights from Q3 2025. Since our last earnings call, we secured gross bookings of approximately 2.7 gigawatts at a base ASP of $0.309 per watt, including 0.4 gigawatts of Series 7 modules impacted by previously disclosed manufacturing issues booked at an ASP of $0.29. We terminated 6.6 gigawatts of bookings under multiyear agreements defaulted on by affiliates of BP, a European oil and gas major at a base ASP of $0.294 per watt. As a result, total debookings since the last earnings call were approximately 6.9 gigawatts, and our current expected contracted backlog is approximately 54.5 gigawatts. We delivered a record 5.3 gigawatts of module sales and reported Q3 earnings of $4.24 per diluted share, both near the midpoint of our previous earnings call forecast. Gross cash increased to $2 billion, supported by improved working capital, new bookings deposits and accelerated customer payments ahead of the effective date for the new beginning of construction guidance. Alex will walk through our financial results in more detail later in the call. From a manufacturing perspective, we produced 3.6 gigawatts of modules in the third quarter, 2.5 gigawatts from our U.S. facilities and 1.1 gigawatts from our international operations. In Q3, we reduced production in Malaysia and Vietnam, primarily due to lower demand driven by the customer default previously mentioned. We continue to advance our domestic capacity expansion, notably at our Louisiana facility, where we initiated production runs and started plant qualification. We have also continued to pursue the enforcement of our intellectual property rights. During the quarter, we made 3 separate filings requesting that the U.S. Patent and Trademark Office, or PTO, deny petitions filed by affiliates of Canadian Solar, JinkoSolar and Mundra that seek to invalidate our U.S. TOPCon patents. Our filings include a reference to comments made earlier this year by the Acting Director of the PTO who stated, "the longer a patent has been enforced, the stronger and more settled the patent owners' expectations should be." We believe our ongoing vigorous enforcement of our decade-old U.S. TOPCon patents, which we consider fundamental to producing that technology is a prime example of a patent holder having settled expectations of the integrity of its IP rights. The view that module manufacturers and their customers and financing parties should strongly consider the potential hurdles of producing, selling or purchasing modules employing TOPCon cell technology is not one held just by us. For example, earlier this quarter, the CEO of ES Foundry explained that his company's decision to focus on manufacturing PERC technology was due, at least in part, to the "legal troubles that would be encountered by TOPCon producers." Lastly, we're pleased to continue building on our commitment to responsible solar, not simply by exceeding industry norms in sustainability and human rights, but by continuously improving on our own performance. Our Ohio facilities, which previously earned a silver rating in the Responsible Business Alliance's validated assessment program have progressed to a gold rating in its 2025 audit, which was completed this past quarter. Turning to Slide 4. I will now provide an update on our manufacturing operations. As it relates to our Alabama facility, 2 of our domestic glass suppliers faced manufacturing disruptions that limited our ability to operate at full capacity, which impacted Q3 production by approximately 0.2 gigawatts. The primary supply chain issue resulted from throughput limitations due to insufficient initial facility readiness at a new factory, while simultaneously a different supplier experienced unplanned downtime. Corrective actions have been implemented at both suppliers and our U.S. glass supply base is again positioned to meet our requirements. While now resolved, this resulted in a temporary shortage of cover glass supply to our Alabama facility, which led to reduced production and increased underutilization charges in the third quarter. Our Louisiana factory has initiated integrated production runs, started plant qualification and the early stage ramp is slightly ahead of expectations. We anticipate receiving required production certificates in Q4 and will begin shipment at that time. As it relates to our international capacity, we have previously indicated the implementation of the Reconciliation Act earlier this year as well as the evolving universal and reciprocal tariff environment could potentially support a business case to establish one or more lines in the U.S. to finish front-end production initiated within our international fleet. We have made the decision to establish a new production facility in the United States, allowing us to onshore the finishing of Series 6 modules initiated by the company's international factories. While the location is subject to final negotiations, we have -- with an announcement expected in the coming weeks, the planned capacity will be 3.7 gigawatts. Production will start at the end of '26 and ramp through the first half of 2027. As we previously noted, such an investment is expected to enable additional production in the U.S. market that we expect will be fully compliant with forthcoming FEOC guidance as well as improve the gross margin profile of our sales by reducing tariff charges and logistics costs associated with importing finished goods. Furthermore, we expect that the modules produced at this facility will provide domestic content points benefits for our customers and qualify for 45X module assembly tax credits. We continue to evaluate options for the remainder of our international Series 6 capacity, including options related to long-term U.S. market demand, U.S. market supply and the global tariff environment. Shifting to the current policy landscape. The U.S. policy and trade environment remains generally favorable. As we have long stated, one of First Solar's key competitive differentiators is the ability to provide certainty to our customers, both in terms of pricing certainty and the certainty of timing, producing, and delivering product. These attributes are particularly valuable in the U.S. solar market, where fiat-compliant suppliers who have domesticated their supply chains and localized their production capabilities provide the surest pathway to enable developers to realize tax benefits and to mitigate the exposure of project pro formas to both the imposition of tariffs and the risk to project schedules associated with relying on imported products. A number of trade and policy developments over the quarter amplified these competitive differentiators. In August, the U.S. Court of International Trade ruled that the Biden administration's 2-year suspension of circumvention-related antidumping and countervailing duties was unlawful, paving the way for possible retrospective duty payments on solar imports brought into the United States between June '22 and June of '24. Also during the quarter, the U.S. International Trade Commission issued a preliminary affirmative determination in an antidumping and countervailing duty case known as Solar 4, that imports of crystalline silicon cells and modules from India, Indonesia and Laos are causing material injury to the U.S. solar industry. In addition to a range of alleged illegal subsidies, the petitioners identified dumping margins of approximately 90% for Indonesia, approximately 247% for Laos and approximately 215% for India. Also during the quarter, U.S. Custom and Border Protection issued a notice of initiation of investigation and interim measures against an affiliate of Huawei Solar in response to a claim submitted by the American Alliance for Solar Manufacturing Trade Committee, of which First Solar is a member that Huawei has effectively transshipped Chinese solar cells and modules into the United States through India. In addition, we, together with the rest of the industry, are awaiting the results of the administration's 232 polysilicon and derivatives investigation including the potential for incremental tariffs impacting the crystalline silicon supply chain. From a policy perspective, the industry also awaits guidance from the administration related to project impacts from foreign entity of concern or FEOC procurement, which may be delayed as a result of the ongoing government shutdown. In short, there continues to be mounting headwinds or uncertainties for U.S. developers associated with procurement dependent on Chinese crystalline silicon supply chain, which we believe enhances the value proposition of our vertically integrated production capabilities. It also validates our approximately $4.5 billion investment strategy of expanding our U.S. manufacturing production and reshoring supply chains, which began under the first Trump administration and continues through the current Trump administration with our most recent facility currently ramping in Louisiana and the announcement of our new U.S. finishing line. This activity places us uniquely at the intersection of several of the administration's key priorities, including those related to domestic manufacturing job creation, American energy and energy affordability and serving among the generation solutions that enable the U.S. to win the artificial intelligence race against China. Turning to India. Since our last earnings call, there have been several notable policy deployments. First, significantly, the application of tariff rate for imports of finished modules into the U.S. was increased to 50%. We continue to monitor dialogue between the U.S. and Indian government related to a potential bilateral trade treaty, easing of tariffs between the 2 countries. As it relates to the country's domestic market, the Indian government continues to promote its domestic renewable energy value chain by progressively including cells in the remit of the approved list of models and manufacturers under a recently announced LIST-II. Inclusion in list becomes mandatory for solar OEMs to sell into key segments of the domestic market effective June of '26. Notably, First Solar was automatically qualified in this list, which was released in August of '25. The Indian government also released stakeholder consultation in September of '25 related to a further extension of the ALMM regulations to include domestically made wafers for potential deployment after June of 2028. Once again, First Solar's India's production is expected to automatically qualify. We anticipate that these regulations will progressively strengthen our position in the Indian market by leveling the playing field. I'll now turn the call over to Alex to discuss shipments, bookings, Q3 financials and guidance. Alexander Bradley: Thanks, Mark. Beginning on Slide 5. As of December 31, 2024, our contracted backlog totaled 68.5 gigawatts valued at $20.5 billion or approximately $0.299 per watt. Through Q3, we recognized 11.8 gigawatts in module sales and recorded gross bookings of approximately 5.1 gigawatts. This included 4 gigawatts booked between the enactment of the reconciliation bill in early July and the September 2 effective date for the new commenced construction guidance. Since our last earnings call, we had gross bookings of 2.7 gigawatts and an average selling price of $0.309 per watt. This includes approximately 0.4 gigawatts of Series 7 modules impacted by previously disclosed manufacturing issues booked at an ASP of $0.29 per watt. The remaining bookings, 2.1 gigawatts were sold into the U.S. market at a blended ASP of $0.325 per watt. As a reminder, a significant portion of our contracted backlog includes pricing adjustments that may increase the base ASP contingent upon achieving specific milestones within our technology road map by the time of delivery. Accordingly, the ASPs presented exclude potential adjustments related to module bin, freight overages, commodity price fluctuations, committed wattage, U.S. content volumes and tariff changes. Our recent bookings scheduled for delivery in periods where such milestones could be met, the potential value is reflected in our backlog as an opportunity rather than the base ASP represented. And for example, among recent bookings, we secured a 0.6 gigawatt order for 2027 delivery at an ASP of $0.316 per watt with the potential for an incremental $0.046 per watt contingent on achieving specific milestones within our technology road map. Demand in the U.S. remains strong. However, we recorded full year debookings totaling 8.1 gigawatts as of September 30, including 6.9 gigawatts in the third quarter. The majority of these were driven by contract terminations with affiliates of BP, which accounted for 6.6 gigawatts. Note, aside from the contract terminations with the BP affiliates, a number of other terminations were for project-specific reasons as opposed to reflecting customer pivots from solar project development generally. For example, our Q3 bookings include volume expected to be delivered to a customer who terminated a project in 2024, but is recommitted to solar development in 2025, continues to source its module supply with First Solar. In addition, we're currently in active negotiations for the procurement of new volume with another customer who previously terminated a contract with us for a specific project of theirs earlier this year. In both cases, these customers satisfied their termination payment obligations. In prior calls, we highlighted the emerging risk of a strategic shift concerning multinational oil and gas and power utilities companies, particularly those based in Europe, with some moving away from renewables project development and back towards fossil fuel investments. On September 30, First Solar filed a lawsuit against BP Solar Holding LLC and its affiliate Lightsource Renewable Energy Trading following their failure to cure multiple breaches of contractual obligations. According to public reports published earlier in the year, BP has been looking to divest its interest in its renewable's development arm. Despite agreements to purchase approximately $1.9 billion or 6.6 gigawatts of solar modules, these BP affiliates did not meet required payment obligations or provide required payment security. After issuing default notices and providing opportunities to cure, we terminated the contract, which entitles us to approximately $385 million in termination payments. Of this amount, we've recognized $61 million in previously collected down payments as revenue. We're seeking monetary damages, which includes approximately $324 million in remaining termination payments, along with certain other receivables for solar modules previously delivered and interest. And if realized, the $324 million we recognized as revenue. We were ready, willing and able to continue fulfilling our contractual obligations to these BP affiliates and are disappointed that we must resort to litigation. The modules that are subject to the contract breach are a mix of domestic and international product, most of which were scheduled to be produced in Q3 and future quarters with deliveries expected to extend into 2029. We're working to address the planned allocation of module inventory that could have been delivered to the BP affiliates, if not for their contract breach. With respect to such planned future module production, the market for these modules may be constrained by the U.S., Indian and European policy and market conditions discussed on the February earnings call and that has since been further exacerbated in the U.S. with our traditional utility-scale customer experiencing transmission and permitting related challenges in large part due to the constraints reflected in the July Department of Interior memo related to renewables project development, the ongoing government shutdown and the impact of tariffs. Note these same factors, which are further exacerbated by the breach of contract to these BP affiliates given our loss of contracted offtake for the product may drive further underutilization charges being realized in 2026 as it relates to our Southeast Asian production facilities for the planned module volume expected to be delivered to these BP affiliates. As a result, our quarter end contracted backlog stood at 53.7 gigawatts valued at $16.4 billion or approximately $0.305 per watt. And as of today, our total expected contracted backlog stands at 54.5 gigawatts, excluding any volumes sold after the end of the quarter. Moving to Slide 6. Our total pipeline of mid- to late-stage booking opportunities remain strong with bookings opportunities of 79.2 gigawatts and mid- to late-stage booking opportunities of 17.8 gigawatts. Our mid- to late-stage pipeline includes 4.1 gigawatts of opportunities that are contracted subject to conditions precedent. As a reminder, signed contracts in India will not be recognized as bookings until we received full security against the offer. I'll now cover our third quarter financial results on Slide 7. We recognized 5.3 gigawatts of module sales during the quarter, including 2.5 gigawatts from our U.S. manufacturing facilities. Our net sales totaled $1.6 billion, representing an increase of $0.5 billion compared to the prior quarter. This increase was primarily driven by higher shipment volumes and the anticipated back-weighted profile of deliveries over the course of the year. Our sales included $81 million in contract termination payments with $61 million related to the contract breached with the BP affiliates. This amount was recognized from existing cash deposits. Gross margin for the quarter was 38%, a decrease from 46% in the prior quarter. This decrease was primarily due to a lower mix of modules sold from our U.S. manufacturing facilities, which benefit from Section 45X tax credits. Additionally, we incurred higher underutilization costs due to continued production curtailments in Southeast Asia, the BP affiliates termination and glass supply chain disruption at our Alabama facility. As an update on warranty-related matters, we've resolved certain obligations and advanced negotiations with additional customers regarding manufacturing issues affecting select Series 7 modules produced prior to 2025. Based on our settlement experience, the estimated number of effective modules and projections of probable remediation costs, we believe a reasonable estimate of potential future losses will range from approximately $50 million to $90 million. Within this range, we've recorded a specific warranty liability of $65 million, an increase of $9 million from our prior estimate, representing our best estimate of expected future losses associated with these manufacturing issues. As of the end of the third quarter, we maintained approximately 0.6 gigawatts of potentially impacted Series 7 inventory, including 0.2 gigawatts under contract and included in our backlog. SG&A, R&D and production start-up expense totaled $145 million in the third quarter, an increase of approximately $6 million compared to the second quarter. This increase was primarily driven by start-up costs associated with the accelerated ramp-up of our Louisiana facility, aimed at providing resiliency to our U.S. production for the year. Operating income for the quarter was $466 million, which included $138 million in depreciation, amortization and accretion, $49 million in ramp and underutilization costs, $37 million in production start-up expense and $7 million in share-based compensation. Nonoperating income resulted in a net expense of $6 million in the third quarter, representing a decrease of approximately $4 million compared to the prior quarter. This was primarily driven by higher interest income as a result of an increase in investable cash, cash equivalents and marketable securities. Tax expense for the third quarter was $4 million compared to tax expense of $10 million in the second quarter. This decrease in tax expense was primarily driven by a $19 million discrete tax benefit associated with the acceptance of a filing position on an amended tax return in a foreign jurisdiction, partially offset by higher pretax income. This resulted in third quarter earnings of $4.24 per diluted share. Turning to Slide 8, I'll discuss select balance sheet items and summary cash flow information. At the end of Q3, our total cash, cash equivalents, restricted cash and marketable securities stood at $2 billion, an increase of approximately $0.8 billion from Q2, driven by improved working capital, new bookings deposits and accelerated customer payments ahead of the effective date for new beginning of construction guidance. As disclosed in our Form 8-K on October 20, 2025, we executed 2 Section 45X tax credit transfer agreements totaling up to $775 million in tax credits, a fixed agreement for the sale of $600 million in tax credits at a purchase price of $573 million payable by year-end and a variable agreement for sale of up to $175 million in tax credits with payment expected in Q1 2026. These transactions highlight the liquidity of the 45X credit market and strengthen our near-term liquidity to support our technology road map and expansion priorities. Accounts receivable decreased sequentially driven by higher cash collections. At quarter end, total overdue balances were approximately $334 million, including a deferred payment settlement of $93 million with a customer, for which interest payments remain current. In addition, we have approximately $70 million in uncollected receivables related to termination payments. We currently have $82 million in accounts receivable for delivered modules that are aged and past due with the aforementioned BP affiliates. This does not include any additional anticipated proceeds from potential recoveries associated with the breach of contract. Although termination payments remain contractually due, these balances are expected to persist pending the resolution of arbitration and litigation. In all instances of contract termination, we're actively pursuing all available remedies, including arbitration and litigation to enforce our contractual rights and recover amounts owed. Deferred revenue increased by $395 million, primarily due to accelerated customer payments ahead of the effective date for new beginning of construction guidance, partially offset by revenue recognized from delivered modules and termination payments. Capital expenditures totaled $204 million in Q3, mainly driven by investments in our Louisiana facility, where we initiated production runs and started plant qualification. As a result, our net cash position increased by approximately $0.9 billion to $1.5 billion. Before addressing our updated guidance, I'd like to revisit the policy and trade environment that shapes our operational decisions throughout the year. These evolving dynamics influenced our strategy, impacted quarterly performance and informed our adjustments to forward guidance. Our 2025 shipment profile required sustained production to fulfill contractual commitments concentrated in the second half of the year amid significant trade and tariff uncertainty. During this period, we navigated a range of potential tariff scenarios, customer negotiations and regulatory developments, including Section 232 actions, FEOC restrictions and AD/CVD investigations. At one point, we managed 2 possible tariff regimes, a continuation of a 10% universal tariff or adoption of reciprocal tariffs initially set at 26% for India, 24% for Malaysia and 46% for Vietnam, later amended to 50%, 19% and 20%, respectively. Our strategy has been to maintain sufficient capacity to fulfill international module commitments and to actively pursue tariff recoveries from customers, at the same time as temporarily curtailing or idling capacity and recording underutilization in circumstances where tariff recovery was unlikely and module sale economics would be challenged. The upper end of our prior guidance assumes sustained production with partial tariff recoveries, whereas the lower end reflected risk by termination-related impacts, including additional underutilization costs and margin erosion from terminated contracts. Three significant updates drive our revised guidance ranges today. Firstly, the decision announced today to establish a new 3.7 gigawatts U.S. production facility, enabling us to onshore finishing for Series 6 modules initiated by our international fleet will result in approximately $330 million of total program direct spend, including approximately $260 million of capital expenditures and approximately $70 million of non-capitalized expense associated with equipment de-installation, cleaning, packaging, shipping, import tariffs and reinstallation. Of this, we expect an incremental $26 million of CapEx and $2 million of production start-up expense in 2025. In addition, we forecast approximately $10 million of incremental indirect charges in 2025 associated with this decision, including severance and asset impairment expenses. As previously noted, we continue to evaluate options for our remaining Malaysia and Vietnam facilities. Today's guidance excludes any additional costs associated with potential restructuring charges or asset impairments that may impact 2025 or future operating results. Secondly, as it relates to the termination of contracts with affiliates of BP, the loss of gross margin assumed in 2025 was largely offset by the termination payment recorded in Q3. Increased underutilization expenses from reduced plant throughput as we curtail production given this termination of demand were incorporated in the low end of our guidance range. Thirdly, as previously discussed, simultaneous incidents at 2 of our glass suppliers led to a shortage of glass available at our Alabama facility in Q3. This reduced full year production by approximately 0.2 gigawatts, resulting in a reduction to gross margin and Section 45X tax credits and increased underutilization costs. Turning to Slide 9. I'll now outline the key updates to our 2025 guidance ranges, which incorporate the cascading impact of our third quarter operational and financial results. Our net sales guidance is projected at $4.95 billion to $5.20 billion, reflecting a downward revision of approximately 0.5 gigawatts from the top end of our prior guidance. This adjustment primarily reflects reduced international volumes sold due to customer terminations, partially offset by termination payments as well as 0.5 gigawatt reduction in assumed domestic India sales following the midyear redirection of India product from the U.S. market to the domestic book and bill market, driven by the high tariff for imports into the U.S. Additionally, U.S. manufactured volumes sold is expected to decrease 0.2 gigawatts at the high end of the guide as a result of Q3 glass supply constraints at our Alabama facility, partially offset by 0.1 gigawatts at the low end by expected increased supply from our Louisiana factory. Gross margin is expected to be between $2.1 billion and $2.2 billion or approximately 42%. This includes approximately $1.56 billion to $1.59 billion of Section 45X tax credits and $155 million to $165 million of ramp and underutilization costs. The bottom end of our previous guide has increased significantly due to further curtailment of our Southeast Asia manufacturing capacity following the contract terminations by affiliates of BP. SG&A and R&D combined expense is expected to total $425 million to $445 million and total operating expenses, which include $90 million of production start-up expense, are expected to be between $515 million and $535 million. Operating income is expected to range between $1.56 billion and $1.68 billion, implying an operating margin of approximately 32%. This guidance includes $245 million to $255 million in combined ramp, underutilization and production start-up expense as well as approximately $1.56 billion to $1.59 billion in Section 45X tax credits, net of the anticipated discount associated with the sale of these credits. This results in a full year 2025 earnings per diluted share guidance range of $14 to $15. In summary, the upper end of our EPS guidance range is reduced by $1.50 per diluted share. This includes approximately $0.60 per share from the supply chain impacts at our Alabama facility, which resulted in increased underutilization costs and lower volumes sold. Contract termination by BP affiliates reduces EPS by another approximately $0.60 per share due to increased underutilization costs and lower volumes sold, partially offset by termination payments. The remaining $0.30 per share is a combination of reduced India volumes sold, increased production start-up expense, finishing line costs and warranty expense, partially offset by non-BP affiliate termination payments and decreased full year tax expense. Capital expenditures for 2025 are now expected to range between $0.9 billion and $1.2 billion. Our year-end 2025 net cash balance is anticipated to be between $1.6 billion and $2.1 billion. Turning to Slide 10, I'll now summarize the key messages from today's call. Despite some near-term headwinds, we continue to believe that our integrated domestic manufacturing platform and reshored domestic supply chain position us for long-term success. We're building a new 3.7 gigawatts capacity module finishing line in the U.S., which is expected to begin production in Q4 of 2026 and ramp into the first half of 2027. We delivered a record 5.3 gigawatts of module sales, and our Q3 earnings per diluted share came in above the midpoint of our guidance range at $4.24 per share. We saw an improvement in our gross cash position to $2 billion and recently executed agreements to sell additional Section 45X tax credits, which we expect to further enhance our liquidity position. We've revised our full year guidance to reflect the impact of third-party glass supply chain disruptions as well as the termination of 6.6 gigawatts of volume by affiliates of BP which we recognize a partial termination payment and a filed a lawsuit for damages for breach of contracts. With this, we conclude our prepared remarks and open the call to questions. Operator? Operator: [Operator Instructions] The first question comes from Philip Shen, ROTH Capital Partners. Philip Shen: First one is on the 6.6 gigawatts of termination with BP. Just want to check in on whether or not in terms of rebooking this volume, it sounds like it's volume from '26 through '29. What kind of incremental pricing do you think you can get for this? Would you expect these bookings to get locked in following the Section 232 tariff announcement, which should be near term. So sometime in Q4, Q1? And then -- or do you think you might wait until things settle down post 232? And then the second question is tied into this as it relates to the 232, is there room for negotiation you think with any of your fixed price contracts that you have out there where they may not have been accounted for in terms of this new tariff. So just curious if you can share some color on that as well. Mark Widmar: Yes, Phil. Look, I mean, now with the termination, we clearly are going to be engaging, looking, given our overall pipeline of opportunities to figure out the right opportunities for this volume in the respective windows that it was anticipated to be delivered. We will continue to be very patient in that regard. Assuming we can get good prices. Like if you look at the one deal that Alex included in his prepared remarks, the base price plus the CuRe adders gets that number into a little bit north of $0.36, close to $0.365. And I think that's a number that we would continue to look to engage. But at this point in time, I think there's other catalysts that could put a little bit more momentum behind that pricing as well, especially with the 232, as you referenced, and there's still obviously FEOC guidance that's going to continue to be provided as well. So a lot of insights or information that still is valuable to us to gain. If we can get good pricing, we'll continue to layer on some volumes into the years that we currently have available supply. But I think the value of being patient here is going to only work to our benefit in that regard. As it relates to the fixed price contracts, the value of certainty, I think, is what Alex indicated in his comments, and we said that many times before. The contracts are -- do not have latitude for something like a revised tariff environment that was not assumed at the time of the committed obligations that both parties assumed. So they do not allow openers for 232s as an example, but we still have capacity in the foreseeable future, especially through our international operations that we can use to engage the market and provide supply once we know the outcome of 232. But yes, the existing contracts that are on the books right now, those are obligations for both parties, and we take that seriously. That's also why we took the position that we did with the Lightsource BP transaction and the termination and enforcing our contractual rights. We worked, as we indicated in our prepared remarks, to try to get to an outcome that would be beneficial for both parties. We couldn't get there. So we had to enforce the contract. And we hold ourselves accountable to that as well. We have contracts and obligations to deliver. Pricing is fixed for certain respective adders and would not include tariff-related outcome or any other adjustments that were a result of the 232s that are being currently under investigation. Operator: The next question today is Brian Lee from Goldman Sachs. Brian Lee: I guess, first, I just want to make sure I interpret this correctly. It sounded like, Mark, you're saying given the adders, indicative pricing, $0.36, $0.365 per watt, that's maybe kind of the level of entitlement you think you'll ultimately settle at once this game of patience evolves to, to when you really engage in pricing discussions post FEOC and 232. And then the second question, just on the 3.7 gigawatts finishing line, great to hear on that. But is the CapEx all being spent this year? And then maybe high-level thoughts around just expanding that. Why not simply do a full 7 gigawatts plus to cover both the Vietnam and Malaysia volume capacity? Mark Widmar: Yes. So Brian, I think as you summarize what I said to Phil, I think that's the objective of where we'd like to ultimately see, especially with the -- on the other side of understanding of FEOC and the 232. That's kind of the entitlement that we would expect with -- especially for the new technology and the value add that we provide through CuRe. So I think you summarized that well. I'll let Alex talk to the CapEx. But before that, as it relates to where we are right now is 3.7 gigawatts, one of the things that we do want to try to keep measured is the finishing line will bring with it domestic content, right? But it's not going to bring the entire value stack of domestic content that we capture through our production in Perrysburg. The front-end semi-finished product that comes into the U.S., obviously, by definition, will not value -- not create domestic content value. So what we're trying to do is keep that throughput pretty much balanced so we can continue to blend. So even that contract that I referenced with the adders that got into the mid-36, that was still a blend of international and domestic. And so we think that by keeping that balance, it allows us to realize the highest potential value for that finishing line. So that's where our head is right now, 3.7 gigawatts kind of balances very well with the production that we have in Perrysburg, which is north of 3 gigawatts as well. We'll continue to evaluate whether there's an opportunity to bring more into the U.S. using the front-end capacity we have internationally. We'll have opportunities to better reassess that once we understand the outcome of 232 in particular and the FEOC guidance that we're looking forward to, and we'll make that decision at that time. Alexander Bradley: And Brian, just on the spend. So what we said is about $330 million of direct spend. Of that $260 million is CapEx. And of that $260 million, we'll spend about 10% of it this year, so $26 million. The remainder will be spent in 2026. The other $70 million, so $260 million of CapEx, $330 million of total spend, the other $70 million is non-capitalizable spend. So that's going to be decommissioning of the current tools, taking them out, cleaning, packing them, the freight to get them to the U.S., some tariff on the import, reinstallation. So all of that will be expensed versus capitalized. Of that $70 million, we're only forecasting spending about $2 million this year. The rest will come in 2026. There is some incremental charge that will hit this year. We said about $10 million. That's indirect associated with what we're doing. So it's not part of $330 million. That's some severance for some associates that will be impacted in Southeast Asia. And then there'll be some equipment write-off as well. There may be more associated with that in 2026, and we'll give you more color on that when we guide for next year. Operator: Your next question comes from Moses Sutton from BNP Paribas. Moses Sutton: In the past, Alex, you delineated, I think, 85% of either gigawatts or customers were in like a true take-or-pay structure contractually and 15%, maybe it was 16%, were supported by the nonrefundable deposits or termination fees. Was BP in the latter bucket, hence, the 20% that you're going after and litigating for that. Given BP is over 10% of the backlog or was at least, I would assume that they weren't in the take-or-pay bucket. But I just want to confirm and if you can comment on which bucket they are, and can you update how firm the rest of the contracts are? I think it would be a good time to give a mark-to-market on that. Alexander Bradley: Yes. So when you say take-or-pay, I think maybe what you're referring to is termination for convenience potentially. And so correct me if I'm wrong, but if you're referring to that piece, then the BP contracts were not contracts that had an ability to terminate for convenience. So they had no ability to exit those contracts. Now if they had wanted to cancel, they could have certainly worked with us. We would have had a discussion as potentially a solution we could have come to. But as Mark said, unfortunately, despite working with them for a long period of time, they chose to default on these contracts. We did have some cash deposits from them, and that's the piece that we recognize as revenue associated with the termination. We also had some LCs. Generally, that was going against some of the accounts receivable that we had outstanding. So we have pulled those LCs as well. And then the residual is generally parent guarantees, and that's the piece that we will be litigating to recover. Operator: The next question comes from Jon Windham, UBS. Jonathan Windham: Just a quick point of clarification, and then I'll get on to my real question. Was the cancellation related to BP, was that all from international factories? Alexander Bradley: No, it was a mix of products, both international and domestic. Mark Widmar: The supply -- just clear on this, the current year supply was essentially all international. So it was a mix. But the -- again, the contract goes out multiple years with delivery anticipated to go out through '29. So think of it as the front of that is mostly international. And as you get more longer-dated, it then transitions into domestic. Jonathan Windham: And then so thinking about it sort of net-net, is it half-half? How should we think about it? Mark Widmar: Yes. I mean it's more than half of it being domestic, but a very -- a significant chunk of it being international. Operator: Up next, we'll hear from Julien Dumoulin-Smith from Jefferies. Julien Dumoulin-Smith: Just following up a little bit on the earlier commentary about the CapEx. You suggested that maybe one or more lines. Can you elaborate under what conditions you would look to seek to open multiple new lines on the finishing front? And how you would think about that in terms of the sourcing front as well internationally? Mark Widmar: So just -- yes, it's also a distinction of how do we refine it. So right now, the -- there will be 2 lines in -- that we will be bringing into the U.S. for finishing. So there'll be 2 finishing lines, okay? And that is 3.7 gigawatts of capacity. We could bring more lines in, right? It doesn't have to be another 3.7 gigawatts. It could be effectively half of that to be another line, or we could potentially bring in 2 lines if need be. It's something that we're continuing to evaluate. There's enough front-end capacity to enable more finishing here in the U.S., obviously. A number of variables, number of items that we've already referenced will inform our decisions around that. We're very excited about getting the first 2 lines, which adds up to the 3.7 gigawatts capacity up and running here as we exit next year. And as we continue to evaluate market opportunities and demand, then we will form our decisions do we make additional investments and how do we bring those lines in, in terms of timing? And do we do just only 6? Or do we also look potentially to bring in Series 7 as well. Operator: Next up is Ben Kallo from Baird. Ben Kallo: Just following up, I think, on Brian's question earlier on pricing, the 4.1 gigawatts of opportunities confirmed but not booked. Can you talk anything about pricing there? And then with your cash balance, how do you think about that? Maybe, Alex, just the priorities of cash going forward over the next 2 years? I know there's a lot of uncertainty but thank you. Mark Widmar: Yes. On that 4.1 gigawatts, Ben, that's more I would -- historical, I would say, pricing. Some of that's India, that's contracted that we don't count as a booking until we received all the security. And some of that is kind of variable pricing dynamics that we have with customers effectively, they can flex up or down from their MSA, their module sales agreement. So I wouldn't say that that's really a reflection of kind of current market pricing. All I would say is that we're happy with the market pricing that we're seeing. We believe there could be additional tailwinds that could further support a very favorable pricing environment for us, and we'll continue to engage the market and react accordingly. Alexander Bradley: Yes. Ben, as it relates to cash, clearly, cash positions increased quarter-over-quarter. We saw some activity during that safe harbor window where we saw some volume that was 100% prepaid. Some of that was taken at the same time within the quarter, some not. So you saw the deferred revenue amount increase. We also had some improvement in the working capital position, which we talked about expecting to improve as we got further into the year. So an increase in cash, no doubt, we're announcing some more CapEx for next year. As Mark said, we'll continue to look at additional finishing lines and see if there's an opportunity there. But the overall framework we use to evaluate cash is one we've talked about before, it hasn't fundamentally changed around running the business day-to-day, looking at additional capacity, looking at M&A, especially as it relates to R&D. And then if we get to a point where we can't accretively deploy that capital, we'll look at capital return. We'll give a further update as we go into next year's guidance, how we think about capital structure longer term. Operator: David Arcaro from Morgan Stanley has the next question. David Arcaro: I was just wondering if you could give a little color on your confidence level in the 54.5 gigawatts backlog now. Are there other customers that you think could be at risk that you're aware of that you're risk weighting in there? Or any other market dynamics that make you think or customer-specific dynamics that make you think this debookings pace could continue or not? Mark Widmar: Yes. So we've been saying now for, I don't know, it could be going on close to 2 years now, something along those lines. There's been indications by a number of large oil and gas multinationals, international companies that are continuing to evaluate their commitment to renewables, right? And obviously, BP falls in that bucket. There's been others as well. Just think about NatGrid. NatGrid, obviously, a large European company that made a decision to sell down its development business going back to now Geronimo, sold it over to Brookfield. You could look at Enel as another example of a commitment to the U.S. market that had been reevaluated. Now I think they've changed their perspective in that regard. And there's a couple of others, which I won't name, but it's -- EDF is, I guess, maybe another one I would throw into that bucket a little bit. I mean it's not oil and gas, but obviously, a large European company that's reevaluating its commitment to the U.S. market. So there's -- obviously, that risk profile is something we foreshadowed. It's something that has played itself out. If you go back and if you look at what's in our contracted backlog, you can go back and look at announced deals that we've done, who some of our larger partners are, you're going to find that, that profile is dramatically different with what sits in our contracted backlog. Now having said that, I mean, we all know that a number of developers and IPPs here in the U.S. I mean, they're working through a number of challenges, right, and permitting issues and project-related issues and what have you that things could evolve in such a way that at a project level, we could potentially see some movement. We said in the call today, we had a couple of customers that have project-specific terminations, one of them who terminated last year project specific, and then now they're back on our order book for more than 0.5 gigawatt of volume. And then we had another one who terminated this year that we're actively negotiating a meaningful contract with. So I don't want to give an indication of there may not be further terminations. But I also want to somewhat reflect that I don't think something as large and structural as what we saw with Lightsource is a high risk. But at any point in time, things can evolve, things could change. A number of our partners have sponsor capital behind it. If Brookfield decides to go a different direction, if KKR decides to go a different direction, if TPG decides to go, Macquarie, I mean, you name whoever sponsor you want to say is behind a portfolio business, if they decide to pivot and go a different direction. I mean there's always an inherent risk in that regard. But what I would say is that while there's still challenges and issues that are being dealt with, there's an opportunity here. The policy environment, I think, is very -- still very positive with what came out of the One Big Beautiful Bill. There is a need for more electrons on the grid. The load profile is only going to continue to grow and project economics and PPAs are still strong, right? So I think those fundamentals, I think, still I would say it's enduring and that we would have a higher level of confidence in contracted offtake agreements that we have on our books right now. But I also want to be balanced in understanding that there could be some amount of risk. But I do think that on balance, there's a lot of market opportunity for our partners and obviously, for us to continue to supply into the market. Operator: Next up is a follow-up from John Windham, UBS. Jonathan Windham: Perfect. I wanted to ask about a topic we haven't covered much on this call is how the ramp in product quality is in Louisiana and Alabama. Can you just touch on how that's running next to expectations? Mark Widmar: Look, the ramp for DRT, I would say that it has gone well. It's an aggressive ramp that we've had -- sorry, Alabama referred to it by acronyms. It actually has gone well, but it's also had its own set of challenges that we've been working through in terms of the ramp process and getting to full entitlement and throughput. And where I see the factory at right now for Alabama, I see it at a very good level. It's hitting its throughput requirements. It struggled, as we indicated in our prepared remarks, with a disruption on our glass supply chain. And obviously, that had an adverse impact on the factory. Louisiana is going extremely well. We're in the midst of going through our product qualification and that will be complete here in Q4, and we'll start shipping product. And right now, the ramp is ahead of schedule, which is all very positive for us in that regard. As you said, I think you may have mentioned product quality and the like. We are continuing to do, as always, being very diligent as we manufacture our product and to ensure that we have a high level of indication of field performance based off of not only accelerated life testing, but obviously, field deployment as well. And it's something that our level of rigor and intensity around that is only going to continue to be more heightened as a result of the initial launch of Series 7. Again, that was the launch of a new product. In this case, both Alabama and Louisiana are just replications of the factories that we launched our Series 7 technology from. And the key learnings that we captured from that launch and some of the changes that we've already communicated that we needed to make to our manufacturing process, both were implemented into Alabama and Louisiana before we started production. But it's something we know with the reputation, it's a brand issue, we got to stay on top of it, and we're going to continue to do everything we can to meet our customers' expectations in that regard. Operator: The next question comes from Vikram Bagri from Citi. Vikram Bagri: Just a quick question. Mark, can you remind us of if there is a precedent of successful litigation against a customer who is in a similar breach of contract or this case with BP will set a precedent for future? Mark Widmar: Yes. I don't have my GC in the room right now because I could ask that question. But what I can tell you is that we are using outside counsel. We have -- we believe very strong contracts that enforce the rights and obligations of both parties. And we believe that if either of those parties are in default, and there's consequences associated with that. I would also use whether there's legal precedents, and I'm sure there are, while I can't cite them to you right now, what I would go back to is if you look at the -- I believe we've had a number across the last couple of years, somewhere in the range of north of $200 million, $250 million or so of various terminations. I think we've also disclosed that about $70 million is sitting outstanding, okay? That means that the vast majority of that -- those terminations were paid because the counterparties understood the obligations and the terms and conditions of the agreements, which are essentially identical across our contracts. And they have honored that obligation in respect of that obligation, and they've remitted payment. They would not have done that unless they thought -- if they thought that there was a reason why underneath the contract that they would not have an obligation to for solar -- for their default. So I can use 2 data points. One is just look at experience and the other is the input that we're getting from outside counsel around our contracts. And we feel very good about the contracts, the way they're structured and the enforceability of the contracts. And my understanding is that, again, this will be -- the filing of the litigation is in the state of New York. I think my understanding is the state of New York has taken a very strong position around this type of condition underneath the contract for default and associated with termination payment. And generally, the courts in New York have cited with the plaintiff in the situation of similar circumstances. So that's about as much information as I have. I do believe, though, we're in a strong position. Operator: Our final question today will come from Joseph Osha, Guggenheim Partners. Joseph Osha: As we think about the timing of the finishing fab coming up in the U.S. and what the commercial environment looks like, I'm wondering what conclusion we can draw about under-absorption of Malaysia and Vietnam next year. And perhaps to put a sharper point on that is, is there any market at all for products being shipped directly out of either of those 2 fabs? Mark Widmar: Yes. So one thing to remember is that we're using the front-end capacity of our international facilities in order to fund that into the U.S., right? And when you think about the cost structure and the absorption, especially around the capital intensity of the equipment, it largely sits on the front end of the processing. So you're going to see reasonably good absorption for that front-end manufacturing that then is finished in the U.S. We also identified that we have taken some headcount reductions. So we are minimizing the back-end processing of the labor associated with that. And then those tools that are being used in the back end are being brought into the U.S. So therefore, the depreciation there will be absorbed against the finishing processes that are being done here in the U.S. So just to put that in perspective. Yes, as it relates to the balance of that production, one of the things we're continuing to work through, and we are in negotiations with a couple of counterparties to almost do a bilateral for that offtake of that volume and to structure a deal around that so we can get to terms. We'd like to find potentially a couple of large customers with large offtake requirements that we can then sort of just sole source that into those opportunities. But clearly, we believe there is an opportunity subject to the tariff environment, subject to what happens with 232, subject to FEOC guidance and everything else. So there's some more triggering events that would have to happen. I think we said in our prepared remarks; we have something like 6 gigawatts of contracted backlog or something like that for Series 6 international still. So we've got some runway in terms of volume and absorption for those production assets, and then we'll continue to evaluate them as we learn more about some of these policy decisions that will be made. Operator: Everyone, that does conclude our question-and-answer session. This also concludes our conference for today. We would like to thank you all for your participation today. You may now disconnect.
Operator: Good day, and welcome to the SPS Commerce Q3 2025 Earnings Conference Call.[Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Irmina Blaszczyk, Investor Relations for SPS Commerce. Please go ahead. Irmina Blaszczyk: Thank you, Dave. Good afternoon, everyone, and thank you for joining us on SPS Commerce Third Quarter 2025 Conference Call. We will make certain statements today, including with respect to our expected financial results, go-to-market strategy and efforts designed to increase our traction and penetration with retailers and other customers. These statements are forward-looking and involve a number of risks and uncertainties that could cause actual results to differ materially. Please note that these forward-looking statements reflect our opinions only as of the date of this call, and we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Please refer to our SEC filings, specifically our Form 10-K as well as our financial results press release for a more detailed description of the risk factors that may affect our results. These documents are available at our website, spscommerce.com, and at the SEC's website, sec.gov. In addition, we are providing a historical data sheet for easy reference on the Investor Relations section of our website, spscommerce.com. During our call today, we will discuss adjusted EBITDA financial measures and non-GAAP income per share. In our press release and our filings with the SEC, each of which is posted on our website, you will find additional disclosures regarding these non-GAAP financial measures, including reconciliations of these measures with comparable GAAP measures. And with that, I will turn the call over to Chad. Chad Collins: Thanks, Irmina, and good afternoon, everyone. Thank you for joining us today. SPS Commerce delivered solid third quarter results across our core business despite ongoing macroeconomic uncertainty and continued spend scrutiny. Third quarter revenue grew 16% to $189.9 million and recurring revenue grew 18%. Our fulfillment business grew 20% year-over-year. The net increase of 450 customers exceeded our expectations in the quarter, primarily driven by strong retail relationship management programs. I'd like to take a moment to review the key dynamics that impacted our revenue recovery business, which came in approximately $3 million below our expectations in Q3. Firstly, we now recognize that there is more seasonality in this business than we had originally anticipated. In Q2, for example, we benefited from a higher-than-expected volume of shipped products related to Amazon Prime Day. Due to the seasonality effect in Q2 and the change in Amazon policy related to inventory capacity for third-party sellers, Q3 shipments came in below our expectations, which resulted in lower-than-forecast revenue recovery rates in the quarter. We've taken both of these factors into consideration in our updated outlook for that business. Revenue recovery is an important offering within our portfolio. It represents a $750 million addressable market across 1P U.S. sellers and a significant cross-selling opportunity within our network, where we're making progress and building momentum. In addition, we're pleased to report we completed our combined go-to-market strategy ahead of schedule, and we are now better positioned to unlock the full potential of this emerging product category. For example, Cyber Power Systems, a global manufacturer of power protection and management solutions, has partnered with SPS to modernize their business systems and processes since 2014. As a long-standing fulfillment customer, they recently engaged with SPS to drive further efficiencies across their supply chain, leveraging the revenue recovery solution for some of their key customers, including Amazon, Walmart and Home Depot. Having realized immediate benefits in ROI, Cyber Power Systems is evaluating other revenue recovery opportunities across their retail network. As we discussed at our Investor Day in September, SPS Commerce is well positioned to capitalize on the long-term growth opportunities driven by an ever-evolving retail ecosystem. Having made strategic acquisitions over the past two years to expand our product portfolio and market reach, we shared updates at Investor Day to address how our product strategy and our reimagined go-to-market motion have evolved to empower the kind of trading partner collaboration that enables supply chains to work like they should. We also hosted a broad cross-section of customers who provided their perspectives on why they chose to work with SPS and how we help them manage supply chain complexity to strengthen their trading partner ecosystems. Most importantly, you heard firsthand accounts of the return on investment that comes from partnering with SPS, such as driving greater operational efficiency and fueling business growth. An example of a recent partnership is Petco, a pet retailer who operates over 1,500 locations in the U.S., Mexico and Puerto Rico, providing both in-store and online omnichannel services. Leveraging SPS' retailer management solution, Petco transitioned over 700 suppliers to standardized digital supply chain requirements. As a result, the retailer reduced manual data reconciliation across merchandising and supply chain teams, delivered measurable efficiency gains and improved trading partner performance tracking. To summarize, despite the spend scrutiny we are experiencing this year across some of our customer groups, we believe the ever-evolving retail ecosystem will continue to drive the need for supply chain efficiencies. With our data-driven solutions, SPS Commerce is competitively positioned to improve collaboration between trading partners. We are the industry's most broadly adopted retail cloud services platform and the world's leading retail network. We provide unmatched value in the data that powers AI-driven use cases and a unique network-led growth motion. Before we dive into our financial results, I'd like to take a moment to share an important leadership update. After nearly 10 years with SPS Commerce, Dan Juckniess, our Chief Revenue Officer, has decided to retire. He will remain with the company through the end of the year to ensure smooth transition. Dan helped shaped SPS' modern go-to-market organization, growing the sales team in both size and strength. On behalf of SPS Commerce, I wish him all the best in retirement. In addition, I'm excited to share that Eduardo Rosini will be joining the SPS Commerce team as Chief Commercial Officer starting December 1. In this new role at SPS, Eduardo will strengthen our commitment to total customer relationship, maximizing the entire customer life cycle from acquisition to onboarding, retention and expansion and ensuring we deliver consistent, intentional and customer-first experiences around the world. As SPS continues to scale, this evolution helps us deepen relationships, maximize customer value and stay aligned with how global customers view their partnerships with one trusted full-service connection. Eduardo brings more than 30 years of growth, go-to-market and full customer life cycle experience across industries and markets, most recently serving as Chief Growth Officer at Sage, VP of Mid-market and Corporate Sales at Intuit and in large-scale commercial leadership roles at Microsoft, operating in North America, South America, EMEA and APAC. His experience leading global organizations, paired with his passion for people and obsession with customers, make him an ideal fit for SPS' next phase of growth. And with that, I'll turn it over to Kim to discuss our financial results. Kimberly Nelson: Thanks, Chad. We reported a solid third quarter of 2025. Revenue was $189.9 million, a 16% increase over Q3 of last year and represented our 99th consecutive quarter of revenue growth. Recurring revenue grew 18% year-over-year. The total number of recurring revenue customers in Q3 was approximately 54,950, an increase of 450 from the prior quarter. ARPU was approximately $13,300. For the quarter, adjusted EBITDA increased 25% to $60.5 million compared to $48.4 million in Q3 of last year. We ended the quarter with total cash and investments of $134 million and repurchased $30 million of SPS shares. In addition, the Board of Directors has authorized a new program to repurchase up to $100 million of common stock, which becomes effective on December 1 this year and is expected to expire on December 1, 2027. We expect to fully utilize the current program before its termination on July 26, 2026. Before we dive into guidance, I'd like to highlight the factors currently shaping our fourth quarter and 2025 outlook. First, a continued impact to our revenue recovery business resulting from the dynamics Chad laid out in his prepared remarks. Second, ongoing invoice scrutiny and delayed purchases affecting spend across our fulfillment customers. Lastly, across retail relationship management programs, several large enablement campaigns were pushed from Q4 into the first half of 2026. As a result, we expect a decline in onetime revenue from testing and certification fees associated with these programs. Now turning to guidance. For the fourth quarter of 2025, we expect revenue to be in the range of $192.7 million to $194.7 million, which represents approximately 13% to 14% year-over-year growth. We expect adjusted EBITDA to be in the range of $58.8 million to $60.8 million. We expect fully diluted earnings per share to be in the range of $0.53 to $0.57 with fully diluted weighted average shares outstanding of approximately 38.3 million shares. We expect non-GAAP diluted income per share to be in the range of $0.98 to $1.02 with stock-based compensation expense of approximately $15 million, depreciation expense of approximately $5.8 million and amortization expense of approximately $9.5 million. For the full year 2025, we expect revenue to be in the range of $751.6 million to $753.6 million, representing approximately 18% growth over 2024. We expect adjusted EBITDA to be in the range of $229.7 million to $231.7 million, representing growth of approximately 23% to 24% over 2024. We expect fully diluted earnings per share to be in the range of $2.31 to $2.34 with fully diluted weighted average shares outstanding of approximately 38.1 million shares. We expect non-GAAP diluted income per share to be in the range of $4.10 to $4.15 with stock-based compensation expense of approximately $58.3 million, depreciation expense of approximately $21.1 million and amortization expense for the year of approximately $37.1 million. For the remainder of the year, on a quarterly basis, investors should model approximately a 30% effective tax rate calculated on GAAP pretax net earnings. Additionally, as a result of the dynamics that are impacting our customers and retail partners this year, we are providing our initial outlook for 2026 and expect to deliver revenue growth without future acquisitions of approximately 7% to 8%. We continue to expect adjusted EBITDA margin expansion of 2 percentage points, driven by continued improvement in gross margin and operating efficiencies. Longer term, we remain confident in our competitive position and market opportunity and our ability to deliver at least high single-digit annual revenue growth without acquisitions and 2 percentage points in annual adjusted EBITDA margin expansion. And with that, I'd like to open the call to questions. Operator: [Operator Instructions] Our first question comes from Scott Berg with Needham. Scott Berg: So I've got a multipart revenue recovery question here. I guess we're all going to have the same questions on this one is, try to help us understand, I guess, when this became apparent in the quarter that the seasonality was a little bit different than you had expected Chad. And as I think about that business going forward, I thought the seasonality in that business was supposed to be stronger in Q4, but it looks like you're reducing your fourth quarter revenues by roughly $6 million, likely all attributed to that business. And then as the natural extension of that is how do we think about that business as impact on that fiscal '26 initial guidance Kim just gave? Chad Collins: Yes, sure. Thanks, Scott. Let me speak maybe to the visibility and how that developed and let Kim speak to the outlook going forward. I'd say late in Q3, we did pick up that the volume of shipments that our customers were sending into Amazon warehouses were a little bit lighter than expected. In many cases, that can be a leading indicator to revenue that will develop, but I would say not necessarily in all cases. Unfortunately, as we closed out the quarter, we did see a correlation in that reduction of shipments into Amazon warehouses from our customers did result in less revenue than expected. So the shipment visibility kind of became apparent pretty late in Q3, and we really didn't understand the full impact to revenue until we close things out after the quarter ended. Kimberly Nelson: And then when you think about the expectations that we have for the remainder of the year, when you think about the Q4 guidance that we just provided and the variance from that versus the implied Q4 guidance from a quarter ago, the impact on the revenue recovery in that, you should look at that similar as Q3. So there were three sort of dynamics that I highlighted that went into that, one of them being the revenue recovery, and that component was about similar impact in Q3 and Q4. Then the other two components were a continuation of where we're seeing some invoice scrutiny and delayed purchase decisions as well as some of those retailer enablement campaigns or relationship management campaigns we were initially thinking were going to happen in Q4. Now those are happening in 2026. And as such, the impact to the P&L in Q4 would be most notable on that onetime revenue of testing and certification just because of the timing of how the subscription revenue works, more of that would show up negatively on the testing and certification in the quarter. Scott Berg: All right. Understood. I guess from a follow-up question, I saw that Dan is leaving. Good luck, Dan. It's been fun working with you, is new Chief Commercial Officer coming in. I guess questions there revolve around what would you expect this new individual to do differently, if anything? I see his background has been not at one, but at two ERPs that you all certainly partner with today for customers with tightly at least. And just trying to help understand what we might see maybe differently going forward, if anything. Chad Collins: Yes. So let me start with what I think will stay the same, but continuing to improve over time. And that's, first, our differentiated go-to-market that we have with retailer relationship management, where we partner with the retailers to help them establish all their digital connections, that in turn, uncovers suppliers for us and is the largest source of new customers for us. We've been refining that approach at SPS Commerce for 20 years, and I expect we'll continue to refine that approach for the next 20 years, and it will be great to have Eduardo partner on continued refinements to that, but I expect that will continue. I also expect that our channel go-to-market where we work with a lot of mid-market ERPs will absolutely continue and very excited to what Eduardo can bring to that, which I think will just be a further advancement of that strategy. Yes, he's worked with a couple -- at a couple of ERP companies that we do partner with, but his whole career has been utilizing a lot of channel to drive mid-market sales, which very much lines up with our business. I think in terms of what may evolve over time that Eduardo will be able to bring us, we'll be really maximizing that expansion and cross-sell motion that we have with existing customers and managing that full life cycle that we have with customers. We've been quite clear that we believe as our product portfolio expands, the opportunity to increase ARPU is probably going to be the faster growing in our growth algorithm between net new customers and ARPU increases. I think Eduardo's background is really going to help us with that. And then as we become a more global organization and continue with our efforts to expand in Europe, Eduardo certainly brings operating experience across multiple cultures and multiple continents and multiple geographies that I think will help us with that continued growth. Operator: And the next question comes from Chris Quintero with Morgan Stanley. Christopher Quintero: A lot of moving pieces here. We just went over the revenue recovery piece. But maybe on the organic side, you all called out invoice scrutiny and some of those retail go-to-market programs getting pushed into next year. So just to clarify, are those incremental impacts that you're seeing this quarter versus the last quarter? And why are some of those projects getting pushed out into next year? Kimberly Nelson: Sure. So specific in Q3, Q3 hit our expectations on both of those. The color that I was providing was specific to Q4 and two dynamics in there. So as it relates to 90 days ago, what we were anticipating for the quantity of retail relationship programs and the timing of those programs, that has changed. So instead of many of those happening in Q4, they're now happening earlier in 2026. So the impact there is on the P&L in 2025. They're not lost programs. It's just the timing of when those are going to happen. Now in some cases, if you think about Q4, it's a really busy time, holiday season. And so it's possible that maybe some of those retailers were a little bit more optimistic of what they thought they would be able to accomplish in Q4. And in those cases, some of those now are just getting moved into '26, primarily due to the holiday season. And then the second part of that, as it relates to the invoice scrutiny delayed purchase decisions. Again, we hit on that expectation in Q3, but we're starting to see some signs that, that's still continuing on. And in light of that, we wanted to also add that continuation at a little bit higher factored into our updated guidance. Christopher Quintero: Got it. Okay. So some of the retailers maybe got a little bit over their skis on their expectations for Q4, I guess. As my follow-up, maybe on the network-led growth motion. I know we talked a lot about it at Investor Day, but is there anything you all need to do from an investment standpoint to make that successful? And is there any kind of early evidence that you're seeing how that's progressing or any kind of early proof points? Chad Collins: Yes. I mean we are making investments in this area. I wouldn't describe them as incremental investments to achieve what we want here, more just where we're focusing our team's attention, and we're having great success. So I think a great example of how this is working is like in revenue recovery, where we're able to get based on the network data, the volume that our customers have trading with certain retail partners where we provide revenue recovery and immediately identify that they are a highly qualified candidate for that revenue recovery solution and automatically serve that up as a leader opportunity to the expansion salesperson that's responsible for that customer so they can engage with them about the benefits they receive from revenue recovery. That type of motion and triggering it off the network is sort of up and running, and we look forward to continuing to scale that and using that to drive more cross-selling activity. And that's just one example. There's multiple examples where we can identify opportunities right from the network data for further expansion in our customers. Operator: And the next question comes from Matt VanVliet with Cantor. Matthew VanVliet: Obviously, across a lot of the software landscape on the application layer, there's a concern that toolkits from various AI tools and LLM providers are enabling more companies to look internally to maybe build functionality that they don't currently have rather than go out and find a vendor to do that. Is that at all being mentioned by some of your prospects as to something they're at least exploring and delaying deals? Or any other thoughts there that maybe your stronghold on this position in the market could be cracking a little bit as customers see the -- I guess, the utility of buying something prebuilt isn't as high as it's been for some time? Chad Collins: Well, we are seeing a few headwinds in our demand environment that we mentioned. This AI as a replacement is not one of those things that we're hearing from prospective customers. And I think that's really for a couple of reasons. One is the breadth of the network itself in terms of the rules that are in there and the way that we have built out the compliance capabilities to so many different retailers to where you can connect once and access those. That's years and years of that intelligence about retailer requirements being built into the network. And quite frankly, it would be very difficult to replicate with LLM or Agentic AI. The second reason is customers are seeing the power of the data that we have in our network and actually seeing that by participating in our network and having access to that data as they advance their AI strategies, the input mechanisms from that data on our network is going to be very powerful to them to execute on their AI strategy. So it's actually quite complementary there. So I think it's really for those reasons that we're not seeing that as a disruption with the end customers. And then I'd say more broadly about our business and business model, unlike some of the other application providers that provide seat-based licensing, if there's less users and more agents, they're vulnerable because our pricing model is really based on the connections in the network, we think that, that's going to be a more durable model that we have with our customers as more AI kind of takes over. Matthew VanVliet: All right. Helpful. And then I guess as you look towards kind of out to next year and the initial guidance you gave with a little bit of a slowdown, at least relative to where we were expecting, does that change the appetite or the strategy around M&A? And will you potentially look for more tuck-ins that offer a broader set of solutions to appeal to more customers to try to revamp growth? Or anything on that front that you think will be impacted by what's going on today and kind of what the expectations are over the next several quarters? Chad Collins: Yes. I wouldn't necessarily say it drives a change in philosophy. We have a lot of conviction in our M&A philosophy and continue to be active with our M&A pipeline really across what I'd say is kind of a couple of three different areas. One being continued consolidation in the core digital connection or EDI market. There still are opportunities for further consolidation there. And when we're able to execute on those types of opportunities, one, it's just really good for the customers because they're typically moving from a much smaller network or a point-to-point set of connections and then you move over to our network and really see the benefit of being on this broader connection, our network with lots of connections built in. The second category is more of the solution expanding or portfolio expanding type acquisitions, similar to what we've done in revenue recovery, and we continue to believe that there'll be more opportunities where we find a solution, it's very applicable to our 50,000-plus customers already on the network and therefore, will drive cross-selling. And a lot of times, we find that these solutions actually get improved by connecting to the network and having access to the data on the network. And then the third category would be geographic expansion. Admittedly, this one is probably a bit of a lower priority as we continue to drive the execution of our Europe strategy on the back of the TIE Kinetix acquisition. But I think as we continue to get traction in geographies outside of the U.S., we'll be able to use M&A over the long term to continue to build up business and capture more markets outside the U.S. Operator: And the next question comes from George Kurosawa with Citi. George Kurosawa: I wanted to dig in on some of the spend scrutiny you called out. This is something you mentioned last quarter as well. Is it right to think of that as being tariff-driven primarily? And then if you could just compare what you saw in Q3 versus Q2. At the time, it seemed like some of that was sort of ring-fenced within your mid-market customers. Have you seen any -- is it more that, that's customer cohort has seen incremental weakness? Or has it maybe spread a little further across the customer base, if that makes sense? Chad Collins: Yes, it makes sense. So I think if we look at customer sentiment right now, and there is some more spend scrutiny coming primarily on the supplier side of our network, I would -- wouldn't say it's exclusively tariff related, but it definitely has a tariff impact. It does seem that many of our suppliers are absorbing incremental costs for the products that they're selling to retailers and not passing a lot of that on. So therefore, they're looking for other types of cost savings in their organization. And I would say that trend has been consistent. It sort of picked up in Q2 and has carried through Q3. As it relates to Q3 results, I think that was factored into our original thinking about Q3. The variance that came from Q3 was quite specific to revenue recovery and related to some of the shipment volume changes for Amazon third-party customers. George Kurosawa: Okay. Great. And then as a follow-up on that line of thinking in the revenue recovery space, is there any way you can help us think through the performance of maybe the SupplyPike assets versus Carbon6, just to get a better feel for if there's anything sort of underlying happening in this market or if this is just exclusively a function of Amazon-specific dynamics? Chad Collins: Yes. So first, I'll say we have high conviction over the long term in this revenue recovery opportunity. We're seeing very strong interest in it and demand from our fulfillment customers and have some great early adopter customers on the fulfillment side who have taken it. We also believe in the strategy where we were quick to build out a comprehensive set of solutions that one covered a wide set of retailers and two, offered both models kind of a SaaS subscription model and Take Rate model. We're also pleased with the work that we've done integrating those teams across SupplyPike and Carbon6 now into a common go-to-market team that is offering all retailers and offering both sort of pricing models to customers based on their specific needs. The headwinds that we saw as a result of shipments in Q3 was exclusive to the 3P side of that business. So if you think all of SupplyPike and the retailers they support are primarily 1P, meaning they're shipping wholesale or direct to store for certain retailers. A good portion of the Carbon6 fits with that because it's the 1P model in Amazon. And then there's another portion of Carbon6 that is the 3P. The variability we saw was in the 3P area. We have not seen much disruption in the 1P area. And as we think strategically, the 3P part of the business is certainly important to us, and it was a sizable portion of Carbon6, and we will continue with that piece of the business. But we really think of the 1P side as a lot more strategic for us because that 1P seller really lines up with our ideal customer profile on fulfillment. And so therefore, we think over time, we're likely to have a broader product portfolio for that 1P seller. And therefore, the fact that the 1P was the piece that was a little less disrupted, probably a little bit more favorable for us. Operator: And the next question comes from Parker Lane with Stifel. J. Lane: Kim, maybe if we look to the 7% to 8% outlook you have for '26 initially here, can you just go into the assumptions on the macro environment that are embedded in that? Is that assuming any sort of normalization or improvement in the environment that you're outlining for 4Q? Anything you can offer there? Kimberly Nelson: Yes. So Parker, what I would say is our initial guidance that is on the -- call it, the lower end of the high single digits takes into account the dynamics that we're seeing this year. And obviously, the way recurring revenue works, there are certain aspects of the dynamic this year that just naturally, right, feeds into next year. And so I think of it more a mid-ish case, meaning we're reflecting what's happened this year, but we also do have optimism as it relates to the business and the opportunity next year that has been taken into account as well. And taking all of that into account, our best view is, call it, that lower end of the high single digit of 7% to 8%. J. Lane: Got it. And Chad, you just alluded to the new go-to-market team that's combined here for revenue recovery. Can you just talk about how quickly you anticipate that you'll start seeing some of the benefits from that new structure? Is that something that can impact 4Q? Or is it more of a couple of quarters for the team to get its feet underneath it and start to execute? Kimberly Nelson: Yes. So we are seeing some early success in pipeline development and pipeline management and moving deals forward with that combined approach in terms of the -- on the Amazon side, where we did see the headwinds in shipment, actually, some of the new customer acquisition has been tracking ahead of where we expected, which gives us conviction about the total market opportunity. The thing about Q4, I would say, is most of the customers that we sign up in Q4 are not going to have a meaningful impact on revenue in either the subscription or the take rate model. So I think continued benefits from this new go-to-market are more likely to have may show up kind of through the P&L in the second half of 2027 in a more meaningful way or 2026, excuse me, than in Q4. Operator: And the next question comes from Mark Schappel with Loop Capital. Timothy Greaves: This is Tim Greaves on for Mark. I guess I want to ask around -- with leveraging your customer change events such as ERP and WMS replacements. Could you provide some directional insight on activity levels you observed there with ERP and WMS replacements, like anything upgrades over the past quarter or two? Chad Collins: Yes. Those -- majority of those change events, which lead to new customers for us are on the ERP side. WMS can be one of them, but I'd say the majority of them are on the ERP side. We have seen some softness in ERP -- sort of changeout or replacement market. And that has come mostly in the area of the what we call the mid-market ERPs. So meaning the very high-end enterprise ERPs, we don't do a ton of business there, but we have seen those deals go through as expected. And the very low end, the small kind of QuickBooks type systems, those actually have moved forward in more of the mid-market ERPs, the Sage, the Microsoft, the NetSuite, in these areas, we have seen some softness in that market, which then kind of slows down the ability to capture new customers via these change events. Operator: [Operator Instructions] Our next question comes from Dylan Becker with William Blair. Jackson Bogli: This is Jackson Bogli on for Dylan Becker. I was wondering if you could go into the new logo side of the equation here. We saw a little bit of a step-up in the quarter. I was just curious to get your thoughts on how we should think about the new logo momentum going into 2026 despite enablement campaigns getting pushed out, but maybe how you're feeling about going into 2026 with some new logo momentum behind you? Kimberly Nelson: Sure, Jackson. So through the first three quarters of this year, we've added a net 1,100 customers. So to your point, that's at a much higher clip than last year -- last year -- well, and that number excludes M&A. And then last year, the number, excluding M&A was 300 for the year. So to your point, we're at a much accelerated rate. And that's primarily driven by these retailer relationship management programs. In Q3, we also exceeded that expectation. We had assumed it would end up being, call it, a net 350. It ended up closer to a net 450 based on those activities. So that's great momentum. Specific -- I know you're asking about next year, but I'm just going to give a little color about Q4. So specific to Q4, because of the comments that I made in the prepared remarks, where we have a fair number of those relationship management programs that are pushing from our original expectation of Q4 into 2026, super logical reason why with the holiday season, but knowing that, that is different than we originally anticipated. Our lens for Q4, when we look at our net customer add perspective, we're assuming similar churn to what we've seen in the last couple of quarters. But since those -- many of those programs have moved out, our expectation for net customer adds in Q4, we expect that number is flat to slightly down potentially in Q4. Again, just that's really timing driven. So then when we think about 2026, we really like the pipeline that we're seeing on relationship management programs. At this point, similar to what we would have shared at Analyst Day, when we think of that mix of what gets us to that high single-digit growth rate, the expectation would be that customer adds are certainly a part of it, but a larger portion of that growth would be coming from the ARPU side of the equation. Nothing's changed there relative to our expectation of the mix being more on the ARPU side and less being on the customer growth side, both important, but similar comments to Analyst Day would still remain. Jackson Bogli: Great. That's helpful. And then one follow-up, if I could. We saw continued margin expansion in the quarter. And I was curious, we've talked about AI a little bit in this call, but what areas are you guys looking to really lean into to drive that further operating leverage in line with your long-term model and maybe how that leads to better network monetization and that AI differentiation building that competitive moat that you guys have? Chad Collins: Yes. Jackson, thanks for picking up on the expanding margins. A lot of that coming from the gross margin. And the driver there in the gross margin is primarily the investments that we have made in our customer experience and in particular, our customer onboarding to the network. That's become much more efficient and that leads to a better customer experience, and that efficiency also has led to some margin improvement. There's continued improvement that we will drive there, first and foremost, to improve that customer experience and then secondarily, to have that efficiency drive better margin for us. Also, I would say, on the G&A lines and sales and marketing lines, as we continue to scale the business, we think we will get continued efficiency there over time and work towards the targets that we have in our long-term model. You did mention AI. I would say we do have internal initiatives now to apply AI technology to continue that efficiency journey and looking, first and foremost, at our go-to-market teams, so a combination of marketing and sales and our customer success teams. One, those are probably the most meaningful workflows in terms of they're all customer-facing workflows. That's also where a lot of our people are today. So we think we continue to drive efficiencies that way as well. Operator: And the next question comes from Joe Vruwink with Baird. Joseph Vruwink: Carbon6 and SupplyPike, when they were originally announced, I think they added to $65 million in revenue in fiscal 2025, bringing a faster rate of growth with it. If I annualize this $3 million to $12 million for a year, it's taking off a double-digit proportion from those businesses. Is that the right way to think of it? And then if I do that into next year, and I'm subtracting off their elevated or what was an elevated growth rate, can you maybe talk about the embedded assumption for revenue recovery within that 7% to 8%? It maybe seems like that side of the business is in line to below the 7% to 8% and the SBS fulfillment business is still kind of above there, but I want to be sure on all that analysis. Kimberly Nelson: Sure. So when we think about that business and we think about it first for the year 2025, we're in around, call it -- within, call it, 10-ish percent of what our original expectations were. When we think about what next year that business represents for us, we still do expect that, that grows at a faster click than our core business. And keep in mind the comments that Chad added, when we think about the cross-sell muscle here, now that we have the combined go-to-market strategy and the combined teams in place, we do believe there's a lot of opportunity for us in 2026 to really flex that cross-sell muscle. We have some at bats that have worked well for us this year, but it's still very early on. So the fact that we're going to have that for all of next year has also been taken into account and leaves us with strong conviction that, that business still will grow at a faster click than the core business next year. Joseph Vruwink: Okay. That's helpful. And then going back to the customer count, if my math is right, it looks like the 3P side of the count is down maybe 500 logos or 5% since the start of the year. One question, how much of that is churn that you're okay with going back to Chad's comments of you're inheriting a business, but now you're looking to refine it and optimize it for what's going to be more enduring for you going forward? And then the silver lining of this question is that if you add the 500 logos back to those 1,100 number you were talking about earlier at the corporate level, 1,600 added for legacy SPS Commerce is a pretty good number. And I wanted to just ask kind of where that's being driven within the environment of spend through the need. Kimberly Nelson: Sure. So when you think about the customer count, to your point, we show the number as total customers, but then we do break that out within supplemental in the 10-Q. So if you think about the 3P side of the business in the quarter in Q3, the 3P customer count declined approximately 150. So just as a reminder, when we acquired the Carbon6 business, that added about 8,500 customers, of which the vast majority were 3P, about 8,200 of that 8,500 were 3P. So what we've seen in that business is specific -- it's actually specific in Q3, where that is down approximately 150. And when I think about the business, one, there tends to just be more churn, right, in that 3P business. It's also a much smaller ASP per customer. And there's also some, I'd call them, nonstrategic ancillary type products that we offer to 3P customers. And in those areas, we have seen some of that churn off. Our expectation would be in some of those areas, we'd expect to see that 3P customer count decline a little bit, very immaterial on the overall revenue, but that trend we saw in Q3, we would expect that, that trend would also continue into Q4 and beyond. So when you think about the business overall, there's the 1P side and the 3P side. The 1P side has much larger revenue per customer or ARPU per customer. The quantity of customers acquired was much skewed to the 3P side. Again, we definitely see a bit more churn there and also the nonstrategic part of the business. But where we saw a decline, really, I would characterize that as really starting in Q3 at that sort of net 150 and wouldn't be imprudent to assume that we're sort of at that clicked going forward as well. Then last thing, to your point, that means the -- over the 1P customers actually grew more. So the net 450 would actually be a higher number when you're looking at the 1P customer adds to your point. Operator: This concludes our question-and-answer session. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the Apellis Pharmaceuticals Third Quarter 2025 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to turn the call over to Eva Stroynowski, Head of Investor Relations. Please go ahead. Eva Stroynowski: Good morning, and thank you for joining us to discuss the Apellis' Third Quarter 2025 Financial Results. With me on the call are Co-Founder and Chief Executive Officer, Dr. Cedric Francois; Executive Vice President of Commercial, David Acheson; Chief Medical Officer, Dr. Caroline Baumal; and Chief Financial Officer, Tim Sullivan. Before we begin, let me point out that we will be making forward-looking statements that are based on our current expectations and beliefs. These statements are subject to certain risks and uncertainties, and actual results may differ materially. I encourage you to consult the risk factors discussed in our SEC filings for additional detail. Now I'll turn the call over to Cedric. Cedric Francois: Thank you, Eva. Before diving into our third quarter results and portfolio progress, I want to briefly highlight the unmet need that Apellis set outs to tackle and why we are uniquely positioned to address that challenge. Apellis is a commercial stage biotech company targeting the overactivation of the complement system, an innate defense mechanism in the immune system that protects the body from acute infection and illness. However, when complement is chronically unregulated, there can be a devastating effect on one's health, driving a broad range of serious often life-threatening diseases. Most approved complement-targeted therapeutics inhibit at C5, a downstream protein in the complement cascade. By only blocking this target, C5 inhibitors do not affect the upstream activity that drives inflammation and tissue damage. Similarly, inhibitors of Factor B act earlier in the cascade and narrowly, reducing alternative pathway amplification but allowing classical and lectin pathway activity to persist, leaving some disease activity unchecked. Apellis' science is founded on a simple but powerful idea to address complement-driven diseases at their source by targeting C3, the central hub where all complement pathways converge. By doing this, we take a fundamentally different approach that enables comprehensive disease control at root cause. For decades, the prevailing view was that C3 could not be effectively modulated because of its central role in immune defense. Apellis solved this challenge by engineering pegcetacoplan, a first-in-class C3 inhibitor that controls overactive complement while preserving essential immune function. The result is both a technological feat in drug design and a transformative clinical advancement for patients. This vision is what sets Apellis apart. We have mastered our core technology and redefined complement therapeutics. The scientific advantage underpins our success to date. Having now translated decades of innovation into 2 approved medicines across 4 serious diseases, Apellis is a commercial stage leader with a truly differentiated C3 platform. SYFOVRE is the first ever treatment for geographic atrophy, having shown robust efficacy in slowing disease progression in the broadest patient population. EMPAVELI has demonstrated best-in-class hemoglobin improvement in PNH and the ability to completely clear C3 deposits from the kidney. Together, these achievements underscore our unprecedented clinical innovation and strengthen Apellis' competitive edge in complement science. Turning now to our business results. The third quarter was a period of further progress where we continued to build on our strong performance. A key milestone was the FDA approval of EMPAVELI for the treatment of patients 12 years and older with C3 glomerulopathy or primary immune complex membranoproliferative glomerulonephritis or IC-MPGN. This approval expands the addressable market for EMPAVELI by approximately 5,000 patients and marks a breakthrough therapy that delivers meaningful results across the trifecta of key disease control measures, including proteinuria reduction, eGFR stabilization and substantial clearance of C3 deposits. With a broad label in hand, we are well positioned for launch in a space where physicians consistently note that efficacy will drive treatment decisions. David will share more on the launch progress shortly. Moving to SYFOVRE. Geographic atrophy is a devastating disease that progressively and permanently robs patients of their vision. Unfortunately, in managing GA, many retina specialists have adopted a wait-and-see approach despite SYFOVRE's well-established clinical profile that demonstrated robust, sustained and increasing benefits with every other month dosing. Because of this, only about 10% of patients diagnosed with GA are treated with complement inhibitors today. In the near term, we expect a period of steady measured injection growth with the next inflection in growth to be driven by new tools and targeted market education initiatives that we plan to bring to market over the next 12 to 18 months. We believe these initiatives will reaccelerate the adoption of complement treatments and grow the overall GA market. Overall, our focus remains on leveraging our expertise in complement-mediated diseases to positively affect the lives of people living with serious illnesses. With this in mind, we continue to maximize our market opportunities for EMPAVELI, drive expansion for SYFOVRE and advance our pipeline. I will now hand the call over to David for an update on our commercial activities. David? David Acheson: Thank you, Cedric, and good morning, everyone. I'll start with EMPAVELI and the recent approval in C3G and primary IC-MPGN. We are now 2 months into the launch, and I'm very pleased with our progress so far. Feedback from the nephrology community has been outstanding, and we are carrying that momentum into Q4. In the U.S., we estimate there are approximately 5,000 C3G and primary IC-MPGN patients. Notably, EMPAVELI's broad label makes it the first and only treatment approved for a comprehensive list of patient populations, including adult patients with C3G, adult patients with IC-MPGN, pediatric patients with C3G, primary IC-MPGN patients aged 12 years and older and patients with post-transplant C3G disease recurrence. EMPAVELI is the only approved therapy for approximately 2/3 of this 5,000 patient population, and we believe it offers highly differentiated efficacy for the other 1/3 where patients have an alternative. Together, the broad label and the strong clinical data position the launch of EMPAVELI for the long-term success. For the first time, patients can be treated with a first-in-class C3 targeting therapy and the only complement therapy that has demonstrated its ability to preserve kidney function by controlling all 3 markers of these diseases, including proteinuria reduction, eGFR stabilization and substantial clearance of C3 deposits. EMPAVELI is delivered through our compact single-use on-body auto-injector. Patients can self-administer in the comfort of their own home without ever seeing a needle. Early feedback from the market has been exceptionally positive, highlighting its ease of use and the convenience of the twice-weekly dosing. The PK profile of EMPAVELI allows patients the flexibility to take treatment on their own terms, avoiding twice daily dosing required by the oral alternative. Ahead of the launch, we scaled our field-based teams to approximately 100 people, ensuring coverage of every U.S. nephrologist managing these patients. Our extensive prelaunch engagement with physicians and patient identification efforts have built a strong foundation for a successful rollout. As communicated in our approval call, the launch metric that we will be reporting early in launch is patient start forms. Through the end of September, we received 152 patient start forms for EMPAVELI. Included in this number are the approximately 50 patients from our expanded access program, or EAP, who are in the process of converting over to commercial drug. We remain on track to have these EAP patients on commercial drug by the end of this year. As a reminder, it generally takes 4 to 6 weeks for a patient to start treatment. We see opportunities to potentially accelerate this time frame as we gain more experience on our launch and as payers' policies are updated. During the quarter, we made meaningful inroads with high-volume prescribers and are confident in the continued growth of adoption. Of the 20 most influential and high-volume accounts in the space, 19 have a REMS certified prescriber and the majority of these centers have submitted start forms, clear evidence that our launch efforts are translating into real-world adoption across priority accounts. On the access front, we are encouraged by payers' recognition of the value of EMPAVELI in C3G and primary IC-MPGN and by the speed at which these patients are successfully gaining access. Furthermore, our dedicated ApellisAssist team is closely working with patients and prescribers to navigate the expected prior authorization requirements, to minimize delays and support a smooth start to therapy. These have been incredibly encouraging early weeks for a rare disease launch, and we are excited by the strong engagement from both physicians and patients. We are learning a great deal about prescriber habits. And once physicians are educated on the differentiated profile of our therapy, they quickly become strong believers in its disease-modifying potential. We believe we have worked through most of the onetime wave of early adopters and EAP patients and expect to receive 225 cumulative start forms or more by the end of this year. Looking ahead, we are confident in the long-term growth potential of EMPAVELI as awareness deepens and patient access continues to expand. Moving on to SYFOVRE. We are encouraged to see continued market leadership with a total estimated injection growth of 4% during the quarter, in line with our expectations. SYFOVRE maintains its leading position, accounting for an estimated 52% of new patient starts during the third quarter and more than 60% of the overall market. As commercialization matures, we've moved past the early adopter phase and expect steady measured injection growth for the near term. Importantly, we believe that the long-term market opportunity remains significant with blockbuster potential. Today, only about 10% of patients who are diagnosed with GA are being treated. And specifically for retina specialists, on average, just 1 in 5 patients with GA in their practice are treated with a complement inhibitor. This leaves substantial room for growth by expanding the total number of prescribers and by increasing adoption within existing practices. To drive this opportunity forward, we are focusing on disease awareness and education, laying the groundwork for the next wave of growth through initiatives that include engaging with early career retina specialists who seek a disproportionate number of new patients, enhancing education around the importance of early intervention and maintaining patients on treatment and refining our messaging to better equip field teams in their outreach and discussions. I will now hand the call over to Caroline to share additional color on these initiatives and provide an update on our pipeline. Caroline? Caroline Baumal: Thanks, David. Let me start with SYFOVRE and geographic atrophy. As the only approved drug that binds to C3, the central protein of the complement cascade, SYFOVRE potently inhibits the damaging downstream effects of complement overactivation, forming the basis of its strong clinical profile. Patients with GA are on an irreversible path to blindness. As Cedric and David mentioned, there is ample opportunity to advance the understanding of GA within the treatment community and to instill the urgency to treat patients early to save retina tissue. To support this, we are developing artificial intelligence tools that will help physicians gain a better understanding of what GA patients experience as well as the benefit of treatment with SYFOVRE. We are also working to provide more convenient administration through the development of a prefilled syringe. We believe that both of these key initiatives will broaden the prescriber universe within the overall GA market and drive higher utilization of SYFOVRE over time. Turning now to EMPAVELI in C3G and primary IC-MPGN. The treatment community's response to the recent approval has been incredibly positive, and we are confident that it will be the preferred treatment option for these patients. We're excited to share 7 abstracts at next week's American Society of Nephrology meeting, further demonstrating EMPAVELI's profound and durable benefit and underscoring our commitment to the rare nephrology community. Building on this momentum, we are expanding EMPAVELI's development into 2 other rare kidney diseases, primary focal segmental glomerulosclerosis, or FSGS, and delayed graft function, or DGF. Similar to C3G, FSGS is a rare kidney disease that progresses to kidney failure within 5 to 10 years for about half of patients. DGF is a complication in kidney transplantation that negatively affects the long-term survival of the kidney and the overall patient outcomes. The complement pathway plays a significant role in both diseases, and there are currently no FDA-approved therapies for either. We are well underway with our planning activities and expect to initiate pivotal trials in FSGS and DGF by the end of the year. With that, I'll now turn the call over to Tim for an update of the financials. Timothy Sullivan: Thank you, Caroline. Total revenue for the third quarter was $459 million, including the $275 million upfront payment from Sobi in connection with the Aspaveli royalty purchase agreement. SYFOVRE net product revenue for the quarter was $151 million. We delivered approximately 101,000 doses of SYFOVRE in the quarter, including 86,000 commercial doses and 15,000 free goods doses. In line with our expectations, we saw a 4% sequential growth in overall total injection demand during the third quarter, driven predominantly by free goods. While we are encouraged by the continued growth in total injections as a leading indicator of demand, we did see an approximate $15 million headwind to our reported revenue due to the elevated use of free goods, which was slightly higher than our expectations. Through the first 3 quarters of the year, we estimate that free drug has been a nearly $40 million headwind to SYFOVRE revenue. Looking ahead to the fourth quarter, we continue to expect modest SYFOVRE total injection growth within the low to mid-single-digit range. Turning to gross to net dynamics. Adjustments during the third quarter for SYFOVRE remained within the low to mid-20% range, consistent with our guidance through 2025. As we move into Q4, we expect gross to net to trend slightly above the prior range. This reflects the normal step-wise pattern of gross to nets over time with modest degradation and some quarter-to-quarter movement that's typical in the buy-and-bill market. Importantly, this reflects expected dynamics rather than a structural shift, and we remain confident in our pricing and access position heading into 2026. From a channel perspective, we anticipate a modest channel build during the fourth quarter, consistent with seasonal patterns expected at year-end. That said, we continue to target stable inventory levels quarter-over-quarter, and we'll provide further commentary during our year-end update. Taken together, our current view is that the fourth quarter SYFOVRE revenue will be broadly in line with what we recorded in the third quarter. Looking beyond these short-term dynamics, as Cedric and Caroline mentioned, we have several compelling opportunities that are largely within our control to reinvigorate SYFOVRE's growth over the next 12 to 18 months. We remain confident in the meaningful long-term potential of SYFOVRE and look forward to updating you on our progress in bringing these initiatives to fruition. Moving now to EMPAVELI. Total net product revenue across indications, which includes PNH, C3G and primary IC-MPGN was $27 million during the third quarter. We believe we are now through most of the initial wave of early adopters. And looking ahead, we expect the nephrology opportunity to normalize into a gradual ramp. Turning to expenses, we've maintained a highly disciplined approach to cost management, prioritizing the commercialization of SYFOVRE and EMPAVELI while continuing to fund the next phase of innovation for Apellis. Operating expenses were $235 million in the third quarter, down from $244 million for the same quarter last year. We continue to expect our full year operating expenses to be in line with the OpEx levels we saw in 2024. We ended the quarter with $475 million in cash and cash equivalents, supported by the $275 million upfront from our Sobi royalty transaction this quarter, our strong cash position gave us the flexibility to discontinue factoring during the quarter. As a result, we now carry the incremental balance in receivables on our balance sheet rather than in cash, and we expect to realize cost savings of approximately $5 million on a go-forward annual basis. We continue to expect our cash position will be sufficient to fund the business to sustainable profitability. And with that, I will now turn the call back over to Cedric. Cedric? Cedric Francois: Thank you, Tim. We have made important progress in 2025 to date. We achieved our third approval in just 4 years, bringing a first-in-class C3 treatment option to people living with C3G and primary IC-MPGN, many of whom had previously been living without any available options. Early feedback across the patient and nephrology communities has been enthusiastic, reflecting recognition of EMPAVELI's compelling efficacy profile and its value as a new treatment option. Additionally, SYFOVRE continues its market leadership and delivers a durable, meaningful revenue stream with opportunities for renewed growth over the long term. Combined with the cash from our Sobi deal in June, we have made steady progress on our path towards profitability. We look forward to building off the solid foundation we have laid for ourselves in the fourth quarter and into 2026. And with that, I'll turn the call over to the operator for questions and answers. Operator: [Operator Instructions] Our first question comes from the line of Jon Miller with Evercore ISI. Jonathan Miller: Congrats on the progress and a strong C3G launch. I guess I'll ask my question -- I'll ask my question about that. Do you still expect past this first bolus of patients that you were talking about that kidney is going to be a distributed or slow indication -- set of indications to penetrate? I think this has been your commentary and the competitors' commentary in the past. Do you expect that to continue? Or is your strong penetration into these top practices indicative of the launch could be more rapid than people expect? Cedric Francois: Thank you, Jon. Great to hear you. And I will hand that question over to David. David Acheson: Jon, thanks for the question. Appreciate it. So first of all, we're really excited about where we are with the launch for EMPAVELI and C3G and primary IC-MPGN. The team has done a great job. And I do suspect as we get through the end of this year that the bolus that we had talked about will be through that, and you'll see steady, consistent growth going into next year. That's our expectation. Operator: Our next question comes from the line of Anupam Rama with JPMorgan. Anupam Rama: Just a quick one on SYFOVRE and on sampling. I think samples are on the higher end of this 10% to 15% range that we've all previously talked about. Should we expect this to now be more stabilized? Or is there a chance that this continues to creep up as you expand the market? Cedric Francois: Anupam, great hearing you. Again, I'm going to hand that over to David. David Acheson: Anupam, thanks for the question. So a couple of things real quick. We definitely review where we are with samples in the PAP program or free goods consistently to make sure that programs are being utilized the way that we want them to be. Also, though, we are, as you know, as a company, very in tune to making sure patients have access to products. So as things continue to grow, we'll have programs available for patients. Operator: Our next question comes from the line of Steve Seedhouse with Cantor. Steven Seedhouse: Just wanted to ask a few specifics on C3G. So first, can you break out just of the 150-odd patients, how many are C3G, how many are IC-MPGN pre- versus post-transplant, adult versus adolescent? And then also, do you know if anyone has switched from Fabhalta to EMPAVELI? And do you have a sense of your market share in C3G, just how many patients are on Fabhalta versus EMPAVELI? David Acheson: Thank you, Steve. Great question. This is David. So you're right, we have 152 start forms, roughly 50 of those came through our EAP program. Consistently to label, we've seen start forms come through across the broad label, which is positive and for both indications. And we are seeing Fabhalta switches as a result of the information we've gotten from physicians as a result of our efficacy, in some cases, some tolerability and the ability for them to dose twice weekly with EMPAVELI versus twice daily with the competitive product. Operator: [Operator Instructions] Our next question comes from the line of Yigal Nochomovitz with Citigroup. Yigal Nochomovitz: So this is also a specific question on the launch. I think, David, you mentioned that 50 of the patients are in the process of converting to commercial drug. These are the ones rolling over from the clinical trials. It's just not clear. Are those actually on drug at this point? Are they still in process? And then the incremental other 102, could you just comment on what fraction of those have started EMPAVELI and approximately how long they've been on the drug since the end of July? David Acheson: Yigal, thank you for the question. So you're correct. There's 50, roughly 50 patients on EAP. Our goal is to make sure all of them make it to commercial product by the end of the year. And of the rest that have come in for new start forms, we are still working through the process with many of them. Remember, it takes 4 to 6 weeks for those patients to typically get from start to finish and get product. And that process is also being worked out as we move through the end of the year. Operator: Our next question comes from the line of Salveen Richter with Goldman Sachs. Unknown Analyst: This is Elizabeth on for Salveen. Just one from us on that 4- to 6-week time frame from start to finish of getting product of EMPAVELI to treatment. When do you think we could start to see kind of an acceleration there? And what do you think that could normalize as? Cedric Francois: Yes. Thank you very much, Elizabeth. So a couple of things to keep in mind. That's typical for most -- rare disease launches, in particular, where you have a REMS and vaccinations, and the start form that has to go in from a physician. The other thing that we're continuing to work through is the policies that are being written at the payer, which also takes some work early on in the process to make sure that, that transition from 4 to 6 weeks comes down to less than that period. So we're working through that now, and we'll have details as we move forward. Operator: Our next question comes from the line of Akash Tewari with Jefferies. Unknown Analyst: This is Kathy on for Akash. So SYFOVRE rev stayed flat at $161 million quarter-over-quarter and induction growth was 4%. So one, do you see this as a floor for SYFOVRE before other components like long-term efficacy data or PFS come into play? And then two, when can we assume a return to growth for SYFOVRE? Or do you think it stays at this level given you're not assuming patient funding gets resolved near term? Timothy Sullivan: Thank you, Kathy. So this is Tim. So from a growth perspective, this quarter, we feel very good about the underlying demand growth of 4%. As we mentioned in the prepared remarks, the bulk of those -- that increase in demand came from free goods. So that was a headwind that we've been experiencing for the last 3 quarters or so, and it's -- the headwind has amounted to approximately $40 million over the course of the last 3 quarters. Now over the long term, beyond these short-term dynamics, as Cedric and Caroline mentioned in their prepared remarks, we have a lot of compelling opportunities to reinvigorate SYFOVRE's growth. Those include the prefilled syringe, among others, and we'll get more visibility to you on those at the beginning of the year. Operator: Our next question comes from the line of Colleen Kusy with Baird. Colleen Hanley: Congrats on the progress. You spoke to some learnings of prescribers' habits in C3G and IC-MPGN at this early stage of launch. Can you elaborate on that a little bit and what the implications are for this launch? David Acheson: Yes. This is David. Thank you, and I'll hand it over to Caroline, too, for some comments on the medical side. I can tell you that we've been very pleased with the fact that we have a very open label. And we've seen patients come through that are aligned to all of the indications -- for both indications in the label, which is very positive. What we're learning now is we're making sure that we get through the process and education with the top [indiscernible] accounts and also make sure that we are continuing to canvas and have the conversations with all of the accounts beyond that. So it's a new indication and a new product for folks, and they're learning how to adjust to it, but we're excited about the launch so far. Eva Stroynowski: And what we've been hearing from physicians is that they are excited about our data, the robustness of it, the reduction in proteinuria and our 52-week results will be presented at the American Society of Nephrology amongst other abstracts that we have highlighting the reductions in proteinuria. Cedric Francois: Yes. Maybe one last thing here from me. This is Cedric. It's been really gratifying to see how well we kind of were prepared and understand the landscape. We're very happy with the demographics that we have calculated, the ramp forecast we've created. So it's gratifying to see the results from clinical trials translate in the real world and the way it is. Operator: Our next question comes from the line of Ellen Horste with TD Cowen. Ellen Horste: I'm on for Phil this morning. Congrats on the quarter. Just one question from us. On SYFOVRE, has there been any progress with the Good Days co-pay assistance charity? Is there any visibility on when and if it can be funded to FSGS patients? Timothy Sullivan: Thank you for the question. This is Tim. So there has been some progress in the sense that we understand that the largest of these groups is open for existing patients, but unfortunately, not for new patients, and you can check that on the website. But as far as we know and as far as we're -- as far as our guidance that we gave in terms of this quarter, we don't expect anything to change with respect to the patient assistance organization. Operator: Our next question comes from the line of Jade Momen with Stifel. Unknown Analyst: This is [Diane on for Annabel]. Two questions. The first one is for C3G, IC-MPGN. For that 1/3 shared market with Fabhalta, how do you expect prescriber -- how do you expect that market to bifurcate? What type of patients would -- are physicians starting Fabhalta in? And what type of patients would be preferred for EMPAVELI ? Cedric Francois: Yes. Thank you for that question. This is Cedric. So I think that, look, the efficacy profile that was established in the VALIANT trial across all of the patient populations that we have tested and that we've spoken about, that is really what stands out there. So this is something that we believe is going to be really important in a segment of physicians that cares deeply about differentiated efficacy. So yes, I think we have -- with the broad label that we have, we have an opportunity to really kind of go through segment by segment. We've talked before about the fact that post-transplant patients are a particularly interesting group for obvious reasons. Most transplanted patients will relapse. Now it takes a little bit of time to get on protocols, et cetera, but that's a very exciting group of patients that we're looking forward to being able to help. And then, of course, patients that are advanced at risk of going into end-stage renal disease. And then the fact that we have pediatrics in our label as well and be able to offer something to patients 12 years to 18 years is very attractive to the nephrology community as well. Unknown Analyst: And I got one more on SYFOVRE. It's been on the market for a couple of years now. And if you go by the patterns in wet AMD, we might start to see patients drop off at this stage. What are you seeing as far as persistence on treatment? Cedric Francois: Compliant. Eva Stroynowski: Thank you for the question. Well, with our every other month dosing, which is very in line with anti-VEGF treatments, we're hearing from our physicians that patients are being compliant with treatment, and there will be some long-term data coming out from our open-label extension next year. Operator: Our next question comes from the line of Lachlan Hanbury-Brown with William Blair. Lachlan Hanbury-Brown: I guess one on SYFOVRE. I noticed the new patient share ticked down a few points this quarter. I was wondering if there's any underlying dynamic that changed in the quarter that drove that? Or is that just sort of noise fluctuating a few percentage points, and it's kind of reached a point of stability here? David Acheson: Yes. Great. Thanks for the question. This is David. So first of all, we're very confident in where we are competitively and just a reminder, we're 52% on NBRxs and over 60%, we continue to hold and have held for TRxs. You're exactly right. What sometimes you'll see is a fluctuation in NBRxs up or down and -- but we're confident in the consistent numbers that we've seen and reporting today. Operator: Our next question comes from the line of Derek Archila with Wells Fargo. Derek Archila: Maybe just 2 from us. First on SYFOVRE. I guess how do you think about prefilled syringe, the checks that we've done on that, it seems like docs would be pretty enthusiastic. So when could that be made available? And how do you think that changes the growth trajectory? Is it more shifting share or expanding the market? And then I didn't know if I joined late, so just in terms of EMPAVELI start forms, any comments on trends post the quarter? Cedric Francois: Derek, great hearing you. Thank you so much. Yes, the prefilled syringe is something that is really important in the context of the retina physicians. It improves the flow in their practices, makes it easier to handle the workload. We have been working on a prefilled syringe. That prefilled syringe is currently being tested in the clinic. We're not guiding on time as to when it will actually be available for competitive reasons. But the quality of the syringe that we have has met the high expectations that we've had and super excited about going to market with that. I think it's also worth mentioning here that the -- within kind of the type of physicians that treat patients with geographic atrophy, there are a lot of physicians that occasionally use SYFOVRE, not on a regular basis. Those are physicians that I suspect are going to be excited about kind of moving towards a more routine involvement of GA patients into their practices. But even for those physicians that have not yet embraced SYFOVRE as a treatment for their patients, we know that many of them are waiting for the prefilled syringe to start treating this terrible disease. I don't know, Caroline, if you want to add something? Caroline Baumal: Well, as a retina physician, I will say that it really increases convenience, consistency and safety to have a prefilled syringe. And the requirements are very high for quality, and I'm really, really pleased with where we're headed with this. There was another part to the question. Timothy Sullivan: So Derek, -- just the last part of that question, thank you again. So from a launch perspective, obviously, we feel great. Beyond the guidance that we gave in terms of the start forms for the prepared remarks, I don't think we're not guiding any further than that, but we're happy to look forward to giving you an update at the year-end call. Operator: Our next question comes from the line of Biren Amin with Pipa Sandler. Biren Amin: This morning, Apellis just revised IZERVAY sales guidance downward by $200 million. And so they're clearly seeing headwinds in GA market growth. Given that data point and your low to mid-single injection growth that you project, do you feel it's due to undertreatment? And what shifts that dynamic with retina physicians? Timothy Sullivan: Yes. I mean so I'll start. So I'll just confirm what you're saying, which is that we do see a significant headwind for these patients who are trying to get treated and want to get treated, but can't afford it. So it's had a huge impact on the market in general. And at least our discussions with retinal specialists suggest that many of them are not treating GA patients or not even having the conversation they should be having with GA patients because this has created a logistical as well as a financial headwind. I'm not sure. I hope that answers your question. Caroline Baumal: I think what can shift the dynamics with physicians also are multiple things that we're working on at Apellis. We're the science company. We have robust data. We're working on educating physicians using artificial intelligence, which they can also use for patients. We're working on a prefilled syringe, and we have multiple new things coming forward to impact physicians and patients. Operator: Our next question comes from the line of Judah Frommer with Morgan Stanley. Judah Frommer: Maybe just a couple of follow-ups. I guess on patient start forms for C3G and IC-MPGN, can you comment on just how they came in versus internal expectations? It sounds like they came in reasonably well. And then on just the sampling for SYFOVRE, any commentary you can make on how much of that is self-driven versus competitive dynamics on sampling? Cedric Francois: Yes. Thank you so much. For the expectations with C3G and IC-MPGN, as I outlined earlier, this is very much in line with what we had expected. We have high expectations. We have -- we also feel very good about the demographics that we have established. That number of 5,000, we believe, is a robust conservative estimate for the number of patients that are out there and could be helped with our product. Then your question on SYFOVIE I'm sorry, but you are breaking up... David Acheson: I can answer. It's on the samples in the free goods. So your question was, is there a competitive dynamic? I don't think that's necessarily the case. What we do know is if someone is reaching for a free good, that's true demand. It's a patient that wants to be treated. It's a physician that wants to treat the patient. And we have those programs in place and monitor them regularly to make sure that they're within the guidelines that we want to have followed, but they're accessible because patients that want to go on treatment, we believe, should be able to do that. Operator: Our next question comes from the line of Ryan Deschner with Raymond James. Ryan Deschner: Can you remind us when the actual date EMPAVELI was first made available to patients for the C3G, IC-MPGN launch? And then also, do you have an update on the rough time line for a top line readout from the Phase II study for SYFOVRE and APL-3007? David Acheson: This is David. I'll answer the first part of the question. We launched the product in the week of July 28. And I'll hand the other portion of the question over on 3007 to Cedric? Cedric Francois: Yes. So thank you for that question. So the trial is enrolling. We're very excited about this trial. As a reminder, with 3007, what we do is combine SYFOVRE with a subcutaneous injection that is an siRNA product, which brings down the systemic levels of C3 by approximately 90%. And the objective there is to go from every 2 months to every 3-month dosing and to then obviously, of course, see an outsized effect on the efficacy side. We're not guiding in terms of when that study will be completed. It's currently enrolling and has a 1-year endpoint readout. Operator: Our next question comes from the line of Douglas Tsao with H.C. Wainwright. Douglas Tsao: Tim, I think it was you that sort of mentioned that there's an issue with some practices sort of just having with a lack of co-pay support sort of a backlog or sort of operational challenges with practices if -- because they're not able to easily put patients on treatment. Is that in terms of just the headache within the practice in terms of just the time it takes to sort of adjudicate benefits and follow that patient? Or is it just the sort of patient having an unrealistic expectation of starting treatment and then having themselves put off and sort of having to deal with the frustration on that side? Cedric Francois: Yes. It's just -- it's a very -- it's really a very complicated situation for the physicians as well as for the patients, right? Kind of figuring out who can afford co-pay, who cannot. I mean there's a lot that goes into it. There's a lot of chair time that is lost by the physician in that process. And as Tim outlined earlier, what we've seen this year is, of course, kind of, a lot of slowdown that was driven by these dynamics, not just on the GI side, also on the wet AMD side, where a lot of practices have temporarily paused even bringing on new patients to avoid having those discussions. So these are all things that are headwinds that we'll have to find a new place of settlement but we are working hard on it. We can help practices with availability and access, of course, but the foundation is something that we -- that is something that we're separated from, of course. Timothy Sullivan: I'll also add that it particularly affects GA patients because there is a generic alternative in the wet AMD space. There is no generic alternative in the GA space. Douglas Tsao: And if I can, on the kidney launch, I'm just curious, I know obviously, something that you sort of -- people have been wondering about in terms of the identification of patients with C3G and IC-MPGN since it does require a biopsy. Have you seen evidence that now there is an available treatment like EMPAVELI or such an efficacious treatment that clinicians are biopsying more regularly or more aggressively than they were in the past? Caroline Baumal: Well, that typically happens when there's a new treatment available for something when there was no previous treatment that there are patients that come out of the woodwork and clinicians are also more motivated to make the diagnosis so they can more effectively treat this disease, which does ultimately end in end-stage renal failure. Operator: Our next question comes from the line of Graig Suvannavejh with Mizuho. Graig Suvannavejh: Congrats on the progress. Just wanted to go back to EMPAVELI. I might have missed it before, but anyway you can provide a sense of breakout in terms of the revenue and what came from PNH and what came from the new rare kidney indications and how the 152 in new patient start forms, how that might have contributed to whatever contribution there was to EMPAVELI revenue from the new rare kidney indications. Timothy Sullivan: Graig, thank you for the questions. This is Tim. Yes. So you can look at our PNH revenue for the last few quarters. Last quarter, we reported, I think, $20.3 million in EMPAVELI revenue. And that market has been relatively static. So I think from the perspective of revenue, you can maybe back out a little bit there and look at the fact that we probably are also putting a little bit into inventory as a distributor. So on a combined basis, it's -- we don't break out that in terms of revenue, and we don't plan to break that out because it is hard for us to do that. And then from a -- can you repeat the second part of the question? I apologize. Graig Suvannavejh: Yes. Just for -- if we do and thanks for that clarity on maybe assuming $20 million-ish or so from PNH and then maybe some inventory build, but whatever the balance is for EMPAVELI revenue in the quarter from the new rare kidney indications. Just trying to get a sense of if you did provide us with $152 million in terms of the patient start forms, how much of that is kind of translating into that balance of revenue specifically in rare kidney? And just trying to get a sense of what fourth quarter might look like, understanding that you're not providing sales guidance per se. Timothy Sullivan: Yes. We're not providing sales guidance. We did give you some guidance on sort of an expectation around start forms for the year-end, which was $225 million. So look, I think the way to think about this probably is looking at the time to getting on drug from start form to getting on drug is approximately 4 to 6 weeks, and I would just work backwards from that. Operator: Our next question comes from the line of Lisa Walter with RBC. Lisa Walter: Congrats on the kidney launch. I was just wondering if you could provide us any color on the pivotal trial design for FSGS and DGF. Cedric Francois: Thank you so much. So these trials have just started. We're not providing details beyond what's available on clinicaltrials.gov. But we're really excited about the opportunity that we have in FSGS and DGF. FSGS, as a reminder, affects about 13,000 patients in the U.S., similar in terms of severity to the patient and the patient's kidney to what we see with C3G and IC-MPGN. And we're looking forward to hopefully having a treatment available for these patients. With delayed graft function, we are looking into a 3-month treatment with EMPAVELI to protect the kidneys that typically come from diseased donors, of which there are 21,000 per year. And about probably 30% of those patients will suffer from that so-called delayed graft function, which is an increase in creatinine in the week post-transplant. Operator: Ladies and gentlemen, we have time for one last question, and that will come from the line of -- it's a follow-up question from the line of Yigal Nochomovitz with Citigroup. Yigal Nochomovitz: Just one quick follow-up, please, on the prefilled syringe. Cedric or Tim or David, I'm just wondering, is that going to be offered also as samples? Or will it only be -- will be restricted to just commercial drug for the prefilled syringe? David Acheson: Thanks. This is David. So we will launch with commercial product. And then over time, we'll have samples available as we get into the launch. Operator: I would like to turn the call back over to Cedric for closing remarks. Cedric Francois: Thank you so much, and thank you, everybody, for your thoughtful questions. This concludes the Apellis third quarter earnings call, and I hope you all have a wonderful rest of the day. Operator: Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect.
Operator: Greetings. Welcome to Cullen/Frost Bankers, Inc. Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to A.B. Mendez, Senior Vice President and Director of Investor Relations. Thank you. You may begin. A. Mendez: Thanks, Jerry. This afternoon's conference call will be led by Phil Green, Chairman and CEO; and Dan Geddes, Group Executive Vice President and CFO. Before I turn the call over to Phil and Dan, I need to take a moment to address the safe harbor provisions. Some of the remarks made today will constitute forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995 as amended. We intend such statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 as amended. Please see the last page of text in this morning's earnings release for additional information about the risk factors associated with these forward-looking statements. If needed, a copy of the release is available on our website or by calling the Investor Relations department at (210) 220-5234. At this time, I'll turn the call over to Phil. Phillip Green: Thanks, A.B. Good afternoon, everyone. Thanks for joining us. Today, we'll review third quarter 2025 results for Cullen/Frost. Our Chief Financial Officer, Dan Geddes will provide additional commentary and guidance before we take your questions. In the third quarter of 2025, Cullen/Frost earned $172.7 million or $2.67 per share, up 19.2% from a year ago. In the third quarter last year, our earnings were $144.8 million or $2.24 per share. Our return on average assets and average common equity in the third quarter were 1.32% and 16.72%, respectively. That compares with 1.16% and 15.48% in the third quarter last year. Average deposits in the third quarter were $42.1 billion, an increase of 3.3% over the $40.7 billion in the third quarter of last year and average loans grew to $21.5 billion in the third quarter, an increase of 6.8% compared with the $20.1 billion in the second quarter of last year. Our organic expansion strategy continues to generate positive results. As of quarter end, expansion deposits and loans stood at $2.9 billion and $2.1 billion, respectively, while generating almost 74,000 new households. That represents 10% of company loans and almost 7% of company deposits. Also, we were pleased to see the overall expansion reach a solid level of accretion in the third quarter, which will continue to grow as newer locations mature. Dan will share more detail in his comments but we are grateful to our owners for their support as we've reached this important milestone. Looking at our consumer business, we continue to see strong results, driven by consistent focus on customer experience across digital, phone and branch channels. And this commitment paired with strategic expansion is fueling what we believe to be industry-leading organic growth. In Q3, we recorded our strongest quarter in new checking household growth since the post-Silicon Valley flight to safety. Year-over-year, consumer checking households grew by 5.4%, a figure we believe positions us at the forefront of the industry in terms of organic growth. Mortgage lending also reached new heights this quarter with record performance across key metrics such as dollars funded, number of loans closed and solution referrals. Based on current momentum, we expect Q4 to surpass these records and we are confident of reaching our year-end goal of $0.5 billion in mortgages outstanding. Our overall consumer real estate loan portfolio, which stands at $3.5 billion in period-end outstandings has grown by $547 million year-over-year or 18.7%. Our commercial business continues to show good activity. Period-end commercial loans grew by 5.1% year-over-year, led by increases in energy, up 17% and C&I, up 6.8%. CRE balances increased 2.7% and were impacted by payoffs as some borrowers, particularly multifamily, opted for more flexible capital structures. Looking forward, I'm encouraged for a number of reasons. Calls made for the third quarter represented the second highest on record, putting us on track for the strongest year for calls made ever. Year-to-date, there have been 3,082 new commercial relationships, setting the pace for the largest number of new relationships in a year. This activity led to $5.6 billion in new opportunities created in the quarter, a 4% increase from Q2 and the highest quarter for third quarter on record. Strong new opportunity growth led to a weighted pipeline at quarter end of $1.9 billion, an increase of 20% from the second quarter and the second highest weighted pipeline ever. The weighted pipeline for CRE and C&I increased 29% and 11%, respectively and increases were seen in customer and prospects as well as core and large opportunities. Also, in addition to our consumer and commercial success, we're seeing some encouraging results for our wealth management and insurance businesses. Our overall credit quality remains good by historical standards with net charge-offs and nonperforming assets both at healthy levels. Nonperforming assets declined to $47 million at the end of the third quarter compared with $64 million last quarter and $106 million a year ago. Most of the decrease in the quarter was related to 2 credits. One was a borrower that returned to accrual status and the second was a successful resolution of a problem credit that had been on nonaccrual status since mid-2023. The quarter end nonperforming asset figure represents 22 basis points of period-end loans and 9 basis points of total assets. Net charge-offs for the third quarter were $6.6 million compared to $11.2 million last quarter and $9.6 million a year ago. Annualized net charge-offs for the third quarter represent 12 basis points of average loans. Total problem loans, which we define as risk grade 10, some people call that OAEM, or higher, totaled $828 million at the end of the third quarter, down from $989 million last quarter. This $169 million improvement was largely driven by the successful resolution of several risk grade 10 multifamily loans as anticipated and communicated during last quarter's earnings call. Also, as we noted on last quarter's call, while we continue to work with a few more multifamily borrowers in the risk grade 10 category and expect resolutions on each of these to occur, our overall commercial real estate lending portfolio remains stable with steady operating performance across all asset types and acceptable loan-to-value levels and debt service coverage ratios. I'm proud of these results and all of us at Frost continue to be optimistic about our strategy. That strategy, combined with our locations in the best banking markets anywhere and the dedication of our Frost bankers puts us in a great position to succeed. With that, I'll turn it over to Dan. Dan Geddes: Thank you, Phil. Let me start by giving some additional color on our expansion results. During the third quarter, expansion locations delivered $0.09 of EPS accretion driven by Houston 1.0 generating $0.14 per share with Houston 2.0 and Dallas nearing breakeven and Austin, the newest expansion region, costing $0.04 per share. The expansion efforts, which began in December 2018, now solidly reap benefits to our shareholders as the branches sown in Houston 1.0 have matured and we expect the other expansion regions to follow a similar trend. For context, Houston 1.0 average branch age is 5.5 years, while Dallas' average branch is 2.5 years, Houston 2.0 average branch is 2 years and Austin, where we are roughly halfway through the build-out is just over 1 year on average. We continue to be pleased with the volumes we've been able to achieve. On a year-over-year basis, the expansion represented 38% of total loan growth and 39% of total deposit growth. Looking at calls for the quarter, the Frost commercial bankers in expansion branches represented 19% of total calls, 12% of customer calls and 31% of prospect calls. For new commercial relationships, 26% of all new commercial relationships were brought in from the expansion bankers. And when looking at just the expansion regions of Houston, Dallas and Austin, expansion Frost bankers accounted for 40% of new commercial relationships for those combined regions. Now moving to third quarter financial performance for the company. Regarding net interest margin, our net interest margin percentage was up 2 basis points to 3.69% from 3.67% reported last quarter. Our net interest margin percentage was positively impacted primarily by a mix shift from lower-yielding taxable securities into higher-yielding balances held at the Fed, loans and tax-exempt securities. Looking at our investment portfolio. The total investment portfolio averaged $20.2 billion during the third quarter, down $198 million from the previous quarter. Investment purchases during the quarter totaled $430 million of municipal securities with a taxable equivalent yield of 5.93%. We had $134 million of municipals roll off at an average tax equivalent yield of 4.88% and $317 million of agency paydowns. The net unrealized loss on available-for-sale portfolio at the end of the quarter was $1.14 billion compared to $1.42 billion reported at the end of the second quarter. The taxable equivalent yield on the total investment portfolio during the quarter was 3.85%, up 6 basis points from the previous quarter. The taxable portfolio averaged $13.3 billion, down approximately $458 million from the prior quarter and had a yield of 3.48%, flat with the prior quarter. Our tax-exempt municipal portfolio averaged $6.9 billion during the third quarter, up $269 million from the second quarter and had a taxable equivalent yield of 4.6%, up 12 basis points from the prior quarter. At the end of the third quarter, approximately 70% of the municipal portfolio was pre-refunded or PSF insured. The duration of the investment portfolio at the end of the third quarter was 5.4 years, down from 5.5 years at the end of the second quarter. Looking at funding sources. On a linked-quarter basis, average total deposits of $42.1 billion were up $311 million from the previous quarter. The linked quarter increase was driven primarily by interest-bearing accounts. The cost of interest-bearing accounts in the third quarter was 1.94%, up 1 basis point from 1.93% in the second quarter. Customer repos for the third quarter averaged $4.6 billion, up $342 million from the second quarter. The cost of customer repos for the quarter was 3.17%, down 6 basis points from the second quarter. Looking at noninterest income and expense, I'll point out a couple of items impacting the linked quarter results. Regarding noninterest income, we saw strong relative quarter performance in insurance commission and fees and public finance underwriting fees. Total noninterest expense was up 1.7% linked quarter and was impacted by higher incentive comp, medical expenses and technology expense. These were offset somewhat by lower planned advertising and marketing expense during the quarter, which were down $3.9 million from last quarter. As Phil mentioned, we are encouraged by our wealth management and insurance businesses. Trust and investment fees were up 9.3% in the third quarter compared to the same quarter last year and 8.2% on a year-to-date basis over 2024. Insurance commissions and fees were up 3.9% quarter-over-quarter and 6.9% year-to-date over 2024. Both of those lines of businesses are focused on a sales culture aligned with our organic growth strategy. Regarding our guidance for full year 2025, our current outlook includes one 25 basis point cut for the Fed funds rate in December. We expect net interest income growth for the full year to fall in the range of 7% to 8% compared to our prior guidance of 6% to 7%. For net interest margin, we still expect an improvement of about 12 to 15 basis points over our net interest margin of 3.53% for 2024. This is consistent with our prior guidance. Looking at loans and deposits, we expect full year average loan growth to be in the range of 6.5% to 7.5%, in line with our prior guidance of mid- to high single digits and we expect full year average deposits to be up between 2.5% and 3.5%, slightly higher than prior guidance. Regarding noninterest income, given our strong broad-based growth in the third quarter, our updated projection for full year growth is in the range of 6.5% to 7.5%, which is an increase from our prior guidance range of 3.5% to 4.5%. And we expect noninterest expense growth to be in the 8% to 9% range, in line with our prior guidance of high single digits. Regarding net charge-offs, we expect full year 2025 to be in the range of 15 to 20 basis points of average loans, a 5 basis point improvement from our prior guidance. Our effective tax rate expectation for full year 2025 remains unchanged from last quarter at 16% to 17%. Regarding our stock buyback, I wanted to mention that during the third quarter, we utilized $69.3 million of our $150 million approved share repurchase plan to buy back approximately 549,000 shares. With that, I'll turn the call back over to Phil for questions. Phillip Green: Thank you, Dan. Okay. We'll open up the call for questions now. Operator: [Operator Instructions] Our first question is from Casey Haire with Autonomous Research. Casey Haire: I wanted to touch on the NIM. The guide is the same but versus last quarter but obviously, we have a Fed cut coming. Just wondering what you're thinking about for the fourth quarter. Dan Geddes: So I would just say that with -- we have the cut in October and then obviously, we have the cut in early December as well. And so I would say that for the fourth quarter, we're generally looking for just in terms of our kind of back book repricing, that would be a benefit. We have some treasuries that are coming due here in November that will help. Obviously, with the 2 rate cuts, that will be a drag on NIM. But in terms of just overall kind of expectations for the fourth quarter, I would say that depending on the -- just in terms of just our volumes in terms of deposits that you could see the NIMs stay -- it has opportunity to stay relatively where it's at comparatively to the third quarter because of those cuts. But again, I think some of it is going to be driven by just volumes of deposits. Casey Haire: Okay. And then just switching to expenses. I think you guys have talked about like things can -- the expense growth can moderate from this high single-digit pace. I guess, kind of 2-parter. What do you see as sort of the core expense inflation for the bank? And how much longer until we can get to that point from this 9%? Dan Geddes: Yes. So I think we're really focused on 2026 expenses, the growth moderating from upper single digits. We're in the middle of kind of budget processing and -- process and not ready to give 2026 guidance. But I think in general, we're focused on getting that growth down from high single digits to, I would say, on a glide path that is heading towards mid-single digits. Whether that's in '26 or '27, we're not ready to kind of say what '26 will be but we see that growth path declining. Operator: Our next question is from Dave Rochester with Cantor Fitzgerald. David Rochester: We've heard from some other Texas players this earnings season talking about stronger competitive pressures in the market. And I was just wondering if you're seeing any evidence of that, any increase in pressures in the most recent quarter. And given, of course, the M&A deals that have been announced over the past few months, which is bringing additional larger competitors into your markets in a more meaningful way, how are you feeling about what that might mean for margin and growth going forward? Sometimes M&A can bring a lot of good opportunities from disruption and then it could also bring more competition. So how do you guys see that balance, that tug of war playing out? Phillip Green: Yes, thanks. I think you caught it right. There is in my view, some increasing competition. I think we called that last quarter. I think we see a little bit more of that this quarter. I don't think anything dramatic. But it's clear there's money out there to be lent. It's mainly on terms where you see the most relevant competition to us. And I think I'm seeing some more pricing competition, although just on the margins. I'm not worried about our ability to compete. Our pipeline is good. And -- with regard to the acquisitions, I think you're exactly right. We have a saying that change equals regression and there's disruption brought on by these acquisitions. It gives us, we believe, a great opportunity to get customers we wouldn't otherwise have gotten. And in some of the markets we're in, we're seeing some really good success with that. And I expect that we'll have more. And if we don't, it's not because we're not trying, we're laser-focused on it. So I think that there will be some opportunity there. That said, we are not always in the market with some of these targets. We don't have exactly the same business model. So there's not always an exact overlap that we can just take advantage of. As far as the other banks coming in, larger banks, I don't want to sound casual about it but that's been our life story for the last 40 years. And I'm not worried about that at all. We, I think, differentiate ourselves very well. And frankly, our largest competitors and most significant competitors that we choose to compete against are really too big to fail. Really, I'd say, just to be honest, Chase, Wells, BofA are our most significant competitors and, therefore, that's where our focus is. It's easiest to differentiate our value proposition against those banks. And they're good banks. I'm not saying there's anything wrong with them but they're very large and I think it's difficult in the segments that we are really good at and choose to compete in, difficult for them to do it at the same level of service and relationship that we have. So I'm not concerned with the other banks coming into the market. And I think we'll continue to do well competitively just like we have to date. It's my view. Dan Geddes: Just something to mention is that the 3 largest money center banks generally have about a 50% market share in the larger markets in Texas. And that happens to be where we get 50% of our new relationships from the larger banks. David Rochester: [indiscernible] how it works out that way. That's great. I guess maybe just switching to the margin. Appreciate the color on where that goes for 4Q. I was curious how you're thinking about that on a more normalized basis, just given the forward curve, the cuts that are expected next year. I know you're still working through the budget. But what do you see in terms of just overall NIM trend over time? Can we move higher over the next couple of years? Obviously, you've got loans and deposits growing in legacy parts of the business and your expansion as well. Just given that backdrop and the forward curve, how much more upside is there to margin? Dan Geddes: Yes. I'll kind of talk -- and I think I mentioned this on the calls the last few quarters, for the fourth quarter, we have around $800 million in either maturities calls or prepayments. And that is around a yield of [ 3.80% ]. And so that will give us an opportunity to invest at higher yields. In '26, that number is going to be a little bit north of $2.5 billion at around a [ 3.60% ] yield. So we will have some opportunity to pick up yield there, obviously, with -- on the short end of the curve, if we do get steeper rate cuts, that would be kind of a headwind to net interest margin. What -- all things being equal is one thing but if we do see a lot of rate cuts, you could see deposit growth accelerate in that environment as well. So just keep that in mind as you kind of look into '26 and beyond if we're in a lower interest rate environment. Operator: Our next question is from Steven Alexopoulos with TD Cowen. Steven Alexopoulos: I want to start -- maybe for you, Dan, going back to your response to Casey's question. So with expense growth expected to moderate, say, over the next 18 months, 2 years, back down to mid-single digit. Does that contemplate the same degree of new branch openings each year? Or does that throttle down or need to throttle down in order to get to mid-single digit? Dan Geddes: That's assuming what we've -- I think a typical year of expansion branch openings. We haven't plugged in less growth. It's working and we're going to continue to do it. Steven Alexopoulos: Got it. So it's just the cost of new as sort of in the run rate at that point. Dan Geddes: Yes. I mean if you think about -- we've opened roughly 70 new branches and so we're up to 200. Well, if we open 10 to 15 a year, it's a lot less of a percentage when it was 130 than when it is at 200. Steven Alexopoulos: Got it. Okay. And then for you, Phil, so you've been pretty clear on these calls. You always get asked about pursuing M&A and you've been pretty clear you're innerly focused. The organic growth playbook is working. I'm just curious, as you think long term, I know you guys always play the long game and you look at potentially over the long term, taking the model outside of Texas. Are you poking around at all to see if there's a small bank out there, which would give you a toehold outside of Texas, just given this window seems to be wide open now to announce and approve deals? Or are you not even exploring that? Phillip Green: Steve, I am not exploring it. And it would be my preference when we do ultimately move outside the state to some market, it would be my preference to do it organically. I think it's cleaner. I think that there could be an opportunity to -- and we would want to hire local talent but I don't think we have to bring along a financial institution to do it with all the accompanying headaches and risk and other things that come along with an acquisition like that. It's been my experience, is that acquisitions, even small ones, tend to take a lot of the air out of the organization as they try to fold that in, particularly when you're as heavily curated a brand and service proposition as we have. So I'd like to believe that we would be able to do that completely organically. And I'd like to believe that we would mix in Frost bankers from the legacy operations along with new talent that we would bring in, in markets that we think would resonate with our value proposition and we could do that. As you say, we play the long game. And I realize that could take a little bit longer but I also believe it has less risk and it has a higher certainty of success. So that's my perspective right now. Operator: Our next question is from Jared Shaw with Barclays. Jared David Shaw: How should we be thinking about the capital generation and return from here in light of the buyback? Is that really just driven by feeling like 14% CET1 is high enough and we're solving for that? Or is it more in reaction to the underlying demand and opportunity for loan growth? Phillip Green: I don't think it signals any kind of lack of optimism of success for growth. I can -- want to make sure that we're clear on that. We are having good growth, as Dan talked about. We've got a great pipeline. I think we're going to be successful with loan growth. But keep in mind, we're starting out from a 50% loan-to-deposit ratio. So we've got lots of dry powder, whether it's in liquidity or it's in capital. So there is no signal whatsoever through those stock buybacks that we're not successful and going to be successful in competing in the marketplace and being successful. I think what's true is that we are generating significant amounts of capital and profitability. And we're taking the opportunity occasionally to utilize that capital and buy some stock back when it's clear that we've got room to do so. And that's what we did. It was not a -- it wasn't a play on price per se. I mean it was pretty much in line with where we are today. I think it's -- we feel like it's good intrinsic value for our shareholders. We have a lot of capital that we can utilize in that way. And so that's why we did it. Jared David Shaw: Okay. And then maybe shifting a little bit. When you look at the expansion markets, is there -- it's actually the newer markets, is there an opportunity to see accelerated fee income coming out of that as well? Or is it really more direct balance sheet lending? What's sort of the -- as we look out over the next year or 2, what's sort of the opportunity from fee income from these new locations? Dan Geddes: Jared, I think that's a good point. We are -- as Phil mentioned, we're bringing in new customer acquisition at what we believe is an industry-leading rate and a lot of that is attributable in these expansion regions where we're able to bring on new customers. And so we are seeing probably better than our pro forma in terms of service charges and it's purely volume related. It's -- we're -- we've brought on more customers than our pro forma projected. And so we're seeing some opportunity there to grow fee income. Operator: Our next question is from Peter Winter with D.A. Davidson. Peter Winter: I wanted to just follow up on capital. The TCE ratio is on the low side versus peers. It certainly had a nice increase this quarter given the AOCI. Is there a level you'd like to see the TCE ratio get to? And maybe any thoughts on restructuring the securities portfolio? Phillip Green: Well, I wouldn't -- first of all, regarding the restructure of the portfolio, it's not something that we are focused on right now. We've got -- that's been discussed, I know in the industry for a while, you've had some people do it but we're going to see those ultimately mature at par and we've got great liquidity and the ability to hold it. So not looking to do that. With regard to capital, I think we're at some of the higher levels we've ever been at. So I think we've got some room as it relates to what we do with that and that was reflected in some of the buybacks that we did this quarter. And I really would expect to continue to be using that vehicle over time at various levels. Peter Winter: Okay. Just on the branch expansion, great to see it accretive to earnings. It's been a pretty long journey. Phillip Green: Yes, it is. Peter Winter: Last quarter, you mentioned it was going to be accretive to '26, so probably a little bit earlier than, I guess, we were assuming. Can you provide any additional color maybe on the level of accretion you're expecting next year? Phillip Green: Not next year. We're not going to give any guidance on anything next year as is our practice until January. But I think we can give some color on it, Dan? Dan Geddes: Yes. So -- and the reason we wanted to call out the accretion when it happened and it was more significant and it -- we've been around breakeven for several quarters but this quarter's accretion was more than twice what it was in the earlier quarters. So we just felt like it was time to bring it to life that it's not only accretive, it's growing. And I brought up the age of each of the expansions because I think that's very relevant that you had Houston generating $0.14 at 5.5 years and roughly Houston 2.0 and Dallas, which are 2 years and 2.5 years at breakeven, well, I think you can see the trajectory of where that earnings growth will come from, both in Houston 1.0 maturing. But really, it's in 2.0 and Dallas reaching that kind of 4- and 5-year status. So again, I think we're looking at probably for the fourth quarter, roughly around the same EPS accretion with the rate cuts, maybe that, that will impact the profitability for the fourth quarter for the expansion by $0.01 or $0.02. Phillip Green: I think Dan brings up a good point with the rate cuts and I think it's important to understand how we look at it. This is a long-term strategy for us. And our pro formas were done based upon what we can think of as a normalized interest rate environment, which to us is probably a 3% Fed funds, 6% prime environment. And we're a little bit above that now. And we don't know what the Fed is going to do. If the Fed brings rates down, just like he said, the value of really any intermediary that's asset sensitive will be somewhat less in terms of the current earnings but it doesn't reflect poorly on the success of what's happening. I mean, because rates are cyclical as far as that goes. When we started out early on the same rates went to 0, right? So we've been in low rate environments. We'll be in higher rate environments. But what you're seeing is, you're seeing the breakout of where that Houston 1.0 is now carrying the load plus adding accretion. And then when you get Houston 2.0 and Dallas and those kinds of things getting that same level, it's just -- the math of it is it just -- it's that tree that continues to grow. And I think that's an exciting part of it. Operator: Our next question is from Sean Sorahan with Evercore ISI. Sean Sorahan: So wanted to circle back on the fee commentary earlier. I heard in your prepared remarks that full year '25 fees are now expected up 6.5% to 7.5%. A quick back of the envelope math there says 4Q should be essentially flat or down a touch. And when you annualize that number, it looks in line with Street estimates for next year, which means any growth there should be interpreted pretty positively. Can you unpack drivers of that flat 4Q expectation? And to the extent that you can for next year, frame out any growth? Dan Geddes: Yes, I'd be happy to. So I think what we're looking at in the fourth quarter, we've had some good growth in trust and service charges, insurance, really kind of across the board. Fourth quarter, we -- it's a little bit lighter in terms of insurance business. So that's one call out. Another one is our public finance underwriting. We had some pull forward of some school bond underwriting that we don't think will happen to that same degree in the fourth quarter. So that's going to impact fee income. So those are just a couple of just, I would say, kind of that linked quarter for the fourth quarter. Sean Sorahan: Got it. And then maybe shifting to credit just because you haven't touched on that yet. Results look great in the quarter. NPAs were down and NCLs were just 12 basis points, both were encouraging. But I think there's a bit of incremental apprehension regarding credit in the market today, maybe relative to a couple of months ago. Can you talk through some of the underlying trends you're seeing and maybe highlight any of the areas you're monitoring more closely given some of the broader macro uncertainties remain, if you had to flag any? Phillip Green: Yes. Thank you. Well, as we pointed out, credit has been very solid. It's been improving. And I think the level of nonperformers, for example, that we've got -- excuse me, while I knock on wood is -- I think that's the lowest I may have ever seen. So credit continues to be good. The credit worry of the day used to be commercial real estate and multifamily. That's been taken care of and it's in the process of being taken care of as private equity takes more of those credits out and as these developments get more seasoned, et cetera. So while there's work yet to do in the multifamily side, things, I think, are solid there. I'm not worried about that. Really -- I really wasn't worried before. But I mean, the numbers are just getting less. And while there will be -- there may be some risk grade 10s that move in to multifamily as they reach stabilization if they haven't hit their debt service coverage ratios, there are other -- at the same time, there are others moving out. So I feel good about that. The acronym of the day is NDFI. I had to Google that to find out what it was but it's a thing now. And so obviously, we've looked at it. I can give you some visibility on that. It's probably implied with your question. The definition that's used in the call report, by that definition, we have about $860 million of NDFIs. That's about 4% of loans. I think it's important to understand what it is. Well over half of that, $532 million would be subscription lines to private equity. That would be about $225 million of that. And then loans to family offices, insurance companies, bank holding companies, portfolio investors would be about $308 million of that. If you look at loans to what I'll call private credit intermediaries, we've got $327 million of those. Probably the most interesting ones based on headlines would be what I call loans to consumer credit intermediaries, which would include Buy Here Pay Here companies. That number is only -- it's here, $74 million. It's performing well. I think if you go back and think about some of our previous conference calls, we saw weakness in the Buy Here Pay Here used car segment back in mid-2023. You might recall our talking about some of the stress in that industry because collateral values, you also had interest rates moving up, which were a problem and just affordability of vehicles, et cetera. And so we moved out about $50 million of that asset class and we're left with just this $74 million, of which we feel really good about. The largest of those is about a $60 million relationship but it's been in business for, I guess, since 1958. It's a 16-year relationship of our company. It's a very conservative operator. Feel really good about that. I could go through other things. There are factoring companies. There are asset-based lending companies. There are things like that. But one thing I think gives an idea to the kind of relationships we have, of that $860 million in total -- and remember, that includes family offices, bank holding companies, portfolio investors, all these subscription lines, all that, which is the majority of it. But we have $1.5 billion of deposits from that asset class versus the $860 million that we've got lent out. And our average relationship in years is 11 years. So we don't have any of the headline stuff that's come out. We're just doing banking business here. I think credit is solid in it. And you got a bank character first, right? I mean I've done some reading on what's out there and what's happened and it seems like character has been a problem. And if you get away from that, you can have trouble. And so I guess one other thing I'd say is you might remember a couple of years ago, we had a company that had a new system and some inventory problems and we worked through that. It was a serious problem for them but they were able to work out of it. It all paid off in time. But it did, I think, highlight to us the need to enhance and increase our field audits in certain situations. So we tightened up our policy there. And so I'm proud of our people for being really out ahead of this, in my view, a couple of years, as it relates to the Buy Here Pay Here and in some of these other areas, too. Look, it's banking and you're never going to be perfect. So I'm not going to say we're not going to have any problem ever in place. But as I look at this portfolio, I do not have any heartburn about it as I read what's going on in the paper and some other areas. Operator: Our next question is from Manan Gosalia with Morgan Stanley. Manan Gosalia: Could you talk a little bit -- can you talk a little bit about the loan growth trends and what you're seeing? Last quarter, you noted more competition on price and structure. I think you pointed to CRE paydowns this quarter as well. How long do you see that as a headwind? And do you think it's got better or worse over the past quarter? Phillip Green: That's a really interesting question. Thank you. I'll tell you that as I have been out in the field talking to our lenders and I think this is proven by the pipeline numbers that I discussed earlier, here's what I'm hearing from them that the summer was tough, particularly the end of the summer, activity was slowing. And I think we saw that a little bit at the end of that summer period. But what they have told me, I'd say 9 out of 10 of the relationship managers I've talked to have talked about how things are moving forward now. And that's -- I think that's new. And I think that's encouraging. And again, as you looked at our pipeline for this quarter, it was up 20% on a linked quarter basis. Now I'm not saying that was all related to that but it certainly would have been a factor. I remember one conversation I had with one lender in Dallas and he gave this example of what a customer said that, that my customer told me, you know what, I wish I had just done the deal 18 months ago. Because it seemed like every time you turn around, there's some problem where the world is going to fall off a cliff and you wait and you wait and if I had just done this, I'd be 1.5 years into the project. So I think there's some people that are getting more comfortable with uncertainty, frankly. I think there's not uncertainty there but there's enough certainty and the need for business to move forward, that they're starting to do it. And I'm hearing that more broadly in our business. And I think that's a trend that I hope continues. I think it may well be doing that through the end of the year. Manan Gosalia: Got it. And I guess, does that mean that there's enough opportunity to grow despite the higher level of competition and maybe despite the high level of CRE paydowns that you're seeing? Phillip Green: I don't think the competition is going to cause us not to be successful. I mean it's there. But I think that in periods of growth, we tend to get our share of the business. People want to bank with us and we are solid and we're always in the market. They don't have to wonder if we're going to be in and out. So I'm not so much worried about competition right now. Frankly, I consider myself and our company a low-cost producer on funding costs. So I can be as aggressive as I want and be as effective as I wanted on the price side. Now the structure side is a different thing and we always deal with that. But as to whether or not it can offset, say, paydown headwinds for things like multifamily, et cetera, I think just talking to our regional teams, they feel like they can. They know what paydowns are. They're talking to their customers. They know what paydowns are expected. They know when they're expected. And yet they're still expecting some growth. So -- and those are the numbers that Dan is really looking to when he gives you those estimates of what growth is. So I would have to say, yes, we think we can offset them. Dan Geddes: I think early in the year, we were losing, especially on the CRE, maybe the first quarter, if I recall, it was encouraging to see that our CRE weighted pipeline had grown 30% linked quarter. And our customer percentage of our weighted pipeline is around 60% and so it's balanced. And that's a really good balance to have 40% of your weighted pipeline on prospects or new relationships. But to see 60% be our customers, I mean that tells me a lot of these payoffs that we've experienced have also kind of cleared the deck for -- especially in CRE for us to go and do the next project for our developers. And just living that world for 20 years, yes, you get the pain of the payoff but you also get to participate in their next few projects. So I think we're looking forward to seeing some really strong commitment trends. And in spite of the headwinds of payoffs that have been elevated this year. And I think 2026, we have some multifamily projects that we expect will pay off through refinance if they're not quite there yet or for merchant builders that may be ready to sell in a different interest rate environment. And so just -- it could also create loan opportunities for us as well. Operator: Our next question is from Catherine Mealor with KBW. Catherine Mealor: You talked about how this quarter was some of the best you've seen in the consumer checking. And if I look at your loan growth versus deposit growth, you've been growing loan growth successfully in the high single-digit range. Deposit growth is typically kind of 2% to 3%. But it feels like we're seeing a shift in deposit growth this quarter and then with -- just with the profitability of your new branches, too. And so just kind of curious, is it fair to assume that, that deposit growth rate accelerates into '26 and so that average earning assets or our balance sheet growth tends to look a little bit better into next year relative to what we've seen over the past couple of years? Dan Geddes: So I would say that there's an opportunity for that as I think one of the opportunities is as interest rates if they -- if we do get several cuts, there's some funds that are sitting in, I'll call, off-balance sheet money market funds that all of a sudden, we start to compete really, really well with. And I could see that being an opportunity to grow deposits to move some of those money market funds on to a bank balance sheet. I'd also see just in terms of just opportunities with our growing of new relationships, we're getting a lot of deposit growth from that. Looking at just kind of where we're getting business from, we've seen roughly -- let me get the number right here because we did on our deposits, our year-to-date, our new relationships generated basically our deposit growth. So our ability to bring on new customers has been a real big driver of deposit growth. So I would expect that to continue into '26 and '27. So I think there's an opportunity. I do think that you're going to see continued competitive pressure on deposit rates and then just deposit growth. So I think there's an opportunity. I don't think we're going to -- I wouldn't necessarily think it's going to expand to levels that we've seen in years past where it was high single digits. But I do think there's a opportunity for us to nudge it a little higher in coming years. Catherine Mealor: And then separately from that, if you look at your slides from this past quarter that you put out, I think Slide 28 shows a really interesting progression in the EPS from the branch investments that you've made and it shows a big pop in EPS in '26 and '27 and you've already talked a lot about that on this call so far. And so it would tell you that we've got big EPS growth just coming from that expansion strategy in '26 and really even more so in '27. And then if you look at consensus estimates, there's very little single-digit kind of EPS growth in consensus estimates today. So do you think the Street is appropriately viewing the profitability improvement that you think can come from the branch expansion? Or are there just structurally other things that are in there that are offsetting it that we need to be aware of? Dan Geddes: Probably the biggest thing that we assume just a normalized Fed funds rate of 3%. And so as -- right now, we're in a higher interest rate environment. So if rates fall, that would be the only -- that would be kind of one of the factors that you would just need to work into your model, is just the interest rate environment and that's just the entire business is impacted by that, correct -- right? So I think that's -- other than that, that trajectory in a normalized environment is -- and we feel really good about because of the volumes that we've achieved with Houston, Dallas and now Austin. Operator: And our final question comes from David Chiaverini with Jefferies. David Chiaverini: How should we think about operating leverage? You mentioned the glide path of high single digit to mid-single digit on expenses looking out to 2027. Any comment on the operating leverage that could potentially come with that? Dan Geddes: We're focused on that expense number. I will tell you that. And with us able to acquire new customers and with our organic growth strategy, I mean, those do help when you think about noninterest income, kind of fee revenue with wealth management, insurance, those lines of business, we're optimistic about us growing in those 2 areas. As we continue to grow in Texas, they're very aligned with our organic growth strategy. So I think there's opportunities there. The headwind is going to be the interest rate environment that we're in and just on the net interest income. And just that growth, that would be my only comment there is, we're going to see opportunities to reprice back book on both loans and our investment portfolio but we're also interest rate sensitive as well. So I think those -- that -- those are the components that we look at. We do think there is this glide path on the expense side to where we're not running high single digits in the foreseeable future. David Chiaverini: Very helpful. And then a follow-up on credit quality. There's been some volatility in oil prices in recent months. Can you remind us at what price level your borrowers would potentially come under some stress? Phillip Green: Well, it depends on a lot of factors, right? It depends on the basins that they're in. It depends on their operating costs, et cetera. So I think you'd look at the industry numbers. And I think it's generally pretty -- it probably pretty -- it'd be pretty well agreed to that in the 40s, you're going to end up with some stress on the companies. But here's a really important factor is how much you are requiring hedging on the portfolio? And we require a significant amount of hedging on our portfolio. And we look deeply into our loan portfolio. They do it every quarter. But obviously, with prices being down, there is a even higher level of interest. But man, the leverage in our portfolio is so low right now and the level of hedging is high and cash flow, EBITDAX is high. I mean it is in really great shape. So -- that combined with the fact that we're in the mid-single digits in energy compared to where it was 10 years ago, 3x that. I feel very comfortable with the portfolio. And even if we did get into the 40s for a while, I'm not really concerned at this point in any existential way about that portfolio because there's a lot of hedging that goes on there that we have in place. And so there's time for people to work through issues and get to the other side. So -- but short answer to your question is probably somewhere in the 40s their stress. Dan Geddes: And just keep in mind, it's not -- the portfolio is about 25% gas, 75% oil, So it's not all crude. Phillip Green: That's true. Yes. That's very true. Hope that helps. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Phil Green for closing remarks. Phillip Green: Okay. Well, that's all we have for you today. We thank everyone for their interest and we appreciate you being on the call. Thank you. We're adjourned. Operator: Thank you. This will conclude today's conference. You may disconnect at this time and thank you for your participation.
Operator: Severin White: Good morning, everyone, and welcome to DigitalBridge's Third Quarter 2025 Conference Call. Speaking on the call today from the company is Marc Ganzi, our CEO; and Tom Mayrhofer, our CFO. I'll quickly cover the safe harbor. Some of the statements that we make regarding our business operations and financial performance may be considered forward-looking, and such statements involve a number of risks and uncertainties that could cause actual results to differ materially. All information discussed on this call is as of today, October 30, 2025, and DigitalBridge does not intend and undertakes no duty to update it for future events or circumstances. For information, please refer to the risk factors discussed in our most recent Form 10-K filed with the SEC for the year ending December 31, 2024, and our Form 10-Q to be filed with the SEC for the quarter ending September 30, 2025. With that, let's get started. I'll turn the call over to Marc Ganzi, our CEO. Marc? Marc Ganzi: Thanks, Severin, and welcome, everyone, to our third quarter 2025 business update. We appreciate you joining us on the call and look forward to answering your questions. Let's get to the quarter. This quarter really exemplifies what we've been building towards at DigitalBridge from our near-term financial goals to our longer-term strategic priorities. Let's get started with the key highlights that align with our strategic road map. First, financial performance. DigitalBridge delivered another quarter of robust growth with fee revenues reaching $94 million, up 22% year-over-year. Our fee-related earnings grew 43% to $37 million in the third quarter, reflected continued margin improvement as revenue growth continues to outpace expenses. Second, capital formation. We raised $1.6 billion in new capital during the quarter, bringing our year-to-date to $4.1 billion. Look, we're well positioned thinking through the fourth quarter here as we remain on track to meet our full-year objectives. As most of you know, the fourth quarter is historically our strongest quarter. Finally, and this is the most important story of the quarter, the relevance and strategic value of our power bank was on full display. We saw record data center leasing activity across our portfolio that will build and accrue significant value for you, our investors, over time. Our portfolio company, Vantage Data Centers announced the Frontier mega campus in Texas, a $25 billion, 1.4 gigawatt development, serving the leading AI infrastructure build-out. This was followed up by a second campus, dubbed Lighthouse in Wisconsin, a $15 billion-plus development to support the expanding OpenAI and Oracle Stargate project. These landmark transactions demonstrate that our years of securing power across the portfolio are now translating into the largest leasing commitments in data center history. I talked about it last quarter, having a power bank that is ready to go for our customers is a comparative advantage. Let me put this quarter's performance in a broader context. Continued financial performance and capital formation that advances us towards exceeding our full-year objectives. What makes this quarter truly distinctive is how our strategic positioning around power is creating differentiated outcomes at the portfolio level. For years, we've talked about the importance of power as the critical constraint in the AI era. Today, we're seeing that thesis play out in real time, and DigitalBridge is leading on the front. As I referenced, year-to-date capital formation of $4.1 billion positions the firm to surpass our financial targets. We achieved our $40 billion FEEUM target 1 quarter ahead of schedule, reaching $40.7 billion as of the third quarter. This milestone that reflects both the strength of demand for digital infrastructure and the execution capabilities of the DigitalBridge global platform. The record FEEUM today translates directly into revenue and earnings growth. We're seeing particularly robust activity in co-invest, where third quarter fee rates continue to expand relative to historic levels, up to 70 basis points in Q3. I talked about this earlier this year in multiple quarters. We're very focused on expanding margins in our co-investment program, and we're getting it done. That's the key. We're executing. We're finalizing our flagship strategy capital formation, targeting over $7 billion in the next few weeks as we head into the end of the year, our focus has pivoted to the second credit strategy and our new offerings in power, stabilized data centers and private wealth that will drive our 2026 capital formation. Having a new product pipeline that sets you up for success is really what it's about in terms of being an alternative asset manager where we have a multi-strategy platform. This is the full effect of DigitalBridge as a full alternative asset manager. This is on display for all of our investors as we push forward into 2026. Next slide, please. Now I want to talk about a key component of our private wealth strategy, the partnership we announced with Franklin Templeton in the third quarter to launch our first programmatic private wealth distribution channel. At its heart, the partnership is about democratizing access to institutional quality, differentiated digital and energy infrastructure investments that were previously reserved for institutions. Franklin Templeton is a $1.6 trillion global investment leader and their CEO, Jenny Johnson, has prioritized this initiative as growing alternative investment portfolios. Importantly, Franklin Templeton are building a diversified open-ended infrastructure solution that will have the ability to invest across all infrastructure subsectors. They intend to compete head on with the mainstream supermarket asset managers. On our side, we're bringing our $100 billion-plus in assets under management and our position as the leading digital infrastructure specialist across data centers, cell towers, fiber networks, digital energy and edge infrastructure. We're partnering with our friends at Copenhagen Infrastructure Partner, the world's largest dedicated greenfield energy fund manager with $37 billion in AUM and Actis backed by our friends at General Atlantic with their deep sustainable infrastructure expertise. For their part, Franklin will focus their accredited investor product on the mass affluent segment in the market, a difficult segment to access without significant investment in sales infrastructure. They have a sales force of over 600 people, giving them strong distribution capabilities and reach. The strategic rationale here is compelling. Together, we're focused on a massive investment opportunity. There's a $94 trillion global infrastructure need by 2040. We're positioned at a pivotal inflection point as AI, electrification and connectivity megatrends accelerate infrastructure demand. Now, why does this matter for you, our DigitalBridge shareholders? Look, first, the 3 reasons: One, evergreen capital. This is an incremental source of capital and FEEUM that layers over time in a long-duration structure. Second, it's an earnings contributor. Fee revenues convert to fee-related earnings as the platform scales. Then third, earlier carrier realization. The potential private wealth carry is paid as accrued earlier than our traditional institutional structure. This partnership launches exactly at the right time, and it supports our strategy of building a multichannel approach to wealth sales. It enables us to reach multiple client segments across the broader wealth universe. There is a secular migration of wealth management allocations to private infrastructure. This is happening. The institutional quality solutions were designed are meant to provide stable, inflation-linked cash flows with resilience through economic cycles. We're capturing what we believe is a massive opportunity and Franklin Templeton gives us distribution platform and private wealth client access to do it at scale. That's the key component that we're doing this at scale. Next slide, please. Let me bring this all together with what I believe is the defining characteristic of the DigitalBridge portfolio today, our power bank. To be credible and to be honest with our customers today, if you don't have a power bank, you really can't have a conversation in terms of leasing megawatts and gigawatts. Last quarter, I highlighted this. We have over 20 gigawatts of total secured power across our data center portfolio. That's not a projection. That's actual power that we can access. That's critical to understand that, that this is not a book dividend or something that we're trying to accomplish. This is power that exists inside of existing land, existing facilities, existing campuses with our 11 existing platforms. In the third quarter, we put that power bank to work and leased a record 2.6 gigawatts across the DigitalBridge portfolio. To put that in perspective, that represents 1/3 of total record U.S. hyperscale leasing for the quarter. 1/3. That's not market share. That's market dominance in the most important segment of the data center industry today. Here's what it means in practical terms. When the world's largest technology companies need to deploy AI infrastructure at scale, they come to our portfolio companies. They come because the portfolio companies have a long track record of delivering for them and because they've got the power. In today's environment, power is everything. You cannot build a 1 gigawatt AI campus without 1 gigawatt of power. It's just that simple. Ultimately, the 2.6 gigawatts of third quarter leasing translates directly into new capital formation, fee revenues and carried interest and long-term value creation. These are decade-plus contracts with investment-grade counterparties. The revenue visibility is exceptional, and the returns are improving relative to what we underwrote when the power was originally sourced. As you think about DigitalBridge's positioning today, think about it this way. One, we have the power; two, we have the platforms; three, we have the customer relationships; and four, we are executing. That combination is creating outcomes that very few firms in the world can deliver. I would argue we are actually the only firm that can deliver it on a global basis, and we're only in the early innings of this cycle. I cannot be more excited about this development. Again, this has been set up. This has been our conversation with you, our investors, for the last 3 quarters. How would we translate this 20-plus gigawatt power bank into comparative advantage? This is as easy as you can see it for investors today. We have the capability, we have the advantage, and we're executing. Next slide, please. Now let me put the power bank into broader context of what we're building across the entire DigitalBridge portfolio. Look, across our 11 data center platforms, we're deploying significant capital to support the growth of the AI ecosystem on a truly global scale, catalyzing development from hyperscale to private cloud to the edge, spanning North America, Europe, Asia Pacific and Latin America. The key to this is it's a customer-driven investment model following the logos where the hyperscale, enterprise and cloud customers are demanding capacity. In North America, Switch, Vantage, DataBank and Expedient are each scaling to meet differentiated customer segments from the largest hyperscale AI workloads to enterprise edge computing. In Europe, Vantage EMEA and Yondr, our newest platform, is building out critical capacity across multiple markets. Vantage Asia Pac and AMES are positioning us for rapid growth in Asia Pacific, while Scala continues to lead in Latin America, and AtlasEdge is capturing the emerging opportunities at the intersection of connectivity and compute in Europe where inferencing will come into full focus in the next decade. We have the products for every type of workload. We have the products for every type of workload in every geography. This is by far the most unique and differentiated data center platform in the world. What makes this powerful is the diversity and complementary of these platforms. We're not a one-product shop. We have the right platform for hyperscale GPU compute, for private cloud workloads, for enterprise colocation, edge infrastructure, and of course, now we move to inferencing. That breadth means we can serve the full spectrum of AI infrastructure demand. It means our customer relationships deepen as their core requirements evolve. That's what I love. I love evolving with customers. Just like we did 30 years ago when we evolved the towers from analog to digital into multiple different technologies over the last few decades. We're capturing that same business model with our customers today in data centers. The capital we're deploying across these platforms is measured in tens of billions of dollars over the next several years. It's directly tied to contracted customer demand and secured power positions. This is DigitalBridge's competitive advantage at scale, a global platform with local expertise backed by institutional capital following customer demand and enabled by our market-leading power bank. With that exciting overview, let me turn over the call to Tom to walk you through the financial details, and I'll come back later to wrap it up. Tom? Thomas Mayrhofer: Thanks, Marc, and good morning, everyone. As a quick reminder, the full earnings presentation is available within the Shareholders section of our website. As Marc discussed, we had an exceptionally strong third quarter, supported by continued capital formation in our flagship fund series, which generates high-margin catch-up fees. Throughout my remarks, I'll highlight the impact of these catch-up fees in order to provide a baseline for our prospective performance once we complete the fundraise for our current flagship funds in the fourth quarter. Starting with the financial highlights. In the third quarter, we recorded $93 million of fee revenue, representing an increase of 22% over the third quarter of 2024. Our fee revenue this quarter benefited from the cumulative effect of organic growth in our flagship fund series and co-investments over the last 12 months with a $8 million contribution from catch-up fees in the third quarter. This growth in fee revenue resulted in $37 million of FRE in the quarter, an increase of 43% over Q3 of last year and putting us on track to hit or potentially exceed the top end of the range for our 2025 full-year FRE guidance. Excluding catch-up fees, FRE for the quarter would have been $29 million, an increase of 36% year-over-year. Growth in FRE resulted in distributable earnings of $22 million for the quarter, representing a double year-over-year. As of quarter end, our available corporate cash was $173 million, providing material liquidity and flexibility for us as we continue to evaluate both our capital structure and opportunities to invest in and grow our business. We also currently hold $54 million of warehouse investments on our balance sheet to support the launch of new power and private wealth strategies, which we expect to recycle over the next year as we raise third-party capital for these products. Moving to the next page. Fee-earning equity under management increased to $40.7 billion as of September 30, representing a 19% increase from last year. This growth is primarily driven by capital formation in the DBP series and co-investments as well as fees activated upon deployment of previously raised capital. We closed $1.6 billion in new fee earning commitments during the quarter, led by strong co-investment activity and new commitments to our latest DBP flagship fund. Turning to the next page, which summarizes our non-GAAP financial results. As mentioned earlier, we reported $93 million of fee revenue in the quarter, representing growth of 22% over the same quarter in the prior year. Our LTM FRE margin was 38% as of the third quarter. We expect FRE margins to remain elevated through the final close of our flagship fund in the fourth quarter of 2025, supported by the continued contribution from catch-up fees. Moving to the next page, which summarizes our carried interest and principal investment income. We reported a $20 million reversal of carried interest during the quarter. As a reminder, the company accrues carried interest based on quarterly changes in the fair value of our fund investments. As discussed previously, many of our vehicles are in the early to middle stages of their life cycle and have not fully worked their way through the J curve to be entirely clear of the preferred return. At this point in their life cycle, small changes in the fair value of the fund assets can have an outsized impact on the quarterly accrued carried interest that we report, including causing reversals as we've seen this quarter in periods when the appreciation in the portfolio does not exceed the preferred return hurdle for the quarter. As we've discussed in prior quarters, carried interest compensation expense tracks these changes, and therefore, there was a commensurate reversal of a portion of the unrealized carried interest compensation this quarter. Principal investment income, which represents the mark-to-market on the company's GP investments in our various funds was $25 million. Turning to the next page. This chart continues to highlight the stability and consistency in growth, both in revenues and margin that we've experienced over the last 2 years. We've included this quarter FRE metrics, both gross and net of catch-up fees, given the more meaningful contribution from catch-up fees this year as we close out the fundraising period for our most recent DBP fund. LTM margin, excluding catch-up fees, has grown to 33% as of September 30. This quarter, we saw $1.1 billion of FEEUM inflows, a significant portion of which was related to the activation of fees on previously raised co-investment capital. These inflows were partially offset by approximately $100 million of outflows. Finally, the company continues to maintain a strong balance sheet with approximately $1.7 billion of corporate assets, largely reflecting our material investments alongside our limited partners and available corporate cash. We're pleased with our results through the first 3 quarters of the year, and we're very excited about the opportunity set that we see ahead of us, both in our core business and some of the new initiatives that we're working on. With that, I'll turn the call back over to Marc. Marc Ganzi: Thanks, Tom. Now I want to shift gears and talk about our investment activity and how we're creating value at our portfolio companies. As a reminder of the framework we outlined last quarter, our competitive advantage is built on a 3-decade operational framework that delivers repeatable value creation. The DigitalBridge development model has 3 phases. Phase 1, we establish platforms. We back great CEOs. We build great companies. We identify and acquire the right platform and the team to capitalize on unique digital infrastructure opportunities. This is about pairing capital and operating expertise with the right strategic business plan around both greenfield development and strategic M&A. You've heard me call it before, this is the build and buy. We move to the second phase, which is about transforming and scaling. Once we have that platform, we have the right team, we execute operational transformation to improve margins, grow the business and scale it efficiently. Then Phase 3, follow the logos. This is our customer-driven investment framework. We allocate capital and resources to support network growth where our customers are demanding that capacity. We don't build data centers or cell towers or fiber networks on spec, never have. Haven't done it in 32 years, we wouldn't start now. We follow the logos. We go to where Microsoft or Oracle, any of the hyperscalers are telling us they need capacity, and we show up for them with strong intention and execution. This framework has delivered repeatable value creation for 3 decades, and it's what's driving the results you're seeing at Vantage, DataBank Switch and our other platforms today. We've been applying this playbook consistently, and it works. It's worked for a long time now. Let me take you through several new initiatives and transactions that demonstrate this model in action. Next slide, please. In September, we announced that GIC and ADIA, both existing Vantage partners are investing $1.6 billion to scale Vantage Asia Pacific platform to 1 gigawatt of capacity. This investment supports the Johor Campus acquisition and broader regional expansion across 5 markets. Let me unpack that for you and why it really matters. Singapore used to be a traditional data center hub in Southeast Asia, but land, power and regulatory constraints have led to a moratorium at one point. That leads to limited growth. Now, along comes Johor, just across the border in Malaysia has emerged as a natural overflow market, much like we executed that strategy in Reno, Nevada when it became clear to us that Santa Clara had the same type of issues. It offers lower cost, proximity to Singapore, less than 1 millisecond and dark fiber connectivity to the Singapore hub. From a customer's perspective, it functions almost like an extension of Singapore, but with better economics and available power. This sounds really familiar, doesn't it? This is exactly what we did with Switch and Reno, where we have today over 1.8 gigawatts of compute available for our customers in Reno. We're running that same playbook here in Johor. The APAC data center market is growing at double-digit growth rates and is expected to reach $77 billion by 2030. 72% of organizations tie their data strategy directly to AI initiatives, which means the demand for data center capacity in the region is only going to accelerate. Again, using the same playbook, we brought in new leadership last year to position the region for growth. Jeremy Deutsch joined as the President of APAC in October 2024. He previously served as the President of APAC at Equinix, an organization that we have a lot of respect for with over 20 years of operating experience. He expanded Equinix into 5 countries during his tenure and was the inaugural Chair of the Asia Pacific Data Center Association. Jeremy is exactly the kind of world-class operator I love partnering with, and I'm looking forward to building this platform with him. He's doing a great job for us. The strategic growth drivers here are clear. Singapore spillover demand creates a natural customer base. AI fuel demand is accelerating across the region. We're positioned with the right platform, the right leadership, the right capital partners in GIC and ADIA. The investment is expected to close in the fourth quarter of 2025, and it represents another example of how we're following the logos in the key markets, not only in Johor, but of course, Kuala Lumpur, Melbourne, Sydney, Osaka. These are the growth markets for AI in Asia. Our hyperscale customers are telling us they need capacity in the region, and we're getting ready to set to deliver to that at scale. Next slide, please. Let me talk about 2 landmark developments that demonstrate the power of our strategic positioning, Vantage's Frontier and Lighthouse mega campuses representing a combined $40 billion investment and over 2.4 gigawatts of GPU compute capacity. What you're seeing here in DigitalBridge backing the build-out of an entirely new generation of compute infrastructure. The AI revolution requires fundamentally different infrastructure than what the cloud demanded. Higher power density, different cooling technologies and most importantly, access to power at giga scale. These campuses represent our response to that transformation. Both are long-term contracted, pre-leased facilities, not speculative development. We have long-term commitments from Oracle, OpenAI and leading cloud providers. The revenue visibility is exceptional. The returns are attractive, and the strategic importance to our customers is undeniable. This is DigitalBridge enabling the infrastructure backbone for the most advanced AI workloads in the world. Frontier is in Texas, $25 billion across 1,200 acres in Shackelford County, delivering 1.4 gigawatts of ultra-high-density racks supporting 250 kilowatts and above. Lighthouse up North in Wisconsin represents $15 billion delivering 1 gigawatt with potential for more with the Stargate program distinguished by the development of new renewable capacity, the largest behind-the-meter renewable commitment in the United States today. Together, these projects create over 9,000 jobs, represents billions in regional economic impact, but more importantly, to our investors, they demonstrate that DigitalBridge has the capital, the expertise, the customer relationships and the power positions to support infrastructure development at scale that very few platforms in the world can match. Construction is underway with the first deliverables beginning in the second half of 2026. These are mission-critical facilities for some of the most important AI initiatives in the world. They validate our thesis that controlling power and backing world-class operators creates differentiation and creates value in the AI area. We're very excited about these 2 developments, and it really catalyzes a lot of hard work. Congratulations to Sureel and the team at Vantage. Next slide, please. What do Frontier and Lighthouse mean for DigitalBridge shareholders? Well, let me spell it out because this is where the value creation happens. First, higher fee co-invest. The attractive development economics of these projects enabled us to raise additional co-invest capital at advantaged fee rates. We're deploying and activating that co-invest capital as FEEUM over the next 2-plus years, which means growing fee streams for the projects and for you, our shareholders. Second, carried interest generation. We're expected to create significant value through carried interest as these developments stabilize over the next 3 to 5 years. Think about the math. We're investing in these projects at development yields. They're going to stabilize at much higher valuation and appreciation flows as carried interest to DBRG and our shareholders over the next few years. Third, developing our LP base. These projects position our platform to attract institutional capital, specifically targeting AI infrastructure exposure. This broadens our LP base beyond traditional infrastructure allocators to include technology-focused investors, sovereign wealth funds focused on AI and other pools of capital that are specifically interested in the sector that have not yet entered. Now let me talk about the key strategic considerations because that's what creates our competitive advantage. First, scale advantage. Operating at gigawatt scale generates structural advantages, superior unit economics, access to constrained power and exclusive positioning for multi-gigawatt hyperscale requirements. Our customers cannot get this kind of scale from anybody else. Second, premium workloads. These campuses are built for the most advanced AI applications. That means higher average pricing in investment-grade hyperscale counterparties. This is the best risk-adjusted business you can do in real estate today. Third, power differentiation. Distributed power delivery at scale is our critical advantage. Frontier represents the largest behind-the-meter power development in the United States today. That didn't happen by accident. That happened because we've been working on power for years. We talked about in our last earnings call, the power of our partnership with ArcLight, our digital power strategy and what we're doing to ultimately put power back into the grid and baseload. Together, these $40 billion developments represent watershed investments for Vantage and for DigitalBridge. They deliver unprecedented scale for the build-out of cornerstone AI hubs, serving hyperscale demand, and they demonstrate better than anything I could say in a prepared remark about our power bank strategy is working. I don't need to talk about it. This is the evidence. This is on display. Next slide, please. Let me close by putting it all together. In terms of our context for our 2025 priorities and where we stand heading into the final quarter of the year. What we delivered year-to-date, we're achieving organic growth with management revenue and fee-related earnings both up 20% year-over-year, even excluding the impact of catch-up fees. We achieved our FEEUM target 1 quarter early, exceeding our 2025 target in the third quarter, and we're tracking to meet or exceed our 2025 metrics on FRE and margins. We launched new investment strategies and channels, specifically our programmatic private wealth strategy, Franklin Templeton. We've continued to maintain a strong balance sheet and liquidity with over $170 million in corporate cash and a growing asset base. We've delivered breakthrough record leasing across our global data center portfolio with 2.6 gigawatts in the third quarter and $40 billion in new development contracted. Looking ahead to our year-end priorities for the fourth quarter. Again, we're focused on delivering and exceeding our 2025 financial metrics with FRE achieving or exceeding our guidance. We're formally launching our new digital Energy and stabilized data center strategies, and we're working to secure initial anchor commitments for one or both. We're building on our early private wealth momentum with targeted asset-specific investment opportunities, and we continue to evaluate strategic accretive M&A opportunities centered on adjacent asset managers. Let me wrap it up with the final thoughts before we go into Q&A. This has been an exceptional quarter for DigitalBridge. What a change a year makes from where we were a year ago in terms of our inability to meet our guidance to where we are today, which is, to be honest, a little bit on the front foot versus our back foot. Yes, we delivered the strong financial results, but this is beyond the numbers. You have to look through what we're doing here. The quarter really proves out my strategic positioning around power and AI infrastructure and what it's doing is it's creating real substantial differentiated value for our portfolio, their customers and our investor base. Advantage announcements, Frontier and Lighthouse represent over $40 billion of committed developments. These are not speculative projects. These are contracted pre-lease facilities with the world's leading technology companies. They're generating fee streams today. They'll generate carried interest tomorrow, and they will demonstrate that we are having and we've created capabilities that cannot be replicated. The Franklin Templeton partnership opens up a new distribution channel to Evergreen Capital. The APAC investment positions us to be one of the fastest-growing global data center markets where we can grow in Asia Pacific with our key customers. Look, I've been in this business for 3 decades, and I've seen -- and I've never seen a more compelling structural advantage than controlling power in the AI era. The demand is massive. The supply is constrained, and we're positioned better than anyone in the world to capitalize on this dynamic. The value that will accrue to our shareholders from this positioning over the next 5 to 10 years will be substantial. I want to preface this by saying, we're literally in the early innings. Let's wrap it up. Super simple quarter, strong financial performance, record leasing driven by our power bank advantage, continued capital formation momentum, strategic expansion of our distribution channels and a clear path to delivering on our long-term value objectives. We're executing our plan. I'm excited about what's ahead, and I look forward to updating you on our continued progress. With that, let's open up the line for questions. Thank you very much. Operator: [Operator Instructions] Our first question comes from Michael Elias with TD Cowen. Michael Elias: Congrats to you and the team, including Surrel on the massive leasing in the quarter. Great job. In the past, Marc, you've talked about $1.55 a share in carried interest for every gigawatt of data center leasing. Can you just help us understand when in the life cycle of the data center, that unrealized carried interest is recognized? Is it when it's leased? Or is it when it's delivered? Then also, I'm seeing more of these gigawatt scale deals on the market. I'm curious, as you think of your power bank, how would you describe your ability to take on more of these massive projects? Marc Ganzi: Yes. Michael, thank you. Let's start with the last part of your question, then we'll come around to the front part. These gigawatt projects are really tough, Michael. I don't think you're going to see tons and tons of them going forward. I think you're going to see more workloads kind of in that 350 to 800 megawatt more bespoke, a bit more tailored. I think building these 1-plus gigawatt campuses are really, really tough. I think it's tough from a capital formation perspective. I think it's tough from a resource perspective. I think a lot of the big gigawatt campuses for LLMs are being delivered now and will be delivered over the next 3 to 5 years. Because remember, these things take about 24 to 48 months to fully build them. What we are seeing an uptake in is in across all of our portfolio is this what I would call kind of 250-megawatt to sort of 500-megawatt workloads. Our sales funnel has gotten a lot bigger in this quarter. We have over a 7 gigawatt sales funnel right now. When you deliver -- when you lease 2.6 gigawatts in a quarter and your sales funnel grows by 7, you obviously -- you can start putting that math together that there's a lot of big chunky deals sitting in the pipeline. Our pipeline has gotten bigger. We delivered over 1/3 of the leasing for the industry in terms of actual power delivered against our power bank, what was actually delivered by the industry, we probably delivered about 50% of actual delivered capacity in the quarter. These metrics are important because we keep talking about the power bank and that 21 gigawatts of power. Leasing another 2.6 gig, delivering another 2, I mean, this is hard to do. Again, when you start -- we started over 10 years ago doing this. We've been able to really keep our pipeline moving and keep our delivery schedules moving, and that's what's giving us massive comparative advantage. I think you'll see other really good quarters from us from a leasing perspective. I just think you're going to see more distributed compute. As we move to inferencing, I think you're going to see -- then you're going to see a whole generation of deals that are going to get done in that kind of 20 to 200-megawatt range, which will be in the sort of secondary markets, which follows what happened in public cloud. Inferencing will really kick in, in kind of '27 through 2032 as we're still building kind of big LLMs. Nothing kind of slows down. Actually, this quarter, we saw acceleration. Kind of the third time I've told you this year, just when everyone thinks maybe there's a bit of a breather, we're not getting a breather, largely because we have this enormous power bank at these 11 portfolio companies that allows us to keep going. For example, later last year, earlier this year, we were talking about some of the big deals that Switch was doing. Now we're talking about some of the big deals that Vantage is doing. Next quarter, maybe we're talking about DataBank or Yondr or Scholops. We don't rely on one platform. I think that's what makes us pretty unique and why investors need to own our stock is really simple because you don't have to hang your hat on one story. There's a great -- look, we have enormous respect for DLR and Equinix. They are great businesses, but those are -- you're relying on one management team and you're relying on one pipeline. When you buy our shares, you got 11 teams Chris crossing the globe, focused on different types of workloads, different types of customer requirements and most importantly, different designs in different locations. I like our bets when you play it with 11 guys on the field versus 1, it kind of gives you a really big leg up. That's why when you're looking at this 21 gigawatts and the 2.6 that we delivered, there's nobody even close in AI data centers to DigitalBridge right now. We're playing the game at just a very different speed and at a very different scale. This quarter really manifested that, and it will continue. I think you'll continue to see that out of us. Now to your question around carried interest around the $1.55 per gigawatt, how do you realize that carry? To fully realize that carry takes anywhere from 3 years to 5 years. Some of that carry is accrued when you get the entitlements and you get the power. Some of that carry gets accrued when you sign the lease. Some of that carry gets accrued when you deliver the first data hall. Some of that carry gets accrued when you deliver the final data hall. Then some of that carry -- well, all that carry gets realized if it ends up -- if the data center ends up getting purchased, put into a continuation fund, gets acquired as part of a portfolio deal. Generally speaking, our monetization and our DPI track record in data centers goes back over 4 years ago. We started returning capital back to investors 4, 5 years ago, whether it was our DataBank continuation fund with Swiss Life, whether it was the North American Stabilized Data Center Co, or Valkyrie, the European Stabilized Data Center Co. We've been a consistent returner of capital to our investors, which then triggers carried interest. Now the problem with DataBank and Vantage was those vehicles were outside of our funds and predated the Colony merger. Now as we get these other companies growing up, whether it's Gala, whether it's Switch, whether it's Vantage Asia Pac, these are now vehicles that sit in our funds. As you know, Michael, roughly about 28% of the carry across our fund products sits with public investors. That episodic nature of carried interest as we deliver these new facilities don't accrue just to the management teams, it now starts accruing to public shareholders. All this hard work that we're doing now, we're accruing that carry, we're building it, but ultimately, we anticipate in the next 24 to 36 months to start delivering that carried interest out to our shareholders. In the meantime, the math is holding up. I think that's one of the key things that you could say with a straight face today is the arithmetic that we put in front of investors a year ago in terms of what a megawatt means, what a gigawatt means, that flow-through to investors now is really quite clear. Operator: Our next question comes from Jade Rahmani with KBW. Jade Rahmani: What's your overarching view on how the new data center projects achieve a stabilized capitalization given their size? Do you envision they will be owned long term by a combination perhaps of large REITs, infrastructure funds and hyperscalers themselves? It seems like the digital bridge structuring expertise could provide solutions to that eventuality. Marc Ganzi: Yes. Thanks. Jade, great to hear from you. Look, we announced last quarter the formation of a strategy called the Data Center Income Fund. Now that strategy is in flight, and we're having a lot of great dialogue with a new set of investors, Jade, that are different from our investors that we had before. Remember, in our flagship funds, we're talking to infrastructure allocators. When we're sitting down on the DCIF product, Jade, we're talking to real estate allocators. For example, last week was the PREA conference in Boston, our new Head of Capital formation for the DCIF product, winning Price is up there with Ramel Marseille. We had over 60 meetings with real estate investors. Real estate investors are really eager to get allocation, Jade, to these amazing stabilized data centers that we have a deep pipeline in. We're excited about that because for us, it's an entirely new swim lane of capital. Every year, there's about $3 trillion of capital that's allocated to real estate Jade. That's bigger than the $1.7 trillion that's allocated to infrastructure. If you think about swimming pools, that's actually a bigger swimming pool than we swim in today in terms of general infrastructure. We get kind of excited about that. Real estate allocators today are looking at industrial properties. They're looking at shopping centers. They're looking at downtown office buildings, which, as you know, are kind of -- is a tough asset class. Along comes these 15-year investment-grade data centers, low incremental CapEx going forward. The tenants rarely call you. It's a pretty hands-off real estate product. Most importantly, 95% of the cash flows that we're seeing are investment grade. This is a really hot new development for us. As we've launched that strategy, and we're really delighted to bring Wendy on the team. We've got [ John Diev ] and Jon Mauck help running the strategy. We've got a big team working on it. It's an entirely new opportunity for us, and it's a new set of investors. It's another way that we're growing our FEEUM, that we're growing our FRE and we're growing our AUM at the same time in a discipline that we know incredibly well. We have the advantage. We know all the developers out there. We know all the other GPs that need liquidity, and we're pretty excited about it. I think the key to that is we do have the solution. We do have the team. We have the right pipeline of ideas and product, and we've already identified the right set of investors. Everything is lining up to be really successful, similar to kind of what we've done in digital power, Jade, a very similar type of approach, very focused, very surgical and not competing with what we're doing. As we look to the future, 2026 will be driven by this real estate product, our digital power strategy and private wealth. We've lined up 3 new products for next year. At the same time, as you can see, we'll always be in the market with some sort of co-invest vehicle. Everything is setting up quite well for next year, and we love the product set. Jade Rahmani: Can you, as a follow-up, give some insight into what fund outflows look like for DBP I, II and InfraBridge perhaps in 2026? Marc Ganzi: I'm sorry, repeat the question again. Jade Rahmani: What do fund outflows look like for DBP I, II and InfraBridge? In other words, how much legacy fund runoff should we expect in 2026? Marc Ganzi: Yes. Thanks, Jade. We don't get into that exactly. We don't give guidance specifically on how we're realizing or monetizing assets. I think as we monetize those assets, we'll report them in our normal cadence. I think, obviously, Fund 1 is starting to near its natural turning point where you begin to think about monetization. We're thinking through that pretty carefully. At the right time and the right speed, we'll do that. Credit is constantly turning over. That turnover is -- loans typically have a 24- to 36-month lifespan. As we're turning over loans and returning capital, we're booking new loans in the second fund and our SMA strategy. InfraBridge continues to do exactly what we think it should do. In due course, we will continue to monetize assets in InfraBridge I. then as we look forward in the coming years, we'll look at InfraBridge II, but again, as we monetize stuff, we'll share that with you in the quarter. All of those fund products are moving at the speed at which you'd expect them to move. We feel good about the speed and the cadence at which we're delivering DPI. Operator: Our next question comes from Timothy D'Agostino with B. Riley Securities. Timothy D'Agostino: On the Franklin Templeton strategic partnership, in the deck, you outlined the $15 trillion opportunity through 2024 -- 2040, sorry, with wealth management allocations to private infrastructure. I was wondering if this strategic partnership is sort of a one-time partnership or if we could see more of these down the road? Marc Ganzi: Sorry, we lost the beginning of what you said. Could you repeat the beginning of your question? Timothy D'Agostino: Yes, sure. Sorry. With wealth management allocations to private infrastructure estimated at $15 trillion through 2040, I was wondering if the Franklin Templeton strategic partnership is sort of like a one-time thing or if we could see more partnerships like this down the road? Marc Ganzi: Yes. Look, I mean, for this particular product, alongside of Actis and CIP and it's a strategy that they've launched on their platform. We have other partners in private wealth. We did a fantastic product offering last year with Goldman. It was really successful. It was wildly oversubscribed. We do intend to be on other platforms and have other partnerships. That is something that we'll reveal in due course. We are not exclusive nor limited just to the Franklin Templeton platform. We are working with other allocators, and we agree with your arithmetic. It's a $15 trillion opportunity. It's really big, and there's a lot of great partnerships to be had, and we're excited about it. For right now, we love what we're doing with Jenny and her team. They're fantastic partners. So far, it's been a really successful launch. Great question, and we'll reveal more next year, but right now, my focus is supporting Franklin Templeton and making sure that, that product is wildly successful and oversubscribed. Timothy D'Agostino: Then as a quick follow-up, could you provide a little bit more color on the Evergreen capital on the long term, on the long duration and then kind of why the structure is so attractive to you all? Marc Ganzi: Well, look, I think we have both types of structures across our product set. We don't believe that you have to be all permanent capital nor do we believe you have to have 10-, 11-year closed-end funds. Commingled funds work well for certain allocators, particularly pension funds and other types of sovereign wealth funds, they like that because there's a finite end to what they're doing. I think other allocators like the open-ended structure, for example, like real estate investors. That's something they're quite familiar with and private wealth clients. They're very familiar with that structure as well. Our continuation funds, the things that we're doing around the real estate asset class, the stuff we're doing around private wealth tend to be open-ended and be permanent in nature. Then our flagship vehicles tend to be closed-end in nature, along with our digital power strategy. That tends to be a strategy that you would lend itself to being closed end. I think that the great thing about DigitalBridge today is that we're a multi-strat platform. We have multiple strategies really focused on allocators very specifically and then pairing that allocation with the right products, the products that investors want, whether it's a data center platform, a tower platform, a stabilized asset, an energy project that's tethered to the AI economy. These are the things that investors really want today. We have the right products and the right structures, so having that multi-strategy capability is really what differentiates DigitalBridge today. Operator: Our next question comes from Rick Prentiss with Raymond James. Ric Prentiss: First, to follow-up on Michael's question a little bit. I mean, Marc, you guys as an all asset manager, but focused on digital infrastructure AI. Good to see you communicate numbers, hit numbers, achieve numbers, maybe exceed numbers. The piece that seems to be missing from the stock price is really recognition of carried interest. You touched on it a little bit to Michael's question, but help us understand the pacing as your portfolio companies now ballpark 50 companies or so, I guess, how should we think about a stable, consistent kind of monetization path into the future to try and get some of this value realized because clearly, AI is hot. power banks are hot, data centers are hot. You're not getting the credit for that. Just trying to think through how do we see that monetization path play out to help the realization of that. I'll come back with a question for Tom on that the bookend impact. Marc Ganzi: Yes. I'll let Tom handle the bookend piece. I'll just stick the 50,000 feet and then flip it over to him. He gets the hard part. I get to answer the easy part. He's smiling at me right now. Look, I would say, Rick, what I said earlier with Michael, which is it's really important to note that we have certain fund products that have now turned the corner and they're entering into that phase where we begin to monetize. If you go back to a 2019 vintage fund, where we invested that fund in 2020 and 2021, it's logical to assume that realizations begin happening in '26, '27 and '28. That's really where our first flagship fund sits. Then logically, you can start thinking about how we exit some stuff in Fund II. I'm not going to, on a call, speculate which companies are going to have those realizations, but what I can tell you is we're now in a steady cadence where we have certain portfolio companies going through strategic reviews. I think that we believe just by the time line and nature of our original legacy flagship funds, you can begin to see a steady unwinding of those funds and return of capital. Along with that return of capital comes the realization of carried interest. Now, Fund II has a little more carried interest for investors. The third flagship fund has a little more carried interest for our investors. I think as time goes on, you're going to see not only more frequency in carried interest, but you'll see more carried interest. We're going to work on that pretty hard next year. I think that will be one of the differentiators about next year versus this year is that you are going to see more realizations next year than this year. The other thing that I would say is on our data center business across the 11 platforms, we have been Rick, pretty creative around creating DPI and creating carried interest. When you've got great vehicles that are in permanent capital vehicles like DataBank or now Manage North America and some of these -- some of the growth metrics around some of these other businesses, we have to recycle capital, return capital, and when we do that, that also triggers carried interest as well. Data centers is an area where we think we can do quite well. I think stay tuned, but we do believe that Rick, it's reasonable to assume that given the age and vintage of some of these fund products that you can begin to count on carried interest instead of being episodic. I don't know, Tom, if you want to add anything to that. Thomas Mayrhofer: No. I mean, you really covered it. The only -- I guess the only thing I'd add is sort of on the margins, if you had sort of backed up 4 years ago and projected a bell curve of where we would be distribution-wise, I would say probably over the last few years, there's been a more significant and extraordinary opportunity to continue investing in some of our portfolio companies than maybe you would have thought 4 or 5 years ago. That may have pushed out exits that you -- several years ago would have thought were happening in '25. Maybe we've continued to invest in some of those companies because the opportunity there is extraordinary. I wouldn't add anything different than what Marc said in terms of the bell curve and the vintages. Ric Prentiss: The way the book works, I think you touched on that in your prepared remarks a little bit about the J curve and where you're at on it because it does confuse people. I think sometimes when they look at the book carrying value, you're not marketing it to market on transactions that are occurring or things in the marketplace. You're literally looking at your asset-by-asset. There some people, I think, look at it and go, well, how can the book doesn't show more? Maybe just elaborate a little bit more on that. Thomas Mayrhofer: Yes. Look, I think there's sort of 2 main components to the performance and how we mark things. Marc talked a bit about kind of our investment playbook, making sure we make the right investments that we are focused on the customers, deliver for the customers, drive operating performance of the companies. That is one significant contributor to the performance. You've seen some of that to date. Then I would say the second material contributor to performance and accrued carry or realized carry is the exit process and selling the companies well. That's where you capture kind of the second stage of value. I would say, we're sort of in between those 2 kind of step functions right now where we've achieved real value and real performance at the company level. We will capture the second step of value as we create distributions and liquidity and realize the full value of the companies, if that makes sense. Ric Prentiss: Does. You're not marking to what transactions might be, you're not marking to comps until you actually achieve a sale basically? Thomas Mayrhofer: Look, if there's -- you think the valuations and performance are 100% quantitative and there's always a bit of qualitative to them. We do our best to mark to where we think -- what we think the asset is worth, but there's always a bit of uncertainty and how much of that will you actually realize in a sale. You're always including some sort of contingency to address that. Ric Prentiss: Marc, one of the interesting things we saw this quarter was the story that Elon Musk is now following you. Can you give us a little background color? Did that happen? How did it happen? What's your kind of relationship with Elon? Marc Ganzi: Yes. Thanks, Rick. I don't comment about social media stuff. It's just kind of, unfortunately, it becomes like water cooler banter. What I will say is, I've got a lot of respect for him. Yes, I do know him, not particularly well, but we know each other, and he's an important customer. He's a very important customer. He uses a lot of our different portfolio companies, and we serve Starlink, we serve SpaceX. We serve Tesla, we serve xAI, and we use his batteries at some of our data centers for storage. It's a really super important customer that we think can get bigger over time and that can be a lot more strategic. Anything we can do to work with him and support what he's doing, I'm very supportive of him, and I'm always happy to put capital into his businesses through infrastructure, we're side-by-side with him. A lot of deep respect there, and I think he's one of the great minds of our generation. If he chose to follow me, that's great, but I'm super focused on servicing him and trying to figure out how we can help enable his businesses to go faster. Operator: Our next question comes from Richard Choe with JPMorgan. Richard Choe: I know you spent a decent amount of time on it, but I think it's important to kind of go through it a little bit more. With Vantage in these -- the Frontier campus and Lighthouse campuses, these are 2 really big deals. Over the past few months, we've seen a lot of companies come out and say that they have a lot of power and that they have a lot of capacity deliverable, but you've actually won these leases. Can you take us through the process a little bit? What gave DigitalBridge and Vantage the, I guess, advantage over the other companies and winning this deal? Marc Ganzi: Yes. Look, I think that we continue to believe that this industry will be unfortunately marked by a lot of amateur and a lot of tourists in the next 24 to 36 months. People that do certainly know how to buy land and how to get entitlements and certainly have to reflect that they have some source of power. I think it's a different level up when you actually build a data center and you're responsible for delivering something at a Tier 3, Tier 4, Tier 5 standard and that you've done it for a decade-plus. Customers know the difference between people that are new to the sector and someone that's a trusted set of hands that has over 400 data centers and 11 different companies. Differentiation isn't about press releases. Differentiation is about execution and the ability to show up for a customer and deliver on time. Again, we don't get a lot of credit in our share price for being around for 30-plus years as executors. What we have to do is we have to go out and we have to deliver a quarter like this. We have to deliver a quarter where we clearly demonstrate leasing volumes that are differentiated, a power bank that's differentiated, but most importantly, to the metrics, Richard, that you now know that we're judged on, which is FRE, FEEUM, distributable earnings, AUM, all of the things that we're being judged on. We know who our peer set is now. We're an alternative asset manager. The most important thing that we now need to do is just like we've been executing for customers, we now need to execute for our public shareholders. The framework and the prism that Tom and I are judged on is by other alternative asset managers. When I said in the earnings call, what a difference a year makes, we had a very tough last year third quarter. Tom and I thought long and hard about it. What we tried to do this year was deliver something that is -- that we can -- investors know they can count on us and that we're credible around the numbers that really matter. I think execution is critical. Executing for our public shareholders is critical, executing for our customers like Oracle and OpenAI is important, and we're executing for hundreds of other customers this quarter. We just don't have enough time or pages in a deck, Tom, to sort of share all of those wins for all those customers, but we're delivering dark fiber routes. We're delivering towers. We're delivering small cell infrastructure. We're delivering WiFi offload. There are so many things that we're delivering right now that we don't have time to talk about. We just got to keep delivering for our logos. That's really what is differentiating about us right now. I think at the end of the day, customers not only vote with their wallet, but they vote with their -- the integrity of their network. I think one thing that we've proven to be for a long time is a very trusted set of hands. Hopefully, that will work out well. I think that a few people are actually turning on capacity right now, and we are. We're turning on capacity, and that's because we started planning this 8, 10 years ago. We didn't start -- we didn't say a year ago an investment committee because we thought it was a hot idea to get into data centers. That's not how we're built. We're built differently. We'll be here. We'll be here tomorrow. We'll be here in 10 years. We were here 20 years ago. I think it's that consistency is what customers really like. When it gets down to choosing, having great teams like Sureel, who knows how to deliver for a customer, that's what it is. We're very fortunate to have Surrel and Jeff Tench and Dana Adams, that entire team is just a bunch of pros. Adults that have been there, have been doing it for a long time, and that is, thankfully, Surrel is our partner. We're fortunate to have a great management team that was able to deliver for the customer. Richard Choe: You mentioned it a little bit, but will these projects be meaningfully contributing to FEEUM early in '26? Or is it more later in '26 and '27? Marc Ganzi: No, 100%. It will be a big contributor in 2 years. We took in a lot of new capital, co-invest capital specifically to these 2 projects. We get paid on that capital on that committed capital. There will be an immediate impact when you have really good co-invest. Look, Tom said it earlier in the year, we've got to improve our margins. Both Tom and I committed to that. Tom has been working on the cost. I've been working on making sure we get our fees up and co-invest. I think we can look at each other and say we've delivered. Tom has done a great job on the cost side. We've done a great job in improving our margins on co-invest. When you put those 2 things together, you get a result like this in the third quarter, which is improved margins, incredible year-over-year growth, as you can see. I mean, just looking at fee-related earnings, were up 43% year-over-year. I don't think there's another publicly traded alternative asset manager that's up 43% year-over-year. This has been a lot of hard work, and we're not done. I think there's a sharp focus on what we got to keep doing. The fees build as we build. As we keep leasing megawatts and we keep deploying capital, so does our FEEUM raise go up and so does our FRE go up. We're heading into a historically strong fourth quarter. I think Tom and I are excited to continue to work hard between now and the end of the year. I don't know, Tom, if you have any voice over on that. Thomas Mayrhofer: No, I think you covered it all. Operator: Our next question comes from Eric Luebchow with Wells Fargo. Eric Luebchow: Marc, I'm curious about your data center power bank that you've been highlighting in the last few quarters. Maybe you could talk about the split you're seeing between kind of behind-the-meter power solutions versus more direct grid-connected power and perhaps how that behind-the-meter opportunity, which seems to be much bigger today, kind of ties into the size and scope of the energy fund you're fundraising for. Marc Ganzi: Look, the energy strategy is super important, and it's a big part of what we're doing in the back half of this year, but more importantly, Eric, what we're doing next year. We've already closed a couple of deals in that strategy. Takanock is one of them where we provide digital power solutions for our customers and to other data center developers. We've got another project where we're tethering some -- a specific power solution to an existing DigitalBridge data center where we're adding 500 megawatts of power. What I love about what we're doing in digital power, Eric, is these aren't ideas. These are very, very focused solutions in very specific locations tethered to very specific outcomes for customers. That's what makes it so unique is that a lot like what we're doing in the data center space, we're doing in the power space. We're not taking risk. We're entering into long-term contracts with counterparties, investment-grade counterparties. We know that the offtake is in place. I think what's interesting, Eric, is as we've been doing this for about 2 years, we've also learned that the grid doesn't go away. You have to learn how to use the grid, you got to learn how to work with the grid. You've got to have battery storage capabilities inside your microgrids. You've got to be able to build up that power during the day, sell some of that into the grid, so you're basically an offtaker into the grid and putting power back into the baseload on. Then during the nighttime when baseload is more available, you can buy back from the grid. It's a very fluid relationship in a microgrid. The key to that is interconnection and being interconnected into the -- that state's Public Utility Commission grid and having an active relationship with the utility. What we're doing is not in contrast or in competition with our utility partners in each state. In fact, we are a trading partner with those utilities. A lot of like what we do in interconnection and fiber, we're doing the same thing actually in power. It's a really interesting business model, and we've had a lot of good early success so far. Someone once told me, I think it was -- I was listening to another alternative asset manager, I think it was Brookfield that said it, but there's $7 trillion in AI, there's a $7 trillion CapEx AI spend. If you think about the power that's required, the incremental power to deliver 300 gigawatts, Eric, there's another $1.3 trillion in power to be built. We look at that, again, that swimming pool is $1.3 trillion. We look at the opportunity there, investors are really excited about it. I've been on the road talking about digital power, talking about microgrids and how we're delivering these power solutions to customers. As you can probably imagine, LPs get really excited. If you look at the fundraising this year in infrastructure, Eric, infrastructure is having a record year in fundraising. I think there'll be over $200 billion of capital raised in infrastructure. -- if you take a look at that micro [Technical Difficulty]. Sorry about that. Technical glitch. Anyway, when you look at the total $200-plus billion of fundraising and infrastructure this year, over 50% of that is to energy transition, not data centers, not digital. It's really interesting to me that allocators are really focused on this issue of power. We really see that as a big opportunity because if we think about building large-scale campuses and if you're going to spend $11 million to $12 million per megawatt building a data center, you could end up spending $3 million to $5 million in grid independent power to that data center. We really look at this as a $0.30 to $0.50 incremental spend on power because we're taking that risk and building the data center. We know how to build our microgrid infrastructure. We know how to source LNG, best solar, wind, hydro and most importantly, use the grid. I think everyone gets obsessed a little bit, Eric, with, oh, you're either on the grid or you're off the grid. It's not that way actually. It's that if you're going to really build a scale and you look, for example, at the last 2 big projects that we've done, we do use the grid. At certain points of the day, we're putting power back into the grid. Then at certain points of the day, we're taking power from the grid. It's a fairly dynamic and fluid relationship between a microgrid and the actual grid itself. I think other people are finally figuring out what we're doing. It makes a lot of sense. We've got great industrial partners. We've got a big pipeline of projects that we're building. We're excited to talk more about it next year. I mean it will be a big part of what we're doing in 2026. As I said, 3 new strategies for next year, and that's -- digital power is one of those strategies. When you and I get together next time in person, Eric, we'll do a little bit of a digital power teaching whenever you're ready. Eric Luebchow: That would be great. I appreciate it. I guess just one follow-up, Marc. Some of these mega deals we've seen, including the ones that Vantage did, obviously, there's a lot of kind of newer hyperscale tech like LLMs that are directly or indirectly backing some of these new builds. How do you think about the pricing, the lease terms, the credit risk of some of these newer players that are obviously not profitable today, but growing incredibly fast. There's certainly been a lot of industry chatter about some of the LLMs, their ability to pay for some of the future commitments they've made. Just curious how you guys think about it at the infrastructure level. Marc Ganzi: Yes. Look, I think that the -- there's different types of LLMs, Eric, right? There's different types of quality of credit tenants. We look at some of the NeoCloud business models, and we've chosen not to put our equity capital to work there. We've been very selective about those types of credits. I think, again, when you've got a really substantial power bank and you've got on-demand capacity ready to go, it does allow you to be a little selective about what we can do. I think it's pretty unique, our ability to choose customers we want to work with. I do get a little worried about some of the credit profile risk around NeoCloud versus AI providers versus the hyperscalers. We've been very cautious about not overweighting one particular customer or one particular story. I think what's unique about our platform is given the scale of our platform, we're invested across all of these customers and all across these workloads so that we're not beholden to one customer or one technology or one LLM. I think that's where scale matters, Eric. We talk a lot about scale in the alternative asset management space. Well, in our specific swim lane, we have a lot of scale, and we have a lot of customers. That diversity in customers is what's really important. We've been able to demonstrate that we can lease to a lot of different logos at the same time. I think at the end of the day, having a diverse set of cash flows and a diverse set of customers and a diverse set of data centers is really where you want to put your capital today. Again, same thing we talked about, buying our stock is a proxy for that, right? You're not making one bet on one specific data center platform, you're making a bet on a global portfolio of 11 platforms, 21 gigawatts and record leasing. That, that flow-through will come through in a function of FRE, FEEUM and carried interest. Operator: There are no further questions at this time. I would now like to turn the floor back over to Marc Ganzi for closing comments. Marc Ganzi: Well, thank you. I appreciate all the thoughtful questions from the analyst community. We look forward to engaging with all of you over the next couple of days to bring more clarity to the quarter. Let me finish in thanking our team. We have an incredible team. Again, I want to bring focus back to third quarter last year against third quarter this year. Specifically, I want to thank my CFO, Tom Mayrhofer, for delivering a very clean quarter and delivering on the promises that we made to you, our public investors. Again, fee revenue up 22% FRE up 43%, distributable earnings up 102% and fee equity under management, FEEUM up 19%. This was a clean quarter. This was a quarter that we -- to be candid, we felt capable of delivering, and we owe it to our investors to deliver results like this in a quarter like this. We have strong liquidity. We're allocating capital. We're raising money. We've got a great suite of new products that will come to market with here in '26, and we're well-positioned to be the leader in digital infrastructure and the power that's required to fuel it. Really looking forward to the end of this year and looking forward to catching up with all of you on the road as we hit different investor conferences. Please follow up with Severin and our team to get access to the team. We're always happy to have a conversation with you. Thank you for your continued interest and your ownership in DigitalBridge shares. We appreciate it. Have a great day. Operator: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.