Image source: The Motley Fool.

DATE

Thursday, August 28, 2025 at 5 p.m. ET

CALL PARTICIPANTS

Chief Executive Officer — Max Levchin

Chief Financial Officer — Michael Linford

SVP, Investor Relations — Zane Keller

SVP, Finance — Rob O'Hare

Need a quote from a Motley Fool analyst? Email [email protected]

TAKEAWAYS

Record Quarterly Performance--Affirm Holdings(NASDAQ:AFRM) reported new records for most key operational and financial metrics, which management noted is unusual for a fiscal fourth quarter ended June 30, 2025, outside the normal seasonal peak.

Repeat Borrower Rate-- 95% of transactions in the fiscal fourth quarter ended June 30, 2025, were from repeat borrowers, indicating high platform engagement.

0% APR First-Time User Penetration-- Approximately 50% of first-time users in the most recent quarter originated on 0% APR products, with these users exhibiting repeat usage patterns similar to the broader user base.

Conversion from 0% to Interest-Bearing-- Customers who initially use 0% APR loans convert to interest-bearing products, according to management, providing incremental future revenue streams.

Merchant Adoption of 0% APR-- The number of merchants subsidizing 0% APR loans doubled year over year.

Funding Capacity Growth-- Funding capacity grew by approximately 55% year over year, as Affirm secured additional “blue chip” capital partners focused on long-term relationships.

Affirm Card Metrics-- Card annualized GMV reached $1.2 billion and the attach rate reached 10%, with trailing 12-month average GMV per cardholder rising from $3,500 to $4,700 for the period ended June 30, 2025.

AI-Powered Adaptive Checkout (Adapt AI)-- Adapt AI deployment led to an average 5% increase in GMV for participating merchants by optimizing financing offers at checkout.

International Expansion Progress-- Initial “friends and family” testing has begun in the UK in partnership with Shopify, with early results showing higher interest-bearing product mix.

Enterprise Merchant Relationship Wind-Down-- Guidance assumes integration with a significant enterprise partner will be fully concluded in the second quarter of fiscal 2026, with zero volume expected thereafter.

Revenue Less Transaction Cost (RLTC) Outlook-- Management expects the RLTC take rate to remain at the high end of the targeted 3%-4% range based on current product mix trends.

SUMMARY

Management confirmed accelerated growth across core metrics in the fiscal fourth quarter ended June 30, 2025, and significant expansion of the 0% APR product among both users and merchants. Repeat engagement climbed, with a substantial proportion of total volume attributed to returning customers. Funding capacity grew by approximately 55% year over year and deepening long-term partnerships with leading asset managers. Innovative AI deployments, notably Adapt AI, demonstrated measurable uplift in merchant sales conversion. International entry is underway via UK pilots, supported by the Shopify channel, signaling future additional geographic moves.

Max Levchin said, “our growth is accelerating, and we are firing on old pistons.”

Michael Linford said, “a one-point move in reference rates should translate to about a 40 bps change in our funding cost,” with impacts flowing through gradually given portfolio duration.

The company highlighted that 0% APR loans remain “still profitable” for Affirm despite lower margins, as they convert users to more lucrative products over time.

Affirm indicated no anticipated impact to its underwriting standards or credit controls despite an increasingly competitive funding and lending landscape.

INDUSTRY GLOSSARY

GMV (Gross Merchandise Volume): The total dollar value of transactions processed on the Affirm platform within a period.

RLTC (Revenue Less Transaction Cost): A profitability metric defined as revenue net of direct transaction costs, used by Affirm to track unit economics.

Attach Rate: The proportion of total eligible transactions in which a specific product, such as the Affirm card, is used.

Adaptive Checkout / Adapt AI: Affirm’s proprietary checkout flow enhanced by machine learning, which customizes financing offers for each consumer to optimize conversion and merchant economics.

0% APR Product: A loan or installment financing offer provided at zero interest to the consumer, typically subsidized by participating merchants.

Repeat Borrower Rate: The percentage of total transactions originated by customers who have previously borrowed through the Affirm platform.

Full Conference Call Transcript

Max Levchin: Thank you, Zane. The results, which I do think are exceptionally strong, is all the explaining we need to do. So just one tidbit. Left on a cutting room floor. That we didn't just crush this quarter. We actually set a new record most of our metrics, which is unusual fiscal Q2 is a normal peak, but this is Q4, and, yep, it is the record. So that's really cool. Tell you that our growth is accelerating, and we are firing on old pistons. Also, we just celebrated Libor's decade at a firm a few months ago, and so I want to Michael on his seven years here as of yesterday. And Rob's upcoming fifth anniversary this Sunday.

Privilege to lead an extremely talented and dedicated team, and I don't take for granted that they and their families are willing to put up with my antics for so many years. Thank you guys, and here's to many more years of building a firm together. Back to you, Zane.

Zane Keller: Okay. Great. Thank you, Max. With that, we'll now take your questions. Operator, please open the line for our first question.

Operator: Great. We will now be conducting a question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. Confirmation tone will indicate that your line is in the question queue. You may press 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. One moment while we poll for questions.

Dan Dolev: And our first question comes from the line of Dan Dolev with Mizuho. Please proceed with your question.

Dan Dolev: Hey, guys. Max, Rob, Michael. Great results as always. So obviously, really strong quarter, amazing guide for next year. It sounds like last quarter, you were talking a little bit about the potential stress and the impact on the firm. It sounds like things have gotten a little better for you from when you reported last time to now. And it has what is, you know, what is your best take on how things stand now and what are the reasons for that optimism? Again, really strong stuff. Very good.

Max Levchin: Thank you, Hans. You know, as Michael loves to say, we take our guidance very seriously and on the side of being thoughtful and, aiming to, get ourselves some a pluses. Instead of just straight a's. And, we typically, do deliver. Not a forward-looking statement. But you know, from the consumer point of view, which I gather was the question we think that it continues to perform. It's really maybe a commentary on how strong the momentum is in The US and to at least similar degree Canadian consumer. And, soon, we'll find out that looks like for UK one. But we're feeling very good about the originations we're driving.

We feel quite excellent about our ability to get paid back on time. So the credit side of the equation, continues to perform really well. On the demand for our service, you see the acceleration in GMV and the, new record in that sense. It off calendar, if you will, is also a reflection of the fact that folks are using Affirm for more and more things.

Dan Dolev: Thank you. Great stuff again. Thank you. And our next question comes from the line of Dan Perlin with RBC Capital Markets. Please proceed with your question.

Dan Perlin: Thanks. Good evening, everyone. So I want to go back to the 0% APRs with the first-time users coming in. I think you said that was, like, 50% Mhmm. Which is, again, like, a very, very strong number. So the question is it's bringing in a lot of new users. I'm wondering when you look at kinda prior quarters, obviously, you can't look at it this quarter, but prior quarters, what kind of, like, repeat rates are you able to, I guess, glean from those initial users coming in? And the real crux of the question is, are they coming on the platform because of 0% APR, but they're not using it again?

Or are they behaving similar to maybe more traditional firm user? Thank you. It's a great question. I appreciate the implied dig at how real are these growth users, but I have good news on that front. They do repeat. Obviously, every credit strata behaves a little bit differently in a sense that folks choose us more or less depending on what alternatives they have, how they feel about the merchant coverage or the deal covers that they want.

But generally speaking, there's not a tremendous difference in terms of repeat of users that have been acquired through zeros or not, But the more interesting thing, which you didn't ask, but I'm gonna answer anyway, is do zero users flip over to interest bearing? And they do. And that's, I think, is a really, really important indicator. Obviously, 0% transactions are somewhat less profitable for us. They're still profitable, so this is not a loss leader. But the interest income that comes in interest-bearing loans, is obviously more profitable, and those folks enjoy zeros when they are available to them.

But experience using Affirm is so positive, they do convert to interest-bearing users just fine and, come back to us for many other things than just zeros. That's great. I figured I'd sort of dig in early. So thanks. Oh, yeah. That's a good it's I when I was reading her numbers, like, you know, what would I stick my finger and be like, how good is that? And this is a good one to ask. Yeah. And the answer positive. Awesome. Yeah. That's fantastic. Thank you. Have a good one.

Adam Frisch: Thank you. And our next question comes from the line of Adam Frisch with Evercore ISI. Please proceed with your question.

Adam Frisch: Hey, guys. Good afternoon. It seems like you guys are just Max, I'll quote you. You guys are crushing it. The only thing I could see kinda derailing the story is what's going on with the consumer. And if you expect things like the resumption of college loans and so forth, maybe the data around consumers gets a little dicier in the next couple months into the end of the year. Could you just remind us where you are in your spectrum of the folks that use your platform, where they are on the FICO scores relatively, like, how many of your transactions are with consumers that are near prime, prime, or super prime?

So when the data inevitably comes out, the consumer might be getting a little shakier, we have someone to fall back on in terms of the quality of the folks engaging. With Affirm. Thank you.

Max Levchin: I don't know if it's gonna come out any sooner than right now. It's all our supplements, I think. But generally speaking, student loan repayment resumption is something that we've all been aware of. Of for quite some time and have definitely taken measures to make sure we are not overextending that borrower and also monitoring how that is going for them. And so it the reason or the fact that we don't give or didn't give an enormous amount of attention to the credit performance in this particular letter, isn't because we forgot. It's because it's been highly consistent and con perform really well.

But it also doesn't mean we've taken our eyes off The sort of the thing that we kept on repeating for years and years is that credit is job number one. It still is. The team still gets the executive team still gets a full credit performance update every single Monday. And anytime the disturbance in the force we move that from once a week to three times a week and you know, daily if that's that warrants it. And so we are very, very mindful of threat performance. Are not even a little bit asleep with the switch. The numbers you see are there exactly because we want them to be there. Set a many times before.

Credit performance is an output of our settings of the models that we run. You know, not sure to belabor the obvious, but we underwrite every single transaction, and there's reserve the right to decline transactions we feel are too risky for the end borrower and for Affirm, and we do. And if there's ever a deviation from our normally, extraordinarily high net promoter scores because not everybody enjoys hearing, hey. You shouldn't borrow. You're overextended. But we won't change our point of view on their ability to borrow and our willingness to lend if they are in fact overextended, be it with a firm or overall in their credit utilization. So no, I'm not concerned about that.

Obviously, macroeconomic shifts are a thing that happens to everybody at the same time. That's not a thing we control, but we can control our results and have controlled the results for years and years as the macroeconomic environment moved up and down, sometimes pretty suddenly.

So I feel very good about our performance, feel good more importantly, in our ability to control that performance so long as we keep our eyes on the credit numbers, and we certainly And I would just add that I think given the short duration of the loans that we're originating, the most important things for us is that we have a full picture of the borrower's wherewithal to repay the loan at the time of origination. And then the asset is so short-dated and we're increasingly working with consumers that we've seen before. 95% of our transactions came from repeat borrowers this quarter.

So that setup really allows us to focus on underwriting the consumer here today where they are and making sure that we're instrumented to catch changes in the future, but we don't really stare at those problems in advance. I think we're really focused on making sure that the cohorts that we originate today pay us back. And if we need to adjust the underwriting, you know, to be more inclusive or less inclusive in the future, we'll we'll do that. In normal course.

Will Nance: Thank you. And our next question comes from the line of Will Nance. With Goldman Sachs. Please proceed with your question.

Will Nance: Guys. Thanks for taking the questions. Nice results today as always. Wanted to ask a question just on the funding environment. Max, we've continued to see the capital markets be wide open for consumer lenders. Like your funding capacity was up roughly 55% year over year, utilization is way down. We've also seen that in pretty much every other lender in the space. With the rise of kind of alternative credit coming into the space. How do you think about the incentives that this creates in the market and, like, the risk of credit issues that result from more of an oversupply of funding from of the lower quality competitors in the space.

Or, you know, people who are kind of flush with funding and haven't have kind of incentives to make a lot of loans because of that. Thanks.

Michael Linford: I can start and Max can add like, I don't know the way I can really speak to the people in the in the broader ecosystem. I know that we are really mindful of the health of the capital markets when we think about picking our partners. As important that we pick capital partners who we think are going to be our partners for the long term and not just worrying about who's the lowest bid today. And as a result, we partner with what we think is the blue chips of these asset managers.

And that can come in the form of large strategic partnerships, with world-class investors like Sixth Street or very good insurance asset managers up and down our stack. That's not an accident. We think really long and hard about picking the partners who we think are gonna be, committed and long term with us. And therefore, we don't move too quickly either. We don't pivot out of a strategy. We think in the better part of decade increments. So we're not so concerned with, what those partners do because they're obviously thinking about the problem, in the right way. I will say the conditions are very favorable as you pointed out, and that's to our to our benefit.

We're really mindful of that, and I think that's part of the reason why the execution is so good right now.

Moshe Orenbuch: Thank you. And our next question comes from the line of Moshe Orenbuch with TD Cowen. Please proceed with your question.

Moshe Orenbuch: Thanks. Thanks very much for taking my question. I was hoping we could talk a little bit about the Affirm card. You gave some statistics, you know, talk about it being a billion 2 volume, a 10% attach rate. And also that the 0% volume on the card kinda tripled you just talk a little bit about, you know, the current strategy with respect to the card, how you think it's gonna you know, impact the firm's customers and volume going forward, and maybe is there any special significance to the 0% of that product?

Max Levchin: Yeah. Try to parse all the really cool threads to pull on here. Actually, cars are growing really well. So the meaning of the update for the avoidance of doubt was it's kicking ass and taking names, and we're very proud of it. And we got a lot more to go before we think it might change. The percent attach rate is just a number. We're we'll celebrate more when it increases. The strategy with the card, I learned the hard way that I'm not gonna front run what's next for it. But it is an extremely active area of investment for us. So we have more coming more things coming. Some really we think, yeah.

It incrementally powerful boosters to this particular rocket are on the way. So we're pretty excited about what's to come there. I will not pronounce them now. But you know, I'm I'm still spending a lot of my time figuring out how to make the card even more compelling. You can see a little bit about the offline category growth. In the update, I think, and that sort of speaks to the fact that we are learning how to offer it in the right way to the consumer so that they remember to take it with them to places where they haven't used for EG, a gas station, which is just not a thing you can integrate you know, online.

In terms of zeros on the card, it's actually a more than anything an amazing surprise and delight. And frequency driver. So if you remember last call, we said that the really ambitious version of the card gets us to 10,000,000 card the vision version of the card future is 10,000,000 cardholders active and, something along the lines of 7,500 plus. Transaction GMV per year. The current trailing twelve months of the cardholder is about $4,700. So think the last time we dropped this number, it was along the lines of 3,500. This is across all Affirm services. So this is card and all the other places where you might go with CART. Dominates.

That's been, obviously, The only way he's So we're not quite at the 7,500, but we're more than halfway there. And so like, there are many things that are coming together to make sure the card is the best expression. Of the firm. So just as far as I think I wanna go right now, we're kinda long-winded on this one. But there's a lot to do, and there's some unexpected things that are coming soon.

Rob Wildhack: Thanks very much. And our next question comes from the line of Rob Wildhack. With Autonomous Research. Please proceed with your question.

Rob Wildhack: Hey, guys. You know, you've been extolling the virtues of the 0% APR product for several quarters now. I mean, as far as I can tell, we haven't really seen your peers lean into that product in the same way. I appreciate that you're not them, but even so, like, why do you think that is? Why has no one else be it fintech or legacy, gone into the 0% APRs with the same kinda vigor that you have?

Max Levchin: Because underwriting is hard. And we're good at it, and others aren't. So couple of things. First of all, I mean to come off of quite so arrogant, but we do think that this is a difficult thing to do, and we spent a long time being good at it. And plenty of internal consternation. Every time we look at a model and ask ourselves, is this a good idea or a bad idea, It's not just cool. Let's give people promotional rates. It's gonna be amazing. If you remember, our zeros are real zeros. It's in the letter as well, but, we don't do deferred interest.

We don't charge fees, which means that if it's zero, consumer really does pay nothing above sticker. That means the transaction has to be profitable strictly through merchant subsidies. Which is a thing to negotiate in a custom contract and a lot of control services that you have to offer to the merchant because they need the ability to turn it on and off if they don't have the margin to do it forever, and we have to have the support infrastructure internally to guide them through such campaigns. Do you wanna do zeros? During this holiday period but not? And you have to do it in a way that compliant with fair lending laws.

Because if you start doing things that are a little too creative, you might end up discriminating advertently against the group that should not be discriminated against. And you're not just doing zeros. Zeros are easier in a sense that at least you know it's a 0% loan. But for a large swath of consumers, actually, five ninety-nine APR is extraordinarily compelling. It's way better than anything else they could get. And so when I see 0% in the letter, what we really mean here is consumers get the benefit of reduced APRs as merchants subsidize them.

And doing that in real-time price to perform on the credit side, on a capital market side because these loans are purchased downstream by people who expect yields that are strong whatever the deal the consumer got. Making sure that these are truly incredible for merchants. It's a massive multivariate problem, and we love math here more than just about anything else. I think most of our competitors just don't. And, that's our strength. Our advantage is we you know, live better through mathematics.

Rob Wildhack: It's helpful. Thanks. And just quick on the guidance, in the comment that the enterprise merchant will transition off in the fiscal second quarter. It's kind of an important time with the holiday season. So a little in the weeds, but do you think that happens at the end or the beginning of that quarter? I guess I'm asking if you're gonna get the holiday spend there or not.

Max Levchin: The assumption in our outlook, Rob, is that enterprise partner is wound down Please proceed with your question. Great. Good afternoon, guys. Nice results. Thanks for taking the questions. I want to touch on the outlook and the take rate. It looks like it's going to be kind of fairly stable with at least the run rated four q level. I guess, does that imply that the mix the product mix that we saw in the fourth quarter should be fairly steady or are there any other you know, take rate impacts that we should be mindful of? Like, for example, with the enterprise partner or anything that might influence some of these numbers as well. Yeah.

We stopped short of guiding to mix specifically, but as you saw this quarter, monthly 0% loans were growing north of 90 year on year. So we would expect that loan product in particular continues to take a bit of share within our mix. But, otherwise, you know, I think most important thing for us is that the units we're creating are profitable and that we have a funding plan and a mixed plan that allows us to sort of stay in that 3% to 4% RLTC range and with the guide, we're expecting to be at the very, very high end of that range from a revenue less transaction cost take rate perspective. Okay. That's really helpful.

And then I guess just a follow-up following up on Will's question around funding. I want to ask are you guys seeing, just given that the funding environment is the best, it's been in quite some time, have you guys seen any, like, uptick in competition or like, irrational players that might be kinda spoiling the water. And I guess, like, it's so how are you guys kind of dealing with that and continuing to grow while maintaining really solid credit. Yeah. For us, the crawl the quality of the credit isn't a isn't really a decision It's it's something we constrain the business with. Then we operate from that point. And that's not lost on our capital partners.

Again, I think the reason why what I consider to be the best investors in the world wanna partner with a firm and do is because of that commitment we've made operate the business in a certain way. And we've done that not just when things are really good. We've done that back through all of the turmoil you've seen over the past half decade. Our best investors see that. They recognize that, and they're attracted to it. Again, we think about these things as long term partnerships. Think some of the behavior or concerns that you're alluding to would exist in people who are looking for just kind of more trade y type relationships, one time y.

And that's just not how we operate our business. So kinda far away from us. And again, when you think about choosing your partners and we have the luxury of choice given our performance, think about the partners we choose to do business with. Our team is really selective around partners who we know are gonna be thoughtful and not get over their skis and chase anything away from them. Know, I talked to partners, and they share that they, you know, either pursuing opportunity and didn't get it because they weren't willing to pay up.

I both of us are happy in those moments because I know that my partner is being disciplined and that discipline will benefit us in the long run. And I think there's just so much capital to go to work right now that it doesn't really give me any concern. Great. To hear. Thank you, guys. Nice results.

Andrew Jeffrey: Thank you. And our next question comes from the line of Andrew Jeffrey with William Blair. Please proceed with your question.

Andrew Jeffrey: Hi. This is Adeeb Chaudhary on for Andrew. Thanks for taking our questions. We wanted to ask on the international strategy in The UK, but also in other geos. You might be looking at and kind of the opportunity for a firm to bring its underwriting product to the rest of world. And then secondly, how the mix of GMV might look differently internationally kind of versus Affirm's core domestic business?

Max Levchin: It's a great question. Happy to report that we are in friends and family testing in The UK. With our Shopify friends. It's very exciting. So that's obviously an enormous potential up of that is not lost on anyone. Obviously, we have merchants that we've taken live there and are excited to bring on a few more of our own, but Shopify is just an incredible partner in our growth. And we think we have it for them as well. So that's coming quite soon. The mix is little hard to tell in the following sense. We know that the market has tremendous appetite for pain three and pain four, which are traditionally zeros.

Because that's what the majority of the competition does the totality of their business in But we also know that all the major merchants we've spoken with are signed have said, what we really need from you guys is longer terms. We want six months, twelve months, which obviously to a large degree, will be interest bearing. So as of right now, I think the mix that we have in The UK is skews more interest bearing than not. As we scale Shopify that is absolutely subject to change just based on what this will do relative to what's available. So I you know, little too early to make claims.

You know, we are absolutely going to be as mindful and as attentive to credit in The UK as we have in The US and Canada. Like, that's not an optional thing. Not going to play it fast and lose whatsoever. But we feel very good about our ability to get the data we need to underwrite and, just to achieve the scale we need to make sure that the levers of control are useful. In terms of other geographies, I think we've been pretty transparent that we're not gonna show you a map, but if we drew one, it would look like Europe.

Andrew Jeffrey: Got it. And if I could ask a quick follow-up, can we just get a high-level update on the Apple Pay partnership and if there's anything kind of incremental to share there? Thanks so much.

Max Levchin: We as is our custom, do not talk about, generally speaking, individual partners, but in particular, we do not talk about all the partnerships in any detail.

John Hecht: Thanks. And our next question comes from the line of John Hecht with Jefferies. Please proceed with your question.

John Hecht: Afternoon, guys. Good quarter. You know? And I'm looking at a globe, and I can't find anything that looks like Europe other than Europe. So, thank you for that. New Zealand kinda looks like Japan. Sorry. The Question on, I guess, customer engagement. You know, higher frequency of engagements. You know, as a I guess, a customer seasons on the platform, platform, do the dynamics or characteristics of their typical transaction change as they kinda mature?

Max Levchin: That is a really good question. I don't know if I have a really thoughtful answer for you right now. The theory behind the card and things like Affirm Anywhere and all the other products we've built to gain frequency, was largely that we already understood to be a considered purchase helper. If you're buying a bicycle or a mattress, that's a once every in a year type purchase. You obviously should use Affirm because you will probably find a great brand sponsored zero or subsidized APR, all that. And so as we added more products, they were always meant to take the AOV down at the average. So we would be useful in more situations more frequent situations.

And that's generally speaking been the case. Yeah. I think if you track our average ticket, you can sort of see a gentle downtrend even as the frequency increased. Faster than the downtrend for sure. As we sort of grabbed onto more purchases just some with more frequent ones. So that's sort of the best I got off the cuff. I am sure we can publish something off cycle explaining really happens. But needless to say, we're very happy with the increased frequency. We're not super fussy about AOVs. We don't think it's our job to make you buy two mattresses.

We're answering demand that you naturally have versus telling you in any sort of promotional way to buy a mattress, buy another one. And so that means whatever natural average ticket average spend the user has on any unit time that's what we should have. We're still ahead of the averages if you look at things like debit cards, which is kind of our primary debit card and credit cards, which are prime primary replacement goods. Or services, you will see that we're still ahead of them, but we're coming closer and closer.

And we wanna rest until we are a proper replacement for credit cards, of course, and at that point, our AOV should be roughly the match to them.

John Hecht: Okay. That's very helpful. And then you guys provided the general framework to think about the impact of rising rates. I mean, the futures curve or the forward curve looks like there's a high probability of lower rates. So maybe can you guys give us a framework to think about the impact of lower rates on the business?

Michael Linford: Yeah. Great question, John. You know, it should be generally the rough the same rough mechanics that we outlined during the rising rate environment where a one-point move in reference rates should translate to about a 40 bps change in our funding cost. So that should be true whether the rates are going up or down. The other part of the framework that we shared previously just for everyone is that there will take time for those mechanics to play out because a portion of our funding is variable in nature, but the majority of our funding actually is not truly variable and will adjust with the time lag.

So it may take a year or two, or even longer for those rate changes to fully show up in our funding cost and in our platform portfolio base. So there's nothing to believe. There's nothing in our agreements with merchants or otherwise that would lead us to believe that we wouldn't see the same impact of a declining rate environment as a rising rate environment if you're looking purely at funding costs. I think the question that we make sure we ask internally is if rates are declining, why is that happening? Right?

And there could be offsetting impacts elsewhere in the business, you know, if rates were to decline because unemployment was rising or there was stress on the consumer, obviously, that lead to costs. Elsewhere, in our in our base.

Matt Code: Okay. Thank you very much. Thank you. And our next question comes from the line of Matt Code with Truist Securities. Please proceed with your question.

Matt Code: Hi. Hey, guys. Thanks for taking the question here. Wanted to go back to the 0% topic. But wanted to address it from the merchant side. So you talked about the number of merchants funding this offering double. Doubling year over year. And I believe that's up to 7% of your total merchant base now. That's funding the 0% APRs. Curious, like, as we look forward, what you think that penetration rate can get to?

Max Levchin: It should round up to almost a 100. There are and I'm prone to some hyperbole with numbers, and Rob was laughing at me. But the here's what I really mean by this. So merchants are broadly divided into a handful of categories, but one way to do it is to think of the margin they spend on marketing. My contention is that marketing budget is at least as well spent at the bottom of the funnel as it is at the top. If you're broadcasting a story why somebody should come shop with you're frequently doing it in terms of going out of business sale, hopefully not, more like, you know, 20% sale or Christmas sale.

So the sort of sales driven sale driven, consumer acquisition. Is a little bit of a hand grenade approach to trying to make sales. At the very bottom of the funnel or at the product exploration level of the funnel, you can be much more precise. And with our technology such as Adapt AI where we offer consumers the exact or our estimation of exact financing offer that would compel them to buy, is just much cheaper for the merchant. They would spend a lower percentage of their marketing budget if they thought of it this way at the bottom of the funnel.

The adoption curve of these tools, the 0% APR contract, is entirely a function of these merchants' realizing that the marketing money they're spending is better spent on such promotions at the bottom of the funnel versus the blanket coverage at the top of the funnel. And every year, we're just doing slightly better making sure this is convincing. You know, everything from showing the results, and or working with them to test this. Publishing white papers, educating our salespeople, helping them educate their internal, accounting people, etcetera. And so at the limit, I think every single merchant will benefit from these programs. There are merchants whose margins are quite low, naturally.

And they spend very little of the overall GMV marketing themselves, maybe because they're already at scale, maybe because they just have an alternative distribution model, that will be the last holdout. But generally speaking, this is a more efficient way of driving sales It is apparent to a large enough body of GMV producers that it will eventually trickle down to the rest of the bunch. So that's my conviction, and I'm standing by it. And every year, we have more and more zeros to show for it. It will, it will keep happening until morale improves.

Matt Code: No. Thanks, Matt. That Anything for that, Rob? Oh, if I could just sneak in a follow-up, Max, you addressed this in the shareholder letter. You touched a lot on AI. Was hoping you could just talk about it on the call here too. Just kinda like how you're thinking about the future for AgenTek Commerce and Affirm's role in it.

Max Levchin: It's in a letter. I try to try to boil it down to be relatively pithy, so you're tempting me to give the longer form that Michael successfully talked me out of. Putting in, but it the letter speaks to it pretty well. We think that AgenTek Commerce is going to be extremely successful for some categories of transactions. It may not be super successful for all of them, Many transactions require final human approval just because they have to do with taste. Kind of the unstated weakness of today's state of AI. Is it's fundamentally taste free. It doesn't know what's beautiful. Certainly, it doesn't know what's beautiful to you.

A lot of purchases are made with taste as the front and center of the y. But the need to finance beautiful things or things that you require isn't going away. So, inherently, we will be in those transactions just like we have been able to find our way into all the other ones. The thing that's compelling for us about AgenTek Commerce in particular it's fundamentally a rehashing or remixing of ecommerce as it exists. Before AI. Like, you can imagine you know, the conversation about universal carts has been around forever. No one's ever really built the universal cart of any kind of scale. Universal shopping cart is very much what's going to happen inside these chatbots.

If you are to close these transactions from multiple brands, multiple stores, multiple warehouses, in the same chat session. So this idea of remixing ecommerce is what I think successful certainly successful first act, maybe all the act of agenda commerce looks like. We are built to be mixed into all environments. Do you see us pop up in places like shop pay installments, which is a really deep integration? We are a component of someone else's wallet. You see us inside Chrome Autofill, which is a completely different integration. But not actually very different from our point of view because our services work in that environment. Very different environment, very similar integration.

Almost identical consumer experience as far as Affirm is concerned. You will see versions of this in Agenda Commerce as that rolls out as well. And we're pretty excited about it. I don't I'm generally a techno optimist, so you should be careful what you sort of believe with my sort of rose-colored glasses on, but I don't think it's going to cannibalize commerce a fundamental level. I think it's actually going to increase volume for a lot of merchants. I think we will find that some things are still going to be purchased the old way, and other things are just gonna become naturally more obvious inside of the assisted or assistance driven transactions.

And we're gonna be for here for all of this.

James Faucette: Really helpful. Thank you. Thank you. And our next question comes from the line of James Faucette. With Morgan Stanley Investment Management. Please proceed with your question.

James Faucette: Hey. Good afternoon, everybody. Wanted to ask on the PSP integration Pretty interesting announcement of BNPL with Stripe terminal. I think we there's potential for that to or similar type announcements to be made with other payment service providers. I'd be curious if there's any framing you would provide in terms of how important think the PSP channel will be for your business, particularly when we think about the business overall excluding Amazon and Shopify as a way to add additional merchants? And how do you intend to lean into that channel etcetera? Good question.

Max Levchin: Generally speaking, offline is still kind of the greenfield of buy now, pay later. The fraction of online to offline is still whatever it is these days. 10 to one eight to one. So there's a lot more there than inside ecommerce, and, yeah, binoculator is a minute fraction that world because the integrations are just difficult. And discovery is hard. Know, placement of you should think of this in more affordable terms sort of messaging prompting at the product level is difficult. So it's important. It's important insofar as when we go to talk to a merchant that has a large offline presence, talking to them about let's promote something together, and then integrate something together are two conversations.

Being able to say, actually, we don't have to worry about the latter. It's already built into your point of sale processor. Let's just talk about the promotional details and how we're gonna advertise the opportunity to finance things without fees, frictionlessly, without gimmicks, makes the conversation easier because now you are talking about that marketing budget and discussing it with just one part of the retailer versus a whole separate IT environment that says, well, We'd love to do it, but our road map is busy until 2030. So in that sense, it's a huge boost. It's an enabling technology. Not a now that we have it every offline partner is just gonna fall into our lap.

So the work isn't eliminated, but it's meaningfully reduced.

James Faucette: Got it. That's really helpful. And then just a quick clarification on 0%. I certainly understand and think that it's the push there and the benefits you get are pretty clear. But I'm wondering in terms of the shorter duration of 0% that you called out, and how that evolved during the course of the June. Is that a seasonal thing? Is that just an expansion of availability? A change in the type of customers that are eligible and opting for 0%? Just trying to get a little bit of color to think about that component on a go forward basis. Thanks.

Michael Linford: Yeah, thanks for the question, James. I think the answer really was in the question. It was really a mix of both. We do have seasonality in our business generally, but certainly seasonality within our 0% programs, and that showed up a bit as well, especially when you're comparing Maybe across Q3 and Q4. And then also, you know, when we introduce zeros to a new merchant, one of the ways that we can do that is by making the shortest term that's presented in the financing program a 0% offer. And so that has the natural output of shortening term links for that merchant's program as well.

So it really is a range of things that were at play in this quarter. And I think it speaks to the flexibility and just our ability to customize across multiple surfaces, term length, and APR, to make sure that we're putting the best program together for our merchants and for consumers.

Reggie Smith: Great. Thanks so much, guys. Have a good day. Thanks. Thank you. And our next question comes from the line of Reggie Smith with JPMorgan. Please proceed with your question.

Reggie Smith: Good evening, guys. Thanks for taking the question. It's funny. I wanted to follow-up. On the question that James just asked, but taking in a slightly different direction. So I'm thinking about PSPs you know, primarily online, so ecommerce. Not named Shopify. Is there a way to kind of frame how do you guys think about your penetration within that channel? And, I guess, the maturity of that channel. So, like, if you were to look at the volumes in that segment, are they growing faster than the line average, slower? Like, help, you know, kinda frame, that channel for us to the extent that you can.

And then, you know, whether or not you guys often have default on status or how that how that works. And then my last question, just around the follow-up to that is just quickly on that merchant that's leaving in the end of the first fiscal quarter. Is the thinking that you'll still your logo will still be available on the website? Or has that changed at Thank you.

Max Levchin: I'll start and let Rob finish. Just because I think you're asking about assumptions in the guide. On the PSP side of things, we're pretty early there. Obviously, default on is a really important, really powerful thing. We have multiple partnerships of this matter with PSPs not named Shopify, and we're working pretty hard on expanding the list and being default on I don't have the growth rates of the top my head, so I don't wanna perjure myself here But I think they are accretive to the growth rate of the business, not detracting. But I will let Zane or Rob look this up. And if I'm wrong, I'm sure they'll correct me soon enough.

But I'm pretty sure I'm right on this one. So it's a really important channel. It's pretty early. If you just follow our announcements, you'll see that these are significantly more recent than example, the Shopify announcement. So just from the pure scale and time to penetrate, These are latercomers, and there's more to be had there. So all of that we think, accretes to the future growth merchant sets are a little bit different sometimes. Obviously, Shopify has an extremely broad appeal, but given they have some degree of this is the canonical Shopify merchant, the same is true for every other platform. Aggregator or payment processor, etcetera, etcetera.

So each one gives us to something that we probably haven't seen before to at least some degree. I think that's all I wanna say on Tuesdays.

Rob O'Hare: Yeah. And in terms of the question around the merchant, I think the easiest way to talk about the relationship is just to outline what's in our Outlook and what we've assumed in the Outlook is that the integration goes away, at the end of this quarter. And so it's unclear exactly the mechanics will be of how the relationship plays out. But that's what we've assumed, and we think we've taken a pretty conservative stance in terms of volume. In fiscal twenty-six coming from this merchant.

Reggie Smith: Got it. And not to belabor it. When you say go away, is that does that mean zero volume from that merchant, or am I that net would go away? What does that mean exactly?

Rob O'Hare: What we've assumed in the Outlook is that through the integration, there would be zero volume. After Okay.

Reggie Smith: Yes. Got it. Okay. Thank you.

Harry Bartlett: Thank you. And our next question comes from the line of Harry Bartlett. With Rothschilds and Company re Redburn. Please proceed with your question.

Harry Bartlett: Hey, guys. Yeah. Thanks for taking the question. I just wanted to touch on international again. So I mean, I'm just thinking about shop pains. You talked about going to but, you know, in terms of how quickly you can roll that into other geographies, is it now a case of you have a playbook and then you'll be able to kinda move a bit faster if you're looking to move in other areas of Europe. And, also, I guess, just outside of shop, you know, do you have any, I guess, difference in your approach to how you're gonna expand internationally?

I'm guessing just curious from this from the point of know, brand awareness maybe isn't quite as strong as it is in The US, and are some incumbent players at checkout. So I just know, wonder if you have a dip approach here on maybe the sales and marketing or consumer loans. Thank you.

Max Levchin: I'll try to touch on all these things as quickly as I can since there's a lot here. So the short answer to your first question is yes and no concurrently. So in terms of the platform build, and a lot of the technology, it is certainly built to be reusable. Not gonna launch UK and go off into build another complete different system to be live and fill in your favorite European country. That's all reusable and designed to be reusable. Etcetera. We're also not too concerned about spinning up technological or data center presence in AWS that they exist in every market.

The different things that are or things that are different about every market is access to data, Some of the peculiarities of local regulation and then also local licensing is really important. So some things you can infer pretty easily about how might one approach to not having to do double and triple work on licensing or following regulatory regimes. So you can be assured that we're doing all those things as intelligently as we can. But there's some work involved even if you're sort of as intelligent as you can possibly be with all those things. So that part, I think we're in really good shape.

We don't expect you know, to go off the radar for too long, and we'll have more to say about it in coming quarters. Things like Apple markets is, not a concern. Just for the avoidance of doubt. In terms of sales and marketing, we said it before, so this shouldn't be news to anybody. But we have a nice list of multinational partners. There are partners that are with us in The US or Canada or UK who are multinational and are generally speaking, very pleased with our performance. We think we have a very good shot at talking those folks into being useful to them in more than one market.

We've been successful at it US and Canada, certainly. So see no reason why with the appropriate level of attention and good hygiene, we couldn't do this again. So that's the expansion plans for kind of these lighthouse brands. We don't anticipate a dramatic investment in our brand in The US or UK or beyond. Mostly because we market very successfully with our partners, and there's a the majority of the marketing spend in our financials reflects the go-to-market efforts we share with our merchant partners where we come together in all sorts of interesting promotional ways. So we'll do that. We have some pretty exciting plans for that in our latest market.

I don't wanna spoil any surprises just yet, but that's certainly coming. It will not break our bank by any stretch. So it's all fully priced into the guide.

Harry Bartlett: That's great. Thank you.

Jamie Friedman: Thank you. And our next question comes from the line of Jamie Friedman with SIG. Please proceed with your question.

Jamie Friedman: Hi. Back to the AI conversation. I know Max wanna keep it pithy, but I wanna ask specifically about what you call it here in adaptive checkout. And specifically the Adapt AI deployments that show an average 5% increase in GMV. What is that about? Can you, like, unpack the business process of how that works?

Max Levchin: Sure. And we are not the best at naming products here as we were lamenting earlier today internally, so you'll have to forgive the repetitive sounding names. So adaptive checkout is the umbrella name of all the various manifestations of how checkout at Affirm works. So if you encounter an Affirm powered checkout, Affirm checkout inside a wallet, Affirm checkout inside a website, directly integrated. So on and so forth. It's all powered by this thing called adaptive checkout. And it wasn't always this way we had a bunch of different builds. Of a firm checkout flow. And over the years, we've been we generally have a tendency to refactor and rewrite a bunch of our products.

Because we think it's just good hygiene. So as we maintain good hygiene, we've over time consolidated into almost a single thing with lots and lots of very thoughtful configurability pieces. Until Adapt AI came along, most of this configurability was essentially manual in a sense that we would sign a contract with the merchant. The merchant would say, here are the terms I want. Here are the programs I'm willing to fund, and I would like a lot of control over when I them on and turn them off.

And, of course, we're very happy to oblige because a huge part of our moat is this configurability is very powerful for the merchant, but it's also not replicable with any of our competitors. Adapt AI was sort of the answer to the question of alright. So we've now built this thing that's the ultimate mousetrap of optimization of checkout. But there's a lot of human effort involved in getting to the best results, and it's not really there's not a book we've published on best practices of tuning adaptive Check out for merchants and we should And then they say, well, actually, we have this really great AIML effort.

Don't we, instead of writing a book about it, build a model that automatically figures out the absolute best way of converting consumers at an Affirm powered checkout. And while we're at it, let's try to transition a lot of our merchant relationships any all of them if we could, to something that looks like we will take care of all the optimization.

Let us figure out the best set of programs for any given consumer as they're staring at a cart or a product on your site or in your store, and we will take care of the rest We will convert them to a buyer from a shopper, at the best possible terms for them that is compelling to them. Not everybody wants a zero percent deal. Many people actually really care about the monthly cash flow impact, and they're far less APR sensitive or total interest sensitive. Many people are extremely headline APR sensitive. And you can sort of slice and dice it from there. Tuning that manually works beautifully. Tuning that automatically is an extraordinary improvement.

And the 5% is great early result. We expect more, and we'll certainly brag about it as we get there. But adapt.ai is AI powered configuration of adaptive checkout. And that's what we talked about rolling it out Last quarter, we've rolled it out with select versions now. Obviously, we are asking for more control from the merchant. We're telling them, look. If you just give us the ability to tune for each individual consumer what they see it will cost you less, and it'll convert into more volume. It'll take a little while for everyone to sign up for that.

But the ones that have are enjoying the benefits early, and we're tuning the models more and more as we go.

Jamie Friedman: Fascinating. Thank you. I'll jump back in the queue.

Giuliano Bologna: Thank you. And our next question comes from the line of Giuliano Bologna with Compass Point. Please proceed with your question.

Giuliano Bologna: Well, thanks for taking my questions and, you know, congratulations on another incredible quarter. As a question and this is Yale. Somewhat of a high level, you know, concept. But I'm curious when you look at a lot of the wall partnerships, there's kind of a new frontier where you know, some of the wallet partnerships can enable offline transactions in the future, and, you know, how you would plan for that and how, you know, material that could be you know, in terms of, you know, driving incremental GMV growth. And then maybe how you think about the underwriting because you have an interesting opportunity Yep.

Continue to differentiate and, you know, increase your leads, you know, ahead of your competitors with such products like that. Yep.

Max Levchin: Certainly very excited about offline commerce. I'm on the record. Talking about that every quarter, I think. Think if you look back at some of the announcements made by some of the largest wallets out there, you will see that they too are excited about offline applicability of the products that Affirm offers. So some of that is, in the near future. We try to be to be con as always conservative in our sort of promises and degrees of excitement about things that aren't live yet. So I'll hang back on the sort of exactly what we expect from it I think the opportunity is enormous. I think there yeah.

It sort of covers a little bit earlier question, but they're two very distinct puzzles. Number one is how do you inform someone that this thing, this thing being a firm, works in their favorite store? We have some we think, really good ideas on how to do that. You will see some of them actually quite soon. On our own surfaces. But, there's also the problem of integration and what in payments nerd slang is called tender delivery. Tender delivery is integration with point of sale systems, digital wallets, various forms of NFC, all of that's in our radar. All of that is really important to us, and we're quite engaged in all those things.

Again, the greenfield size is roughly 10 x of what we're chasing in ecommerce. If you believe we can solve the latter problem, which we're very confident in, it becomes a question of how well can you communicate it and how aggressive can you be in communicating it to shoppers from the brand point of view, which I think asked five years ago, some of them would have been wondering when might if someone might go first, I think at this point, it's flipped to actually it should be promoted because it's so successful in driving conversion. One fun fact, we see increase in demand for Affirm anytime anyone in the industry runs a large promotional campaign.

There's just the notion of, oh, yeah. Buy now pay later is available. Accretes to Affirm naturally even if we're not the ones putting our name on the ad. So it's just a matter of awareness more than it is anything else. In the offline world.

Giuliano Bologna: That is extremely helpful, and I really appreciate that. I'll jump back in queue.

Operator: Thank you. And with that, there are no further questions at this time. I'd like to turn the floor back to Zane Keller for closing remarks.

Zane Keller: Thank you for the questions today, everybody. We'll see many of you on the conference circuit soon, I'm sure. Have a good Labor Day weekend, and talk to you soon. Bye.

Operator: Thank you. With that, this does conclude today's teleconference. We thank you for your participation. May disconnect your lines at this time.

Where to invest $1,000 right now

When our analyst team has a stock tip, it can pay to listen. After all, Stock Advisor’s total average return is 1,068%* — a market-crushing outperformance compared to 185% for the S&P 500.

They just revealed what they believe are the 10 best stocks for investors to buy right now, available when you join Stock Advisor.

See the stocks »

*Stock Advisor returns as of August 25, 2025

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. Parts of this article were created using Large Language Models (LLMs) based on The Motley Fool's insights and investing approach. It has been reviewed by our AI quality control systems. Since LLMs cannot (currently) own stocks, it has no positions in any of the stocks mentioned. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Image source: The Motley Fool.

DATE

Thursday, August 28, 2025 at 4:30 p.m. ET

CALL PARTICIPANTS

Chief Executive Officer — Joel D. Anderson

Chief Financial Officer — Sabrina Louise Simmons

Investor Relations — Tina Romani

Need a quote from a Motley Fool analyst? Email [email protected]

RISKS

Chief Financial Officer Sabrina Louise Simmons stated, Tariffs will have the most significant negative impact in Q4. Explicitly citing, external cost pressures, including tariffs, are expected to become increasingly significant in the second half of 2025.

Sabrina Louise Simmons commented, "Transactions is a place we are very focused on improving. So that's really the biggest opportunity for us. And you heard" indicating ongoing pressure in customer transaction volume.

Management acknowledged, "do not expect progress to be linear," highlighting that topline progress may be masked by further business model changes and that performance may not consistently improve each period.

TAKEAWAYS

Net Sales-- Net sales decreased 2.3%, reflecting ongoing store closures and the decision to move away from unprofitable sales.

Comparable Sales-- Comparable sales were down 1.4%, with sequential improvement of 130 basis points in comparable sales on a two-year basis from Q1 to Q2 due to stronger store performance.

Gross Margin-- Gross margin increased by more than 120 basis points year over year to 39.3%, attributed to disciplined pricing and promotion management, with minimal tariff impact in the quarter.

SG&A Expenses-- SG&A was reduced by $36 million from the prior year, with more than 150 basis points of leverage in SG&A; over a quarter of SG&A savings resulted from employee benefits optimization.

Operating Profit-- Increased by $41 million year over year to $43 million, driven by margin expansion and expense leverage.

Adjusted EBITDA-- Rose $30 million year over year to $114 million, with margin expansion of nearly 220 basis points to 7.6% of sales.

Inventory-- Ended down 9.5% year over year, while in-stock levels improved for customers.

Free Cash Flow-- Exceeded $50 million in free cash flow. Year-to-date free cash flow was about $10 million.

Store Count-- Ended at 1,388 U.S. stores, following 10 net closures year to date and 25 net store closures in 2024.

Cash and Liquidity-- Finished with $190 million in cash and $684 million in total liquidity, including an undrawn revolver.

Full-Year 2025 Adjusted EBITDA Guidance-- Raised to $385 million–$395 million.

Full-Year Net Sales Outlook-- Anticipates net sales will be down low single digits for FY2025, including the impacts of recent store closures.

Q3 2025 Adjusted EBITDA Outlook-- Guided to $92 million–$94 million, up nearly 15% year over year at the midpoint.

Capital Expenditures-- Full-year capital expenditures are expected to total $125 million–$130 million, targeting higher ROIC.

Loyalty Program Relaunch-- New program with a retention focus is scheduled for roll-out in 2026, as part of longer-term customer engagement strategy.

E-Commerce Channel-- A new leader has been appointed, and management has begun targeted efforts to reduce friction, improve digital basics, and enhance omnichannel experience.

New Merchandise Initiatives-- First product category for humans launched, with items priced under $20 and designed to spur impulse purchases.

Petco Health and Wellness Company-- "where the pets go" tagline reintroduced, supported by in-store experiential events; early customer feedback and NPS scores have improved since the end of last year.

SUMMARY

Petco Health and Wellness Company(NASDAQ:WOOF) delivered improved profitability through margin expansion and cost reductions, while net sales declined 2.3% and comparable sales declined 1.4% due to strategic store closures and a pivot away from unprofitable revenue. Management raised full-year adjusted EBITDA guidance, signaled readiness to begin selective reinvestment, and highlighted sequential improvement in comparable store performance from Q1 to Q2. Leadership identified forthcoming tariff headwinds and called out the quarter's strong free cash flow and liquidity, positioning the company for continued transformation into phase three: a return to profitable sales growth.

Chief Executive Officer Joel D. Anderson said, Results will begin to show up in 2026 in terms of a positive comparable sales metric. Clarifying that the company does not expect to achieve positive comparable sales before 2026.

Management indicated that operational process improvements, merchandising resets, and expense control have contributed to store profitability, while e-commerce enhancements and a new loyalty program are planned for later phases.

Anderson outlined four strategic pillars for the company's next phase: improved store experience, scaled services, differentiated merchandising, and omnichannel execution.

INDUSTRY GLOSSARY

SG&A: Selling, General, and Administrative expenses, encompassing all non-production costs, including payroll, marketing, and store-level operational expenses.

AUR: Average Unit Retail, the average selling price per unit sold.

AUC: Average Unit Cost, the average merchandise cost per unit to the retailer.

NPS: Net Promoter Score, a customer loyalty and satisfaction metric based on likelihood to recommend a brand or service.

ROIC: Return on Invested Capital, a profitability measure indicating how efficiently a company uses its capital to generate returns.

Empty Calorie Sales: Sales generated through promotions or activities that provide limited long-term value or margin, often targeted for elimination in profitability improvement initiatives.

Planogram Reset: The systematic rearrangement of in-store product displays to improve merchandising, in-stock rates, and product productivity.

Full Conference Call Transcript

Joel D. Anderson: Good afternoon, everyone. And thank you for joining us today. I'm incredibly proud to share the progress we are making in strengthening the foundation of our operating model and improving our retail fundamentals while positioning Petco Health and Wellness Company, Inc. for sustainable, profitable growth. We are continuing our transformation journey and pleased we have the confidence to raise our earnings outlook. In addition to the progress we are making on our transformation, this month marks the sixtieth birthday of Petco Health and Wellness Company, Inc., celebrating our rich heritage. In our six-decade history, Petco Health and Wellness Company, Inc. has been where the pets go. Consumables, for grooming, for vet services, for pharmacy, and more.

I'm honored to be leading Petco Health and Wellness Company, Inc. along with a talented team as we embark on the next sixty years. As I complete my first year on the ground at Petco Health and Wellness Company, Inc., it is gratifying to watch Petco Health and Wellness Company, Inc. regain confidence and relevancy in the pet sector. I will spend a few minutes later in my prepared remarks outlining what this means and where I'm seeing progress. Looking to our financial performance in Q2, sales were in line with our outlook. And we meaningfully improved our profitability, increasing operating income by over $40 million and generating more than $50 million in free cash flow.

For the quarter, we delivered $114 million in adjusted EBITDA. This is a true testament to the hard work all the teams at Petco Health and Wellness Company, Inc. have leaned into. As we enter the back half, we continue to execute on phase two of our transformation and expect to make improvements to our bottom line and overall performance versus last year. It is with this confidence in our ability to deliver improvements that we are able to raise our guidance and at the same time begin thoughtful reinvestment behind the business as we set the stage for phase three of our journey returning to profitable sales growth.

As part of this work, our leadership team has been engaged in a North Star project to reimagine every key element of Petco Health and Wellness Company, Inc. We've uncovered so many positive aspects about our heritage, identified the details of what our customers expect us to improve, and have honed in on Petco Health and Wellness Company, Inc.'s differentiated positioning in the marketplace. From a marketing perspective, it quickly became obvious we needed to bring back a more emotional element to how we go to market and connect with pet parents. Our research has told us that we have an amazing heritage that resonates with our customers still today.

As part of our sixtieth celebration, we reintroduced our beloved "where the pets go" tagline, returning to the heart and soul of our brand, with a fresh approach designed to increase relevancy. The campaign started in July and fully launched in August. Initial results indicate it is resonating with strong feedback and positive reactions from our customers. As part of the campaign relaunch, we reintroduced unique in-store events and experiences for all members of pet families. In July, we hosted several experiences like free pet food tasting and "meet the critters," where families had the opportunities to meet our companion animals while learning from our knowledgeable and friendly pet experts.

And personally, one of my favorites, in honor of Shark Week, we hosted a "Feed the Sharks" event allowing families to get up close and personal with our freshwater fish. Petco Health and Wellness Company, Inc. truly is where the pets go in real life. The key for us to successfully move to phase three, a return to growth, is to bring this to life through compelling marketing, improved merchandising, engaging creative, and stronger store execution, giving customers a reason to step away from their screens and shop with their pets.

While certainly acknowledging we are still in the early days, I'm pleased to share that we have seen positive customer sentiment and engagement around these events on our social channels and sequential increases in our NPS score since the end of last year. Survey respondents highlighted partner friendliness and helpfulness, with an average satisfaction rating above 90%, which speaks to our ability to deliver experiences that pets and their people aren't getting anywhere else. In addition, several of our store managers reported people waiting outside our doors before we opened for in-store events. This is simply evidence the marketing message is breaking through the clutter, and our pet parents want to engage and have in-store experiences with our store partners.

I mentioned earlier, now as I look to Q3, we are going to begin to test our way into phase three and invest back into the business. An important step towards cementing our brand for the future is to invest internally, and next month, I'm looking forward to bringing leaders across the organization together for our leadership summit. This is an opportunity for support center and store leaders to come together to not only celebrate our sixtieth anniversary but to launch our updated values and, most importantly, align on what a reimagined Petco Health and Wellness Company, Inc. means for our customers and our plans to execute on that vision.

Throughout my career, I found that company culture is the baseline for success. Since joining Petco Health and Wellness Company, Inc., I've been incredibly proud of the culture that exists today centered around pets first. We are harvesting that cultural heritage with an equal focus on operating disciplines and a winning mindset. It has been rewarding to watch the collective commitment and energy grow as we instill a one Petco Health and Wellness Company, Inc. way attitude across the entire organization and set the foundation for the next stage of our journey. Alongside culture, driving operational improvements remains in focus, and that was a success story in Q2.

During the quarter, we continued to take steps towards strengthening our retail fundamentals. For example, our operations, merchandising, and supply chain teams worked together to simplify and optimize our processes that drive inventory accuracy, four-wall in-stock, and ultimately improve on-shelf in-stock of our entire assortment. These efforts were a contributor to our improved Q2 EBITDA performance. Additionally, we continue to see improvements in both inventory per store and sales per square foot. In addition to operations, merchandising excellence remains at the forefront of our work. You've heard me talk about allocating more space to our higher productivity SKUs, adding capacity on shelf, and improving end cap displays.

All of which just launched over the last few months are contributing to improved store performance. We're also focused on bringing in product newness. For example, we launched our very first product category aimed at humans online and in stores selectively in response to a customer survey where 90% of our pet parents shared that they are interested in buying pet-themed products. Priced under $20, products are designed to be giftable, affordable, and impulse-worthy, celebrating the bond between pets and the people who love them. This is just one example of the merchandise overhaul we are making to reinvent Petco Health and Wellness Company, Inc.'s overall product offering.

Over time, we will begin to see newness throughout our entire assortment that will differentiate us from others and surprise our customers with unexpected ideas for their pets. Moving on to marketing, last quarter, I spoke to you about the relaunch of our loyalty program, which is a great example of the work that is ongoing to implement a more sophisticated approach to customer segmentation. The new program will feature personalized rewards with a retention focus designed to strengthen long-term relationships throughout the pet life cycle. More to come in 2026, and I'm pleased with the strategic customer insights our teams are utilizing to guide the development of the program and the enhanced customer experience it will ultimately deliver.

As we've talked, do not expect progress to be linear, and it's also important to note some of the early top-line progress is masked by areas where we still have opportunity for improvement or the need to further sunset prior behaviors and implement new Petco Health and Wellness Company, Inc. defined go-forward operating principles. For example, in-store services growth is stronger than the total reported figure as we temporarily deprioritize our paid loyalty program ahead of the relaunch in 2026. Similarly, consumables performance in stores is stronger than the total reported figure as underlying improvements in stores are offset by the softness in e-commerce as we retool that channel.

And finally, as we look to Q3, it's important to remember we are lapping our toughest compare from a comparable sales perspective. Most importantly, we believe our stores, together with our comprehensive services offering, are Petco Health and Wellness Company, Inc.'s differentiator in the market long-term, and this is where our initial transformation efforts have been concentrated and our success has been seen. That said, while we have intentionally concentrated our phase two efforts on improving our physical store fleet, given they represent the vast majority of our sales, we have a tremendous opportunity to continue to enhance our omnichannel customer experience. We recently welcomed a new leader for our e-commerce channel, and he has already identified several opportunities.

I look forward to spending more time personally with the digital team to eliminate barriers and drive improvements with the goal of delivering a seamless omni experience that our customers are excited about. And we can then increase our marketing efforts to invite new customers back to pepco.com. Before I wrap up my thoughts and turn to Sabrina to share our financial details, I want to specifically comment on phase three, growth. While our strategy thus far has been intentional, to give up certain sales, these decisions are making us more profitable, which allows us to begin to invest back into the business. The speed at which everyone worked to get us to this point is gratifying.

And the work I am seeing internally for the future is promising. Growing sustainable sales the right way takes time. And it also takes a company that has discipline, a positive attitude, a winning can-do mindset, and a commitment to merchandise differentiation. I've shared examples of each with you today. We have begun to order new merchandise and are working now to sell through our existing inventory. I'm confident you'll be excited about what is coming. Please know that while our merchandise overhaul is happening, all the wheels are in motion with our marketing, operations, services, and digital teams to move ahead with speed and rigor.

While this is in motion, we expect the bottom line improvements to continue and further provide the necessary strengths to return Petco Health and Wellness Company, Inc. to growth. In closing, I'm incredibly proud of the work teams have accomplished in my first year at Petco Health and Wellness Company, Inc. While acknowledging at the same time more work is ahead. I'm looking forward to our national meeting next month and engaging directly with our store general managers, vet leadership teams, and leaders throughout our support centers. We are bringing everyone together to make sure the message is consistent, the focus is sharp, and the urgency is universal.

We must be known as a company that celebrates amazing pet experiences, creates great strategies, and delivers on our promises both internally as well as externally. We'll accept nothing less. The initiatives planned for the back half will continue to move our transformation forward, and I look forward to sharing updates as we progress. With that, I'll hand the call over to Sabrina to take you through the specifics of our strong second quarter results and share the details of what we plan to accomplish over the balance of 2025. Sabrina?

Sabrina Louise Simmons: Thank you, Joel. Good afternoon, everyone. I'm pleased to share our continued progress on strengthening our economic model. As we've discussed with you previously and in line with our goals laid out at the start of the year, we are executing with intention to build a strong foundation from which to grow. This means expanding our gross margins and leveraging SG&A, resulting in improved profit, cash flow, and overall returns. Our teams are moving with urgency as we progress against this phase of our transformation, and our second quarter results reflect our continued progress. In line with our outlook, net sales were down 2.3% with comparable sales down 1.4%.

As a reminder, the difference between comp sales and net sales is driven by the 25 net store closures in 2024 and the additional 10 net closures year to date, bringing our U.S. store count at the end of the second quarter to 1,388. It's worth noting on a two-year basis, comparable sales improved 130 basis points from Q1 to Q2, driven by improvement in our store performance. Our top-line results primarily reflect the decisions we are making to move away from unprofitable sales, shifting instead to a promotional strategy, better retail execution, and enhanced customer experience.

This work resulted in gross margin expansion of more than 120 basis points versus last year to 39.3%, with gross margin in both products and services expanding once again this quarter. Similar to Q1, gross margin expansion was driven by a more disciplined approach to both average unit cost and average unit retail, including stronger guardrails and the deployment of more disciplined processes to effectively manage our pricing and promotional strategies. It's also worth noting that there was minimal tariff impact in the second quarter. Moving to SG&A, for the quarter, SG&A decreased $36 million below last year and leveraged more than 150 basis points.

As we've discussed previously, our management of expenses is not simply a one-time cost-cutting exercise, but rather a fundamental shift in mindset around how we operate. And that new rigor is evident in our results. A little over a quarter of the $36 million improvement year over year came from employee benefits optimization work. Over the last several months, we conducted a comprehensive review that resulted in meaningfully improved actuarial results. We recognized the benefit of all this work as we trued up our reserves to the semiannual action report in the second quarter.

More efficient store labor and operations along with expense management across the board drove the remainder of the improvement, though notably, marketing expenses were about flat on a year-over-year basis in the quarter. While there's more work ahead, we're pleased with the progress we've made to adopt a more disciplined mindset. Our expanded gross margin and expense leverage resulted in a $41 million increase year over year in operating profit to $43 million. Adjusted EBITDA increased $30 million to $114 million and expanded nearly 220 basis points to 7.6% as a percent of sales.

Moving to the balance sheet and cash flow, inventory continues to be well managed, with ending inventory 9.5% below last year, all while achieving higher in-stock for our customers. Free cash flow for the quarter was over $50 million, and year to date was about $10 million. Both the quarter and year to date were well above the prior year. We ended the quarter with a cash balance of $190 million and total liquidity of $684 million, including the availability on our undrawn revolver. And now turning to our outlook for the full year, we are raising our adjusted EBITDA outlook for 2025.

We now expect adjusted EBITDA to be between $385 million and $395 million, an increase of roughly 16% at the midpoint. For the full year, we continue to expect overall net sales to be down low single digits to last year, which includes the impacts of store closures in 2024 and 2025. It's important to note that the impacts of tariffs will become sequentially more meaningful as we move through the back half.

Additionally, the significant progress we've made during the first half against strengthening our economic model and improving our earnings profile provides us the flexibility to selectively invest behind the business where it makes sense as part of our ongoing efforts to set the stage for phase three, a return to profitable sales growth. For the third quarter specifically, it's important to keep in mind that over the last five years, adjusted EBITDA in the third quarter has been sequentially lower than the second quarter. In line with that historical seasonality, we expect adjusted EBITDA to be between $92 and $94 million, up nearly 15% year over year at the midpoint.

We expect net sales to be down low single digits versus the prior year, and as an important reminder, we are lapping the toughest sales compare of the year in the third quarter. With regards to other guidance items, for the full year, we expect depreciation to be about $200 million, net interest expense of approximately $130 million, about 25 net store closures, and approximately $125 to $130 million of capital expenditures with a greater focus on ROIC.

In closing, Joel spoke about the energy inside the organization, and I wanted to also take a moment to thank all of our teams for the incredible work accomplished to date, the output of which is clearly evident in our strengthening bottom line results. With that, we welcome your questions.

Operator: Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed, and you would like to withdraw your question, please press star then 2. And at this time, we'll pause momentarily to assemble our roster. And the first question will come from Michael Lasser with UBS. Please go ahead.

Michael Lasser: Good afternoon. Thank you so much for taking my question. So it sounds like you're moving closer to phase three, Joel. When is a reasonable expectation for us to hold the firm accountable for generating a positive comp? Is that by the fourth quarter of this year, or is that more likely a 2026 outcome?

Joel D. Anderson: Thanks, Michael. You know, as I think both of us mentioned, you know, Tina went into detail or, sorry, Sabrina went into detail. You know, the third quarter is our hardest compare of the year. And so like I outlined earlier, we are smack in the middle of phase two, Michael. And while we are beginning to seed ideas and test and learn as we like to call it for phase three, the results will begin to show up in 2026 as it relates to a positive comp. But we will start to work on ideas right now, Michael.

Michael Lasser: Okay. And my follow-up question is it sounds like the gross margin gains came in part from eliminating some promotional and unproductive activities. Were those mostly online, and is that what drove the weakness in the online segment? And if you were to take away the online channel, would Petco Health and Wellness Company, Inc. have generated a positive comp in the stores business?

Joel D. Anderson: Yeah. Michael, I don't want to get into specific segments. But, you know, as you can tell from my remarks, we've really been focused on the stores. It is where the majority of our sales are. And so, therefore, it was intentional that's where we start. We see it as the biggest opportunity long term for us, and we wanted to get that underway. So not only are we pleased in the results the stores are making, but the traction we're getting in e-commerce is working as well, but that's been more focused on the bottom line.

Sabrina Louise Simmons: And just to add a little bit to that, Michael, I would say everything Joel said about the stores, ditto. Online last year did have much more promo and stacking that we needed to clean up. So if you think about it, between stores and e-commerce, there was more cleanup to be done on the e-commerce side to be helpful.

Michael Lasser: That's very helpful. Thank you very much, and good luck.

Operator: Thank you. The next question will come from Steven Zaccone with Citi. Please go ahead.

Steven Zaccone: I want to follow-up on Michael's question on gross margin. So could you just dig a little bit more detail there how that performed relative to your own expectation? Because it looks like a big beat. And then it sounds like there's some timing aspect with tariffs. So can you just elaborate on that a little more, how we should think about gross margin rate in the back half of the year?

Sabrina Louise Simmons: Yes. So we have been super focused. You know, from our first call together, we've talked about the economic model and how one of the most important tenets of that is expanding our gross margin on a year-over-year basis for the full year to get our business healthy so that when we do regrow sales, it has a nice flow through on healthy margins. So we've been working every lever AUR, AUC, within those, you know, every lever promo, pricing, clearance, markdown to deliver on that gross margin expansion, and we're really pleased how it came through on both merchandise and services in the second quarter. When you look forward, though, Steve, for sure, tariffs start to impact.

So we had almost no tariff impact in Q2. There were some, but it's, like, let's call it rounding. As we go to Q3, it becomes meaningful, and then it becomes even much more meaningful in the fourth quarter.

Steven Zaccone: Okay. Understood. I guess the follow-up then on that is just how do we think about mitigation efforts? And maybe as it relates to the top line specifically, how did pricing perform in the second quarter? And what's your view on pricing as we get into the back half of the year?

Sabrina Louise Simmons: Well, we've been doing pricing all year long, so maybe more than a lot of retailers who perhaps are reacting to the second half tariff, we have been using this vehicle as we came together as a new leadership team from the get-go. So, really, there's less of a change in the second half, but will we be using that lever? Of course, we will. But it'll be with a consumer-first lens. We are very focused on delivering on a value proposition to our customer. So no change there, but, yes, it will continue to be used.

Steven Zaccone: Okay. Understood. Very much. Best of luck on the back half.

Operator: The next question will come from Steve Forbes with Guggenheim. Please go ahead.

Steve Forbes: Hey, guys. This is Jake Nebosh on for Steve. Thanks for the time. So two questions for me here. One, you know, you guys mentioned last time that you were working on some planogram resets and wanted to circle back to see if you could provide some updates on the work there. Then I have a follow-up.

Joel D. Anderson: Yeah. I think we were specifically talking about our dog and cat reset back then. And so about my prepared remarks where I talked about on-shelf availability, better in-stocks, making it easier for our store associates to fill the shelves, which therefore makes them more productive, which makes our stores more profitable. So it was very successful. We've completed those resets. You'll continue to see more of those as we move through this year and into next year in other categories. But it's just a great example of the diligence the teams are making to improve the profitability in the stores, improve on-shelf in-stock for our customers, and make our stores more customer-friendly.

Sabrina Louise Simmons: Yeah. Just to tag on to that, as you heard me say, part of our SG&A savings was store labor and operations, and that is exactly what Joel's talking about, that we got a lot of benefits that are flowing through in our expense savings.

Joel D. Anderson: You had a follow-up, Steve?

Jake Nebosh: Yes. Perfect. Yeah. Just a follow-up here. And I know you touched on this a little bit, but, you know, curious if you guys can share some more detail around the North Star initiative that you guys have been working on. And, you know, maybe it's too early, but I'm curious if you have any updates there.

Joel D. Anderson: Yeah. I think, you know, we'll certainly give you a more detailed outlook on that as we get into the specifics of phase three and growth. But I can tell you, as we think about phase three, there are really four main pillars to it. It's all about delivering an amazing store experience. You know, our partners are pet-first, and that's what sets us apart. It's delivering services at scale. You know, services aren't easy. And, you know, in many ways, I think of that as our moat, and that clearly showed up in our North Star work of how important our services were.

You know, the ecosystem interacting between grooming, hospital, and center of store is something Petco Health and Wellness Company, Inc. only can do. Third pillar, merchandising differentiation. I've alluded to that, gave you several examples in my remarks, but you're gonna see more newness out of us, more surprise and delight. You know, we have to be relevant. No more of set it and forget it. You know, seasonal categories, pricing, that all comes into the merchandise differentiation. And then finally, number four is, over time, winning with omnichannel. So those are kinda some of the pillars that are coming out of our North Star work that's gonna drive our growth down the road. Thanks, Jake.

Jake Nebosh: Perfect. Thank you very much, guys.

Operator: The next question will come from Kaumil Gajrawala with Jefferies. Please go ahead.

Kaumil Gajrawala: Hi, everybody. I guess a couple of things. The first is just, you know, where we sort of are in the process of the e-commerce sort of pullback and eventual retool, is that sort of complete? Exactly the same question, I guess, on the inventory side. Inventories came down nicely. And so are inventories where you sort of intend them to be now, or is there still more work to do? But, really, like, are those two projects kind of, you know, mission complete and time to move on or still more to get done?

Joel D. Anderson: Yeah. Kaumil, let me take e-commerce, and then Sabrina, if you want to chime in on inventories. You know, look, as I said earlier, it was our intentional focus to start on the stores first. You know, in a unique way, by us reducing sales in e-commerce, our e-commerce channel is actually more profitable today. But the work we've been doing is just getting started and is ongoing. We hired a new leader, and he's already making a big impact. Reducing friction, and quite honestly, we're just improving basic retail 101 operating principles, like speed, page load time, appointment scheduling enhancements, improving repeat delivery. Our loyalty program will come in 2026.

We think we've got plenty of media buying optimization to do and really improve our targeting and personalization. So those are just several examples, but I would say we're in the phase on e-commerce of identifying, and now we'll focus on implementing. And then, Sabrina, on inventory?

Sabrina Louise Simmons: With regard to inventory, I mean, yes, we're so proud of the work the teams have done even in the face of, you know, tariffs. To get the inventory dollars down so far. So we're big on continuous improvement. I believe there's always opportunity. But we don't want to push it too far. We pulled off, as I said, a down nine and a half with improving in-stocks at the same time. So our goal is to always have a tight relationship between sales and inventory, and inventory below sales to me is always a great thing as long as it's not hurting the customers, and that's what we'll be focused on continuing to deliver.

Kaumil Gajrawala: Got it. And if I could ask about, you know, your commentary on the increasing NPS scores, if, you know, sort of postmortem, what's behind that? Is it just the marketing? Is it what's happening in-store? It just feels, given the way you've laid out the phases, that is something that you'd expect when you're much further along phase three than maybe at this stage. Just curious if there's anything behind that.

Joel D. Anderson: Well, nothing specific. It's a whole host of a lot of improvements. Joe Vanese, who leads our stores organization, you know, of the new leadership team's probably been here the longest. And, you know, he's made traction in many different areas. We've already had one leadership meeting with the leaders of the stores organization. We've got another one I talked about coming up next month with all our store general managers and above. And those are just examples of us reinvesting back in our people and really putting effort into the store experience. And it's clearly beginning to resonate with our customers. It's showing up in the metrics I shared with you.

And I really believe, you know, it's really important for Petco Health and Wellness Company, Inc. to have a great store experience. And so that's why we've really leaned in initially with our store partners.

Kaumil Gajrawala: Alright. Thank you.

Operator: The next question will come from Kendall Toscano with Bank of America. Please go ahead.

Kendall Toscano: First thing I wanted to ask was just on the comp, if you could comment on any of the transactions versus AUR that you saw during the quarter? Thanks.

Sabrina Louise Simmons: Sure. Overall, we're pleased with UPT and Basket. Transactions is a place we are very focused on improving. So that's really the biggest opportunity for us. And you heard Joel talk about how we're starting these great efforts on events and making the store fun. Doing much more marketing, we're looking forward to improvement there. But that was the one that held us back in the quarter. Joel, do you want to add?

Joel D. Anderson: No. I think that really covers it nicely, and, you know, as we get towards growth, the real focus will be on starting to invite customers back into Petco Health and Wellness Company, Inc. and shared with you some examples of that with the store experiences.

Kendall Toscano: Okay. That's helpful. And then, the other question was just it sounds like there's been a lot of progress in key areas like inventory and in-stocks. And curious just where the biggest remaining gaps are that you're working to address before you'd be more confident to shift fully into phase three?

Joel D. Anderson: Well, I think as I alluded to in my prepared remarks, our back half begins to contemplate reinvesting back in the business. So I think it's less about the gaps, and it's more about how pleased we are with the progress we've made to date. And that progress gives us the confidence that we will continue to make progress. Sabrina talked about inventory. There's always opportunities there. But the team's made such progress that we're beginning to invest, so it's now the shift starts to be, you know, talking about those four pillars of growth that I alluded to on a couple of questions ago. That's where our focus is.

Sabrina Louise Simmons: And just to elaborate on what Joel said, we just think there's such a nice runway here. Even if you just think about margins alone. So we've been really focused, like we said, on AUC and AUR levers, including inventory management and pricing and promo and markdown and clearance. But what's kind of yet to come that we're in the early stages of is we think there's a lot of opportunity in sourcing, we think there's a lot of opportunity in expanding categories like pharmacy, in regrowing over time, our supplies business. So we still have a lot of levers left in front of us, which, you know, makes us very excited.

Kendall Toscano: Got it. That's really helpful. Thanks again.

Joel D. Anderson: Thank you.

Operator: The next question will come from Simeon Gutman with Morgan Stanley. Please go ahead.

Simeon Gutman: Hey, Joel. Hey, everyone. Can you talk about the number of pet families? Can you talk about growing, declining? And then, Joel, what are you learning about the families as far as the departments they're shopping, the services they're using you for, anything that's surprising you from when you started?

Joel D. Anderson: Yeah. Simeon, good question. I would say our industry data is showing that the pet space is relatively flat right now. And, in fact, for us, as we've intentionally focused on the bottom line rather than the top line, we're really pleased with our performance as, you know, we're not giving up that much market share. And at the same time making significant improvement on the bottom line. As far as, you know, the observations we've made from that I've seen, you know, I've been surprised at how many one-time customers we have. And I think that's probably some areas where we were too bottom of the funnel focused on our e-commerce channel.

As opposed to being more focused on omni customers' lifetime value of customers. So those are some of the changes we'll make. And we also have a significant amount of customers that shop us for our services only. And we've got an opportunity really there to grow that share of wallet with our customer into some of our other categories. Merchandise, improve our repeat delivery capabilities so they use us, those are just a couple of examples, Simeon, of things we've observed through all our North Star work.

Simeon Gutman: Okay. And then, you mentioned, like, just toggling some inventory, bringing some new stuff in. Is there any, and I'm sorry if this was asked, is there any inventory movement markdown risk associated with changing merchandise mix going forward?

Joel D. Anderson: Nothing significant, Simeon. I mean, obviously, when you change inventories, optimize inventory, you can tell Sabrina said, our inventory was nearly down double digits. And that didn't come with a huge inventory risk at all. So, look, we gotta be disciplined about it, Simeon, and go at it methodically, but I don't see any big inventory risk on the horizon.

Sabrina Louise Simmons: And just to underscore that, the teams are really focused on improving the governance and processes around inventory and buys. And we absolutely need more newness for our customers, and we're excited to bring it in. But those buys will be tight and well-controlled and seasonal. And fast-turning. So we intend to manage it with, you know, a lot of good progress, process, and governance.

Simeon Gutman: Thank you.

Joel D. Anderson: Thanks, Simeon.

Operator: And the last question for today will come from Justin Kleber with Baird. Please go ahead.

Justin Kleber: Hey, everyone. Thanks for taking the questions. So first off, Joel, you've been talking about cleaning up these empty calorie promos for a handful of quarters. I'm curious if you could help us size the drag to the comp from this activity. You know, if we normalize for what you're doing, I mean, is the business comping up kind of excluding the cleanup of these promotions?

Joel D. Anderson: Well, I don't know. That's a little probably too specific to get into. I think it's more important to look at it where we're at with the progress, and, you know, both Sabrina and I commented that Q3 is the toughest compare. So, you know, what you can glean from that is we started in on this progress in Q4 of last year. We identified more in Q1s. And so on. So, you know, as we continue to find opportunities where there were empty calorie sales, we are offsetting those with some of the growth initiatives that are starting to take place, but we still need to get through, especially this Q3 and in the beginning of the holiday season.

Sabrina Louise Simmons: Oh, I was just gonna add, Justin, what Joel already said in his remarks, which is what we see under the covers is improvement in our store performance, and that's really important to us because that's the vast majority of our sales. So just to reiterate, that was our first area of focus. And it's just great to see the improvement there. And e-commerce is probably six months behind because a new leader just started, and as Joel said, identification phase. So we will get there because we know all the levers we need to work. But we're very pleased with what's happened in our stores.

Justin Kleber: Thank you for that. Helpful. And then just a follow-up on the implied fourth quarter adjusted EBITDA guide. It looks like at the midpoint, if you do the midpoint of your third quarter guidance, you'd be down 2% year over year. So just trying to understand what is driving the decline? Is it more about the tariff headwinds building? Or more about your intentional investments back into the business as you set the stage up for a return to growth?

Sabrina Louise Simmons: Yeah. I mean, we gave ranges. So it kinda depends where you model it and end up. But what I will reiterate about the fourth quarter is definitely tariffs have the most meaningful negative impact in Q4. Secondly, we're excited because of our strong performance in the first half. We're excited that we get to keep some powder dry in the second half for areas of investment should we deem them, you know, worthy of investing. The only thing we have committed to, by the way, is the leadership summit that Joel talked about. But we want to keep that dry powder.

And then, you know, finally, I think it's good to just protect against volatility because I don't think the macro's completely out of the woods. We live in a, you know, we live in times where there's big news cycles nearly every day. So we feel like we've taken a prudent approach to the back half.

Justin Kleber: Makes perfect sense. Thank you both for your perspective, and best of luck.

Joel D. Anderson: Thank you, Justin.

Operator: This will conclude our question and answer session. I would like to turn the conference back over to Ms. Tina Romani for any closing remarks. Please go ahead.

Tina Romani: Perfect. Thank you so much, Joel and Sabrina, and thank you, everyone, for your time and your questions. We're looking forward to seeing many of you next week. And with that, that concludes our call. The conference has now concluded.

Operator: Thank you for attending today's presentation. You may now disconnect.

Where to invest $1,000 right now

When our analyst team has a stock tip, it can pay to listen. After all, Stock Advisor’s total average return is 1,068%* — a market-crushing outperformance compared to 185% for the S&P 500.

They just revealed what they believe are the 10 best stocks for investors to buy right now, available when you join Stock Advisor.

See the stocks »

*Stock Advisor returns as of August 25, 2025

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. Parts of this article were created using Large Language Models (LLMs) based on The Motley Fool's insights and investing approach. It has been reviewed by our AI quality control systems. Since LLMs cannot (currently) own stocks, it has no positions in any of the stocks mentioned. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Image source: The Motley Fool.

Date

Thursday, Aug. 28, 2025 at 4:30 p.m. ET

Call participants

President & Chief Executive Officer — Dr. Fermi Wang

Chief Financial Officer — John Young

Head of Investor Relations — Louis Gerhardy

Need a quote from a Motley Fool analyst? Email [email protected]

Takeaways

Revenue-- $95.5 million (non-GAAP) in fiscal Q2 ended July 31, 2025, up 11.2% sequentially (non-GAAP), surpassing the prior non-GAAP guidance range of $86 million to $94 million.

IoT revenue mix-- IoT represented slightly more than 75% of total revenue in fiscal Q2, with sequential growth in the low teens led by portable video edge AI applications.

Automotive revenue mix-- Automotive segment revenue (non-GAAP) increased sequentially by the mid-single digits in fiscal Q2 2026.

Non-GAAP gross margin-- 60.5% non-GAAP gross margin in fiscal Q2 2026, at the low end of the prior non-GAAP gross margin guidance range of 60.5%-63%, primarily due to product mix shifts.

Non-GAAP operating expenses-- $53.4 million non-GAAP operating expense in fiscal Q2 2026, below the midpoint of the $52.5 million to $55.5 million non-GAAP guidance, attributed to lower engineering-related costs.

Non-GAAP net income-- $6.4 million non-GAAP net profit, or 15¢ per diluted share, in fiscal Q2 2026.

Cash and marketable securities-- Cash and marketable securities totaled $261.2 million at the end of fiscal Q2, up $41.4 million from the year-earlier period.

Operating cash flow-- Operating cash inflow was $5.5 million in fiscal Q2 2026 (non-GAAP), with $4.1 million in capital expenditures in fiscal Q2 2026 yielding $1.4 million in free cash flow in fiscal Q2 2026.

Days sales outstanding (DSO)-- Days sales outstanding (DSO) increased to 40 days from 31 days in fiscal Q2.

Days of inventory-- Days of inventory decreased to 85 days from 98 days sequentially in fiscal Q2 2026.

Customer concentration-- WT Microelectronics accounted for 71% of revenue in fiscal Q2 2026 as the sole logistics partner exceeding the 10% threshold.

Q3 revenue guidance-- Management forecasts fiscal Q3 2026 revenue (non-GAAP) of $100 million to $108 million, with a midpoint of $104 million (non-GAAP).

Q3 segment growth outlook-- Automotive revenue (non-GAAP) is expected to increase by mid- to high-single digits percent sequentially in fiscal Q3 2026, IoT revenue is projected to increase in the mid-teens percent in fiscal Q3.

Q3 non-GAAP gross margin guidance-- Expected in a 60%-61.5% range.

Q3 non-GAAP operating expenses guidance-- Forecasted at $54 million to $57 million, with the increase due to new product development costs.

Full-year revenue guidance-- Management raised its revenue growth estimate to 31%-35% ($379 million midpoint) for fiscal 2026, up from the prior 19%-25%, citing a stronger order book and upward unit and ASP trends.

HAI revenue mix-- HAI is projected to comprise approximately 80% of total revenue in fiscal 2026.

Growth drivers-- Both unit volume and average selling price are each contributing roughly 50% to overall revenue growth in fiscal 2026, according to John Young.

Customer wins-- Notable design wins include Arashi Vision’s 8K 360-degree drone, Honeywell’s 50 series enterprise security cameras in India, and Sensera’s MultiCam fleet platform.

Product innovation--Ambarella(NASDAQ:AMBA) achieved its first HAI infrastructure design win with the N1655 SoC, as announced during the fiscal Q2 2026 earnings call, with new AI appliances applying large language model-powered search and multimodal intelligence.

Process technology roadmap-- Work remains on schedule for two-nanometer projects, targeting customer production in early 2027.

Summary

Ambarella(NASDAQ:AMBA) reported non-GAAP revenue of $95.5 million in fiscal Q2 2026, driven by sequential growth in both automotive and IoT segments (non-GAAP), with IoT edge AI applications—especially portable video—leading gains. The company raised its full-year revenue growth forecast to 31%-35% for fiscal 2026 (non-GAAP), attributing the uptick to balanced contributions from unit volume and average selling price, alongside expanding HAI and edge AI application breadth. Management stated that the pipeline for new applications, including robotics and edge infrastructure, is converting to tangible design wins, contributing to future revenue visibility.

Chief Financial Officer John Young said, "growth is roughly fifty fifty between ASP and unit growth," clarifying the dual-driver nature of accelerating topline results.

President and CEO Dr. Fermi Wang highlighted that customer demand remains supported by robust backlog and no abnormal inventory build, stating, "we feel quite confident that we haven't seen any meaningful inventory buildup in our customers."

Company leadership emphasized a unified hardware/software architecture enables leverage across IoT and automotive, increasing operational efficiency and reducing field application engineering resource constraints.

Portable video and robotics are expanding Ambarella’s addressable IoT market, with high ASP products fueling above-average growth in fiscal Q2 2026 (non-GAAP), while non-security IoT applications are now outpacing traditional security cameras in growth rates, as discussed in fiscal Q2 2026.

Management maintains a deliberate investment focus on both automotive and IoT HAI markets given distinct design cycle durations and market opportunities, but near-term topline growth remains more reliant on IoT due to shorter cycles and faster ramp of new applications.

Investor queries on M&A rumors were met with no comment on speculation, with Dr. Wang stating their leadership position in shipping HAI SoCs is a core strategic differentiator.

Industry glossary

HAI: Hybrid Artificial Intelligence, denoting AI system-on-chip solutions optimized for edge inference combining neural network and traditional processing accelerators.

SoC: System-on-Chip, an integrated circuit that consolidates key components—such as processors, memory, and interfaces—onto a single substrate to deliver complete device functionality.

Edge AI: Artificial intelligence deployed at the edge of a network, processing data locally on devices rather than sending data to centralized cloud servers.

IoT: Internet of Things, encompassing networked physical devices equipped with sensors, processors, and software to exchange and act on data.

ADAS: Advanced Driver-Assistance Systems, automotive systems that provide safety and autonomous functionality for vehicles.

OpEx: Operating Expenses, recurring costs related to running the business excluding cost of goods sold.

ASP: Average Selling Price, the weighted average price at which products are sold, used as a key indicator of product pricing power.

DSO: Days Sales Outstanding, a measure of the average number of days it takes a company to collect payment after a sale.

Full Conference Call Transcript

Louis Gerhardy: Thank you, Towanda. And good afternoon. Thank you for joining our second quarter fiscal year 2026 financial results conference call. On the call with me today is Dr. Fermi Wang, President and CEO, and John Young, CFO. The primary purpose of today's call is to provide you with information regarding the results for our second quarter fiscal year 2026. The discussion today and the responses to your questions will contain forward-looking statements regarding our projected financial results, financial prospects, market growth, and demand for our solutions, among other things. These statements are based on currently available information and subject to risks, uncertainties, and assumptions.

Should any of these risks or uncertainties materialize, or should our assumptions prove to be incorrect, our actual results could differ materially from these forward-looking statements. And we are under no obligation to update these statements. These risks, uncertainties, and assumptions, as well as other information on potential risk factors that could affect our financial results, are more fully described in the documents we file with the SEC. Before starting the call, I'd like to summarize our planned investor events for our third fiscal quarter. On September 3, we'll participate in Citi's Global TMT Conference in New York City. September 4, we'll host KGI Securities Bus Tour in Santa Clara.

On September 16, we'll host Bernstein's Seventh Annual West Coast Semiconductor Bus Tour at our office in Santa Clara. And on September, Craig Hallum will host us on a Midwestern NDR. Access to our second quarter fiscal year 2026 results press release, transcripts, historical results, SEC filings, and a replay of today's call can be found on the Investor Relations page of our website. The content of today's call, as well as the materials posted on our website, are Ambarella, Inc.'s property and cannot be reproduced or transcribed without our prior written consent. Fermi will now provide a business update for the quarter. John will review the financial results and outlook and will be available for your questions after that.

Fermi?

Fermi Wang: Thank you, Louis, and good afternoon. Thank you for joining our call today. Our strong momentum continued in our second quarter with revenue over $95.5 million, increasing 11% sequentially above the high end of our prior guidance range of $86 million to $94 million. The second quarter results represent a fifth consecutive quarter of record HAI revenue. Furthermore, I am proud to say the midpoint of our new third quarter and the full fiscal year 2026 revenue guidance range represents all-time record quarterly and fiscal year total revenue for Ambarella, Inc. In our May 29 earnings call, we increased our fiscal 2026 revenue growth estimate to a range of 19% to 25% or approximately $348 million at the midpoint.

With a strong order book as well as our expectation for both our total unit ship and our average selling price to increase in fiscal 2026, we are increasing our fiscal 2026 revenue growth estimate to a range of 31% to 35%, or approximately $379 million at the midpoint. Needless to say, it is a very exciting time for Ambarella, Inc. Fundamentally, a multiyear period of significant AGI R&D investment, our broad product portfolio enables us to address a rising breadth of edge AI applications.

This increased breadth not only drives our overall unit demand, but we continue to see very strong demand for our new five-nanometer AI SoCs in both our existing and emerging AGI markets, which is driving our firm-wide average ASP higher. I would like to double-click on the rising breadth of AGI applications I mentioned and focus on three applications we see as rapidly emerging for us: portable video, robotic aerial drones, and edge infrastructure. Our edge AI revenue began in the enterprise security market more than five years ago, and it was followed by incremental edge AI applications in the smart home, automotive safety, and telematics markets, all of which are continuing their unique growth trajectories.

Now this year, on top is the rising demand for our edge AI SoCs from the portable video market, including action cameras, panorama cameras, and body-worn cameras. In addition to the portable video market, we expect to commence high-volume shipment into the robotics market by the end of this fiscal year. The unit volume in the robotics market is highly fragmented by application, form factors, and customers, but our technology products and roadmap have enabled us to win one of the early high-volume robotic applications, partially autonomous aerial drones. Portable video and robotics both represent new emerging edge AI applications in Ambarella, Inc.'s traditional market for IoT endpoints.

Today, we are also announcing our first win in the HAI infrastructure with our N1655 SoC. This win is yet another example of the expanding breadth of our HAI business, and I am encouraged by the interest in our N1 Edge AI infrastructure roadmap from both new and existing customers. In the automotive economy market, the largest subset of the robotics market, we are actively bidding on OEM projects with our CV380 family over a vest nanometer central domain controller for L2+ to L4 applications. While offering significant lifetime revenue opportunities, the lower frequency of our decision, OEM program device, and a longer time to revenue are causing our other edge AI applications to emerge more rapidly.

Nevertheless, we remain highly focused on developing this business, and we will provide updates on our progress as wins occur. I will now describe some representative customer engagement during the quarter, beginning with the two key customer design wins that validate our future vision and strategy. In the rapidly growing robotic drone market, Arashi Vision, also known as Insta360, launched the world's first 8K 360-degree drone on this new anti-gravity brand. Powered by our CV5 AI SoC, this drone features dual lenses on both the top and the bottom, enabling 8K 360-degree video recording.

The AI capacity in CV5 is fully utilized in this partially autonomous drone, and our product portfolio will enable the drone market to evolve rapidly to high levels of autonomy. The anti-gravity A1 is set to launch globally in January 2026. We are proud to see Arashi successfully differentiate their diverse portable video and now robotic aerial drone portfolio with AI features such as neural network image signal processing, AI editing, and gesture control leveraging our AI SoCs. A majority of Arashi's products are based on Ambarella, Inc.'s SoCs, and approximately 70% of our shipments are exported.

In the emerging HAI infrastructure market, a global networking customer is rolling out a compact on-premises network AI appliance with multimodal intelligence at the event level built on our N1655 AI SoC. This appliance will add large language model-powered natural language search, and we were selected because of our power efficiency, network bandwidth saving, and low build of material cost. This is a great example of one of the green shoots I mentioned earlier. There are several other use cases being evaluated on our N1655 SoC. Now, in the automotive safety, ADAS, and telematics business, I would like to share some key customer wins during the quarter.

Sensera, a leading provider of commercial fleet telematics solutions, has introduced its AI MultiCam platform based on Ambarella, Inc.'s CV72 AI SoC. Sensara's AI MultiCam delivers live 360-degree visibility and real-time risk detection alerts on an in-cab monitor with up to four times auxiliary HD camera fit. It is a great design win for CV72 that demonstrates more camera inputs and advanced AI features on a single SoC. Audi is utilizing CV22FS for their life-right immune functions in the EFI model initially in the China market. It enables them to provide intelligent context-adaptive viewing mode on highways, parking, turning, and lane changes with dynamic image processing and display enhancement functions.

Also, in the newer market, BAIC's skeletal H9 is utilizing CV22FS for their rear-view electronic mirror. They note that AI-aided detection via camera input helps them cut down blind spots by up to 60%. And a leading Chinese OEM will utilize our CV22 SoC for their 8-megapixel sensor designed specifically for Level 2 ADAS functionality. The key capability they are enabling is small target detection at long range. In the enterprise security segment, Honeywell in India has launched its 50 series enterprise security cameras in 3-megapixel and 5-megapixel resolutions based on our CV25 SoCs. India is a fast-growing market with a drive for made-in-India products, creating new customer opportunities for us.

In the smart home market, one of our long-term customers in the US has leveraged our H32 SoC to build multi-sensory, multi-modal AI products available in retail outlets today. They have built a nursery device integrating video monitoring, two-way intercom, high noise generator, and air quality sensor. They have also built a garage device that features carbon monoxide and heat detection, security camera, and intercom functionality. Also, in the smart home market, NetMol launched their indoor camera of advanced products that is built on H6 SoC for the European market.

You can see from these representative customer engagements, we continue to build design wins momentum in our existing edge AI endpoints of application, and we continue to successfully address incremental AGI applications such as robotic aerial drones and edge infrastructure as the HAI market breadth expands. I think having shipped more than 36 million HAI processors to hundreds of customers who have successfully ported hundreds of advanced customer AI models to our SoCs, there should be no doubt that Ambarella, Inc. is a leader in HAI. HAI is expected to represent about 80% of our total revenue this year. We are focused exclusively on the unique needs of the HAI market, and we continue a rapid pace of innovation.

In conclusion, I would like to summarize the key points covered today. First, we delivered Q2 results above the high end of our prior guidance and we increased the midpoint of full-year fiscal 2026 revenue guidance by 9%. Second, the breadth of our edge AI applications we are successfully addressing is expanding, as seen with our ongoing ramp in a variety of portable video applications into the anticipated product production ramp for robotic aerial drones and edge infrastructure. Third, the growth of our HAI business is occurring with our higher-priced HAI SoCs, supporting the anticipated growth in our ASP.

Last, we are exclusively focused on the unique requirements of the AGI market, and we remain an established AGI market leader who continues to innovate at a rapid pace. Now John will now discuss the Q2 results and the Q3 outlook in more detail.

John Young: Thank you, Fermi. I'll now review the financial highlights for the second quarter fiscal year 2026 ending July 31, 2025. I will also provide a financial outlook for our 2026 ending October 31, 2025. I'll be discussing non-GAAP results and ask that you refer to today's press release for a detailed reconciliation of GAAP to non-GAAP results. For non-GAAP reporting, we have eliminated stock-based compensation and acquisition-related expenses adjusted for the impact of taxes. For fiscal Q2, revenue was $95.5 million, above the high end of our prior guidance range of $86 million to $94 million, up 11.2% from the prior quarter and up 49.9% year over year.

Sequentially, automotive revenue increased in the mid-single digits and IoT increased in the low teens, with IoT growth led by the adoption of edge AI in portable video applications. IoT in fiscal Q2 represented slightly more than 75% of our revenue and is spread across an increasing number of edge AI applications. Non-GAAP gross margin for fiscal Q2 was 60.5%, at the low end of our prior guidance range of 60.5% to 63% due to product mix. Non-GAAP operating expense in Q2 was $53.4 million, below the midpoint of our prior guidance range of $52.5 million to $55.5 million, primarily due to lower engineering-related costs associated with the timing of product development.

Q2 net interest and other income was $2.2 million, compared to our prior guidance of $1.8 million. The increase was primarily from higher interest income. Q2 non-GAAP tax provision was approximately $200,000. We reported a non-GAAP net profit of $6.4 million or 15¢ per diluted share in Q2. Now I'll turn to our balance sheet and cash flow. Fiscal Q2 cash and marketable securities reached $261.2 million, increasing $1.8 million from the prior quarter and $41.4 million from the same quarter a year ago. Increased cash and marketable securities benefited primarily from operating cash flow associated with increased revenue, partially offset by increased expenditure on capital investments during the quarter.

Receivables days sales outstanding increased from thirty-one days in the prior quarter to forty days, while days of inventory decreased from ninety-eight days to eighty-five days. Operating cash inflow was $5.5 million for the quarter. Capital expenditures for tangible and intangible assets were $4.1 million for the quarter. Free cash flow was $1.4 million. We had one logistics company representing 10% or more of our revenue, WT Microelectronics, a fulfillment partner in Taiwan, that ships to multiple customers in Asia, came in at 71% of revenue for the second quarter. I'll now discuss the outlook for 2026. The breadth of our Edge AI business is expanding with a strong unit and average selling price outlook.

As a result, in Q3, we forecast revenue in the range of $100 million to $108 million, or $104 million at the midpoint. Sequentially, we expect mid to high single-digit percent growth in our automotive business, with our IoT business up in the mid-teens. For fiscal 2026, we anticipate a revenue growth range of 31% to 35%. We expect fiscal Q3 non-GAAP gross margin to be in the range of 60% to 61.5%. We expect non-GAAP OpEx in the third quarter to be in the range of $54 million to $57 million, with the increase compared to Q2 driven by new product development costs.

We estimate net interest and other income to be approximately $2 million, our non-GAAP tax expense to be approximately $800,000, and our diluted share count to be approximately 43.7 million shares. Thank you for joining our call today. And with that, I will turn the call over to the operator for questions.

Operator: Thank you. Ladies and gentlemen, as a reminder to ask a question, please press star 11 on your telephone. To withdraw your question, please press star 11 again. We ask that you limit yourself to one question and one follow-up. Our first question comes from the line of Christopher Rolland with Susquehanna. Your line is open.

Christopher Rolland: Hey, thanks so much for the question and congrats on a great quarter. So for my first question, I think for years, you guys pitched yourself kind of as the future of the company being automotive first. But IoT at this point has just been an incredible outperformer. I think it outperformed auto by four times this year. So I guess my question is, are you thinking about IoT differently now? Could there be a pivot in your business where you just double down spending around IoT versus auto, lean into the development of IoT versus auto?

And when might we get to a point where auto outperforms IoT, or is this not the case just given, you know, the great interest in IoT? Thank you.

Fermi Wang: Right. Thank you for the question. I think the first part to answer is, like I said in our script, that we are continuing to focus on our level two plus, level four time, and we are working hard to continue to win design wins there. But also, I pointed out that because our other HAI business, because of shorter design cycles and more available opportunities for us, we are making significant progress there. We are going to continue to focus on the HAI market, including both autonomous driving as well as IoT. But I want to point out that the fundamental hardware architecture between the HAI for the IoT side and the autonomous driving side are identical.

Our CPU architecture, our image processing pipeline, our CPU investment, even the online OS side, they are huge in average between each two. So in terms of OpEx expense side, the leverage is very strong. Obviously, the go-to-market strategy from the marketing side is almost sales side. Are different. But we are going to continue to focus on those two areas because I still believe, you know, long term, the time driving continues to drive our strength. But as you can see from our announcement, we made significant progress on the HAI in the IoT side. Where that means we are going to put also more resources on this than before to continue to make progress.

And try to collect more market share in this particular market.

Christopher Rolland: Thank you for that, Fermi. And, yeah, just maybe back to the growth rates. Just a couple of things. First of all, would you expect auto to outgrow IoT next year, or is this really gonna be you've talked about high auto and your CV3 wins. I think ramping in 2027. Would we have to wait for auto to outperform at that point in time? Thank you.

Fermi Wang: Right. So I think the auto will outperform IoT, but we have a major design wins with OEMs. Like, the one that we talk about in the back kit, the VW case two dot o. Do we want the design? Yes. I think, you know, 2027, 2028 time frame, we can see that. That auto growth will be will offer from IoT. Right now, think in the foreseeable future, that before we get any major design win from the automotive side, IoT will continue to have a very strong compute contribution. To our income.

In fact, that you know, our current growth you can see that the growth rate that we got from the just IoT side is significantly improved over the last few years.

Christopher Rolland: Yep. Thanks, and congrats.

Fermi Wang: Thank you.

Operator: Next question comes from the line of Kevin Cassidy with Rosenblatt Securities. Your line is open.

Kevin Cassidy: Yes. Thanks for taking my question, and congratulations on the great results and outlook. You know, they you've my interest with the air the robotic aerial drones. It You mentioned Insta360. Is there this another trend of, will there be multiple companies coming out with these solutions? And are there commercial applications like for deliveries?

Fermi Wang: Yeah. So first of all, I think for Insta360, they are target market is commercial and the consumer, and the volume is significant compared to what we have seen in the market outside DGI. And then also that we are seeing definitely, there's a market trend A lot of different companies in different countries are focusing on this drone particular drone application. Now that autonomous driving on this car side become more popular technology, widely available. You can imagine that the pump drive autonomous drones will become popular. And with that, that will enable many different possible applications in the near future.

I think that potential trend is driving this is really consistent with the robotic trend that we are seeing in other applications. When the autonomy become popular and become possible then the possible applications with those robots or drones become, you know, in the in the past was impossible, now definitely thinkable. So I think that, we compute to engage multiple drone design wins activities, and we think that you're gonna continue to see us to report our success in this market.

Louis Gerhardy: Great. It's Louis. Just to kinda add on. To that and maybe tie it into Chris' question. This is just a great example of you've got multiple high bandwidth sensors in a real-time application. You know, collecting data and driving you know, a higher level of autonomy higher and higher levels of autonomy just like you know, in a vehicle. You know, moving from L1 to L4. You see the same sort of trend beginning in the aerial drone market and, of course, other robotic spaces. And it's all happening with the same underlying AI inference accelerator.

That's that's in common across all these markets, whether it's auto autonomy, auto safety and telematics, or any of these IoT markets, So we leverage the technology across a lot of different applications.

Kevin Cassidy: Right. Thanks. And, yeah, I guess your energy efficiency also is very useful if you're gonna be flying something at has to have a battery and energy efficiencies. Really important. And, you know, just you have so many exciting things happening with your new designs. I didn't hear much, about your process technology or moving on to the next, generation. Is that still on track of moving to two nanometer?

Fermi Wang: Absolutely. In fact, that now we are you know, our foundry con our foundry partner continue to announce design wins not only give us a lot more confidence, but also our potential customers I think that, we will continue to work on two nanometer projects and still remain target to take our customer to production in early 2027.

Kevin Cassidy: Great. Congratulations again.

Fermi Wang: Thank you.

Operator: Our next question comes from the line of Quinn Bolton with Needham and Company. Your line is open.

Shadi Mitwalli: Hey, guys. This is Shadi on for Quinn Bolton. Congrats on the strong results. My first question is on the guidance. Your Q3 guide implies a seasonally down Q4. Given all the progress you guys have been making and the Edge AI tailwind, this feels somewhat conservative. So this

Fermi Wang: Right.

Shadi Mitwalli: Get your thoughts and maybe the puts and takes as we think about Q4.

Fermi Wang: So first of all, I think that the seasonality that we are guiding for the for this Q3 and Q4 is increasing the range compared to our previous year. So I don't think that should be a surprise. But if you look at that you know, a lot of the products, you sell the product become driven by consumer cycles. That will definitely explain to you that why we are seeing the seasonality based on our guidance.

Shadi Mitwalli: Got it. That makes sense. And then my follow-up is on the non-security camera. Portion of the IoT business. How does Ambarella, Inc. view this segment growing over the next few years? And at what point might the non-security segment surpass the security camera? Segment of the IoT business? Yeah.

Fermi Wang: First of all, thank you for that question. I think that's important. We're internally, we're looking at that also. Because, you know, all of the new application we announced today, none of that is really on the traditional security camera business. In fact, that from the drone robots, to the, you know, portable video to the edge infrastructure, they are those are the really the new market we have been talking about that we haven't shown much result until this quarter.

And I think that, I think enterprise or the enterprise security and home security continue to be the combination continue to be a large portion of compared to others, but I think that, we do see that the growth rate on the non-inter on non-security portion of business will continue to outpace the other side.

Louis Gerhardy: Yeah. Just to be clear, Shadi, our, security business we expect to continue to deliver very good growth But now you have these portable video and some of the robotics markets and other things kicking in that's as you observed, causing our other IoT business outside of security to contribute very nice growth for us.

Shadi Mitwalli: Got it. For the color, and congrats on the progress. Thank you.

Operator: Please stand by for our next question. Our next question comes from the line of Liam Farr with Bank of America. Your line is open.

Liam Farr: Hi. This is Liam on behalf of Vivek. Thank you very much for taking our question. There's been a lot of media reports recently about M&A and industry consolidation. And I was wondering if you're able to address kind of what role you expect industry consolidation to play and what your strategy looks like if you remain independent.

Fermi Wang: Right. So, obviously, we cannot address that the rumors. I think we just have no comment on that. But, however, I want to point out that with today's earning call, you can see that the AGAI, the importance on the strategy side of AGAI becomes so obvious in the market space. And with that, we are the probably one or few, maybe only one shipping 36 million units of AGAI SoC so far. Put us as a leader of in that market. So with the combination, I really think that the rumor base is that our strength our focus on AGAI, and I think that we're gonna continue to pay play very well for us.

Liam Farr: Thank you. And then just as a follow-up. In terms of going back to the IoT and auto side, clearly a strong quarter. What does the sustainability look like of these growth drivers through 2026? And where should we kind of expect more of a upside trajectory on the IoT and on the auto side? Thank you.

Fermi Wang: Right. So on the auto side, I think we definitely continue to work hard to get secured first design win on the level two plus level three. That is really what push our growth trajectory beyond the what we have with automotive. And with IoT, we are really growing significantly this year. Over last year. And thank because look. Thanks for your contribution. Of a few products ramping up by our customers. So we believe that growth will maintain, and we're going to provide the guidance for next year. And we will definitely believe that automotive and both IoT and automotive will continue their growth trend.

Louis Gerhardy: Yeah. Just to put a little more color on it. Hi. It's Louis. It's not like there's just a couple markets that are you know, contributing to the growth. You know, five, six years ago, it started for us in enterprise security. And it was public. And smart home. Then AI video telematics and commercial fleets. You know, certain in-cabin you know, e-mirrors or driver monitoring. But now more recently, in IoT, you've had portable video, which is not just one thing, but it's you know, body-worn cameras. It's panorama cameras. It's action cameras. And now we're moving into robotics initially with aerial drones. Expected to become significant.

So it's not really, like, are those are you in a couple markets, and are they gonna, you know, static and how are they gonna do? It's more about edge AI touching more and more different vertical applications. And that's what's been happening to the business.

Liam Farr: Thank you.

Louis Gerhardy: Thank you.

Operator: Please standby for our next question. Next question comes from the line of Kyle Smith with Stifel. Line is open.

Kyle Smith: Hey, guys. This is Kyle Smith on for Tory Sponberg at Stifel. Congratulations on the strong quarter. So I think it's pretty clear that the strong revenue beat in Guide is stemming from tangible design wins and product momentum. But that being said, could you provide more commentary on the process that management uses to check for any potential demand pull-ins related to the tariff environment? Are you speaking directly with customers or distributors, monitoring yourself for any irregularities, is it kind of a mix of multiple factors?

Fermi Wang: Yeah. So I think that's a very important topic in internally because you know, we all going through this industrial-wide inventory correction for the last three years. And every time we seen some high growth of area, the first reaction is with that total cost. So in the past few years, we build a relationship with older customer. And also our distributor. To make sure that we review inventory every month. And then based on that, we try to decide whether that we think any inventory build. So far, I think throughout the process with this internal check, we haven't seen any inventory build that beyond the normal practice.

And also, we have personally, every time I have a meeting with, you know, my peers in our customer base, one would probably always about supply chain and about the supply end. I got no feeling that nobody telling us that they are building excessive inventory worrying about geopolitical situation. So with that, that's just from the feedback from customer. But more internally, inside, we build some kind of a check checkpoint to understand you know, look at the customers the older patterns and their then whether that's associated with any product ramping up So if there's any indication of extra inventory build, internally, we have some well, have some read along.

So far, based on the all of this internal and external discussion, I think that we feel quite confident that we haven't seen any meaningful inventory buildup in our customers.

Kyle Smith: Perfect. Thank you. And you mentioned a lot of really exciting design wins in the prepared remarks. I'm curious what the customer response has been to the Cooper development platform, particularly within these new and emerging markets? And are there any specific components of the platform showing outsized positive feedback?

Fermi Wang: I think, first of all, the coop the feedback from our Coupa development platform is very positive. Not only the help our customer to eat to move from one of the chip to another chip easily because Coupa platform cover all of all the chips that we develop And so that for our customer, it's really become powerful tool for them develop what the product ones and they can put know, use the same product to many different chips. Of on the umbrella. So that's one most important thing.

But because with the investment now, we can easily enable our customer to play with our play out play with our SDK and also play with all the neural network we put in into our model garden and also enabling them to learn how to use our compiler to compile the neural network to our hardware. All of those feature, all integrate into this Cooper platform. So I of course, I'm not saying that's perfect, but definitely, with the benefit to customer, they all continue to give us great feedback about how we can continue to improve it so that they can enjoy the platform more.

Kyle Smith: Perfect. And if I could just sneak one more in. You know, contemplating this really outsized revenue growth you continue to expect, non-GAAP OpEx to grow at around 10% annually? Or should we maybe bake in a little bit higher OpEx going forward? Yes. Thanks, Kyle, for the question. I think it's reasonable if you take this you know, little bit higher than 10% is probably reasonable. I think quarter over quarter, I think year to date, we're at about 12 or year to date, we're at about 12% growth. I think we'll probably stay in that range for the full year. Perfect. Congratulations again, guys.

Fermi Wang: Thank you.

Operator: Please stand by for our next question. Our next question comes from the line of David O'Connor with BNP Paribas. Your line is open.

David O'Connor: Yeah. Good afternoon, guys. Thanks for taking my question. Maybe for me, just going back on the automotive side. Things again and ADAS. You know, through this year, you know, the L2 plus adoption rates, you know, have slowed the software not ready. OEMs optimizing for price. I mean, you guys have talked about this through the year. As we sit here in August and from your recent conversations with customers, can you talk about any changes there on how they're viewing that kind of adoption on their next model? Any sign that they may be pulling it in?

Or just any kind of changes that you're seeing there across the kind of, that would help kind of frame the backdrop for potential Right. CV3 wins.

Fermi Wang: I think the scenario you described continues, and we continue to see OEM coming up bidding on the I would say, more low end of Level two plus than, you know, higher end than that. Because people like you said, OEM really focus on getting a proper cost than function features. In fact, even in China, recently, we start seeing a similar trend because Chinese government definitely trying to make sure that the home driving becomes safe and become the safety become the most important feature. So I really think that the total trend of auto autonomous driving is focusing on safety and also low end of the function performance.

For example, the part that we announced a design win on a eight megapixel ADAS in China. Just give you an indication that while we continue to build on all kinds of different features, and that we see more opportunity on the low end with level two plus and also ADAS opportunity.

Louis Gerhardy: Yeah, David. I mean, we still see very significant lifetime revenue opportunities in the auto autonomy market for sure. But there's this you know, as Fermi mentioned earlier, there's a lower frequency of decisions You know, the market can be subject to delays like you referenced, and there's a longer time to revenue. So what's been happening is all of these other edge AI markets have more than caught up and you know, are growing very rapidly for us now. But we still have these products and very much focused on landing these wins. It's just the frequency of them isn't as high.

David O'Connor: That's very helpful. Thanks. Thanks, guys. Maybe one for John. Just on the incremental kind of growth year over year, you know, with the with the new guide, you're kind of up maybe know, 95, a 100,000,000, somewhere like that. For the year. Is there any way you can kind of split that out, in terms of units versus ASP or contents, just kind of how you would break that down as kind of a percentage? Is half of it unit growth, half ASP? Any kind of steer that would help us there at size that kind of difference between those two drivers. Thanks, guys. Yeah. Thanks, David. I think

John Young: you know, what we've been seeing through the throughout this year as it's pulled together know, our estimate is that growth is roughly fifty between ASP and unit growth.

David O'Connor: Very helpful. Thanks so much, guys.

Fermi Wang: Thank you.

Operator: Please stand by for our next question. Our next question comes from the line of Gus Richard with Northland Capital Markets.

Gus Richard: Yes. Thanks for taking my questions, and my congratulations for the strong results. Just in the IoT market, could you give us a split between the security applications and nonsecurity applications, and which of the nonsecurity applications are growing the most rapidly? So in a nonsecurity application, I think that portable video definitely grow the fastest. And in fact, that Insta360 using a CV file to build a clear next generation sports camera as well as the panorama three sixty degree camera and the ASP is high and the unit number continue to grow. So that definitely is a faster growing market.

I won't be surprised we see a lot of growth of in the future, see some growth on the drones drone side too because the ASP and unit number growth can be significant too.

Louis Gerhardy: I guess the auto business in Q2, I think John mentioned, grew in the mid single digits and IoT grew you know, in the mid teens. And that would put, you know, auto in the low 20% range as a percent of revenue. And IoT the balance.

Gus Richard: Got it. And then just in terms of the IoT business you know, you've got a wide diversity of applications, and I would imagine that your customers need you know, support from field application engineers. And I'm just wondering is that a limitation? Is that something that you need to bolster to help accelerate growth? You know, how are you about customer support in that regard?

Fermi Wang: Right. So first of all, that unified hardware and software platform we just mentioned, is really helpful because that means our field engineering can easily switch you from one customer to another customer Although maybe a different application, different products, but the fundamental how and so forth are almost the same. So from that point of view, we definitely can leverage our field engineers in different application. But you are right that our revenue grow and when we're looking at a different customer base, we continue to add to our field engineering, which is part of our growth plan that John highlighted just a few minutes ago.

Gus Richard: Got it. Thanks so much.

Fermi Wang: Thank you.

Operator: Please standby for our next question. Our next question comes from the line of Martin Yang with COBCO. Hi. Thank you for taking my question. On the strength you called out on portable video products, can you tell us if the strength is driven by a single key customer, or have you expanded your customer base with new design wins with new OEMs? In the past quarter.

Fermi Wang: Well, we in fact, we continue to have a multiple customer base. In this space. But however, Insta360 definitely is the largest one. That we mentioned because they, you know, they switch from H22 base video processor only solution last year to this year's CV5 based solution, That ASP growth definitely is one of the main reason we're confused. The growth on the from them. But I we continue to engage multiple you know, portable video players throughout our careers.

Louis Gerhardy: Hey, Martin. I think you're familiar with the company, but you know, we're selling into, like, seven different portable video product lines there. That would include you know, action, camera, sports, panorama, but know, also body worn. Webcam, video conferencing. And now you know, aerial drones. So it's a lot of different, product categories. It's not just a few. Right.

Martin Yang: Got it. Thank you. A follow-up question on InstaFix So in your guidance, do you assume business as usual with them without any potential impact from their ongoing lawsuit in The US? Well, first of all,

Fermi Wang: yeah, we look at it. And, you know, it's it's not out in our position to make a judgment on the outcome of lawsuit. I will leave that to the two parties. Our assumption is based on the, the POs we receive from our customer. And that's the only thing we're counting on to forecast our business.

Martin Yang: Got it. Thank you for that's it.

Fermi Wang: Yep. Thank you.

Operator: As a reminder, ladies and gentlemen, that's star one to ask a question. Please stand by for our next question. Our next question comes from the line of Richard Shannon with Craig Hallum. Your line is open.

Richard Shannon: Open. Great. Thanks, guys. Let me ask you a question. First one is on the broader edge AI opportunity. Talked about your first design when hoping to ship near the end of this fiscal year. Maybe you can describe what the, you know, the pipeline looks like, maybe describe it, even quantify it, number of designs, opportunities, and kind of the any maybe new applications you're seeing here versus what you described in the past? It's infrastructure. Right? I think

Louis Gerhardy: Richard, was your question about just edge IoT overall or just the infrastructure? Edge in

Richard Shannon: I'm sorry. I misspoke. Edge infrastructure. Sorry about that.

Fermi Wang: Right. Exactly. So first of all, you know that we have been working on the N1 N1655 product and for a while talking to many customer. And this particular design win is our first design win that we can talk about. You can imagine that we're definitely engaging with multiple customer, new and old or existing customer. With potential design wins. And you should expect we'll continue to talk about our progress in this particular market. And the particular I think the there are so many different type of potential appliance that people can build.

But in general, you can imagine that this kind of appliance is really trying to aggregate multiple H endpoints and apply most advanced AI models on that and to provide different services. That's just in general terms to describe opportunity out there definitely, this kind of appliance need to run not traditional computer vision plots. More importantly, all the large language model or vision language model are the probably the focus area where our customer wants.

Louis Gerhardy: Yeah. Richard, we talked about a SAM for this market of you know, in this year, this fiscal twenty six of being around a 125,000,000 and in five years, you know, approaching 500,000,000. And you know, we feel those figures are conservative. We'll we'll we're still learning about the market. Spermy said this is our first design win, but we're pretty excited about the level of interest from customers, both new customers and existing customers for Ambarella, Inc.

Fermi Wang: And the success of this market will continue to drive up our average selling price.

Richard Shannon: Okay. Great. Thanks for that, guys. Second question here is on the portable video opportunity here and following on the questions. Responses from past couple of questions here. To what degree are these opportunities or applications more consumer oriented versus enterprise in nature?

Louis Gerhardy: Well, it depends on the market, but I say overall across all, you know, seven that I just described for, like, Insta three sixty, more weighted to consumer And, there's still being sold into enterprise applications. For example, body worn cameras is a market that, at least today, is very heavy enterprise and public safety driven. And that's one of the categories. But if you switch over to some of the other portable video markets, it might be more on the consumer side. And overall, I'd say, they are weighted more heavily to the consumer side which is one of the factors that allows them to get to revenue faster.

Richard Shannon: Okay. Great. Thank you, guys.

Fermi Wang: Thank you.

Operator: Thank you. Ladies and gentlemen, I'm showing no further questions in the queue. I would now like to turn the call back over to Dr. Fermi Wang, CEO, for closing remarks.

Fermi Wang: And thank you for joining us today. We are going to see you next time for sure. Thank you.

Operator: Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.

Where to invest $1,000 right now

When our analyst team has a stock tip, it can pay to listen. After all, Stock Advisor’s total average return is 1,068%* — a market-crushing outperformance compared to 185% for the S&P 500.

They just revealed what they believe are the 10 best stocks for investors to buy right now, available when you join Stock Advisor.

See the stocks »

*Stock Advisor returns as of August 25, 2025

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. Parts of this article were created using Large Language Models (LLMs) based on The Motley Fool's insights and investing approach. It has been reviewed by our AI quality control systems. Since LLMs cannot (currently) own stocks, it has no positions in any of the stocks mentioned. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Image source: The Motley Fool.

Date

Aug. 28, 2025, 9:00 a.m. ET

Call participants

Chairman and Chief Executive Officer — Efraim Grinberg

Executive Vice President and Chief Financial Officer — Sallie DeMarsilis

Need a quote from a Motley Fool analyst? Email [email protected]

Risks

There was a $2.2 million impact from unmitigated U.S. tariff expenses in the fiscal second quarter ended July 31, 2025. Management stated mitigation actions "will predominantly impact future periods."

Gross margin fell by 20 basis points to 54.1% from 54.3% in the fiscal second quarter of the prior year, primarily due to increased tariffs and unfavorable foreign exchange, according to management.

The Movado brand experienced a 5.6% sales decline in the fiscal second quarter.

Management confirmed it will not provide a fiscal 2026 outlook, stating, "Given the current macroeconomic environment and the ongoing uncertainty of the impact of tariffs on our business."

Takeaways

Net sales-- $161.8 million, up 3.1%, with constant currency growth of 1.4% in the fiscal second quarter.

Adjusted operating profit-- $7 million, more than double the $2.6 million reported in the fiscal second quarter of the prior year.

Gross margin-- Gross margin was 54.1%, down 20 basis points in the fiscal second quarter, primarily due to higher tariffs and currency headwinds, partially offset by a favorable mix.

Net income-- $5.3 million, or $0.23 per diluted share, compared to $3.5 million, or $0.15 per diluted share in the fiscal second quarter of the prior year.

Inventory-- $28.3 million higher than the prior year (+15.5%) in the fiscal second quarter, with $16 million pulled forward in the U.S. to mitigate tariff exposure.

International sales-- Increased by 6.9% (reported) and 3.9% (constant currency) in the fiscal second quarter, led by growth in Europe, Latin America, and India.

U.S. sales-- Decreased 1.6% in the fiscal second quarter, impacted by continued channel rebalancing.

Licensed brands-- Reported growth of 9.5%, or 6.5% at constant currency, in the fiscal second quarter.

Movado brand sales-- Declined 5.6% in the fiscal second quarter, though e-commerce posted 6% growth and brick-and-mortar sell-through improved.

Operating expenses-- Fell by $2.0 million to $80.6 million (adjusted) in the fiscal second quarter, due to lower marketing spend, partially offset by higher performance-based compensation.

Annualized cost savings-- $10 million in expected savings for fiscal 2026 from prior operating expense reductions.

Cash balance-- $180.5 million with no debt reported at the end of the fiscal second quarter.

Outlet stores segment-- Grew 2.4% in the fiscal second quarter, supported by recent initiatives and positive momentum.

Share repurchases-- 100,000 shares repurchased, with $48.4 million remaining on the authorization as of the fiscal second quarter.

Summary

Management stated it established a "strong position in inventory of Swiss-made watches in the United States" to cover a substantial portion of anticipated demand in response to the new 39% tariff as of the fiscal second quarter ended July 31, 2025. Tariffs and currency pressures were cited as the primary drivers of lower gross margin, with strategic pricing actions implemented on July 1 and further actions planned. Cost-saving efforts are expected to deliver approximately $10 million in annualized reductions for fiscal 2026, which management stated are mitigating operational increases and supporting profitability growth. International growth outpaced the U.S., with Europe, Latin America, and India leading performance in the fiscal second quarter, while the U.S. saw a 1.6% decline in net sales due to strategic changes in distribution channels.

The CFO explained that approximately $4.6 million of reciprocal tariff costs remained embedded in inventory at the end of the fiscal second quarter.

Management described licensed brands as benefiting from a resurgence in "fashion watch and jewelry category" demand, citing heightened Gen Z interest on digital platforms.

Efraim Grinberg said, "We would expect our inventories to be in line by year-end," addressing concerns about the significant rise in inventory levels.

Management referenced the completion of most restructuring charges and expects these "will be reduced significantly" in future quarters, as discussed on the fiscal second quarter earnings call.

Recent trends in mini and microwatch sizes have drawn young women back to the category, creating product opportunities across the brand portfolio.

Industry glossary

Mini watches: Wristwatches with case diameters typically between 23 to 28 millimeters, positioned as appealing to younger and female consumers per discussed brand trends.

Microwatches: Even smaller wristwatches than mini watches, referenced in the call as an emerging size segment within the portfolio.

Full Conference Call Transcript

Efraim Grinberg: Thank you, Allison. Good morning, and welcome to Movado Group's second quarter conference call. With me today is our Executive Vice President and Chief Financial Officer, Sallie DeMarsilis. After I review the highlights of the quarter and share our progress on key strategic initiatives, Sallie will take you through the financial results in more detail. We will then be happy to answer questions. We are pleased with our overall results this quarter as we return to growth in both sales and profitability. Sales grew by 3% to $161.8 million, and adjusted operating profit more than doubled to $7 million from $2.6 million last year despite a $2.2 million impact from unmitigated U.S. tariff expenses.

Although we have taken certain actions to partially offset tariffs, those actions will predominantly impact future periods. After the quarter ended, the United States implemented a tariff rate of 39% on Swiss imports. During the second quarter, we have built a strong position in inventory of Swiss-made watches in the United States and would expect a substantial portion of the year's needs are covered. We are hopeful that over the next several months, the United States and Switzerland will agree to lower tariff rates. Of course, we continue to monitor the situation closely and to develop mitigation plans. We continue to operate with a strong balance sheet, with over $180 million in cash and no debt.

Overall, we are pleased with the progress that we have made on our strategic initiatives, with a focus on returning the company to growth and profitability. We would expect to see approximately $10 million of annualized savings spread evenly throughout this year as a result of the actions we took late last year to reduce operating expenses. Although we experienced a 5.6% sales decline in our Movado brand, we continue to make progress on our Movado strategy, which I will discuss later in my remarks. In our licensed brands, we grew by 6.5% on a constant currency basis or 9.5% on a reported basis.

Overall, we reported gross margins of $54.1 million versus 54.1% versus 54.3% in Q2 of last year despite the 130 basis point impact of additional tariffs in the U.S. Most of our strategic pricing actions to partially offset the impact of tariffs became effective July 1. Our international business grew by 6.9%, or 3.9% on a constant currency basis, led by a strong performance in Europe, Latin America, and India, with Europe seeing particularly strong trends. As expected, this performance was offset somewhat by the Middle East, where we are in the process of rebuilding our team.

Our U.S. business declined by 1.6% as we focus on rebalancing our chain jewelry store distribution, although we had an improved performance in our domestic department store and e-commerce channels. Our outlet stores segment grew 2.4% for the quarter, and we are excited by the recent initiatives and accelerating trends in that channel. As we look at the progress that we are making in our brands, we are particularly pleased by the success that we are seeing in the overall performance of trend-right products across our brand portfolio. In Movado, we are making significant progress in returning the brand to growth in our wholesale distribution.

We have seen strong performance in our own e-commerce site, with 6% growth and strong trends in our digital partners. In brick and mortar, Movado brand sell-through has returned to growth in the second quarter in our department store channel, where we have implemented and expanded our coverage as a point of sale and installed our new point of sale display. We will continue to execute behind these initiatives as the year progresses. On the product front, Movado has seen increased penetration and success in women's watches, including our new iconic bangle watches and our new mini quest in bold, which along with our bold tank watch is a best seller.

On the men's side, we are seeing strong performance in the Movado bold collections, including Verso automatic and Quest automatic. Our heritage collection inspired by Movado's rich heritage continues to do particularly well in a limited distribution across the country. The Movado brand marketing campaign for the second half will include new creative featuring our Movado icons, Ludacris, Jessica Alba, Julianne Moore, Christian McCaffrey, and Tyrese Halliburton. We are very excited by the digital-first content that our team has executed with a greater focus on products associated with each of the icons. We have exciting new products debuting this fall, like the new Museum Imperial with Christian McCaffrey and Our Heritage 1917, with Tyrese Halliburton.

On the women's side, Jessica Alba and Julianne Moore will be featured with different shapes of our museum bangle collection and a women's version of the museum imperial and Heritage 1917. Turning to our licensed brands, we are seeing a return to the fashion watch and jewelry category with increased interest by Gen Z consumers across digital platforms like TikTok, Reels, and YouTube. Sales in our licensed brands grew by 9.5% for the quarter or 6.5% in constant currency. In Hugo Boss, we have experienced strong growth in our iconic families, Time Traveler and Candor. Our new updated Grand Prix is quickly becoming a best seller.

We are also excited by our new women's watches led by the May family with a petite square shape. In Tommy Hilfiger, we are very excited to be refocused on the women's watch category. Our EMEA family is already showing signs of strong sell-through and will be featured in our fall campaign. Complementing Mia is Moira, a new mini East West Oval that has gotten a strong reception. On the men's front, we are excited by our new seventies-inspired Chronograph Hudson Collection, which will be featured in our holiday campaign, as well as by RegattaTH, a new sports watch collection in exciting colors opening at $139.

In Lacoste, we are introducing a new black and gold version of our iconic LC 33 collection and will complement our Tang Parisienne with a new oval version. Our Lacoste jewelry business continues to exceed expectations, and we are very excited to introduce the Arthur and Crocodile families to complement our best-selling Metropole bracelet collection. In Calvin Klein, we are launching a new mini version of our best-selling Pulse collection, as well as a new 18-millimeter contemporary collection that has really piqued our retailers' attention. Coach continues to perform extremely well, particularly in the United States, and is now showing momentum in Europe as well.

For the second half, we have several new introductions in our best-selling Sammy Oval collection with a strong new 20-millimeter Reese tank. We will also be expanding our best-selling charter collection for him. As we enter the second half of the year, we recognize that uncertainty remains around tariffs and the broader retail environment. At the same time, we are excited by the new products we have introduced and encouraged by the resurgence we are seeing in the fashion watch market. As a leadership team, our focus remains on driving profitability and delivering consistent growth in both sales and operating margin while maintaining the strength of our balance sheet and executing against our strategic plans across all of our businesses.

While some of our initiatives have longer time horizons, we are confident that we are taking the right actions for the long term and positioning Movado Group for sustainable success. I am happy about the plans that we are building for the year ahead, and I would now like to turn the call over to Sallie.

Sallie DeMarsilis: Thank you, Efraim, and good morning, everyone. For today's call, I will review our financial results for the second quarter and year-to-date period of fiscal 2026. My comments today will focus on adjusted results. Please refer to the description of the special items included in our results for the second quarter and first six months of fiscal 2026 in our press release issued earlier today, which also includes a reconciliation table of GAAP and non-GAAP measures. Turning to a review of the quarter, overall, we were pleased with our performance for 2026. Sales were $161.8 million as compared to $157 million last year, an increase of 3.1%. In constant dollars, the increase in net sales was 1.4%.

Net sales increased across licensed brands and company stores, partially offset by a decrease in net sales in owned brands. By geography, U.S. net sales decreased 1.6% as compared to the second quarter of last year. International net sales increased by 6.9%. On a constant currency basis, international net sales increased 3.9% with strong performances in certain markets such as Latin America and Europe. Gross profit as a percent of sales was 54.1% compared to 54.3% in the second quarter of last year. The decrease in gross margin rate as compared to the same period of last year was primarily driven by increased tariffs and unfavorable foreign exchange, partially offset by favorable channel and product mix.

Operating expenses were $80.6 million as compared to $82.6 million for the second quarter of last year. The $2 million decrease was driven by a strategic reduction in marketing expenses, partially offset by an increase in performance-based compensation. The combination of higher revenue and gross profit and a decline in operating expenses drove operating income to $7 million, a $4.4 million improvement from $2.6 million in 2025. We recorded approximately $1.1 million of other non-operating income in 2026 as compared to $1.8 million in the same period of last year. Other non-operating income is primarily comprised of interest earned on our global cash position. We recorded income tax expense of $2.7 million in 2026 as compared to $843,000 in 2025.

Net income in the second quarter was $5.3 million or $0.23 per diluted share as compared to $3.5 million or $0.15 per diluted share in the year-ago period. Now turning to our year-to-date results, sales for the six-month period ended July 31, 2025, were $293.6 million as compared to $291.4 million last year. Total net sales increased 0.8% as compared to the six-month period of fiscal 2025. In constant dollars, the increase in net sales for the year-to-date period was 0.3%. U.S. net sales declined by 1.6%, and international sales increased by 2.6%. Gross profit was $158.9 million or 54.1% of sales, as compared to $158.2 million or 54.3% of sales last year.

The decrease in gross margin rate for the first six months was primarily due to unfavorable foreign exchange and increased tariff costs, partially offset by favorable channel and product mix. Operating expenses were $151 million as compared to $153.4 million for the same period of last year. The decrease was driven by a strategic reduction in marketing expenses, partially offset by an increase in performance-based compensation. For the six months ended July 31, 2025, operating income was $7.9 million compared to $4.8 million in fiscal 2025.

We recorded approximately $2.7 million of other non-operating income in the six-month period of fiscal 2026, which is primarily comprised of interest earned on our global cash position, as compared to $3.8 million in the same period of last year. Net income was $7.2 million or $0.32 per diluted share as compared to $5.5 million or $0.24 per diluted share in the year-ago period. Now turning to our balance sheet, cash at the end of the second quarter was $180.5 million as compared to $198.3 million of the same period last year. Accounts receivable was $94.4 million, up $7.7 million from the same period of last year, primarily due to timing and mix of business.

Inventory at the end of the quarter was up $28.3 million or 15.5% above the same period of last year. $5.1 million of the increase was due to foreign currency, and $4.6 million of reciprocal tariffs is included in inventory on hand at the end of the second quarter. As Efraim mentioned, as of July 31, we have built a strong position in inventory of Swiss-made watches in the United States and would expect that a substantial portion of this year's needs are covered. We are comfortable with the composition and balance of our inventory at year-end.

In the first six months of fiscal 2026, capital expenditures were $2.8 million, and we repurchased approximately 100,000 shares under our share repurchase program. As of July 31, 2025, we had $48.4 million remaining under our authorized share repurchase program. Subject to prevailing market conditions and the business environment, we plan to utilize our share repurchase program to offset dilution in fiscal 2026. As Efraim mentioned, we closely monitor the changing tariff landscape, and we will continue to develop mitigation plans. Given the current macroeconomic environment and the ongoing uncertainty of the impact of tariffs on our business, the company is not providing fiscal 2026 outlook. I would now like to open the call up for questions.

Operator: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up their handset before pressing the star keys. One moment, please, while we poll for a question. Our first question comes from the line of Hamed Khorsand with BWS Financial. Please proceed with your question.

Hamed Khorsand: Hi, good morning. So there was lots of commentary about mini watches, and I just wanted to understand what you are seeing from consumer habits or purchasing that you think that the mini is the route that you are taking?

Efraim Grinberg: So I think, and you know, we have both what we call mini watches, and we have microwatches, which are smaller. Mini watches for us are watches from, like, 23 to 28 millimeters. And what had happened is that for a period of time, watches had gotten bigger both for men and for women. So over the last few years, they have gotten smaller again. And with that aspect, it has actually brought young women back into the category. And there is a lot of social media around that and layering of women's watches with jewelry. And so we believe it represents a significant opportunity across our brand portfolio.

And that trend has, as many trends do, begun in luxury and then moves into more accessible products as well.

Hamed Khorsand: Okay. And during Prime Day, I know you guys were participating. Was there anything that stood out of that event that has continued since? Or was it purely the consumer responding to price?

Efraim Grinberg: So we are probably a bigger participant in the prime events in Europe than we are in the United States. But we have seen our overall digital business with those retailers that are completely focused on the digital environment, whether it be Zalando or the Amazons of the world, really doing very well on a global basis. And that is really good to see, and that is really across our brand portfolio. So we believe that is an increased opportunity as we continue to progress down our strategic plan.

Hamed Khorsand: Okay. And then I know you have talked about raising inventory because of the Swiss watches, but earlier this year you had also raised inventory because of what is going on with tariffs. How much of your increase overall year to date, and I am speaking on calendar so excuse me, year to date on the calendar, can you just digest through the channel by the holiday shopping season?

Efraim Grinberg: Sure. So I will start, and then I will turn it over to Sallie. Our inventories got very low at year-end, so we began to rebuild inventory in Q1 of this year. We would expect our inventories to be in line by year-end. And what that has allowed us to do at the same time is to offset some of the tariff impact by having inventory moved to the United States prior to the implementation of certain tariffs. Obviously, we cannot offset all of it, and then we have taken other actions, whether it be pricing or negotiations with suppliers, to help mitigate some of the effect as well. But I will turn it back to Sallie as well.

Sallie DeMarsilis: The only detail I will add to that, and thank you, Efraim, that was very thorough, is we have, as I mentioned, about $28 million of additional inventory at this time. We do expect to work it down by the end of the year to something more reasonable. But of that, about $16 million of it is in the U.S. So we did pull it forward into the U.S. so that we can manage through these tariffs and kind of get ahead of some uncertainty with that. As we also mentioned, just to reiterate, we do think that a substantial portion of what we need in the U.S. is probably already here.

We will add in what might be new styles or something that is an advertisement or maybe something that is just selling faster than we had anticipated. Bring it in, but we should be in relatively good shape.

Hamed Khorsand: Okay. Can I ask one more question?

Efraim Grinberg: Certainly. Absolutely.

Hamed Khorsand: You have taken a lot of these restructuring charges in the last few quarters. When do they stop? And when do us investors see it show up in quarterly results?

Efraim Grinberg: Well, I think it is a combination both of charges dealing with our event that occurred in the Middle East last year, as well as some charges on the restructuring side. I would think on the restructuring side, they are predominantly done. There could be some laggard expenses on the other charges, but I would expect overall that they will be reduced significantly.

Sallie DeMarsilis: And just to remind you that we did mention when we were talking about the savings and the initiatives we were putting in place, those are offset by some increases this year in our costs. So you will see they offset some of the increases that we would have for regular year-over-year increases for merit, adding back performance-based compensation, and, of course, currency.

Hamed Khorsand: Okay. Very good. Thank you.

Operator: Thank you. And we have reached the end of the question and answer session. I would like to turn the floor back to Efraim Grinberg for closing remarks.

Efraim Grinberg: Okay. Thank you all for participating with us today, and we look forward to joining you again for our third quarter conference call where we will hopefully be able to share with you the progress that we continue to make on our strategic initiatives. Thank you.

Operator: Thank you. And this concludes today's conference, and you may disconnect your lines at this time. We thank you for your participation.

Where to invest $1,000 right now

When our analyst team has a stock tip, it can pay to listen. After all, Stock Advisor’s total average return is 1,068%* — a market-crushing outperformance compared to 185% for the S&P 500.

They just revealed what they believe are the 10 best stocks for investors to buy right now, available when you join Stock Advisor.

See the stocks »

*Stock Advisor returns as of August 25, 2025

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. Parts of this article were created using Large Language Models (LLMs) based on The Motley Fool's insights and investing approach. It has been reviewed by our AI quality control systems. Since LLMs cannot (currently) own stocks, it has no positions in any of the stocks mentioned. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Image source: The Motley Fool.

DATE

Thursday, August 21, 2025 at 8 a.m. ET

CALL PARTICIPANTS

Chief Executive Officer — Rui Chen

Chief Financial Officer — Sam Fan

Need a quote from a Motley Fool analyst? Email [email protected]

TAKEAWAYS

Total net revenues-- Total net revenues were RMB 7.3 billion in the second quarter, up 20% year over year, with games and advertising as the main growth drivers.

Games revenue-- Increased 60% year over year to RMB 1.6 billion, propelled by new seasons of the SLG title and celebration events.

Advertising revenue-- Grew 20% year over year to RMB 2.4 billion, supported by AI integration, enhanced ad infrastructure, and an increased advertiser base.

Value-added services (VAS) revenue-- Rose 11% year over year to RMB 2.8 billion, led by live broadcasting, premium memberships, and fan-charging programs.

Gross profit-- Grew 46% year over year to RMB 2.7 billion, with gross margin expanding to 36.5%, up from 29.9% in the same period last year.

GAAP net profit-- GAAP net profit was RMB 218 million, compared with a net loss in the same period last year.

Adjusted net profit-- Adjusted net profit was RMB 561 million, shifting from an adjusted net loss ratio of 4.4% in the second quarter of 2024 to an adjusted net profit ratio of 7.6%.

Operating expenses-- Operating expenses were RMB 2.4 billion, remaining stable in absolute terms versus the prior year, with R&D expenses declining 3% year over year.

Operating profit-- Operating profit (GAAP) was RMB 252 million. Adjusted operating profit was RMB 573 million, both reversing a loss in the prior-year period.

Daily active users (DAUs)-- Reached 109 million, up 7% year over year.

Monthly active users (MAUs)-- Grew 8% year over year to 363 million, with average daily time spent increasing by six minutes to 105 minutes.

Monthly paying users-- Increased 9% year over year to 31 million, driven by memberships, fan charging, and live broadcasting.

Premium memberships-- Premium memberships totaled 23.7 million as of the second quarter, with over 80% on annual or auto-renewal plans.

Cash and equivalents-- RMB 22.3 billion (USD 3.1 billion) as of June 30, 2025.

Operating cash flow-- Operating cash flow was approximately RMB 2 billion.

Share buyback-- Repurchased approximately 5.6 million shares for HKD 783 million (USD 100 million), with 6.4 million shares repurchased to date under the approved USD 200 million plan as of June 30, 2025; USD 84 million remains available for future buybacks as of June 30, 2025.

AI-driven results-- AI integration contributed to a more than 10% year-over-year increase in eCPM and a 30% year-over-year rise in performance-based ad revenue, while AI-generated ad covers accounted for over 30% of all covers.

Community engagement-- The number of official members rose 11% year over year to 270 million, with a twelve-month retention rate remaining around 80%.

Offline events-- Bilibili World and Bilibili MacroLink attracted over 400,000 participants, up 60% year over year, establishing status as a leading offline animation expo in China.

Game pipeline-- Four to five new games await licensing approval, including ACG and casual games, with planned international expansion for Samo into Hong Kong, Macau, Taiwan, and overseas markets.

Gross margin outlook-- Management targets a 37% gross margin by the fourth quarter and maintains a midterm gross profit margin target of 40%-45%.

Operating margin outlook-- Aims for a 10% adjusted operating margin in the fourth quarter and a midterm target of 15%-20% operating margin.

AI product launches-- Planned release of tools for human-like mid- and long-form AI-assisted video creation and virtual idol companionship.

June 18 ecommerce performance-- Advertisers during the June 18 campaign increased 60% year over year; GMV climbed over 33% year over year during the June 18 campaign; creators exceeding RMB 10 million GMV grew over 60% year over year during the June 18 campaign; digital appliance GMV grew over 50% during the season, household GMV was up 85% year over year during the June 18 campaign, and categories like maternal care and watches grew over 60% year over year.

SUMMARY

Management highlighted high-margin growth in games and advertising while reportingBilibili(NASDAQ:BILI) credited AI technology for enhanced ad delivery, creative generation, and content recommendations, resulting in higher advertiser demand and performance. The company underscored sustained user engagement and community expansion, with notable increases in both user base and content consumption duration. Bilibili detailed the success of premium memberships, live broadcasting, and the expanding influence of its Gen Z plus audience, both online and at record-setting offline events. The company reaffirmed commitment to shareholder returns with continued share repurchases and plans for global gaming expansion, supported by a robust cash position and scalable operational model.

CEO Chen emphasized, "For example, advertising revenue grew 20% year over year. And Carly mentioned AI has played an important role behind that number," integrating AIGC tools to scale high-performing ad content and recommending technology to personalize user experiences.

Bilibili established its brand as a cultural lifestyle, evidenced by Bilibili World in 2025 drawing a diverse audience, including 11% with foreign passports, further reinforcing its offline IP influence.

CFO Fan confirmed, "Gross margin (GAAP) has increased sequentially for 12 quarters through [the second quarter of] 2025," and outlined a pathway to reach midterm profitability targets through disciplined OpEx and leveraging operating scale.

Management plans to broaden verticals through AI-driven innovation, including deeper algorithmic targeting, new ad developer products, and expansion into live streaming, search, and trending topics.

INDUSTRY GLOSSARY

SLG: Simulation/Strategy game genre focused on tactical and resource management gameplay.

PUGV: Professional User Generated Video; high-quality user-produced video content distinct from short-form or standard UGC.

ACG: Anime, Comic, and Games; a content vertical popular with Gen Z audiences and central to Bilibili's platform strategy.

AIGC: AI-Generated Content; digital media or advertising materials created with artificial intelligence tools.

ECPM: Effective Cost Per Mille; advertising industry metric measuring revenue per thousand ad impressions.

GMV: Gross Merchandise Value; total value of merchandise sold through a platform within a set period.

Full Conference Call Transcript

Rui Chen: Thank you, Juliet. And thank you to everyone for joining us today to discuss our 2025 second quarter results. We maintained strong momentum in the second quarter, delivering solid revenue growth alongside our thriving community of high-value, loyal young users. Total net revenues for the second quarter grew by 20% year over year to RMB 7.3 billion, driven by the continued strength of our core games and advertising businesses. Games revenues rose 60% year over year to RMB 1.6 billion, propelled by new seasons of our popular SLG title. Advertising revenues increased 20% year over year to RMB 2.4 billion, supported by greater AI integration that made our ads more efficient and effective.

Underpinned by operating efficiency, our growth in games and advertising drove a 46% year-over-year increase in gross profit, with gross margin expanding to 36.5% from 29.9% in the same period last year. As a result, we achieved GAAP net profit of RMB 218 million and adjusted net profit of RMB 561 million. Our performance reflects our growing influence among China's Gen Z plus audience. By providing users with high-quality content they love, we foster deeper engagement that fuels our commercial ecosystem. In the second quarter, BAUs reached a new high of 109 million, up 7% year over year, and MAUs grew by 8% to 363 million.

The average daily time spent rose to 105 minutes, up six minutes compared to the same period last year, reflecting our continued focus on high-quality videos that capture and hold our community's interest in meaningful and fulfilling content. Our growing influence among our core users is showing up both online and offline. This year's Bilibili World and Bilibili MacroLink drew in record crowds. Over 400,000 participants attended the three-day event, 60% more than last year, making it one of the largest offline animation expos in China. The strong turnout reflects the vitality of our brand and the power of our community, showing the tremendous potential of our young users.

Their tastes are already shaping mainstream trends, and countless more interests within our community are waiting to be unleashed. Looking ahead, we will sharpen our focus on delivering the best PUGV community experience, attracting more users and growing alongside them. At the same time, we will continue to proactively invest in monetization initiatives to drive sustainable profitability. Through these efforts, we are confident in our ability to create long-term value for all of our stakeholders. With that overview, let's take a closer look at our core pillars of content, community, and commercialization. Beginning with content and community, we remain firm believers that high-quality content and an engaging community are essential to the lives of today's young generation.

Gen Z plus comes to Bilibili Inc. not for quick hits, but for meaningful content they care about. And we are seeing that translate into stronger influence, longer watch time, and greater commercial potential across every corner of our platform. Driven by high-quality PUGV content, the average daily time spent reached 105 minutes in the second quarter, up six minutes year over year. Notably, the watch time for videos longer than five minutes increased nearly 20% year over year in Q2, proving Bilibili Inc.'s undeniable user mindshare to consume mid to long-form meaningful content. Not only are people spending more time, but more people are paying for premium content.

Monthly paying users increased by 9% year over year to 31 million, driven by membership, fan charging, and live broadcasting. In the meantime, our community remains engaged and loyal. The number of official members was up by 11% year over year to 270 million, with a twelve-month retention rate remaining around 80%. We maintained our dominant leadership in ACG content. Chinese anime content performed strongly during the second quarter, with watch time up 34% year over year, driven by popular titles such as A Record of Mortal's Journey to Immortality, The Tales of Hurting God, and Linkage Season Two.

Game content remained one of our top categories, with watch time increasing by 21% year over year, making Bilibili Inc. an essential platform for game developers to engage deeply with the gamer community and strengthen their IP. It is also no surprise that AI-related content continues to be a breakout category. Watch time grew 61% year over year, cementing Bilibili Inc.'s role as the go-to platform for Gen Z plus to learn, explore, and create with AI. Likewise, AI advertiser demand increased by about 150%, highlighting the great synergy between content value and commercial potential. Meanwhile, consumption-related content categories continue to grow, driven by evolving user behavior.

As our Gen Z plus users become more financially independent, they increasingly rely on peer creators for trusted reviews and tutorials when making purchase decisions. This has boosted engagement across verticals. Watch time for home appliance content rose 14% year over year, parenting and early education rose more than 50%, and travel and lodging saw an 11% increase, reflecting growing interest in experience-driven consumption. We continue to enhance our products and services to help creators make more money. In the first half of the year, about 2 million creators earned income on Bilibili Inc. through various channels.

Creators' total income from our fan charging program more than doubled in the first half of the year, once again showing users' increasing willingness to pay for quality content. The number of creators monetizing through Sparkle Ads and video and livestream ecommerce also grew 1949% year over year, respectively, in the first half of the year. Now let's talk about our commercial businesses and their progress. Our commercial growth demonstrates how our growing influence among younger users is directly translating into commercial value. Advertising is one of the most direct business lines that shows this. In the second quarter, our ad business grew 20% year over year, reaching RMB 2.4 billion and continuing to outpace the industry's average growth rate.

During the second quarter, we continued to advance our ad infrastructure, improving ad conversion efficiency through recommendation algorithms, creative generation, and smart ad placement. Through deeper LLM integration with multimodal content understanding, we are capturing user intent more precisely and delivering smarter, more personalized ad recommendations. The upgrades we have made to the AIGC tools are also helping advertisers generate high-performing creative apps at scale. In the second quarter, roughly 10% of new ad titles and over 30% of ad covers were created using these tools, helping advertisers reach users more effectively with content that resonates with their target audiences.

We also offer smart ad placement tools to allocate, sequence, and monitor ad performance in real-time, significantly reducing manual operations at the same ad spend. These enhancements are boosting both efficiency and scalability, improving ECPM by more than 10% year over year, and fueling around 30% year-over-year growth in performance-based advertising revenue in the second quarter. Revenues for brand and native advertising also maintained healthy momentum. Industry-wise, games, digital products, home appliances, ecommerce, Internet services, and automotive were our top five advertising verticals in the second quarter. The number of advertisers increased by over 20% year over year, reflecting our growing appeal to brands.

Leveraging our dominant user mindshare, game developers are allocating larger ad budgets to Bilibili Inc. to engage more deeply with young gamers. Demand for three C and digital products remained robust, supported by our leadership in these categories and national subsidy tailwinds. In ecommerce, Bilibili Inc. delivered an average new customer acquisition rate of about 60% for advertisers across industries under the SIMPLE plan during this year's 6.18 season. GMV from products priced above RMB 1,000 increased nearly 50% year over year, further demonstrating our users' strong purchasing power and our ability to convert user engagement into high-intent transactions.

Turning to our games business, in the second quarter, revenues increased by 60% year over year to RMB 1.6 billion, owing to Samo's enduring strength in its first year and evergreen titles, FGO and Azerlane, which recently celebrated their ninth and eighth anniversaries respectively. To mark Samo's first-year anniversary, we rolled out an upgraded season eight on May 31, featuring new gameplay, characters, and in-game events. Backed by a targeted marketing push, both engagement and retention have been solid as we enhanced onboarding, monetization path, and returning user experiences. Building on this strong momentum, we are developing new game seasons, piloting mini-program offerings, and preparing for Samo's international rollout later this year.

Looking at our game pipeline, we have a number of games in the approval process, including multiple ACG titles and casual games. Once approved, we are prepared to bring them to our community and further expand our presence in the gaming space. And finally, let's look at our VAS business. Revenues grew 11% year over year to RMB 2.8 billion, driven by steady momentum across live broadcasting, premium memberships, and other value-added services. Our focus remains on refining live broadcasting operations by fostering more quality content and diversifying monetization features to support steady growth. Through refined operation, gross profit margin for live broadcasting continued to improve in the second quarter.

Premium memberships maintained stable growth, reaching 23.7 million at the end of the period, with over 80% on annual or auto-renewal plans, demonstrating their loyalty and commitment to our platform. Meanwhile, our other VAS products continue to grow rapidly in the second quarter, especially our fan charging program, which increased by more than 100% year over year, with more users showing their support for the creators and high-quality content they love. Looking ahead, our focus remains on what sets Bilibili Inc. apart: high-quality content that resonates with China's Gen Z plus generation. This is the foundation of our growing influence and the engine behind our expanding commercial opportunities.

At the same time, we are actively embracing the transformative opportunities brought by AI, from enhancing operational efficiency to elevating user experience, accelerating monetization, and expanding our global reach. These advancements further strengthen our foundation for sustained growth and long-term profitability. With that, I will turn the call over to Sam to share more financial details.

Sam Fan: Thank you, Mr. Chen. Hello, everyone. This is Sam. In the interest of time on today's call, I will review our second quarter highlights. We encourage you to refer to our press release issued earlier today for a closer look at our results. In the second quarter, we continued to grow revenues, expand our margins, and grow our profitability, driven by growth across our commercial businesses, particularly in our high-margin advertising and games businesses. Total net revenues for the second quarter were RMB 7.3 billion, up 20% year over year. Our revenue breakdown for Q2 was approximately 39% from VAS, 33% from advertising, 22% from games, and 6% from our IP derivatives and other businesses.

Our cost of revenues increased by 9% year over year to RMB 4.7 billion in the second quarter, while our gross profit rose 46% year over year to RMB 2.7 billion. Our gross profit margin reached 36.5% in Q2, compared with 29.9% in the same period last year. Our expanding gross profit and margin show that our model is built to scale. Our total operating expenses were RMB 2.4 billion, remaining stable compared with the same period last year. S and M expenses increased 1% year over year to RMB 1 billion. G and A expenses were RMB 510 million, up 4% year over year.

R and D expenses were RMB 866 million, down 3% year over year, mainly related to R and D efficiency improvements. These efforts allowed us to maintain positive operating results. Our operating profit was RMB 252 million, and our adjusted operating profit was RMB 573 million, both compared with losses in Q2 2024. Adjusted operating profit margin reached 7.8% in the second quarter. Net profit was RMB 218 million, and adjusted net profit was RMB 561 million versus losses in the prior year period. Our adjusted net profit ratio in the second quarter was 7.6% compared with an adjusted net loss ratio of 4.4% in the same period a year ago.

Cash flow-wise, we generated about RMB 2 billion in operating cash flow in the second quarter. As of June 30, 2025, we had cash and cash equivalents, time deposits, and short-term investments of RMB 22.3 billion, or USD 3.1 billion. During the second quarter, we enhanced our shareholder return by repurchasing approximately 5.6 million Class Z ordinary shares, each equal to one ADS, for a total of 783 million Hong Kong dollars, or 100 million US dollars, as part of our ongoing share repurchase program. These shares have all been canceled as of the end of 2025.

Under our 200 million US dollar share repurchase program, approved by the board in November 2024, we have repurchased a total of 6.4 million shares so far, at a total cost of 116 million US dollars, leaving about 84 million US dollars available for future buybacks as of June 30, 2025. Thank you for your attention. We would now like to open the call to your questions.

Operator: Thank you. To ask a question, and wait for your name to be announced. To whisper your question, please press 1 and 1 again. For the benefit of all participants on today's call, if you wish to ask your question to management in Chinese, please immediately repeat your question in English. The company will provide consecutive interpretation for management's statement during the Q and A session. Please note that English interpretation is for convenience purposes only. In the case of any discrepancy, management's statements in the original language will prevail. We will now take the first question from the line of Xueqing Zhang from CICC. Please go ahead.

Xueqing Zhang: Thank you for taking my question, and congratulations on the strong quarter. My question is about the user ecosystem. We have noticed that the company's DAU and MAU growth accelerated in the first half of this year, and the average daily time spent has also continued to increase. So what are the main drivers, and what is your outlook for the future? In addition, some are Bilibili Inc., etcetera, 400,000 solid participants. So what opportunities can we see for the 3BD community from BWS success? Thank you.

Rui Chen: Okay. In the past sixteen years, we have been focusing on providing the highest quality content and fostering a thriving, welcoming community culture. And under the current Internet environment, we think the high-quality content and supportive constructive community environment are what's in scarcity. In the current video landscape, I think there is an oversupply of video content. People are not lacking content to watch, but they are lacking high-quality content to watch. The same thing goes with the content, the feedback, the voice, from the netizens. There are plenty of voices across all apps. But what truly matters are those supportive resonating voices from welcoming friendly communities.

So that is what Bilibili Inc. will continue to focus on by curating the highest quality content and also fostering a welcoming community environment that allows people to connect over the same interest and resonate with each other. We believe that by mastering both high-quality content and the thriving community culture, users will naturally come. They will be drawn into this unique experience. In the second quarter, our DAU grew by 7%, and MAU grew by 8%. That is a result of us focusing on the quality content as well as a welcoming community environment. Just like the upgrade we see in lifestyle consumption, content consumption is also evolving.

And more importantly, the upgrade in content consumption, particularly in taste, is largely one way. Once someone receives and has watched high-quality content, it is very hard for them to go backwards. Over the past fifteen years, we have really established a strong presence in users' mind shares in categories like anime, games, and knowledge-based content. And there is still a lot of things we can do to further expand surrounding the user's interest network. In addition to that, we think there is more to be done beyond just PUGV, for example, podcasts, picture and text-based content, AI-based virtual companionship, there are lots of potentials and tremendous room for us to expand into.

So to summarize, we think that it is an integral part for high-quality content as well as a good and welcoming community environment that is actually self-sustaining and ever-evolving. For example, we think the high-quality content can attract those people who can truly appreciate this type of content. And the friendly, welcoming, supportive users continue to motivate us content creators to continuously create good content. That is why on Bilibili Inc., we have noticed that a talented content creator can be easily discovered by our users. And at the same time, they can quickly adapt and evolve into a larger, more influential content creator. And even for the same content, I can see everywhere.

But the number of interactions and the quality of that interaction is always the best on Bilibili Inc. And, also, for those high-quality content creators, their fan base, their stickiness, is the highest, the strongest on Bilibili Inc., and that is a well-established and common knowledge among the content creators in China. And that is why you see many high-quality content has been discovered on Bilibili Inc. platform. For example, a few years ago, the first PV of Blackness Recall was discovered by Bilibili Inc. user and quickly became viral and so influential across the Internet.

And also a few years ago, we co-produced the mini animation Nobody that was also discovered by Bilibili Inc. user and became viral popular recognizing Bilibili Inc.'s community. And now we are very glad to see that its big movie is now well, it is getting more even more wide recipients from the audience. And its box office has exceeded 1 billion RMB. And another example would be Flask yesterday at 4 AM. Black Lecon Black Blackness with Pine Pioneer premiered on Bilibili Inc. platform. In less than two days, its total video views have already exceeded 12 million.

And that is why you have seen many, many good content will be the most appreciative and be discovered by Bilibili Inc. users because we have established that environment that allows high-quality content to thrive. This year's Bilibili World has broken many records. We have attracted an audience from more than 20 countries and regions with over 400,000 people attending the events. Among them, 70% came from outside of Shanghai, and 11% of the tickets were purchased by foreign passport holders. And it is safe to say that Bilibili Inc. has become the largest ACG event in China, both in terms of scale and influence.

Even for the Shanghai City, it has invented the word of ACG consumption for Bilibili Inc. because the event drew a large number of young people to Shanghai, boosting local offline consumption and even becoming a new cultural landmark for the city. And at its core, it is a real-world reflection of Bilibili Inc.'s brand and community offline. People not only use Bilibili Inc.'s product, but they also come to offline events named after Bilibili Inc. This shows and reaffirms the influence of IP as well as our community. It is safe to say that Bilibili Inc.'s brand has become a part of the lifestyle of the young generation in China.

Operator: We will now take the next question from the line of Miranda Tsong from Bank of America Securities. Please go ahead.

Miranda Tsong: Thank you, management, for taking my question. My question is about the advertising business. So the second quarter ad business beat expectations again. Can management share what are the drivers? And looking ahead into the second half, what are the trends you are seeing for the industry? And what is your expectation about the company's business trend? And what kind of new products and technologies will you roll out? Thank you.

Rui Chen: In the second quarter, our advertising business maintained strong growth, outpacing the overall industry. Quarterly revenue reached a record high of RMB 2.4 billion, up 20% year over year. Speaking of the driver behind that growth, we continue to focus on the one horizontal and vertical strategy. In this quarter, we continued to strengthen our ad infrastructure product, and technology efficiency allowed us to further unleash our users' value and traffic value. Of the following three points, will support that. One is during the quarter, we further enhanced our integrated campaign combining feeding and conversion.

In the second quarter, over 50% of the Sparkle app also leveraged our Tuesday program, which is the topic acquisition program we have in our app system. Number two is that we continue to strengthen our marketing data infrastructure, leveraging the multimodal large model to significantly improve our ad delivery efficiency. The last thing is we continue to optimize the deep conversion capabilities. The share of deep conversion doubled in the second quarter year over year, and there is still room for us to improve. And that directly leads to an uplift in our overall ad eCPM.

And from an industry standpoint, in the second quarter, our top five advertisers' verticals saw a slight change, which are games, digital products, home appliances, ecommerce, online services, and automotive. And the number of advertisers increased over 20% year over year in the second quarter. Looking at more details, games remain our largest vertical. We continue to leverage our high-quality full-chain conversion capability, we further strengthened our market share in premium game advertising while expanding to new scenarios such as Bilibili Inc. mini-games and game live streaming, creating incremental revenue opportunities. And professional reviews from our professional content creators and in-depth content from those creators continue to attract advertisers to target the young consumers.

In the second quarter, home decorations ad revenue grew nearly 70% year over year. So we will continue to deepen our vertical marketing solutions while consolidating our leadership in key industries. At the same time, we are looking to expand into broader consumer categories. I wanted to add some June 18 data for your reference. First of all, we continue to press on our open lead strategy and attract more advertisers to come to Bilibili Inc. and see us as a must-invest platform during major sell seasons. The number of advertisers during the June 18 campaign increased 60% year over year, and the engagement between creators and consumers continued to rise.

During the June 18 campaign, the total GMV grew over 33% year over year, and the number of creators exceeding RMB 10 million GMV grew over 60% year over year. And here are some data points to show the consumer's trend on Bilibili Inc. Digital appliance grew over 50% during the season. Household up 85%, even for categories such as maternity and child care, food and beverage, and even watches, all grew over 60% year over year, showing Bilibili Inc.'s users' strong consumption power as they grow with the platform. For the second half outlook, there are two points we invite you to take a closer look at.

One is a broader application and linkage of products and technologies across multiple endpoints and scenarios, including but not limited to PC, OTT, store mode, live streaming, search, and trending topics. And any scenario that we can link the consumer with the advertiser, we will be putting more effort into. The second point will be on AI. We believe that AI will continue to drive improvement not only on efficiency but also delivering actual advertising revenue. One thing is that we will continue to implement ongoing iteration of our recommendation algorithm, enabling deeper content understanding and more precise app targeting based on our user interest and historical behavior.

Another point would be the AIGC advertising tools to help our advertisers to generate covers and titles or even content tailored to Bilibili Inc.'s users' language and creative style at scale. Currently, about 30% of the ad covers are AI-generated, and there will be more room for us to push the number forward. And lastly is on AI-powered automated ad developer products. We will be launching more of those products to improve our advertisers' cost control capability as well as scaling capabilities. From an industry vertical standpoint, in the near term, we think the advertisers' budgets are migrating from multiple platforms to a few core platforms. Platforms that are indispensable and unique will capture larger shares of the client budget.

And in the longer term, as China's consumer market evolves, advertisers will be placing more emphasis on building their brand on top of the Pure Self conversion budget. Because no advertiser can afford to ignore the influence and purchasing power of young people. And on that aspect, we believe Bilibili Inc. is in a very unique position. So in summary, whether in the long term or short term, as long as our community continues to thrive, the value of Bilibili Inc.'s advertising business will become increasingly evident over time. We remain confident in our ability to sustain the growth above the industry average. Thank you. Operator, next question, please.

Operator: We will now take the next question from the line of Felix Liu from UBS.

Felix Liu: Thank you, management, for taking my question. My question is on the game business. Can management share any color on the recently concluded Samo first anniversary season eight? How should we think about the second half trend for Samo as well as for next year? And on your new game pipeline, what are the key games you would like to highlight? Thank you.

Rui Chen: On June 13, Samo celebrated its first anniversary, and during that season, the DAU broke a new record within the year of 2025. The achievement of Samo on its first anniversary truly demonstrates that the game has established itself and laid a foundation to become a long-lasting title. We are confident that Samo will become a lifestyle with a life cycle of over five years and continue to contribute solid game revenue for us. During the season eight and anniversary celebration event, we have launched multiple new monetization tools such as the limited edition skins, which were well received by our users.

We believe, for example, the skin sales during the anniversary have met our expectations and show that we have explored a new monetization tool that is even more healthy and sustainable compared to other tools. Going forward, we will have the new card monetization combining with this skin, as well as new innovative monetization models that will help us to make Samo even more sustainable and healthy. The most important thing for us is to focus on making every game season the best game season. As long as we continue to provide that experience, we think the users will naturally stay and continue to play with this game.

On the one hand, we think the overall development capacity for Samo has improved quite a lot, and each new game season will be featuring richer content. Moving forward, we will continue to optimize the gameplay, make it more fun, more balanced, and make the game even more engaging. On top of the new user acquisition going forward, we will be putting more emphasis on retaining and activating the old users because this game has sustained eight game seasons, and there will be a lot of old users or dormant users. It is very important for us to activate and awaken those existing users who have played Samo but have left the game for some reason.

This will be a very important channel for us to maintain a healthy game community. So as far as we see so far, the user retention rate has been maintained at a very healthy level. We are expecting to launch the traditional Chinese version of Samo at the end of this year or early next year to the players in Hong Kong, Macau, and Taiwan. And we are also going to explore full potential release in overseas markets such as Japan and Korea. Looking at our pipeline, we currently have four to five games that are waiting for licensing approval. And once the approval is obtained, the game will be released accordingly.

In the short term, we will be expecting to release a casual game based on nonfungible IP, which I believe is quite fun and entertaining to look forward to. And going forward, we will continue to focus on the strategy of creating games, reinventing games, for the new generation of gamers, and we will be exploring new game genres and making innovations across different genres. There are a number of potential categories in our pipeline, and we are quite looking forward to them.

Operator: We will now take the next question from the line of Lincoln Kong from Goldman Sachs. Please go ahead.

Lincoln Kong: Thank you, management, for taking my questions. So my question is about our profit margin. We have seen our group profit margin continue to trend high. So what are the potential areas of our cost efficiency and cost discipline going forward? How should we think about the second half in terms of our profitability outlook? And any timeline to achieve our mid-year target of 15% above operating margin? And in terms of the use of cash, what are the future areas of our capital allocation? How should we think about our return policy? Thank you.

Sam Fan: Thank you, Lincoln. This is Sam. I will take your question. In Q2, our top line grew by 20%. Our gross profit increased by 46%. So we saw very strong operating leverage here. Our gross margin has been increased sequentially for 12 quarters. We expect the same trend to continue in the 37% by Q4, let's say. So we still maintain our midterm gross profit margin target of 40% to 45%. And for the OpEx, we have continued to improve our efficiency of the operation. So if you look at the absolute dollar amount of our OpEx in the first half of this year, it's pretty flat year over year.

So we expect to achieve the year-over-year decline of the OpEx in the second half because in the second half of last year, we had more marketing spending on Samo, right, at the first two quarters. So for the probability, over the past two years, our gross profit margin grew very well. And our operating profit has grown even faster, outpacing our gross margin improvement. In Q2, the OP margin was 7.8%. So we are confident that we can achieve quarter-over-quarter improvement to achieve a 10% adjusted operating margin in Q4 this year. So, again, we maintain our midterm target of 15% to 20% for our OP margin.

And regarding the cash usage, to enhance our shareholder returns, we already repurchased 100 million US dollar shares in our Hong Kong line in Q2, and then we have canceled all those shares. So under the current 200 million buyback program, we still have 83 million remaining available. As we have sufficient US dollar cash reserve offshore, the repurchase will continue based on the market condition. So thank you for your question.

Operator: We will now take the next question from the line of Yiwen Zhang from China Renaissance. Please go ahead.

Yiwen Zhang: Thank you for taking my question. So my question is about AI. Can you discuss what kind of AI application we have on the platform? And what is the latest progress? Thank you.

Rui Chen: As a matter of fact, the AI application or adoption across multiple scenarios from Bilibili Inc. has already started to generate value. For example, the advertising revenue grew by 20% year over year. And Carly mentioned AI has played an important role behind that number. For example, the AIGC cover title generation has meaningfully improved the click-through rate. And, also, from behind the MAU and DAU number increases, AI also played a vital role in terms of delivering the right content to the right users.

On the topic of providing high-quality content and fostering a friendly community, we have also leveraged the AI capability to amplify Bilibili Inc.'s strength through early identification of high-quality content through understanding the user's commentary session. And that has helped us to promote high-quality content at a very early stage and allow that content to be seen by more people. This has already shown in our user matrix and community engagement. I'll elaborate on three aspects of how AI is helping Bilibili Inc. to become better. One is that AI can really emphasize Bilibili Inc.'s strength from one aspect. One example would be every day, there will be over 1 million long comments generated by our users.

In that era of AI, that means about 1 million people helping the AI to map the content to identify the content as good content. Good data points. And this asset, this type of long comments generated by real Bilibili Inc. users, is a truly unique data asset for us to identify high-quality content at a very early stage and promote that across our platform. And we already have specific tools to help us to amplify that strength, and we will be adapting that technology going forward across multiple content categories and scenarios. And the second is on AI-assisted content creation.

For mid to longer-form video, we've seen other players have made even for open-source tools for short video creation, but that's merely just on the mid the video material itself, no longer than thirty seconds. Whether AI can make mid to longer-form video, the question we think the answer is yes. On the one hand, we've seen other players in the market have tools to make mid to longer-form videos. But it just seems at first look, it's produced by AI. However, we think we have the ability to make human-like mid to longer-form video because we have the best and most talented content creators on our platform who can help us to make this into reality.

And we will be launching that product very soon, and we think it might be the best human-like mid to longer-form AI video creation tool that's out there. Well, the purpose of that tool, of course, goes back to help our content creators to lower their barriers and improve their production efficiency and contributing to overall content supply rather than making AI-produced video. So we think another analogy is to make very good Chinese food, you will have the Chinese ingredients. Not just to have them microwave. And we are here to offer the ingredients.

And on areas that Bilibili Inc. has key advantages on, for example, such as animation, virtual idols, and big virtual streamers, AI also has a strong potential to help us to meet the demands of those ACG lovers. For example, the virtual companionship by a virtual streamer or virtual idol, that can be very effectively resolved by the help of the AI. And we have already dabbled in that area, and there will be a product launched soon to the market.

Operator: And that concludes the question and answer session. Thank you once again for joining Bilibili Inc.'s second quarter 2025 Financial Results and Business Update Conference Call today. If you have any further questions, please contact Juliet Yang, Bilibili Inc.'s Executive IR Director, or Pearson Financial Communication. Contact information for IR in both China and the US can be found on today's press release. Thank you, and have a great day.

Where to invest $1,000 right now

When our analyst team has a stock tip, it can pay to listen. After all, Stock Advisor’s total average return is 1,045%* — a market-crushing outperformance compared to 182% for the S&P 500.

They just revealed what they believe are the 10 best stocks for investors to buy right now, available when you join Stock Advisor.

See the stocks »

*Stock Advisor returns as of August 18, 2025

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. Parts of this article were created using Large Language Models (LLMs) based on The Motley Fool's insights and investing approach. It has been reviewed by our AI quality control systems. Since LLMs cannot (currently) own stocks, it has no positions in any of the stocks mentioned. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Image source: The Motley Fool.

Date

Aug. 18, 2025 at 5 p.m. ET

Call participants

Chief Executive Officer — Thiago Maffra

Chief Financial Officer — Victor Mansur

Operator

Need a quote from a Motley Fool analyst? Email [email protected]

Risks

Thiago Maffra explicitly stated, "2025 has demonstrated to be more challenging than we estimated, demanding more efforts from all our teams to keep growing our business in a profitable way," signaling a difficult operating environment affecting growth initiatives.

CFO Victor Mansur noted, "If the banks that give credit to their clients keep asking for investments in terms of reciprocity, we may suffer a bit more in Q3 and Q4 2025 since we are not going into this business," highlighting risk of continued corporate net outflows.

"Bear in mind, that we can have a change in tax rules which can impact currently tax-exempt fixed income instruments," Maffra stated, flagging regulatory uncertainty that may influence product demand and capital market activity.

Takeaways

Total client assets (AUM + AUA)-- BRL 1.9 trillion as of the latest quarter, representing 17% year-over-year growth.

Gross revenues-- BRL 4.7 billion, up 4% year-over-year and 2% sequentially in Q2 2025.

Retail revenue contribution-- 77% of total gross revenues came from the retail business in Q2 2025.

Net income-- BRL 1.3 billion, up 18% year-over-year and marking the highest quarterly figure in company history for Q2 2025.

Return on equity (ROE)-- 24.4% for the quarter, expanding 223 basis points year-over-year.

Capital ratio (BIS)-- 20.1%, up 110 basis points quarter-over-quarter in Q2 2025.

Active clients-- 4.7 million as of the latest quarter, up 2% year-over-year.

Diluted earnings per share (EPS)-- Diluted EPS grew 22% year-over-year in Q2 2025, outpacing net income growth due to share buyback execution.

SG&A expenses-- BRL 1.6 billion in Q2 2025, up 10% year-over-year and sequentially, mainly due to higher marketing and technology investments.

Efficiency ratio-- Improved to 34.5% for the last twelve months, a 161 basis point improvement versus the prior year.

Retail net new money-- Positive inflows in retail were offset by a $6 billion outflow in the corporate and institutional segments in Q2 2025, due to tighter liquidity and increased reciprocity requirements from banks for credit lines.

Retail credit card TPV-- Credit card volume grew 8% year-over-year in Q2 2025; affluent and private banking card offerings were launched.

Life insurance written premiums-- 45% year-over-year growth as of the latest quarter, with management highlighting early-stage potential.

Retirement plan client assets-- BRL 86 billion, up 15% year-over-year in Q2 2025.

New retail product revenues (FX, global investments, digital account, consortium)-- $256 million, up 146% year-over-year in Q2 2025, with consortium gaining traction from a zero base.

Issue services revenue-- Down 30% year-over-year and 5% quarter-over-quarter in Q2 2025 versus the all-time high in Q2 2024, due to softer DCM activity.

Corporate revenues-- Up 14% year-over-year and stable quarter-over-quarter, buoyed by derivatives solutions in Q2 2025.

Fee-based model penetration-- 5% of total client assets as of Q2 2025, with potential for gradual growth toward 7%-8% in the coming years.

Share buyback program-- BRL 1 billion buyback program to be executed through next year, with a target for total capital returns above 50% of net income for 2025 and 2026.

Summary

XP(NASDAQ:XP) delivered record net income (GAAP) and expanded profitability in Q2 2025, achieving significant increases in retail-driven revenues and asset growth despite a challenging macroeconomic environment and headwinds in the corporate and institutional segments. Management reaffirmed its 10% top-line growth target for this year, supported by new products, channel diversification, and ongoing expansion of sales teams, while warning of potential volatility from upcoming tax policy changes and continued pressure on corporate net new money. Shareholder returns remain a top priority through both elevated capital ratios and a defined buyback, even as SG&A increases outpaced revenue growth due to marketing and technology outlays.

Maffra said, "we are convinced that we have a more sustainable revenue model and profitability is a consequence," highlighting management's confidence in the business model's adaptability.

Mansur noted, "the EPS growth pace was again faster than our net income growth" in Q2 2025, directly linking share buybacks to EPS expansion.

Management outlined that while fee-based models lower take rates slightly, they drive higher wallet share per client, likely compensating for revenue compression over time.

Upcoming tax regulation changes could alter DCM market conditions and affect asset warehousing strategy, as highlighted by both Maffra and Mansur.

Retail cross-selling and the rollout of new verticals—especially in insurance, retirement, and global products—are driving incremental revenue streams and diversification benefits.

Corporate and institutional segment outflows were described as closely tied to banks' requirements for investment reciprocity tied to lending activity, a risk that may persist.

The efficiency ratio has improved by 161 basis points year-over-year to 34.5% for the last twelve months, but guidance calls for near-term stability in light of ongoing investments in platform and personnel expansion.

Industry glossary

GCM (Global Capital Markets): Segment encompassing primary and secondary debt and equity capital markets origination and distribution activities.

DCM (Debt Capital Markets): Area focused on the structuring, issuance, and distribution of debt securities for corporate and institutional clients.

AUM (Assets Under Management): Total market value of investments managed on behalf of clients.

AUA (Assets Under Administration): Assets that a financial institution administers or holds on behalf of clients, without managing investment decisions.

IFA (Independent Financial Adviser): A financial adviser not tied to a single provider who offers clients a range of product choices and is remunerated by transactional or fee-based models.

TPV (Total Payment Volume): Aggregate value of transactions processed through credit cards or payment services.

BIS ratio: Regulatory capital adequacy ratio calculated under Basel guidelines, indicating the strength of a financial institution's capital base relative to risk-weighted assets.

CET1 (Common Equity Tier 1): Core measure of a bank's financial strength from a regulator's point of view, focusing on common equity capital relative to risk-weighted assets.

VaR (Value at Risk): Metric indicating the maximum expected loss with a given confidence level over a specified time horizon.

Take rate: The proportion of client assets from which recurring revenues are generated.

Full Conference Call Transcript

Thiago Maffra: Good evening, everyone. I appreciate you all joining us today for the second quarter 2025 earnings call. So half the year is already behind us, but there is much more to come. We are still working hard, I would say, in an obsessed way to keep evolving our clients' journey experience and product offering. 2025 has demonstrated to be more challenging than we estimated, demanding more efforts from all our teams to keep growing our business in a profitable way. As a result, we are continuously increasing our profitability. Now analyzing the main KPIs. The first one is client assets, AUM, and AUA, for which we posted BRL1.9 trillion, a 17% growth year over year.

Total advisers accounted for 18,200, representing flat figures year over year. On active clients, we posted 4,700,000 clients, with 2% growth year over year. During the quarter, gross revenues marked BRL4.7 billion with a 4% growth year over year. EBT year over year is 5% lower, reaching BRL1.3 billion, mainly because last year, we had positive impacts from overhead, turning this quarter not like for like. And on the bottom line, it's another record. We achieved the highest net income in our history, reaching BRL1.321 billion. It represents an 18% year over year growth. On profitability, we achieved 24.4% ROE during the quarter, a 223 bps expansion versus the second quarter of 2024. 10 out of 11 quarters posting growth.

This means 10 out of 11 quarters posting consecutive growth. On capital ratio, we printed a comfortable level at 20.1%, representing an increase of 110 bps quarter over quarter. Regarding diluted EPS, we posted 22% growth year over year, another in which it grew faster than net income, driven by our share buyback program execution. As we speak, we still have a share buyback program of BRL1 billion to be executed until next year. As I mentioned during last quarters, our capital distribution plan is aligned with our guidance, and we will operate the business with a base ratio between 16-19%. Now let's see more details on the next slides.

Since last quarter, we have been sharing new info to provide a better understanding of our ecosystem, considering institutional clients in total client assets and provided assets under management from our asset management business and AUA from our fund administration business. Said that, our total clients AUM and AUA comprehend almost BRL1.9 trillion, which represented a 17% growth year over year. On the right hand of the slide, is presented how net new money evolved. This net new money is only related to client assets. This quarter, we marked billion dollars in retail net new money and minus $6 billion in corporate and institutional.

It's important to mention that during the second quarter, SMEs and large corporates net new money reflected the dynamics of the current macro scenario. First, due to payment of higher interest expense, companies have less liquidity than before. Second, in order to minimize this liquidity constraint, some companies withdrew part of their investments with us as they were used in reciprocity for credit lines with other players. On the retail side, the lower tax-exempt volumes in GCM impacted primary offerings allocation and consequently the net new money coming from individuals. We keep developing our product offering and capabilities to constantly offer the best investment alternatives to clients, which should drive higher net new money in the long term.

I would say that the current environment has proven to be more challenging than we expected at the beginning of the year, especially for investment banking origination activity. However, we still have a better GCM pipeline for the second half of the year, new investment products offering, and other initiatives supporting our efforts to achieve retail net new money averaging $20 billion per quarter this year. On the next slide, let's delve into our retail strategy. Here, I would like to address some topics which are connected to our business model. Today, the company presents a more complete ecosystem with retail, institutional, and corporate divisions fully integrated to generate investment opportunities. This benefits us in many instances.

One of them is the fixed income platform in which we are much more complete now, being one of the largest distributors of midsized banks' time deposits. Second, innovative in developing new instruments such as the Boundary Pack Structure Notes. And third, also having a robust wholesale bank franchise with a corporate secured book to serve retail clients. As part of our business model, to engage clients on another level, we also launched new verticals in strengthening our investments portfolio while attending clients' demand in banking, insurance, retirement plans, global account, FX, and now consortium. This competitive ecosystem enabled us to present higher profitability during the last years.

And there is much more to do since we will keep investing in channel diversification, expanding sales teams, improving our product platform experience, with a more accurate client offering, and improving our intelligent segmentation. Recently, we also launched new guidelines to the AFAs, sharing our knowledge, tools, and methodologies, focusing on an opportunity to increase productivity, responsiveness, and efficiency. And independently, if it's through XP internal teams or AFAs, we also developed and agreed in a new and more comprehensive way to serve our clients. New rules are aligned with one objective, to improve client experience. Our main goal is to keep serving clients with excellence no matter in which channel or remuneration model they have chosen.

With this new way of growing business, we are convinced that we have a more sustainable revenue model and profitability is a consequence. For sure, the current diversified ecosystem defines XP as a defensive business with long-term growth. We are confident that our unique business model will keep evolving to achieve our long-term goals, which is to become the leader in investments in Brazil. Moving to the next slide. We see on the left-hand side how we serve clients with different models, channels, and how XP is remunerated. By the way, we have already launched a fee-based model a long time ago, anticipating what's becoming reality today.

It means that IFAs and internal advisers can attend clients with transactional fees or fee-based model, according to clients' preference. We also have RIAs and consultants which work in a fee-based model, attending clients with asset custody in different platforms. What we see today from the client perspective is a higher demand for fee-based model when compared to the recent past. Today, the fee-based model represents only 5% of our total client assets. Looking at developed markets, for example, the US, the fee-based model achieved around 50% share of clients' assets. If this is a trend in Brazil, we are ready to serve our clients.

Our capacity to attend clients with different models differentiates us from competitors and it's translated into more share of wallet and longer lifetime. Moving now to the next slide, about retail cross-sell. As we have stated before, we have implemented new initiatives and products to diversify our revenue streams during the last years. Starting with credit card, it grew 8% year over year marking billion in TPV during the quarter. As we anticipated last quarter, we launched new products targeting affluent and private banking clients. We estimate that with the new value proposition, cards should accelerate in the next years. Life insurance written premiums posted 45% growth year over year.

As we said in recent quarters, our insurance business is a growth avenue which is still at its early stage. Since it presents a huge penetration potential, we understand that we'll keep growing at a fast pace on a quarterly basis. On retirement plans, our client assets posted 15% growth year over year on the second quarter and reached BRL86 billion. We keep expanding our sales force to increase our relevance in this industry, since our market share is mid-single digit and there is a relevant addressable market to penetrate during the next years. In new products, we consider FX, global investments, digital account, and consortium.

Altogether, they presented 146% growth year over year, with revenues reaching $256 million this quarter. It's important to note that consortium came from scratch and it's gaining traction month after month. Moving to the next slide, we will address our wholesale bank evolution. Taking GCM into consideration, this quarter we saw decent industry volumes, but not close to last year's. Coupled with that, some players became more aggressive in pricing, trying to gain market share, and therefore resulting in lower fees. Finally, tax-incentivized products have lost share in total industry volumes during this quarter. For the next quarter, the pipeline is solid, we have more opportunities and there is a chance to reaccelerate our revenue growth.

Regarding XP's broker dealer, it was another positive quarter, and we became the leader in the local industry with 17% market share. As we saw this quarter, we still expect to see improvements bit by bit until 2026. This quarter, we kept the same size of our corporate securities book with BRL34 billion. Bear in mind, that we can have a change in tax rules which can impact currently tax-exempt fixed income instruments. We are now expecting to increase this book during the year. The rationale behind this is that companies will try to anticipate their debt issuance before the change.

Also for next year, with elections in sight, we are likely to see increasing volatility and therefore a reduction in corporate clients' appetite for new issuance. So our strategy, that being the case, is to keep this warehouse book and sell it to our retail clients during the next year. To conclude my presentation, I would like to reinforce that our innovative offering, advisory model, costs, and capital discipline, are translating into higher profitability, even considering the more challenging scenario. Our ecosystem is way more complete than years ago, and there is a big opportunity in front of us to expand our core business, our retail cross-sell, and our wholesale activity.

We are confident that by executing this, we reach our goals regarding market leadership in investments and also regarding our long-term growth. Now I will hand it over to Victor who will provide a deeper look into our financial performance this quarter. And I will be back for the Q&A session.

Victor Mansur: Thank you, Thiago. Good evening, everyone. It's a pleasure to be here with you to discuss our financial performance for 2025. Starting with total gross revenues. Total gross revenues for the quarter reached BRL4.7 billion, representing a 4% increase year over year and a 2% increase quarter over quarter. It was another quarter that retail gained in total revenues, now representing 77% out of total. This quarter, once again, our main driver for retail growth year over year were fixed income and other retail, which includes retail's new verticals, such as global accounts and consortium. On the wholesale bank, corporate was the highlight, partially offsetting the negative impacts on issue services due to a tough comp from 2Q 2024.

I will share more details during the next slides. Retail revenue posted billion in the quarter, a 9% growth year over year and a 4% growth quarter over quarter. The quarter growth was mainly driven by equities, which presented a higher ADTV in the period. Equities printed slightly more than BRL1 billion, with several percent growth quarter over quarter. A year over year perspective, fixed income was the main contributor, growing 20% and reaching BRL988 million in revenue. It's important to mention that in other retail concepts, the main contributor is the float per month durations, where we had higher average volumes if high interest rates during the quarter.

Now let's move to the next slides with corporate and issue services. Before moving to the quarter results, it's important to mention that on 2Q 2024, we posted all-time high corporate financial services revenues backed by a strong DCM activity. Therefore, have a tough comp for this quarter. Issue services presented million, minus 30% year over year and a minus 5% quarter over quarter. On the other hand, corporate revenues posted a solid 14% increase year over year and was flat quarter over quarter. It reached million, supported by our capacity to offer different solutions to our clients, mainly if derivatives. Moving on to the next slides, we will explore our SG&A and efficiency ratios.

Our SG&A expenses totaled BRL1.56 billion in this quarter with a 10% growth year over year and also quarter over quarter. We keep investing in our business and this quarter, we had a higher expense in the non-people category. Most of it explained by marketing and technology investments. During the quarter, despite this slower pace in your revenue growth, our operational cost discipline supported our efficiency ratio at 34.5% last twelve months. When compared to last year, efficiency ratio improved 161 basis points.

We will keep our plan to improve our business efficiency, and this will come in parallel with new investments that will continue to be made aiming to enhance our tech platform, our product offerings, and sales team expansion. Moving to the next slide, let's see our EBT. Just to recap, last year, we had positive EBT impact from the overhead related to the head of certain assets and liabilities. Therefore, EBT is not like for like one or comparison. On 2Q 2025, we printed BRL1.3 billion EBT, which represented a 4% increase quarter over quarter. Even considering the issue services impact on our revenues, we are able to expand our EBITDA margin by 50 basis points.

On the next slide, we see the net income. Net income achieved BRL1.3 billion, an 18% growth year over year and a 7% growth quarter over quarter. Net margin expanded by approximately 130 basis points quarter over quarter and 320 basis points year over year, reaching 29.7% in 2Q 2025. In your revenue mix for this quarter, higher secondary market activity compensated lower volumes on investment banking, impacting our effective tax rate. This translated into a new record high net income for a quarter, with significant EPS growth. Let's focus on earnings per share and ROE details over the next slides. Our diluted EPS in 2Q 2025 reached BRL2.46 per share.

As we continue the execution of our share buyback program, canceling the respective shares acquired, the EPS growth pace was again faster than our net income growth. In the quarter, our diluted EPS posted 22% growth while our net income grew 18%. Both on a year over year basis. Our OTE market 30.1%. Two ninety basis points higher year over year. Our ROE grew on a yearly and a quarterly basis reaching 24.4%. This represents two thirty basis points increase in comparison to the same quarter last year. These numbers I have just mentioned are important indicators that we keep generating consistent income returns to our shareholders. Finally, moving to capital management.

As we have planned, we keep our target of distributing dividends and securing share buyback programs. Combined, their volumes should be above 50% of net income for 2025 and 2026. We already have a share buyback program of BRL1 billion to be executed until next year, and new announcements will be made according to the Board of Directors' decision. Moving to the second part of capital management on the next slide. This is the last topic of my presentation. And we can see on the left-hand side that our BIS ratio in a very comfortable level of 20.1%. On the same rationale, our CET1 is at 18.5%, which is way higher than peers' average of 12%.

On the high hand side of the slide, we can see that our total RWA to total asset ratio was 27%. Which represents the third reduction in a row and 4% lower year over year. Total RWA remained steady quarter over quarter and grew 9.8% year over year, reaching BRL101 billion. As I said last quarter, RWA should grow at a moderate pace when compared to net income, and it was the case in this quarter. Since net income posted 18% growth year over year. As Maffra said before, the potential new tax regulation may change the DCM dynamics and therefore impacting our willingness to warehouse assets to distribute during the 4Q and 2026.

It's important to highlight that our VaR marked 13 basis points of our or R28 million dollars demonstrating our risk discipline since it was 4% lower year over year. And now we can go to the Q&A.

Operator: Okay. We're going to start our Q&A session. And the first question is from Eduardo Rosman from BTG. Eduardo, you may proceed.

Eduardo Rosman: Hi. Hi, everyone. Now my question here is on capital generation and dividends and buybacks. Right? So just help us understand a little bit more your capital generation because it seems that you've been able to improve it this quarter. Actually, you are growing your capital base, I think, faster than your net income. Right? So you're still way below the level this year the level of buybacks and dividends when compared to last year. Right? So can we see an acceleration of that now in the second quarter? How do you see that? We see that you have this soft guidance of above 50%, you know, for 2025 and 2026. But can you please help us with more details?

Thanks.

Victor Mansur: Hi, Rosman. Good evening, Thank you for your question. First dividing the answer here in some parts. First one, as we anticipated the net income would grow a bit faster than the RWA over this year. Delivering some leverage in capital terms. And I think that was the case. Also, as you comment we didn't distribute as much of the net income as we generated over this quarter. The second part, we are still capturing a bit of leverage over the 4.966 new regulation. And the benefit will be delivered over the year in the DRC and market risk, principally in the credit spread risk inside of market risk.

The second part will be delivered over the risk-weighted assets operational risk. Also, we expect to see that over the next quarters. Another part here talking about the trend for the year. We expected to see the RWA growing slower than the net income. And the new tax regulation may change a bit the dynamics of the DCM market. And depending on how it goes, we may warehouse a bit faster than initially expected to take advantage of the demand from clients to issue before the regulation takes place in 2026.

Even though we don't expect any of those to impact our targeting our target to pay more than percent of our profit this year because we still have a lot of spare capital. And remember here, our CET1 ratio is at 18% and the average of the industry is at 12%. So a lot of space So we may announce the rest of the payout over the rest of the year. And the discussion between dividends and buybacks depend on the price of the stock, and we need to discuss that for board.

Eduardo Rosman: Crystal clear. Thanks a lot, Victor.

Operator: Next question is from Yuri Fernandes, JPMorgan. Yuri, you may proceed.

Yuri Fernandes: Thank you, Victor. I have a question regarding our corporate like, corporate lending strategy. I know it's something small for you. But you have been discussing new products, new strategies, and a question I have is if corporate really matters, for the entire ecosystem, when we go through your AUT, we see that the commercial is the portion, like, not growing as much and, like, actually, it creates an AUC and that's the money the same. So just trying to understand if you how is your perception about corporate training and if you believe this could be something that is missing for your ecosystem and your trucking? Thank you.

Victor Mansur: Hi, Yuri. This is Victor. Thank you for the question. Our idea, incorporate lending is the same as other product we originate to sell. You may see the corporate book growing, but everything that we put in, we expect to put out at some moment in time. So the growth you see in the credit portfolio is exactly that. The portfolio grew hopefully BRL3 billion. And that will go under a securitization and we're going to sell those assets over the next quarters.

Yuri Fernandes: No, thank you, Victor. But I don't believe like being more or less active here it's it's you know, could be more helpful for your operation.

Victor Mansur: Yeah. Yes. It could, but the same as kept markets we have our risk appetite and if you are buying credit to sell or originate a security to sell, it occupies the same risk space. So we are not going to increase our portfolio over our risk appetite because of any other strategy because they use the same pocket.

Yuri Fernandes: You know? Perfect. Thank you.

Operator: Okay. Next question is from Thiago Batista, UBS. Thiago, you may proceed.

Thiago Batista: Hi, guys. Can you hear me?

Thiago Maffra: Yes. We can.

Thiago Batista: Okay. Hi, Thiago. I have two questions. Maffra, in the beginning, you commented about the new initiatives to try to speed up the net new money on XP in the second half of the year. Can you give us a little bit of more details about those initiatives? Second one, about the guidance for next year. Are you still comfortable with the guidance that you gave, I would say, two year two or three years ago? If you look to consensus for this year on top line, consensus is something close BRL20 billion of top line. So to achieve the low end, you need to expand 14%, 1.5% next year.

Seems it's still feasible, but, I wanted to hear, for you guys, if guidance for next year is still, achievable.

Thiago Maffra: Thank you for the question, Thiago. The first question about, net new money. As we mentioned on the presentation, we still see the $20 billion per quarter in retail as a reasonable level for the next, quarters. Of course, if see a change in the macro environment, starting, interest rate cuts or, something like that, we should see the $20 billion accelerating. But for now, that's the level that we are, comfortable. Of course, this quarter, was a little bit tougher on SMBs and corporate lending, but on and corporate segment, but we are confident that the $20 billion is, it's a good it's to a good level. How we get there?

There are a lot of, initiatives in the company. If you go back a few years, I would say that the main one was channel diversification. Back in 2021, we only had one channel, what we call the B2B, the IFA channel. Today, we have the internal advisers. We have the RIA model. So if you look the numbers today, more than half of the net new money is coming from the new channels. And we keep investing in increasing the number of internal advisers, the number of IFAs on our network. So one of the, levers here.

The second one when you have, a tougher, environment, and higher interest rates competing with product, CGs from the banks, especially the tax-exempt ones, it's not that easy. So all the time, we are creating new products to compete with the banks. We just launched some new products here this quarter. They are performing very well. It's a type of fund with senior trench and it's a Selic rate here and tax-exempt. So it's a very good one. So we are all the time trying to create products to compete with the banks. And we do also partnership with some of the public banks and some other banks, through auctions or through bilateral distribution.

So all the time, we are trying to originate products I would say the third one in probably the most short term and effective, tool here It's how we increase the productivity of our IFAs. Okay? So we have been investing a lot of time. As I said, on the first quarter, now helping the IFA channel to increase productivity through technology, through sales management. We have some people in some of the operations and we are seeing the numbers starting to pick up.

And the last one, but it's more like I would say, medium term, we have been investing a lot on increasing the level of service, the way of serving our clients through financial planning, through wealth planning, session, tax planning, and so on. We have created our own internal models. We have been training all day at face. But I would say here is more like a medium term especially on the current scenario where buying SCG at 15%, it's, probably, a good option for some of the investors, and it's harder to make them move to XP.

But on the medium term and long term, for me, this is the biggest, opportunity we have, like, increasing the way of serving in the market and creating a new level of servicing investment in Brazil. And the second question was guidance for next year. Yeah. Yeah. We are still pursuing the guidance for year. Of course, right now, we are, like, pursuing the bottom of the guidance, okay? But we are still pursuing. For this year, we believe that the number for revenue that we are pursuing is still around 10%. Of course, you saw the numbers for the first half of the year. They are a little bit lower, five and a half percent.

Against, 10, but we are very that the numbers will accelerate on the second half. And the growth rate will be higher on the second half than the first one. Okay.

Thiago Batista: Thanks, Thiago. That's very clear.

Operator: Okay. Next question is from Mario Pierry, Bank of America. Mario, you may proceed.

Mario Pierry: Hey, guys. Thanks for taking my question. Maffra, can you give us a little bit more color on the inflows so far in the third quarter? Because, again, it sounds as if you're confident that you can return to this $20 billion per quarter. Are you seeing have you seen so far the first half of this quarter a number close to that level that gives you confidence? So that's my first question. My second question is related to your EBITDA margin. Yes, it continues to improve. However, you are still are below, right, your medium-term guidance, and seems like revenues are growing a little less than you anticipated. Even though you're still maintaining the plus 10% for this year.

Is there anything you can do on the cost side if the revenues don't come through this year? Thank you.

Thiago Maffra: Thank you, Mario, for the question. We'll take the first one. We cannot talk about the net new money for the quarter. So far, but, my answer for you will be we are confident in delivering the $20 billion, or around $20 billion for the next quarters? As I mentioned before.

Victor Mansur: And hi, Mario. Taking the second part here about EBT and SG&A. First, talking about EBT. Our product and the EBT depends on the product mix as we discussed it before. And also the tax rate. And the trend in both of them should be trading around the quarter if the market keeps the way it is. And talking about SG&A, we delivered a lot of reduction in the efficiency ratio over the last two years, almost 400 basis points. And since we keep investing in strategic areas as new advisers and technology and you name it, we may see the index more flattish over this year.

It's valid to reinforce our commitment to cost control and the efficiency even though but we are not gonna stop investing in your core because of a bit more of unpredictable levels of revenue coming from their Wholesale Banking size. As Maffra said, 02/1926, there is a lot of time to the end of 02/1926. And for now, we are comfortable if the levels

Mario Pierry: Okay. That's clear, Victor. Let me rephrase the first question then. When we look at inflows during the second quarter, did you see an improving pattern throughout the quarter? On a monthly basis, are you seeing inflows improving? Or did you see them improving in the quarter? Or is it relatively you know, the same amount of inflows per month?

Thiago Maffra: Mario, I will give you the same answer that I gave before. I believe we can deliver the $20 billion. If you get the last quarter, it was $16 billion. I imagine that one customer or two could make the difference here. So $20 billion, it's the number here, and around $20 billion, could be a little bit higher or a little bit lower. Okay? But that's the pace right now.

Mario Pierry: Okay. Thank you.

Operator: Okay. Next question is from Marcelo Mizrahi, Bradesco BBI. Marcelo, you may proceed.

Marcelo Mizrahi: Hello, everyone. Thanks for the opportunity to do the question here. So my question is regarding, again, about the corporate portfolio. Which was a huge growth in a quarterly basis. And not too much in a yearly basis. But just to understand what's the what's the tribe of this credit, what's happening exactly here. And looking forward, another question is regarding the net new money of the corporates. To understand, if there are any new strategy here, is if there are any news here to justify this net new money negative on the corporate side? Thank you.

Victor Mansur: Thank you for the question. Victor here. The first part sorry, the first part about credit portfolio. As we said before, those are credit we originated to sell. So basically, those are operations we did with corporates and we originate receivables that will be securitized and then sold to our client base. That's something that we did before over the other quarters. And it's the same that we're gonna do again. So we expect to sell that. And talking about the corporate, the new money, the I think the problem here is the dynamics of the market. We are seeing we begin to see that in the first quarter and then the trend intensified a bit in the second quarter.

What we are seeing the banks that give credit to the companies, they are asking for a reciprocity in terms of investments to deliver some credit lines. Since we are not in this business and we are not able to give the main product that is credit, we are seeing the money flow to banks that usually have some products as cash flows, anticipation of cards and etcetera. So that's basically the that's basically the case.

Marcelo Mizrahi: Okay. Thank you.

Operator: Moving to the next question. Tito Labarta from Goldman. Tito, you may proceed.

Tito Labarta: Hi. Good evening. Thanks for the call. I'm taking the call. My question, just following up a little bit more on the revenue growth right? I mean, you're maintaining the 10% for this year, around 10%. Maffra, you said it should accelerate. The second half of the year. If you break that down, right, retail growing 9% year over year. 11 that's a big closer. I guess, first, do you think retail in and of itself will accelerate in the second half of the year? Or two, is it more the issuer services, the corporate and all the other lines you expect? Mean, those obviously still accelerates given the somewhat weak. First half of the year.

But just so we can break out between retail and other revenues and which lines can drive that revenue growth closer to 10%? Thank you.

Victor Mansur: Hi, Tito. This is Victor. So basically, we can break that revenue growth between the first half of the year and the second half is three factors. The first one is very easy to explain. We have 6% more business days, so more business days, we have more trading days, more interest rates over our capital and clients cash. And also a higher SILIQ rate in the second half of the year against the first. That's the first part of the explanation. The second one, is the new verticals and new advisers.

So basically, we keep hiring advisers, and we have a lot of products that are still in rollout and are growing a lot as international investments, consortium and other products in the new verticals portfolio. And the last one that is more volatile is the product mix If we have a second quarter, if a DCM that is stronger, and more primary offering from funds, we may see a lift in retail revenues and also new issues services revenues. So basically, those are the three components and why we are expecting to have higher revenues in the second half against the first.

Tito Labarta: Great. No. That's helpful, Victor. Just one quick follow-up. Maybe on the fixed income revenues, which are still strong, like 20% year over year, although it did fall a little bit in the quarter. I mean, mentioned higher rates. How do you think about are you getting to sort of like the peak level on the fixed income or can that still continue to outpace the other segments just on a relative basis? I see the fintech and other than relative to the other, just given the review on the website.

Victor Mansur: Okay, Tito. I heard the first part of the but the second was, a bit confusing here. But I will try to answer here. First, in fixed income, it's important to mention that for retail clients, we are in the highest ever Selic rate in almost twenty years. So we are in the highest level the cycle. So in the perception of the clients they never had interest rates spot interest rates that is so that's as high as now. So why is important to mention that? Because clients, they don't go longer in duration when that happens.

If this slope in the interest rate curve, So what we are seeing is an increase in volume but decreasing ROA given that duration profile. So when interest rate starts falling or the interest rate has a more normal shape, we may see the duration going higher again and the ROA increasing. But that's a bit of the dynamics of fixed income right now. And what can change that over the second half of the year? Is the DCM market and the primary offerings that may go to market if the pipeline goes as it is because of the new tax regulation. So a lot of primary options attract clients, and we may see they get longer in duration again.

So, basically, we expect the fixed income line to perform keep your performance well And depending on the primary market and the same, we may see this number a bit higher.

Tito Labarta: Thanks. That's good.

Operator: Next question is from Arnaud Shirazi from Citi.

Arnaud Shirazi: Hi, all. I have two questions here. My first one is related to non-people related expenses. We saw a 38% year on year increase. I know that it was by marketing and also technology, but it seems a little bit too much for me. And, also, the second one is related to tax. How would the tax increase is on offshore funds has been evolving? And what drove the positive income tax rate for this quarter? Thank you.

Victor Mansur: Thank you. Thank you for question. First here talking about SG&A. We had a lot of investments in marketing. We had some events that are the first time that we're doing the size that we did. We had the B2B experience is event for all our IFAs network outside of Brazil where we announced some important measures for the year. And second is the gas is agro business event here in Brazil that we sponsored and very important to us because we get closer to the clients that issue taxes and notes, corporations that are able to issue taxes and notes.

Also, investments in markets to get our reputation a bit more stronger and more visible over all brands and newspapers and etcetera. In terms of technology, it's one of events that we did in terms of cloud and other kinds of tech. And talking about the trend over the year, keep in mind the next quarter, have the or main event of the year, the expert. So also another quarter if no people expenses that are higher than comparison quarter over quarter.

Moving to tax rates, I think we talked in a few opportunities that given the dynamic of the market and the product mix, if the market making activity and secondary market a bit more stronger than investment banking and broker dealer revenues. There are tax rate should be trading around 15% and that was basically the case. Now we closed at 14 something over the last twelve months. And if the product mix keep the way it is, that's the number that we may see, over the year.

Arnaud Shirazi: Thank you. But as related to offshore tax, the potential increase, what the thoughts?

Victor Mansur: Ah, okay. Perfect. I think as any other financial institution in Brazil, there is a lot of ways to plan our tax structure and we are confident that the impact will be marginal in your business.

Arnaud Shirazi: Thank you.

Operator: Okay. Next question is from Neha Agarwala from HSBC. Neha, you may proceed.

Neha Agarwala: Thank you for taking my question. Just one again, sorry to go back to this, but the corporate net new money was significantly weak versus what you saw in the seen in the previous quarters. I understand the volatility, but anything specific this quarter that led to this big, decline compared to previous quarter? And should we expect more of that next quarter, or was this like a one-off trend with some one-off moves? And my second question is, you talked a bit about the fee-based model, and that's only 5% of your AUC, and that's been growing. Can you talk a bit more about what impact we could see from that on your take rate, if any? Thank you.

Victor Mansur: Okay. Thank you. Thank you, Neha. I will take the first one. I think the corporate dynamic is a bit there what I said. If the banks that give credit to their clients keep asking for investments in terms of reciprocity. We may suffer a bit more in the third Q and 4Q since we are not going to this business. But also, it's important to remember that the ROA of this money is extremely low. So, the impacts in revenues to losing that money, they are not relevant. But it's very hard to predict what we are gonna see over the next quarters. As you say, these are more volatile cash.

Thiago Maffra: Hi, Neha. This is Thiago. Thank you for your question. I will take the second part. When do you think about fee-based model, I believe there is evolution about, the model in Brazil. If we get the US market, for example, today, if you look in terms of AUC, it's $70.30, but in terms of revenues is more like $50.50. Okay? In Brazil, as I mentioned, it's still very small. Okay, but it's growing. As I mentioned in the presentation, today, we are prepared for to offer to our clients any kind of model, consultancy, fee-based, IFR IFA model, transactional-based model. We can serve our clients in different ways and charge in different ways, okay?

So we are agnostic, and we offer what's best for our clients. What we expect for the next years, as I mentioned at the beginning of the year, this year was to grow, I would say, from 3%, 4% to 7%, 8%. Okay? So it's growing. And but it's gonna be a long journey here. It's not going to happen like from one day to the other, but we'll grow. And again, we are the best platform to offer all the models to our clients, and we believe being agnostic to models is a real differentiation to serve our clients better. But thinking about revenues, if you look only the take rate it goes down, a little bit.

Not a lot, but it goes down. Okay? But usually, it comes with a higher share of wallet. So, usually, when we start to serve a client to a fee-based model, or to, consolidation of, funds outside of XP, usually, the AUC or the wallet or all the money that we oversee if it's not a 100% here. Because today, we offer that model. We consolidate what's outside of XP. Usually, you make more money or, I would say, equal money in terms of revenue. Because you increase the size of the wallet. Okay?

So I would say, if, in the next quarters or years, we'll start to see the take rate going a little bit down but at a very slow pace. But the share of wallet per client will increase. And compensate the lower take rate.

Neha Agarwala: Very clear. Thank you so much.

Operator: Okay. Next question is from Pedro Leduc, Itau BBA. Leduc, you may proceed.

Pedro Leduc: Okay. Good evening, everyone. Thank you so much for the call and taking the question. I would like to explore the gross margin a little bit more, expand that Q on Q when I try to look at the moving pieces here. IFA commission incentives get nicely diluted. So I was trying to dig into this trend a little bit more. What drove it? If you were related to maybe the lower pace of net new money or the mix of your revenue movements or more equities, less fixed income, Just trying to get a sense of what is driving this gross margin expansion and how to think about it in the second half. Thank you.

Victor Mansur: Hi, Leduc. Thank you for your question. I think here, first talking about some events. As we said before, the expected credit losses should be trading a bit lower than last quarter, and that trend should remain like that, around BRL9 million to BRL100 million. And the second point was a bit higher than average sales tax and that should go back to the average and not expect the number to go to be as high as that. And the margin should go as normalizing when you look in the last twelve months. Yeah. And the channel mix is also important to mention.

And as the internal sales force keep growing, but also, that's a trend that you're gonna see improving over quarters. But if you look at the last twelve months, that's the pace. That should be expecting for the rest of the year.

Pedro Leduc: Thank you.

Operator: Okay. Next question is from Daniel Vaz from Bank of Safra. Vaz, you may proceed.

Daniel Vaz: Thank you. What is it? Yep. One Enrich opportunities, you mentioned that the picture see productivity has been much stronger than the B2B. Right? So the B2C has been a large for focus recently, and you standardize probably an approach for selling for the sales team. Right? So seems more well structured right now. When it comes to the B2B I think the productivity has deteriorated. Like, over the years. So I wanna hear from you first if you're seeing net outflows from this channel from the B2B. And secondly, if you could tell us a bit your diagnostic right on the B2B channel if you need a higher focus right now to maybe refresh or review this model.

So this has been in the press recently regarding M&As on the advisory a lot of mandates. Would be good to hear from you the diagnostic. Thank you.

Thiago Maffra: Thank you for the question. As we have said in the past, for us, it's not, one channel or the other. We believe in having multiple channels for, different reasons. But when we look the B2B channel, the B2B channel specifically, as you mentioned, the productivity was, very low. It's too low when compared, like, to, two years ago, one year and a half. Or more ago. But it's getting back. It's improving, bit by bit. It's not gonna change a lot from one quarter to the other, but it's improving.

So everything that we have been done a lot of efforts and energy that we have put, on the channel since, last, the end of last year and more specifically at the beginning of this year. It's paying off, and we are starting to see the performance of B2B channel improving. So that's why we are confident on the $20 billion. Okay?

Daniel Vaz: Okay. So a follow-up. So you don't need a refresh or a review in this the way you operate in this model, right, as you did in the B2C?

Thiago Maffra: It's just, a normal, evolution. You have, like, to evolve the model. We just announced back in on the B2B experience, the big event that we do annually for the B2B channel. JZero was in Mendoza. And we announced some, changes on the way of serving clients. So I would say minimum standards of, serving our clients. So allocation, number, and ways, points of contact with the customers, And so I would say more like a franchisee model where we have, minimal standards. And we just announced that, like, two months ago. So it's an evolution. It's not like a big change.

Daniel Vaz: Okay. Thank you.

Operator: Okay. We are at the time. So the name of the company would like to thank you all for participating in our second quarter 2025 earnings call. Any further questions will be more than welcome. Just look for the IR team and we keep in touch, and see you soon. Thank you very much.

Where to invest $1,000 right now

When our analyst team has a stock tip, it can pay to listen. After all, Stock Advisor’s total average return is 1,070%* — a market-crushing outperformance compared to 184% for the S&P 500.

They just revealed what they believe are the 10 best stocks for investors to buy right now, available when you join Stock Advisor.

See the stocks »

*Stock Advisor returns as of August 18, 2025

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. Parts of this article were created using Large Language Models (LLMs) based on The Motley Fool's insights and investing approach. It has been reviewed by our AI quality control systems. Since LLMs cannot (currently) own stocks, it has no positions in any of the stocks mentioned. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Image source: The Motley Fool.

Date

Monday, Aug. 18, 2025 at 4:30 p.m. ET

Call participants

Chief Executive Officer — Olivier Taelman

Chief Financial Officer — John Landry

Head of Investor Relations — Pearson Dennis

Need a quote from a Motley Fool analyst? Email [email protected]

Takeaways

FDA PMA approval-- GENEO system received premarket approval for commercial sale in the United States, authorizing the first and only bilateral AGNS (autoglossal nerve stimulation) therapy for obstructive sleep apnea (OSA) in the US.

Revenue-- $1.4 million in 2025, a 73.8% increase over 2024.

Gross margin-- 63.4% in 2025, unchanged from 2024.

Operating loss-- $21.2 million in 2025, compared to $14.2 million in 2024, attributed to accelerated commercial investments in the US market.

Cash position-- $45.9 million as of June 30, 2025, down from $67.3 million at March 31, 2025, with $29.3 million of term debt capacity remaining, available in two tranches.

US commercial launch-- Commercial activities have begun, with a 50-person commercial team targeting 350-400 high-volume AGNS implanting accounts, accounting for 75%-80% of total US AGNS market revenue.

Physician training-- Over 100 US physicians trained at launch, with regular weekly sessions ongoing to build clinical adoption.

Patient compliance and satisfaction-- Published DREAM study data show device compliance of 85.9% and patient satisfaction of 90%.

Regulatory label differentiation-- The GENEO system is not contraindicated for patients with complete concentric collapse (CCC), although the US label includes a warning since US-specific CCC effectiveness is not yet established.

Reimbursement pathway-- GENEO uses CPT code 64568, the same as its main competitor, recognized by both commercial and government payers for OSA indication; initial pre-authorization approvals have been secured.

Patent litigation-- Nyxoah reported that Inspire Medical has initiated a patent lawsuit prior to GDUFA approval, but stated this "will not impact our US commercial launch."

Access study enrollment-- Enrollment in the US access study for CCC indication was purposefully stopped, as management determined the cohort offers adequate statistical power for PMA supplement submission.

Commercial expansion plans-- The US field team starts with 25 territory managers, each with responsibility for 4-6 accounts, with approximately 15 additional managers to be added each quarter, scaling coverage toward all high-volume implanting sites.

Differentiated label-- Management claimed FDA approval included a label reflecting both positional OSA efficacy and absence of CCC contraindication, emphasizing "bilateral stimulation is making a difference compared to unilateral stimulation."

US pricing-- Tied to the shared CPT code structure.

GLP-1 market dynamics-- Management expects the GENEO patient pool "will grow, not shrink," as GLP-1 drugs could move higher-BMI patients into the device's efficacy range (BMI <32), according to commentary during the Q2 2025 earnings call.

Post-launch metrics-- Leading indicators being tracked include number of physicians trained, value analysis committee (VAC) submissions, and pre-authorization approvals.

Physician engagement model-- Before physician training, candidates must present five eligible patient cases, supporting immediate post-training implant procedures.

Future CCC label expansion-- Management expects to submit a PMA supplement after the twelve-month follow-up of access study patients, as stated on the Q2 2025 earnings call, with possible FDA label addition for CCC at the end of 2026 or early 2027.

Summary

The transcript revealedNyxoah(NASDAQ:NYXH)’s entry into the US OSA market after obtaining FDA PMA approval for its GENEO system, which is now commercially available. Gross margin in 2025 was 63.4%, unchanged from 2024, and a significant operating loss for 2025, attributed to US commercialization investments. The company’s unique regulatory label allows bilateral AGNS therapy and avoids a CCC contraindication, underscoring a pivotal competitive positioning. Management articulated a focused commercial and reimbursement strategy, highlighted positive clinical adoption and compliance rates, and outlined near-term expansion through increased sales force and VAC processes, all while addressing patent litigation risks and anticipating label updates for CCC indications.

John Landry stated, "we could expect to see potentially the SG and A spend nearly double in 2026 over the levels seen in 2025."

CEO Olivier Taelman explained GENEO’s immediate commercial rollout concentrated on high-volume implanting sites, with a sequential ramp in both targeted accounts and territory managers.

The company confirmed initial rapid VAC and pre-authorization approvals, despite variable timelines for full account onboarding, some of which can extend up to nine months.

Management specified that CCC patients remain an off-label use for GENEO in the US, with promotion expressly limited to on-label indications until further regulatory approval.

Demand for the device is driven, in part, by the absence of an implanted battery, distinguishing GENEO from competitors in patient and physician outreach.

Industry glossary

AGNS (Autoglossal nerve stimulation): A device therapy delivering electrical stimulation to the hypoglossal nerve to treat obstructive sleep apnea.

OSA (Obstructive sleep apnea): A sleep disorder marked by repetitive airway obstruction and disrupted breathing during sleep.

CCC (Complete concentric collapse): A specific upper airway collapse pattern relevant for device therapy eligibility and regulatory labeling.

VAC (Value analysis committee): Multi-disciplinary hospital group evaluating new medical devices for clinical and economic benefit prior to purchase or adoption.

DREAM study: Nyxoah's pivotal trial evaluating GENEO device safety, efficacy, compliance, and patient-reported outcomes in OSA treatment.

PMA (Premarket approval): The FDA’s regulatory process for authorizing new medical device commercialization in the US.

CPT code 64568: Billing code used in the US for hypoglossal nerve stimulation device implantation.

Full Conference Call Transcript

Pearson Dennis: Thank you. Good afternoon, everyone, and I welcome you to our second quarter 2025 earnings call. Participating from the company today will be Olivier Taelman, Chief Executive Officer, and John Landry, Chief Financial Officer. During the call, we will discuss our operating activities and review our second quarter 2025 financial results released after U.S. market closing today. After which, we will host a question and answer session. The press release can be found on the Investor Relations section of our website. This call is being recorded and will be archived in the Events section on the Investor Relations tab of our website.

We begin, I'd like to remind you that any statements that relate to expectations or predictions of future events, market trends, results, or performance are forward-looking statements. All forward-looking statements are based upon our current estimates and various assumptions. These forward-looking statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. All forward-looking statements are based upon current available and the company assumes no obligation to update these statements. Accordingly, you should not place undue reliance on these forward-looking statements.

For a list and description of our risks and uncertainties associated with our business, please refer to the risk factors section of our form 20-F filed with the Securities and Exchange Commission on 03/20/2025. With that, I will now turn the call over to Olivier.

Olivier Taelman: Thank you, Pearson. Good day, everyone, and thank you for joining us for our second quarter 2025 earnings call. I'm extremely proud to announce that we received FDA PMA approval for our GENEO system in the United States. This result was the culmination of persistence, strong regulatory, and clinical execution supported by the entire passionate and committed Nyxoah S.A. team. For US patients suffering from obstructive sleep apnea or OSA, the GENEO system provides them with a significant advance from currently available treatment options. For physicians, they now have a choice to select the optimal AGNS therapy for their patients. For Nyxoah S.A., it marks the beginning of an exciting journey in the US.

This PMA approval confirms the safety and effectiveness of our innovative technology and authorized commercial distribution in the US, which now has actively begun. The GENEO system becomes the first and only bilateral AGNS therapy approved in the US for treatment of OSA. It's also important to note that the GENEO system is not contraindicated for patients suffering from complete concentric collapse or CCC. And all of these key differentiators represent off-label highlights of the ability to treat patients with positional OSA. This is important as according to published data, a patient's AHI score can double when a patient sleeps in a supine position on their back.

Adding this another label serves as a validation of the clinical outcomes for more pivotal dream study which met its primary endpoints regardless of a patient's sleep position. Also note, that complete concentric collapse of CCC is not contraindicated but is included as a warning in the company's label as the safety and effectiveness of patients suffering from CCC has not yet been established for the GENEO system based on US specific clinical data. Our goal is, however, to monitor to make GENEO available for US patients suffering from CCC as soon as possible. Therefore, we strategically elected to stop enrollment in the access study.

We believe that the number of patients enrolled in access will have enough statistical power to draw meaningful conclusions on our effectiveness complete concentric collapsed patients. In addition, we see great results in real life data from patients in Europe where our CE Mark already includes an indication for CCC patients. I'm also pleased to report that our dream study was published by the Journal of Clinical Sleep Medicine, which is a leading journal for the sleep community. I'd like to highlight a couple of data points that were published for the first time which demonstrate a high level of patient satisfaction. The device demonstrated compliance of 85.9% and the patient satisfaction was scored at 90%.

This data confirms our early experience in Europe and we believe the publication of the DREAM study will strengthen our US launch and will also give us access to new international markets. Immediately, upon receiving FDA approval, we started our focused US launch with a commercial organization with over 50 highly talented and experienced professionals. This team is now executing on our two-pronged launch strategy. They will target high volume hypoglossal nerve stimulation implanting centers, where they will position GENEO as a differentiated option for patients suffering from OSA. And they will focus on developing strong referral networks with physicians managing large populations of moderate to severe OSA patients who quit CPAP but are in need of treatment.

Our US sales team is already actively engaging with these targeted sites, working through the value analysis committee and pre-authorization approval processes. From a launch execution perspective, I am very pleased to report that already in the first week, we received several VAC and pre-authorization approvals. It's also very exciting to see multiple physicians with patients lined up who are running quickly to become the first to implant the GENEO commercially in the US. Regarding reimbursement, we have identified the use of CPT code 64568, which has been recognized by commercial and government payers for the OSA indication.

This is the same CPT code used by our competitor, and we feel confident that we will be able to differentiate ourselves via our unique technology benefits and patient focus. As a result of our ongoing work with the American Academy of Otolaryngology and participation in the FDA's early payer feedback program, educating CMS and major commercial payers on the clinical impact GENEO can have on their OSA patients, positions us well for acceptance of pre-authorization submissions in the near term and favorable coverage decisions in the long term. With over 100 physicians in the US already trained and additional weekly training sessions scheduled, there is strong momentum building in the medical community.

Organizational traction in the marketplace is demonstrated by the many physicians lining up patients for a GENEO implant in just our first week of commercialization. This early interest gives us confidence in the success of our US launch. We have also identified demand from patients who are hesitant about receiving an implanted battery which requires the need for subsequent surgery to replace this battery. The GENEO system addresses this need with its unique and less invasive design. There has recently been a lot of discussion on the potential impact of GLP-1 on the AGNS market.

Contrary to our competitor, we have strategically limited our patient population to those with a BMI below 32, since that is where the efficacy for GENEO is proven. As a result, we believe that the eligible GENEO patient population will grow, not shrink. This belief is based on third-month study data showing GLP-1's ability to bring patients with high BMIs of 37 and above down to a BMI level where clinical data demonstrate that GENEO is effective. Without GLP-1s, we would never be able to treat this high BMI patient population. While there might be patients with lower BMIs dropping out of the potential AGNS patient population, this will be outweighed by a significant number who become eligible for AGNS.

On another topic, prior to GDUFA approval, Inspire Medical initiated a patent lawsuit against Nyxoah S.A. Since Nyxoah S.A. was founded, we have invested significantly in our IP portfolio and we will vigorously defend ourselves in this matter and have the means to do so. This patent lawsuit will not impact our US commercial launch, which is already underway and generating a lot of enthusiasm in the marketplace. To conclude my opening remarks, I want to emphasize that the FDA approval marks a pivotal moment for Nyxoah S.A. Our bilateral stimulation technology offers a truly differentiated solution that makes us unique for patients.

We believe GENEO can fundamentally improve the quality of life of OSA patients by giving them a good night's sleep. With the current ongoing momentum, and physicians already lining up patients for GENEO, we are confident in our ability to execute a successful US launch. With that, I'll turn the call over to our CFO, John Landry, for a financial update.

John Landry: Thank you, Olivier. We recorded revenue of €1,300,000 in 2025 compared to €800,000 in 2024 for an increase of 73.8%. Gross margin in 2025 was 63.4%, or essentially flat to 2024. Total operating loss for 2025 was €19,900,000 versus €13,300,000 in 2024. This was driven by the acceleration in the company's commercial investments in the US in preparation for post-FDA commercial launch. Our cash position, including cash, cash equivalents, and financial assets, was €43,000,000 at 06/30/2025, compared to €63,000,000 at 03/31/2025. We also have €27,500,000 available to us under our term debt facility, which can be drawn down in two equal tranches of €13,750,000 each, subject to certain milestones.

With that, I'd now like to hand the call back to Olivier to discuss his thoughts on the remainder of 2025.

Olivier Taelman: Thank you, John. Before we conclude, I want to emphasize that this FDA approval represents a truly historic moment for Nyxoah S.A. I would like to thank all Nyxoah S.A. employees for their persistence and effort in making this happen. We have now officially entered the US OSA market with our innovative GENEO solution, and the launch is actively ongoing. The enthusiastic response from physicians and their patients reinforces our confidence in the success of this US launch. We believe the remainder of 2025 will be a transformative period as we establish GENEO in the US market and advance our mission of making sleep simple for patients worldwide.

We look forward to updating you on our progress on our next earnings calls. With that, I would now like to open the line for questions.

Operator: Thank you. Ladies and gentlemen, as a reminder to ask a question, please press 11 on your telephone, and then wait for your name to be announced. To withdraw your question, please press 11 again.

Jon Block: Our first question comes from the line of Jon Block with Stifel. Your line is open.

Jon Block: Obviously, big congratulations to you and the team. I'll start off just any year-end '25 metrics you know, any indicators to focus on. Trade positions. I don't know. I'll throw that one out there even though I know you said you already have, I think, it was over 100. Can we be getting a glimpse to that? The number of certified centers, the number of implants? I know it's early days, but just as we think about over the next three or four months, you know, where our eyes or where our focus should be as we think about exiting '25 in regards to the GENEO launch? Thank you.

John Landry: Yeah. Thanks for the question, Jon. In terms of some of the leading indicators that we're tracking, obviously we mentioned today the number of physicians trained. That's going to be something that we keep a close eye on as that's obviously a leading indicator. We'll also be looking at the number of value analysis committee applications that we submit to the various institutions over time as that's also another leading indicator. Think over time we'll be looking at some other metrics vis a vis maybe number of accounts opened or pre-authorization approvals received. However, at this point in time, we're still working through that and we'll share more on our next quarterly call with all of you.

Jon Block: Fair enough. Thanks for that. And then I'll sort of pivot. Olivier, this one might be for you, but just you know, obviously, was the approval, but then there was also I don't know. I mean, in call it, like, the favorable label that went along with the approval. So you talk about how you expect to leverage the differentiated label, you know, such as no triple C contraindication, the sleep positional data. You know, I know if it's more of a commercial question, if you would, but how do you expect to capitalize on that in the go-to-market we think about over the next handful of quarters. Thank you.

Olivier Taelman: Thank you, Jon, for this question as well. Yeah, clearly it was for us. But an important win to also see this differentiation reflected in the label. As our mission is always to make sleep simple, and that starts also by being certain that we can protect patients throughout the entire night regardless of what position they are in. And that is why positional OSA is so important that also there we can continue showing a highly effective technology and therapy. And so forth, GENEO is the only technology that is offering this. So that comes to the supine data and the positional OSA.

When it comes to CCC, of course, there is extremely encouraging to see that also FDA is recognizing this. By not giving us a contraindication. Contrary to competition. And as you know, with access, there we also did great work. We had our PIs implanting a significant number so now we can closely we can stop the enrollment earlier because also there, we would like to advance on bringing this and making it available for CCC patients in the US. So both are reflected in the label. I know that you and many of your colleagues had questions on this in the past.

And, again, it is confirming what we were telling you that bilateral stimulation is making a difference compared to unilateral stimulation. And that this definitely will also help convince physicians when they have to choose between the two available AGNS technologies.

Jon Block: Alright. Great color. Thanks. I'll hang up more, but I'll hop back in the queue for now. Thanks, guys.

Olivier Taelman: Thank you, Jon. Please stand by for our next question.

Operator: Our next question comes from the line of Adam Maeder with Piper Sandler. Your line is open.

Kyle: This is Kyle on for Adam. Thanks for taking the questions, and extend our congrats on FDA approval as well. Maybe just first to double click a little bit on the commercial strategy, that you discussed in your prepared remarks. Was somebody to get an idea of which accounts you're kind of aiming to target first. Are they, you know, kind of centers from the dream study? Some of the high volume implanters? Can you just give us kind of any color around the accounts and the strategy there?

Olivier Taelman: Yes. No, no, definitely. As I mentioned in the script, we have a two-pronged approach. So first of all, we go and our sales team will focus on high volume, but also stimulation implanting accounts. Maybe as a quick reminder to this, you know that in the US, there are roughly 1,400 implanting accounts offering AGNS, but it stays a very concentrated market, meaning that 350 to 400 of these are high volume accounts and are representing 75 to 80% of the total revenue. So those are the accounts the team will be focused on. We start with a team of 50 commercial people. Of which 25 are territory managers.

They will all have four to six of these accounts, and we have built what we call a scalable technology. So every quarter, we will add a number of territory managers and increase the number of accounts so that we can cover as soon as possible all 400 of those high volume implanting accounts. So that is what we call, you know, focused launch. Next, and I think as important, is also strengthening the referral parts. And the way we are doing this in that technique, so it's totally different compared to the way it's done in the past in the sense that we will focus on patients that have moderate to severe OSA and are quitting CPAP.

And also there, focusing on those specific patient groups will definitely strengthen the trust and confidence of physicians, and will also further make sure that patients in need for treatment will get a sleep surgeon that can help them with the solution. So that's all we plan to go forward with our launch strategy.

Kyle: That's super helpful. Thanks for the color there. Maybe just for my second question, to shift over to reimbursement a little bit, is there just how do you plan to go about that process here looking forward? Is there any logistical considerations you know, around, like, the work that you're doing with the different payers? And then maybe more specifically, when can we expect to see some onboarding of some of the larger payers? Would it be fair by the end of this year, or it kind of more of a 2026 story? Thanks again, guys.

John Landry: Yes. Thanks, Kyle. I can take this question. So, in terms of our reimbursement strategy, we have a comprehensive reimbursement strategy. So, we're using, as you may be aware, an established CPT code. At launch, we're using the 64568 code. We've worked closely with the AAO on that particular code. We've participated in the FDA's early payer feedback program. And we're also been working with engaging CMS in major commercial payers in the US around this particular code. So as we work through this multifaceted approach and strategy, we expect these decisions will start coming in first for the pre-authorizations. We'd expect some of those to come in this year.

Clearly, I think we mentioned we had our first one now, but we expect more of those to come in over the balance of the year. And then as we start moving into more of coverage decisions, if you will, that'll be probably more of a 2026 item, Kyle.

Kyle: Perfect. Thank you.

Olivier Taelman: Welcome. Please stand by for our next question.

Operator: Our next question comes from the line of Suraj Kalia with Oppenheimer. Your line is open.

Suraj Kalia: Hey, Olivier. John, can you hear me all right?

Olivier Taelman: Yes. We can. Hello, Suraj.

Suraj Kalia: Perfect. Gentlemen, congrats on the approval. I know it's been a long time coming. And on the label. So, Olivier, quick one. Let me start out. You mentioned system enrollment has been stopped. I presume that the SME chimed in and helped you all reach that decision.

Olivier Taelman: Yeah. So when it comes to the access study, in fact, we reach a significant number of patients that are already implanted that gives us the confidence that if we have to draw statistically conclusions that are statistically forward enough, right, to use this terminology that we have more than enough patients. Maybe to give you some background Suraj on this, and I'm looking also what is going what is happening in the OSFIRE study. We know that the number of patients that we are having, we have already more than doubled the number of patients that have an where they're also looking at CCC patients.

So that's just a side comment but I think important information for you to know as well. And then the next thing on this why we make this decision is we wanna help patients with CCC in the US as well. Like we are doing in Europe in a very successful way, like we demonstrated in Australia, the better sleep study. And therefore, here, we cannot wait. And when you have enough patients implanted, we do think it is so well calculated decision to stop earlier and that we can activate the twelve-month follow-up time frame.

So by same time, same period next year, will be able to publish those data then we submit a PMA supplement, and we should already be able to '26 beginning latest beginning '27 also to add this to our label in the US and be able to help CCC patients. That are currently contraindicated for AGNS.

Suraj Kalia: Got it. Will it be a I'll question, please? So just the second one for me. This how are you thinking about patient outreach and packaging of the products specifically Supine, CCC, lack of a battery, what's the How are you thinking about packaging this? Do you think you're making it back even it's the same inspired Yes. Makes sense. So you'll intend launching a targeted approach for bilateral.

Olivier Taelman: So first of all, Suraj, we will further leverage on our clinical data. I think this is this is really important. So that we look at patient phenotypes when we know we are extremely efficient. You know, the adult patient population, then when it comes to AHI, and I would like to point this out in dream of AHI range, it's 15 to 65. Which is already different compared to competition where it's 20 to 50. So there, we're already able to install to demonstrate a strong number 15 to 65. So that is one aspect.

Another aspect is what we learned in market research is that for physicians is extremely important to know that their patients will be protected through o gen iodide. So this is something that is not only resonating well with ENT surgeons, but it's very well resonating with sick physicians who have to refer patients. Because they see this effect when they stop studying polysomnography sleep exams They see exactly when a patient is in what position So it's a great benefit being able to show protection throughout the night for a sleep physician providing them confidence when they refer a specific patient all the way to an ENT surgeon for the genome.

And then last, when it comes to the outreach, yes, we have a focused launch. We start with 25 territory managers. They hook up four to six centers. I think I already explained concentrated the business still is in the in the US, and we will scale quarter after quarter by adding roughly 15 new territory managers and each time adding up to 75 new implant sites. And that, to John's point, will only also become one of our key metrics in measuring our success going forward. And it gives us the ability in short term also to reach all 350 to 400 high volume sites. Hope this is answering your question.

Suraj Kalia: Thank you.

Operator: Please stand by for our next question. Our next question comes from the line of Ross Osborn with Cantor Fitzgerald. Your line is open.

Matthew Park: This is Matthew Park on for Ross today. Thanks for taking the questions, and congrats again on FDA approval. So starting off with Olivier on back approvals, how should we think about a reasonable pace for account openings through the remainder of '25 and into '26? And then are there any headwinds here that we should be mindful of?

Olivier Taelman: Yes. No, it's an excellent question in the sense that what the team did really successfully is to augmenting also the VAC committees by time they need in order to reach a decision. What we learned is you have some that go extremely fast. As I already mentioned, we have the first time we have several of those fast track committees where we already passed the VAC committee. But you also have number of VAC committee that will really take their time, and time can go up to nine months in some in some advantage and so in some cases.

So here, will focus and follow the segmentation The fastest, of course, there we are currently immediately, and that's how we further scale up. And I do not want to set expectations on saying this is the precise number that we will achieve by the end of this year. It is clear that, you know, targeted approach all the hospitals that we are targeting, they also will go to the VAC and we expect all of them to gain us an approval in the coming six months.

Matthew Park: Got it. That's super helpful. And then, that one for John here. You know, as we're thinking about spending the back half of the year and into '26 as you guys filled out commercial infrastructure in the US, can you kind of walk us through some of the puts and takes around operating leverage that we should be mindful of?

John Landry: Sure, absolutely. From an OpEx perspective, we don't provide specific guidance, but maybe you can provide some color in terms of how we're thinking about the investment levels. So for so the back half of this year, in terms of OpEx spend, we'd expect to see R and D continue at pretty consistent rate and then maybe be a little bit up year over year. Considering some of the investments we're making in the IP litigation front. From an SG and A perspective, that will be considering the investments that we made in our sales and commercial efforts in the US with the 50 highly talented professionals we have in that organization.

And then as we look at 2026 from an overall investment level perspective, we'd expect the majority of the increase next year to be in the way of SG and A as we increase the size of commercial organization, again, by expanding it by those scalable units 15 territory managers over the course of the year. So you know, we could expect to see potentially the SG and A spend nearly double in 2026 over the levels seen in 2025.

Matthew Park: Got it. Thanks for the color. Congrats again, guys.

Olivier Taelman: Thank you.

Operator: Please stand by for our next question. Our next question comes from the line of David Rescott with Baird. Your line is open.

David Rescott: Great. Thanks for taking the questions, and congrats on the approval here. Wanted to ask first on reimbursement, the VAC, the prior auth processes that you've called out. In the prepared remarks. I guess, you just help us understand what considerations go into those, VAC and prior auth, you know, conversations? Are you definitively kinda locked in to reimbursement there? Did Is that fully ironed out? Just how do we think about what the prior auth and back processes are, relative to kind of what the underlying CPT code and commercial coverage cost?

John Landry: Sure. Yes. Thanks for the question, David. Yes. So early on, it's clearly early on in the process. But in terms of the approvals that we received, vis a vis the VAC and or the pre-authorizations that answer is yes. So we've gone through the process. I think really what we're looking to do there is demonstrate the clinical efficacy and the effectiveness of the technology. Certainly, utilizing the HTNS code, the 64568 code on the CPT side, And we've been able to have success in demonstrating that at least in this early stage to those hospitals and accounts and centers where we've completed the VAC.

And as Olivier mentioned, there are various lengths of process for these VACs as well as the pre-authorization process. The VAC approvals can range anywhere from very short periods of time up to nine months. And you know, on the pre-authorization process, it's, you know, extended as well. So that's where we're at this point in time, and forward to continuing to build this body of approvals.

Olivier Taelman: And maybe in addition to this, if you allow me to add, AGNS is no there is no longer one company that is offering an AGNS solution. I mean, with GENEO, we enter the market. There is no option to choose. And that's why today, as of today, there is an AGNS treatment solution there are different companies offering this. And I think that's also important. So the previous work done in the past it was also linked to AGNS. So all the faculties, they recognize this. And they know what it is and what it can do.

And as of today, there are two companies who can offer solution, and it's up to their physicians that will decide together with the patient solution they will choose.

David Rescott: Okay. Great. And then maybe on the, you know, DCC patient, population, you know, you've got the no contraindication. You know, there's the warning that it wasn't tested, but you have access, that is coming. One, I guess I don't know if you if you called out a timeline. I might have missed it on the access side for when that data should read out. But I guess how do we think about the patients that are on the CCC side that can get treated you know, today versus those that you can kinda go after and target once you have access kinda fully in hand.

Olivier Taelman: So when it comes to the access trial, now we stop the enrollment. So the time clock for twelve months can start. So twelve months from now, we will have the data of all access patients, and then based on this study data, we will submit the PMA supplement. Normally, this takes roughly another six months before FDA grants you a supplement. So if you do the math, earliest end of Q4 2026 beginning Q1 2027, we could have CCC patients added to the label. Today, having no contraindications, I will vary I thought that FDA is recognizing already that CCC, it's something where they would like to see US specific data before adding the label.

But where they also recognize the fact that CCC should not be a contraindication. And I think that's an important first step in the direction in opening it up in the US market for patients also OSA patients suffering from CCC.

David Rescott: Okay. So would it be fair to assume that you know, can start treating NCCD patients, say, since there is no contraindication, maybe pump the gas, on that once you have access out and the PMA supplement in? Or, in the near term, are you really kinda just waiting for the access results?

Olivier Taelman: Thank you. So in the near so we are waiting for the excess results and let me be very clear on this one. We would not promote an off-label indication. And today's CCC, It's Also For GENEO Off Label In The US. So we would never ever promote this. But on the other hand, it is clear that it's on a contraindication and it is in the warning section of our labeling. So physicians, they know what this needs.

David Rescott: Okay. Perfect. Thank you.

Operator: Please stand by for our next question. Our next question comes from the line of Michael Polark with Wolfe Research. Your line is open.

Michael Polark: I have two First one, pricing. Can you confirm as you launch now in the US, intent to price at Inspire's level $25,000 Or has the thought process on pricing changed?

Olivier Taelman: No. Indeed. So we use the same CPT code. And we are following also the class strategy that it comes with the CPT code. To your point.

Michael Polark: What I figured. Just thought it worth clarifying as we go into launch. And then my second question is if you look to open accounts, is there an ask you're making of these surgeons You invest in them, you train them, you're gonna be, you know, targeting and competing for patients, on their behalf. That's an investment that you make. What kind of return do you ask of these initial centers, if anything? And I'm just thinking, like, look. They're they're all in the business of hypoglossal nerve stem. They have large wallets.

What is a share of wallet that you're you're wanting kind of a maybe not as a firm commitment, but a soft commitment from these surgeons as you get going this initial cohort? Is it is it 10%, 20%? Is it more? I'd love a feel for how you go about those initial conversations and signing up this initial group of their planters. Thank you.

Olivier Taelman: Thank you, Mike, for this And it's also a question, of course, as you can imagine, that we internally discussed as well because we have a lot of demand from positions for HMO to be trained on the on the technology. And we can unfortunately not train all of them at the same time. So what we are asking is before a physician is eligible, like, to join the training or invited for a training, they need to come with five patients. Clearly defined patients, and we use the criteria as the same criteria as in the dream study. So we ask them to come with five patient cases, then they get the training.

We can already discuss those five patients so they can be implanted right after they go back after being trained. That's what we do. When it comes to much share, because you are removing also the last 10 of 20% market share, Honestly, we don't at this stage.

We do think that if they are well trained, high quality training, they do their five cases meaning that they will all go through their surgical learning curve, then we are convinced that they will make the right decision when patients are coming and that also patients will know if they can choose a bilateral stimulation with a single incision You know, all the different differentiated factors, full body MRI compatibility, that we will be able to capture a lot of patients with our GENEO.

Michael Polark: Thank you for the color.

Operator: Thank you. Ladies and gentlemen, that concludes our question and answer session. I will now turn the call back over to Olivier Taelman for closing remarks.

Olivier Taelman: Thank you again for your time today. And your continued support of Nyxoah S.A. As I mentioned in the beginning, this is the most exciting time in our in our company history. We are so excited to be able to launch in the in the US. I will also not forget on international markets where we're also making good progress but it's clear that the market is in the US. And finally, after so many months, years of orthographic I'm pleased that we can answer this and then the entire team is extremely exciting. So you will and I will look forward also updating you on our progress in the coming months.

So thank you all again, and have a nice day.

Operator: Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.

Where to invest $1,000 right now

When our analyst team has a stock tip, it can pay to listen. After all, Stock Advisor’s total average return is 1,070%* — a market-crushing outperformance compared to 184% for the S&P 500.

They just revealed what they believe are the 10 best stocks for investors to buy right now, available when you join Stock Advisor.

See the stocks »

*Stock Advisor returns as of August 18, 2025

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. Parts of this article were created using Large Language Models (LLMs) based on The Motley Fool's insights and investing approach. It has been reviewed by our AI quality control systems. Since LLMs cannot (currently) own stocks, it has no positions in any of the stocks mentioned. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Image source: The Motley Fool.

Date

Thursday, August 14, 2025 at 4:30 p.m. ET

Call participants

Chief Executive Officer — Ari Kahn

Chief Financial Officer — Thomas Windhausen

Operator

Need a quote from a Motley Fool analyst? Email [email protected]

Takeaways

Total revenue-- Total revenue was $3.8 million for fiscal Q3 2025 (quarter ended June 30, 2025), down from $3.9 million in the prior-year period, with subscription license revenue (GAAP) rising but services revenue declining.

Subscription license revenue-- $3.1 million for fiscal Q3 2025, up from $3.0 million in the prior-year period, representing 81% of total revenue.

Services revenue-- Services revenue was $700,000 for fiscal Q3 2025, down from $900,000 in the prior-year period, accounting for 19% of total revenue.

Cost of revenue-- Cost of revenue was $1.3 million for fiscal Q3 2025, up from $1.2 million in the prior-year period, resulting in a gross profit of $2.5 million and a gross margin of 66%.

Subscription license gross margin-- 70%, down from 72% in the prior-year period.

Services gross margin-- 50%, down from 58% in the prior-year period.

Operating expenses-- Operating expenses were $3.2 million for the quarter ended June 30, 2025, up from $3.1 million in the prior-year period.

Net loss-- Net loss (GAAP) was $800,000 for fiscal Q3 2025, up from $300,000 in the prior-year period.

Adjusted EBITDA-- Adjusted EBITDA was negative $330,000 for fiscal Q3 2025, compared to positive $3,000 in the prior-year period.

Cash balance-- Over $2.1 million as of June 30, 2025, with accounts receivable at $1.4 million; total debt under $348,000, with no remaining earn-outs from prior acquisitions.

Contract bookings-- $1.7 million in contracts signed for fiscal Q3 2025, adding $600,000 in ARR for fiscal 2025; year to date, $6 million in contracts with over $2 million in ARR year to date.

Hawk Search revenue contribution-- Now over 60% of total quarterly revenue.

Customer expansion-- More than 20 new customers acquired in fiscal 2025, and over 30 licenses sold to existing customers.

Average deal size for Hawk Search-- Initial $25,000 ARR contract, with average expansions adding $50,000 in ARR.

Analyst recognition-- Gartner ranked Hawk Search as the number one B2B search software provider this quarter.

Marketing investment-- Quarterly ad spend increased from $250,000 to $500,000 in fiscal Q3 and Q4 2025, funded by a March capital raise; with some resales closing in less than 60 days.

Product innovation-- Launched Do It Best Hardware as a client with Hawk Search powering over 3,000 stores; released Model Contacts Protocol (MCP) enabling advanced AI-agent search management and real-time analytics for B2B clients.

Customer concentration-- No Hawk Search customer contributes 5% or more of revenue, though certain partners like Hewlett Packard and Consolidated Electrical Distributors play important strategic and innovation roles.

Pipeline mix-- About 60% of sales booked to existing customers, and management expects this dynamic to continue as product adoption expands.

Professional services outlook-- Management guided services revenue to remain near $750,000 per quarter for fiscal 2025 and fiscal 2026 with 50% gross margin, as license growth remains the core strategy.

Capital structure-- 12.1 million shares outstanding at quarter-end, with 862,000 warrants and 1.8 million options detailed in the cap table.

Summary

Bridgeline Digital(NASDAQ:BLIN) reported growth in subscription license revenue and a reduction in services revenue for fiscal Q3 2025. The company prioritized expanded marketing spend and achieved increased lead generation and a shorter sales cycle, reduced from 125 days to 112 days, following its March capital raise. Hawk Search is now the leading contributor to revenue, supported by high net revenue retention, major contract wins, and independent analyst recognition. Product advancements such as Model Contacts Protocol are contributing to customer expansion and higher deal sizes, while the company guides toward steady services revenue and increased license adoption moving forward.

Thomas Windhausen said, "For the previous six quarters [fiscal Q1–Q3 2024 and Q4 2024–Q2 2025], our non-personnel lead generation spend was budgeted at $250,000 per quarter, totaling $1 million a year. And then we did a $2 million capital raise in at the March. And those funds are almost all dedicated towards increasing that marketing spend."

CEO Ari Kahn stated, "Our net revenue retention for Hawk Search is 114%."

Ari Kahn said, "Gartner ranked Hawk Search as the number one B2B search software provider above all of our competitors."

Thomas Windhausen confirmed, "About 60% of our sales have been to existing customers, and this is a healthy and great thing."

Industry glossary

ARR (Annual Recurring Revenue): The value of recurring subscription revenue normalized for a single year, used as a key growth metric in SaaS businesses.

MCP (Model Contacts Protocol): A Bridgeline Hawk Search feature allowing AI agents and human teams to jointly manage and optimize search functionality across websites in real time.

Net revenue retention: A metric reflecting expansion, renewals, and contraction within the customer base, indicating the percentage of recurring revenue retained and expanded from existing customers over a period.

Full Conference Call Transcript

Ari Kahn: Thank you, Tom. Good afternoon, everybody. In our fiscal year 2025, we signed $1.7 million in contracts, which added $600,000 in ARR to our subscription revenue. Year to date, we have booked $6 million in contracts with over $2 million in ARR. This brings revenue from our core products to more than 60% of our total revenue with double-digit growth from Hawk Search. This year, we have added more than 20 new customers in addition to more than 30 licenses sold to existing customers. Our customers love Hawk Search. Our net revenue retention for Hawk Search is 114%. In fact, our average sale of expansion products to existing customers is double the size of our initial sale to new customers.

On average, customers are starting with a $25,000 ARR contract for Hawk Search, and then adding another $50,000 ARR above and beyond the $25,000 for advanced features such as our AI-powered smart search. After they are live, there's no greater demonstration of value that we deliver to our customers than them buying additional products from us. Hawk Search has an outstanding position in the market with huge customer successes as well as accolades from partners and analysts. This quarter, Gartner ranked Hawk Search as the number one B2B search software provider above all of our competitors.

Our number one ranking in B2B is driven by a number of factors, including our quantity of live customers using Hawk AI, our ability to solve complex sites at scale, and the out-of-the-box value Hawk delivers to B2B customers. This week, we launched Do It Best Hardware. Do It Best is using Hawk Search to power over 3,000 stores with real-time inventory and AI-enhanced search results. Only Hawk Search offers multisite management so franchises and chains with large numbers of sites can centrally manage search results, which can be set up to be impacted by live inventory. Our sales success has been driven by a modest marketing budget.

And in March, we made a small capital raise to expand that budget for lead generation. We doubled our ad spend from $250,000 a quarter to $500,000 a quarter. We're seeing excellent results from this investment with qualified lead generation more than doubling. Our sales cycle is also contracting and has reduced from 125 days down to 112 days, with resales this quarter having less than 60 days between the initial introduction to signing a contract. The increased marketing budget, faster sales cycle, and analyst recognition are expected to fuel even stronger growth in upcoming quarters. As part of our investment in lead generation, this quarter, we have expanded our lead gen programs through strategic partnerships.

Insight 25, our first Hawk Search virtual summit, drew 400 registrants and featured partners, including Hewlett Packard, BigCommerce, XEngage, and Crescent Electric. And at B2B Online in Chicago, we hosted a live river cruise dinner with Pemberley, Chronix, and DDS. These co-hosted events generate more leads per marketing dollar and produce more qualified leads with faster sales cycles than we could do by ourselves. Hawk Search leads the market in AI-powered product discovery with new capabilities that give customers more control and insight than ever before. This quarter, we added Model Contacts Protocol, also known as MCP.

We added MCP to Hawk Search, which allows AI agents to help manage Hawk Search alongside the human merchandising team that typically runs a website. Our tailored AI approach expands our customers' existing teams so they can leverage AI agents today without having to blindly assume the AI is going to do everything for them correctly, which happens with many of the other AI products. In essence, we are treating AI as a team member, not a replacement to our customer's marketing program. MCP also allows merchandisers and developers to control search results with natural language, to boost key products, prioritize categories, and target campaigns with precision.

In fact, they can even ask complex questions to the MCP component of Hawk Search and get visual results, graphs, tables, and other information to help them understand the performance of their own website and their sales processes. Together with advanced analytics, these enhancements provide deeper performance insights, integrate with business intelligence tools, and make enterprise-grade AI more accessible and impactful. A few examples of this quarter's business development successes include a Fortune 100 tech company signing a Hawk Search agreement to optimize global e-commerce search across high-volume, multi-region sites. One of the nation's largest electrical distributors selected Hawk Search to power AI-driven search across more than 70 storefronts.

The implementation integrates with both Sitecore and Salesforce Commerce Cloud, to unify product and content discovery. A top five US electrical distributor expanded its Hawk Search license to support hundreds of e-commerce portals using our multi-engine management to launch test personalized experiences. Ivystone Group deployed Hawk Search across five e-commerce sites with multisite management, concept search recommendations, and merchandising to improve intent matching and buyer engagement. And a leading Jansen distributor renewed its partnership to leverage semantic search and personalized e-commerce, boosting both conversion rates and average order value. Hawk Search is fueling Bridgeline's growth.

As of this quarter, Hawk Search is more than 60% of our total quarterly revenue, is growing at a double-digit pace, is being recognized by top analysts as a number one solution, and has outstanding customer satisfaction with a 114% net revenue recognition. The development and introduction of new features into Hawk Search is resulting in customers tripling their initial investment by adding new features like our AI capabilities and smart search. We have doubled our lead budget to capitalize on this momentum and are already seeing economies of scale.

That, along with the sales cycle of only 112 days, will soon make Hawk Search growth shine into our consolidated financials so that you can see overall growth for the whole company at the level in which Hawk Search is growing today. Now I'll turn the call over to our Chief Financial Officer, Thomas Windhausen, so he can share some additional details with you. Tom?

Thomas Windhausen: Thanks, Ari. I'll provide an update on our financial results for the 2025, which ended 06/30/2025. Total revenue for the quarter ended 06/30/2025 was $3.8 million as compared to $3.9 million in the prior year period. Looking at each component of revenue, our subscription license revenue, which is comprised of SaaS licenses, maintenance, and hosting revenue, for the quarter ended 06/30/2025 was $3.1 million as compared to $3 million in the prior year period. As a percentage of total revenue, subscription and license revenue was 81% of total revenue for the quarter ended 06/30/2025. Services revenue was $700,000 for the quarter ended 06/30/2025 compared to $900,000 in the prior year period.

As a percentage of total revenue, services revenue accounted for 19% of total revenue for the quarter ended 06/30/2025. Our cost of revenue was $1.3 million for the quarter ended 06/30/2025 compared to $1.2 million in the prior year period. And as a result, our gross profit was $2.5 million for the quarter ended 06/30/2025. Our overall gross profit margin was 66% for the quarter ended 06/30/2025, with our subscription license gross margins of 70% for the quarter June 25 compared to 72% in the prior year period. Our services margins of 50% for the quarter ended 06/30/2025 compared to 58% in the same period in 2024.

Our operating expenses were $3.2 million for the quarter ended June 30, compared to $3.1 million in the prior year period. And our net loss was $800,000 for the fiscal quarter ended 06/30/2025 compared to a net loss of $300,000 in the prior year period. Our adjusted EBITDA for the quarter ended 06/30/2025 was negative $330,000 compared to positive $3,000 in the prior year comparable three-month period. Moving to our balance sheet. On 06/30/2025, we had cash of over $2.1 million and accounts receivable of $1.4 million. Our total debt outstanding as of 06/30/2025 was under €300,000, approximately $348,000 US dollars, with a weighted average interest rate of 3.4% and principal payments due through 2028.

We have no other debt or remaining earn-outs from any other previous acquisitions. And at 06/30/2025, our total assets were $16.1 million with total liabilities of $6.2 million. Finally, with an update of our cap table, at June 30, it included 12.1 million shares outstanding, 862,000 warrants, and 1.8 million options. The 862,000 warrants consist primarily of 167,000 warrants with a $2.85 exercise price expiring in May 2026 and 592,000 warrants with a $2.51 exercise price which expire in November 2026. Bridgeline looks forward to continued growth and success in fiscal 2025 and beyond as we continue our focus on revenue growth, product innovation, customer success, and delivering shareholder value. Thank you for joining us on the call today.

At this time, I'd like to open the call to questions and answers. Moderator?

Operator: Thank you. At this time, we will be conducting our question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. And you may press 2 if you would like to remove your question from the queue. Handset before pressing the star keys. One moment, please, while we poll for questions. While we do that and get that set up, I do have a couple of questions that were sent in advance. So we will go through those. We have some questions from Howard Halpern at Taglich Brothers. Howard has three questions here.

Number one, how has your customer acquisition strategy evolved? Can you guys hear me alright?

Thomas Windhausen: Oh, sorry. I was on mute, and I'm back. Oh, alright. Okay. So the question was, how is our customer acquisition?

Howard Halpern: Yeah. How has our customer acquisition strategy evolved?

Thomas Windhausen: Great. So we're very analytical in marketing, and we track all of our leads so that we know which marketing event was the lead's first touch point and that we also know which marketing campaigns were follow-on influencing touch points. With this information, we're able to increase investments in campaigns that generate the best leads or have the biggest impact on lead conversion. Today, we have sufficient history and analytics to know where most of our new leads are coming from. A year ago, we were experimenting with two-thirds of our budget and investing one-third towards known lead sources. And today, I'd say that ratio has really flipped, where we are experimenting with a third.

You always want to experiment in the marketing world. And then investing two-thirds of our budget towards known campaigns, campaigns that we know win or influence. These can be conferences, online ad sources, partnerships, and other events. Because of the outstanding recognition that we've gotten from analysts like Gartner and softwarereviews.com and G2 Crowd, and customer satisfaction, we're also now bringing both customers and analysts to the sales cycle to provide references and other details that help our prospective customers more quickly make their decisions. Great.

Howard Halpern: Great. Thanks, Ari. Another question. Where does our pipeline stand in regards to reaching new customers or expanding within existing customers?

Thomas Windhausen: So this year, we have more bookings to existing customers than to new customers, both in quantity and in booking size. About 60% of our sales have been to existing customers, and this is a healthy and great thing. This tells us that we have a product line that delivers tremendous value to our customers. And we need to increase awareness with a larger marketing megaphone, so to speak, a larger ad spend budget so that the rest of the world can find out why customers are staying with Bridgeline and doubling down and increasing their investment in Bridgeline.

With 114% net revenue retention, we expect existing customers to continue to represent probably 60% of licenses even though we're expanding our marketing budget. So we're going to win more customers with a larger budget, but our existing customers are even more rapidly expanding their investment by buying products like our SmartSearch, the AI-driven products, and advanced analytics. We have hundreds of customers who still have products that they can buy from Bridgeline. So this is a great trend. It reduces our overall customer acquisition costs. And these sales make Bridgeline a healthier company.

Less marketing dollars produce longer customer lifetimes, and it often results in innovations with new features coming from customers and driving additional sales into our customer base.

Howard Halpern: Excellent. I do have one more. Are you getting any customer feedback about the new technology enhancements, and how could they always be deployed to expand revenue?

Thomas Windhausen: Okay. Well, most nearly all of our products released in 2024 and 2025 were driven by customers. So structurally, we've got a professional services division that helps our customers both implement our products and provide consultative advice to them as to how to better run their own websites. And then we've also got a sales team, our customer success team, which is helping our customers understand what other products we have and figure out when the right time is for them to buy one of our other products. These two teams are always getting feedback, bringing that into our product management department run by John Murcott, and several other people in the team.

And a lot of times, those are producing ideas as to products that we should have and we don't have. We'll see two or three or four of our customers asking for something that's very similar. We figure out what the general generalizations are between all of those customers. And then rather than our customer having to build and maintain a bespoke implementation, something custom just to themselves, they get to just buy a license for something that we maintain and, of course, sell to our other customers. So multisite management platform, an example that was driven by customers. Our advanced analytics was driven by customers.

Of course, all of the SmartSearch AI stuff was driven both by huge advances in large language models and neural nets and by customers as well.

Howard Halpern: Excellent. Thanks. Moderator, do we have anyone who is on the phone line for Q&A?

Operator: Yes, sir. We have a question on the line from Casey Ryan of Westpark Capital.

Casey Ryan: Alright, Tom. Thanks for the update today. It's encouraging.

Thomas Windhausen: Thank you, Casey.

Casey Ryan: Yeah. You bet. So I had a few questions. So sales and marketing has sort of ticked up over the last couple of quarters, which I think has been encouraging. And I think you're speaking to the fact that conversions are going well and that you're working in that area. Should we continue that absolute dollar level to kind of continue to tick up as we go through the end of the fiscal year and into FY '26? Is my first question.

Thomas Windhausen: Okay. Great. Great. And that's a very important question. It really drives our momentum. So for the previous six quarters, our lead gen spend, this is non-personnel, lead gen spend was budgeted at $250,000 per quarter, a million dollars a year. And then we did a $2 million capital raise in at the March. And those funds are almost all dedicated towards increasing that marketing spend. Right now, we've increased it from $250,000 to $500,000. So our third quarter was at a solid $500,000. Fourth quarter is at a solid $500,000. And we expect our first quarter, which will be October to December, to continue at the $500,000 level. Then we'll reevaluate it along the way.

But we've got enough gas in the tank to stay at that level for a long time. And it is producing results.

Casey Ryan: That's excellent. I'm really happy to hear that you guys are actually pegging that at the high end. Because I think previously, we talked about you were targeting kind of $250,000 to $500,000, but the fact that you're committing $500,000 suggests that results are pretty good, in terms of what you're seeing in terms of pipeline development. Tell me, I'm curious, and it's hard to get information about this from our side all the time. You know, as Hawk Search is having success, what are competitors doing who may not have the same technology or the same ability as Hawk Search? Are they cutting prices? Are they trying to bundle new services?

Like, what are you seeing in response to that? Or maybe there isn't a consistent organized response from the competition.

Thomas Windhausen: Well, the one thing that we do consistently see, especially from a couple of competitors, is them throwing in free professional services to make up the difference between their capabilities and ours. So maybe they don't have something that is as out-of-the-box as us or doesn't connect to the underlying product information management system or something, and they'll just send a team of people in there to try to make up that difference, and they'll eat that cost. I don't think that's sustainable. I think they should just figure it out and put those things out of the box.

But we see that, and we have to answer it because they can say yes to anything if they're going to basically buy the customer. We've got to explain that if you build a custom solution, sooner or later, the honeymoon's over, and that custom solution is not going to be managed for free as opposed to if it was just part of a product. So that's our response there. But that's the most common thing we can do.

Casey Ryan: Okay. And so people have, you know, competitors have some ability to sort of offer that but that's not infinite, basically, because they're basically losing money on those tactics, I guess.

Thomas Windhausen: Yep.

Casey Ryan: Yeah. Okay. Terrific. And then I think this is part of the long-term shift in terms of revenue mix as well, but I think, in terms of digital engagement services, that number's kind of slowly ticking down. Like, I think, certainly as a percentage of total revenue, but even in terms of absolute dollars. And, like, I think that's intentional on your part as you drive the company forward. Should we expect sort of the pace that we've seen to be continued in that, or would there be something dramatic where you guys might exit a certain line or do something that's sort of bigger, you know, in terms of magnitude to that revenue line at some point in '26?

Thomas Windhausen: Yeah. I think that throughout the rest of 2025, so from now all the way through 2026, people should expect us to be at around $750,000 per quarter in professional services revenue with a 50% gross margin. Our partners, our agency partners like to do the services, and we partner with them, and they do a lot of the services with our guys really just coming in as the subject matter to do the really hard stuff, which is why we're at a higher margin. And our customers also like to see things out of the box, and we try to provide that for them, which is very valuable. So that's where you don't see that area expected to grow.

We're going to focus on growing the license and let our partners have some of that and us do the most complex components of an implementation.

Casey Ryan: Okay. Super. So potentially consistent dollar contribution, but as we expect growth from Hawk Search and kind of your core growth engines, shrinking as a percentage of the total.

Thomas Windhausen: That's right.

Casey Ryan: Yeah. Okay. That's terrific. And then the last question, and again, you know, I suspect maybe this is too granular. But, you know, within Hawk Search, do you guys have significant customers, I guess, or customer concentration in, like, I'm just trying to get a sense of if anyone's even contributing 5% of revenues in a given quarter or if everyone is sort of down lower towards 1% or sub 1% in terms of contribution.

Thomas Windhausen: Right. We do not have any 5% customers in Hawk Search, but we do have some guys that are significantly larger than other ones. And we speak about them a lot, and I'll tell you that Hewlett Packard is a partner, not just a customer, and has driven a lot of innovation with us. And we've got an outstanding relationship with them, and they participate in our conferences. And it's a very important relationship. And, also, consolidated electrical distributors, same thing. We've brought a lot of innovation, made great suggestions to us. But nobody is at 5%.

Casey Ryan: Okay. Okay. Great. Well, all really helpful. You know, it feels like the execution's really good, and I appreciate you taking my questions. And I appreciate the update. Thank you.

Thomas Windhausen: Thank you, Casey. Nice speaking.

Operator: Thank you. Once again, if you have any questions, please indicate so now by pressing star one on your telephone keypad. Okay. As we have no further questions in line at this time, I would like to hand it back over to management for any closing remarks.

Thomas Windhausen: Great. Thank you. Well, thank you, everybody, for joining us today. We very much appreciate your continued support of all of our investors and of our customers and of our partners. We're excited about our business and ongoing growth prospects. We think that we are in the sweet spot right now with respect to B2B companies coming online and us being the number one B2B search platform. We're in the sweet spot with respect to artificial intelligence and how the large language models that are driving this revolution really are tailored very well for the type of product that we have. And we're seeing Hawk Search grow.

I know that everyone is anxious to see that growth shine through, and we expect to see that in 2026. And this is an exciting time for the company. Thank you all. Our next conference call will be in December 2025. Until then, be well.

Operator: Thank you, ladies and gentlemen. This does conclude today's conference, and you may disconnect your lines at this time. And we thank you for your participation.

Where to invest $1,000 right now

When our analyst team has a stock tip, it can pay to listen. After all, Stock Advisor’s total average return is 1,070%* — a market-crushing outperformance compared to 184% for the S&P 500.

They just revealed what they believe are the 10 best stocks for investors to buy right now, available when you join Stock Advisor.

See the stocks »

*Stock Advisor returns as of August 18, 2025

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. Parts of this article were created using Large Language Models (LLMs) based on The Motley Fool's insights and investing approach. It has been reviewed by our AI quality control systems. Since LLMs cannot (currently) own stocks, it has no positions in any of the stocks mentioned. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Image source: The Motley Fool.

DATE

Thursday, Aug. 7, 2025 at 5 p.m. ET

CALL PARTICIPANTS

• Executive Chair — Steve Sanghi
• Chief Executive Officer — Richard J. Simoncic
• Chief Financial Officer — Eric Bjornholt
• Head of Investor Relations — Sajid Dowdy

Need a quote from a Motley Fool analyst? Email [email protected]

TAKEAWAYS

• Net sales-- Net sales in June were $1.075 billion, representing 10.8% sequential growth for the fiscal first quarter ended June 30, 2025, and exceeding the high end of updated June guidance by $5.5 million.
• Geographic and segment growth-- All geographies and major product lines, including microcontroller and analog, achieved double-digit sequential growth.
• Non-GAAP gross margin-- 54.3% non-GAAP gross margin, including $51.5 million in underutilization charges (non-GAAP) and $77.1 million in inventory write-offs (non-GAAP); incremental non-GAAP gross margin was 76% sequentially.
• Non-GAAP operating margin-- 20.7% of sales (non-GAAP), representing a 670 basis-point sequential increase in non-GAAP operating margin; incremental non-GAAP operating margin was 82% sequentially.
• Non-GAAP earnings per share-- $0.27 non-GAAP earnings per diluted share, $0.01 above the high end of updated non-GAAP guidance.
• GAAP net loss-- $(46.4) million GAAP net loss attributable to common shareholders, or $(0.09) per share (GAAP), including special charges of $22.2 million for foundry exit costs and Fab 2 closure on a GAAP basis.
• Inventory reduction-- Inventory balance declined by $124.4 million sequentially to $1.169 billion; days of inventory fell to 214 from 251 in the prior quarter, and 266 two quarters prior.
• Distribution sell-through versus sell-in-- Distribution sell-through exceeded sell-in by $49.3 million, narrowing the distribution sell-in versus sell-through gap from $103 million in the March 2025 quarter.
• Cash flow and capital position-- $275.6 million in operating cash flow, $244.4 million in adjusted free cash flow for June, $566.5 million consolidated cash and investments as of June 30, 2025, and $175 million reduction in total debt, with net debt increasing by $30.2 million.
• Adjusted EBITDA-- Adjusted EBITDA was $285.8 million, or 26.6% of net sales, with a trailing twelve-month adjusted EBITDA total of $1.167 billion, and a net debt to adjusted EBITDA ratio of 4.22 as of June 30, 2025.
• Capital expenditures and guidance-- Capital expenditures were $17.9 million; capital expenditures for fiscal 2026 forecasted at or below $100 million.
• September guidance-- Net sales expected at $1.13 billion ± $20 million for the fiscal second quarter ending Sept. 30, 2025; non-GAAP gross margin between 55%-57%; non-GAAP operating profit between 22.2%-24.6% of sales; non-GAAP EPS between $0.30 and $0.36.
• Lead times-- Current lead times are mostly four to eight weeks as of the June 2025 quarter, with some products extending to six to twelve weeks due to bottlenecks in substrates, lead frames, and packaging capacity.
• Bookings and backlog-- July bookings were the highest for any month in the last three years; September starting backlog exceeded that of June at the same point in time for the fiscal second quarter.
• AI and product portfolio-- The company introduced new FPGA solutions offering up to 50% power savings or 30% cost reductions; its AI coding assistant increased customer programming productivity by up to 40% as reported by customers in 2025.
• Inventory strategy-- Factory output significantly below shipment rate, with wafer starts planned to increase in December 2025, ahead of full inventory normalization.
• Capital return outlook-- Adjusted free cash flow is expected to exceed dividend payments after the fiscal second quarter, with subsequent excess cash flow targeted at debt reduction rather than share buybacks.

SUMMARY

Microchip Technology (NASDAQ:MCHP) management attributed sequential revenue acceleration in the fiscal first quarter to broad-based end-market improvement, channel and customer inventory reduction, and a recovering demand environment. Executive Chair Steve Sanghi stated that guidance for the fiscal second quarter implies a sequential increase of 5.1%, well above normal seasonality of approximately 3%, in contrast to peers' caution. Automotive remains the weakest end market, while data center and industrial demand are reviving, with lead times starting to lengthen in select regions and product types. The leadership team confirmed continued inventory normalization, progressive margin recovery, and incremental operating leverage as key strategic drivers. Outlook for the December and March quarters is for results "above seasonal," according to management commentary following the fiscal first quarter, with no return to non-cancelable order practices and increasing customer visibility requested to manage supply chain constraints.

• CEO Richard J. Simoncic noted that new defense, aerospace, and AI design wins—including adoption of radiation-tolerant FPGAs and embedded post-quantum cryptography—are broadening Microchip Technology's product reach.
• Management identified U.S.-based manufacturing scale as a potential tariff exemption advantage, subject to further rule clarification.
• Deleveraging will precede any share repurchase program, in line with target leverage metrics (net debt to adjusted EBITDA of 1.5 or lower, as discussed in the June fiscal first quarter earnings call).
• Steve Sanghi stressed that extended customer backlog and flexible cancellation terms differentiate current engagement from prior non-cancelable booking programs.
• No material impact was reported from recent currency shifts, as 99% of revenue and assets are U.S. dollar-based.

INDUSTRY GLOSSARY

• Sell-in: Shipments from the company to distribution partners or direct customers, not yet reflected in end-user consumption.
• Sell-through: Actual products sold by distribution partners to end customers, representing true demand signals.
• PSP program: Non-cancelable, non-returnable pricing and supply program used by Microchip Technology during COVID-era supply disruptions.
• CNSA 2.0: Commercial National Security Algorithm Suite 2.0, a U.S. government cryptographic standard for defense and secure applications.

Full Conference Call Transcript

Steve Sanghi: Thank you, operator, and good afternoon, everyone. During the course of this conference call, we will be making projections and other forward-looking statements regarding future events or the future financial performance of the company. We wish to caution you that such statements are predictions, and that actual events or results may differ materially. We refer you to our press releases of today as well as our recent filings with the SEC that identify important risk factors that may impact Microchip Technology Incorporated's business and results of operations. In attendance with me today are Richard J. Simoncic, Microchip Technology Incorporated CEO, Eric Bjornholt, Microchip Technology Incorporated CFO, and Sajid Dowdy, Microchip Technology Incorporated's head of investor relations.

I will provide a reflection on our fiscal first quarter 2026 financial results. Eric will go over our financial performance, and Richard J. Simoncic will then review some product line updates. I will then provide an overview of the current business environment and our guidance for 2026. We will then be available to respond to specific investor and analyst questions. Microchip Technology Incorporated employees are often referred to as chippers. I will begin with a question for all of you, and then I will provide the answer. How many chippers does it take to deliver a good quarter? The answer is that it takes quite a few.

But they all showed up to deliver an outstanding quarter like we produced in June 2025. And that is the point I want to make. 18,000 employees of Microchip Technology Incorporated worked all last year on a pay cut, have not received a bonus or a salary increase in a year and a half, and suffered through a gut-wrenching global layoff earlier this year in March. These employees, working with high morale, came together to deliver an outstanding quarter. I tip my hat to all 18,000 employees of Microchip Technology Incorporated worldwide. I will highlight a few salient points of our financial results. 10.8% sequential sales growth. Net sales were up sequentially in all geographies.

Sales from our microcontroller and analog businesses were both up in double-digit percentages sequentially. Non-GAAP gross margin was 230 basis points sequentially, and incremental non-GAAP gross margin was 76% sequentially. Non-GAAP operating margin was up 670 basis points sequentially, and incremental non-GAAP operating margin was 82% sequentially. Inventory went down by $124 million sequentially. Our target for the whole fiscal year is a $350 million reduction, so we are off to a very good start. Inventory days were 214 days. Our inventory over two quarters has gone down from 266 days to 251 days to 214 days. We expect inventory at the September quarter to be between 195 and 200 days.

The inventory write-off in the June quarter was $77.1 million, down from $90.6 million in the March quarter, was $51.5 million, down from $54.2 million in the March quarter. Adding $77.1 million inventory write-off and $51.5 million of underutilization charge makes a total of $128.6 million of charges. Divide that by the net sales of $1.075 billion, and you get a non-GAAP gross margin impact of 12 percentage points. Adding it to the reported non-GAAP gross margin of 54.3% indicates that the product gross margin was 66.3%. The point is, as inventory write-off and under charges decrease, we believe our long-term non-GAAP gross margin target of 65% is achievable.

We have accrued about $5.5 million from the upside profit to provide a small bonus to our 18,000 employees who deserve it very much. The net impact from this approval is less than a penny per share. And with that, I will pass it on to Eric Bjornholt, who will take you through our more detailed financial performance last quarter. I will come back later to discuss the business environment and provide guidance for the second quarter. Eric?

Eric Bjornholt: Thanks, Steve, and good afternoon, everyone. We are including information in our press release and on this conference call on various GAAP and non-GAAP measures. We have posted a full GAAP to non-GAAP on the Investor Relations page of our website at www.microchip.com, and included reconciliation information in our earnings press release, which we believe you will find useful when comparing our GAAP and non-GAAP results. We have also posted a summary of our outstanding debt and our leverage metrics on our website. I will now go through some of the operating results, including net sales, gross margin, and operating expenses.

Other than net sales, I will be referring to these results on a non-GAAP basis, which is based on expenses prior to the effects of our acquisition activities, share-based compensation, and certain other adjustments as described in our earnings press release and in the reconciliations on our website. Net sales in June were $1.075 billion, which was up 10.8% sequentially, $5.5 million above the high end of our updated June guidance provided on May 29. We have posted a summary of our net sales by product line and geography on our website for your reference. On a non-GAAP basis, gross margins were 54.3%, including capacity underutilization charges of $51.5 million and new inventory reserve charges of $77.1 million.

Operating expenses were at 33.7% of sales, and operating income was 20.7% of sales. Non-GAAP net income was $154.7 million, and non-GAAP earnings per diluted share was $0.27, which was $0.01 above the high end of our updated guidance. On a GAAP basis in June, gross margins were 53.6%. Total operating expenses were $544.6 million and included acquisition intangible amortization of $107.6 million, special charges of $22.2 million, which was primarily driven by foundry contract exit costs and our activities associated with the closure of Fab 2, share-based compensation of $45.2 million, and $7.5 million of other expenses. The GAAP net loss attributable to common shareholders was $46.4 million or $0.09 per share.

Our non-GAAP cash tax rate was 11.25% in June, and we expect to record a non-GAAP tax rate of about 9.5% in September. Our non-GAAP tax rate for fiscal year 2026 is expected to be about 10.25%, which is exclusive of a transition tax and any tax audit settlements related to taxes accrued in prior fiscal years, and was positively impacted by the impacts of the recently passed One Big Beautiful Bill. Our inventory balance at June 30, 2025, was $1.169 billion and down $124.4 million from the balance at March 31, 2025. We had 214 days of inventory at the end of June, which was down 37 days from the prior quarter's levels.

Our inventory reduction actions are what drove this. Included in our June ending inventory was 616 days of long life cycle, high margin products whose manufacturing capacity has been end of life by our supply chain partners. Inventory at our distributors in June was at 29 days, which was down four days from the prior quarter's level. Distribution sell-through was about $49.3 million higher than distribution sell-in. Our cash flow from operating activities was $275.6 million in June. Our adjusted free cash flow was $244.4 million in June. And as of June 30, our consolidated cash and total investment position was $566.5 million. Our total debt decreased by $175 million in June, and our net debt increased by $30.2 million.

Our adjusted EBITDA in June was $285.8 million and 26.6% of net sales. Our trailing twelve-month adjusted EBITDA was $1.167 billion, and our net debt to adjusted EBITDA was 4.22 at June 30, 2025. Capital expenditures were $17.9 million in June, and we expect capital expenditures for fiscal year 2026 to be at or below $100 million. Depreciation expense in June was $39.5 million. I will now turn it over to Richard J. Simoncic, who will provide some commentary on our product line innovations in June. Richard?

Richard J. Simoncic: Thank you, Eric, and good afternoon, everyone. I am pleased to share our operational progress this quarter, highlighting strong momentum across aerospace, defense, AI applications, and network connectivity. As a leading semiconductor supplier to the Department of Defense and our NATO allies, our aerospace and defense business continues to strengthen amid increased global defense spending driven by geopolitical tensions and NATO modernization. With over sixty years of aerospace and defense heritage, including from our acquisitions, we have recently achieved significant defense industry device qualifications and continue to expand our product portfolio to support commercial aviation, defense systems, and space applications. Microchip Technology Incorporated plays a key role in supporting products to many modern defense platforms.

Also, our radiation-tolerant FPGA solutions can deliver up to 50% power savings while maintaining the highest levels of security and reliability. We have recently expanded our FPGA portfolio by introducing cost-optimized solutions that deliver up to 30% cost reduction while maintaining industry-leading performance and security. This positions us firmly across both high-reliability defense applications and broader industrial markets. Microchip Technology Incorporated continues to be a leader in the microcontroller industry and enabling customers with our AI coding assistant, aiding customers to achieve up to a 40% productivity improvement programming our microcontroller devices.

At Masters, our major technical conference this week, we previewed further advancements for the attendees with the inclusion of AI agents into the AI coding assistant, that will be released into the market in September, further improving productivity and reducing time to market for our customers. The AI build-out continues to create substantial opportunities across our portfolio. We have secured design wins in data center infrastructure spanning AI acceleration, storage, and network infrastructure with tier-one cloud providers and enterprise leaders. We have strategically expanded our connectivity, storage, and compute offerings for AI and data center applications as well as intelligent power modules for AI at the edge. Security remains paramount as defense and AI deployments proliferate.

We have made significant advances with embedded controllers that feature immutable post-quantum cryptography support, which was recently mandated by the NSA. This support enhances the security of platforms using our digital signing for secure boot and secure firmware over-the-air updates. These capabilities are essential enablers to protect our defense, industrial, and AI applications well into the future in compliance with critical standards such as CNSA 2.0 and the European Cyber Resiliency Act. With that, I will pass the call to Steve for comments about our business and guidance going forward. Steve?

Steve Sanghi: Thank you, Richard. During the last quarter's earnings conference call, I talked about a trifecta effect on our revenue growth. We saw that effect in action last quarter. First, our distributors' customers' inventory is getting corrected, and we saw the first sequential increase after two years in distribution sales out last quarter. Second, the distributors sell-in versus sell-through gap shrunk from $103 million in March to only $49.3 million in June. So distribution sell-in is rising to meet the sell-through, and we believe there is more to go. And third, our direct customers' inventory is getting corrected, and we saw the first sequential increase in direct sales in two years.

This trifecta effect led to a 10.8% sequential growth in our net sales in June. We believe that this dynamic is still in effect. Importantly, we believe that what we are seeing represents structural demand recovery as we remain below normalized end-market demand levels. After two years of correction, we believe we are feeling a supply chain deficit rather than experiencing any significant pull-forward activity. The second effect I have spoken about is the impact on gross margins. As the inventory comes down, our inventory write-off will decrease, thus growing our gross margin percentage. As the inventory comes down and we start to grow the factories again, our underutilization charge will decrease and will further grow the gross margin.

We saw these two effects in action last quarter. Our inventory write-off decreased from $90.6 million in March to $77.1 million in June. A factory underutilization charge dropped from $54.2 million in March to $51.5 million in June. This combined effect is adding to our gross margin. We expect the increase in gross margin percentage will continue as the inventory write-off decreases and we ramp the factories, which will lower the underutilization charge. We currently plan to start increasing wafer starts in December. Now, the market environment. We are seeing some recovery in our key end markets: automotive, industrial, communication, data center, aerospace and defense, markets, and consumer are all looking somewhat better.

While we have not seen any material tariff-related pull-ins in April and May, we saw some selective acceleration of orders from Asia, which appear to be tariff-related. We believe that such pull-ins amounted to only mid to high single-digit millions. However, it is important to provide context on pull-ins more broadly. We are still shipping below normalized end-market demand across most of our markets after two years of inventory correction. This deficit to normal demand level means that any pull-in we are seeing represents underlying demand where the inventory has run out at the customers rather than borrowing from future quarters. Now let's go into our guidance for September.

We believe substantial inventory destocking has occurred at our customers, channel partners, and downstream customers, and the trifecta effect is in play. Our backlog for September started higher than the starting backlog for June, and as of this time, the backlog for September is comfortably higher than the backlog for June at the same point in time. The bookings for July were higher than bookings for any month in the last three years. I will make a comment about lead times. While lead times for products have been four to eight weeks for some time, we are experiencing a lead time bounce off the bottom and increases on some of our products.

While we have sufficient inventory, it is mostly held in the die form. We still have to package and test the products. We're running into challenges on certain kinds of lead frames, substrates, and subcontracting capacity. While these challenges are isolated to specific areas, we expect them to broaden and lead times go from the four to eight weeks range to more like six to ten weeks range out in time, and on certain products, they're likely to go to eight to twelve weeks range. The customer and distributor inventories have begun to run low on many products. We are increasingly getting short-term shipment requests and pull-ins of the prior orders.

Our customers will be well advised to manage their backlog and have twelve to sixteen weeks of their needs on backlog so they are not caught short. The emerging lead time pressures and increasing customer requests for expedited shipments reflect the reality that inventories have run too low on certain products. This dynamic supports our view that we are seeing demand normalization from a severely corrected starting point rather than speculative buying or any significant pull-forward activity. Taking all of these factors into account, we expect our net sales for September to be $1.13 billion plus or minus $20 million. We expect our non-GAAP gross margin to be between 55-57% of sales.

We expect our non-GAAP operating expenses to be between 32.4-32.8% of sales. We expect our non-GAAP operating profit to be between 22.2-24.6% of sales. We expect our non-GAAP diluted earnings per share to be between $0.30 and $0.36 per share. I want to again highlight the leverage in our business model. With a $54.5 million sequential increase in net sales at the midpoint, we would expect to see approximately 77% of such amount go to the bottom line as non-GAAP operating profit. As the inventory drains further and inventory write-offs decrease, we expect our gross margin recovery will accelerate, and with the incremental profits going to the bottom line, we will have tremendous leverage.

Finally, a comment on our capital return program for shareholders. After this September, we expect our adjusted free cash flow to exceed our dividend payment, driven by increasing revenue and profitability, low CapEx, and liberating cash from the inventory. Therefore, we do not expect to have to borrow money to pay our dividend after this quarter. In future quarters, we intend to use this excess adjusted cash flow to bring down our borrowings. With that, operator, will you please poll for questions?

Operator: Thank you. Ladies and gentlemen, we will now begin the question and answer session. You will hear a three-tone prompt acknowledging your request. Should you wish to cancel your request, please press star followed by the two. I would like to advise everyone to have a limit of one question and a brief follow-up. If anyone has an additional question, you can put yourself back in the queue by pressing star one again. One moment for your first question. Thank you. And your first question comes from the line of Vivek Arya. Thank you. Please go ahead.

Vivek Arya: Thank you for taking my question. Steve, many of us equate better than seasonal sequential trends as a sign of recovery. When you look at your September outlook, sales up 5% or so sequentially, would you call that seasonal, above seasonal? Basically, what we are all trying to get our hands on is yes, there is a recovery, but are we done with that stronger recovery as in a lot more above seasonal quarters? So just how would you describe September seasonal, above seasonal? And then what does that kind of inform us as to how December could shape up in similar terms?

Steve Sanghi: So thanks, Vivek. Quarter guidance of 5.1% up sequentially would be considered well above seasonal. Our seasonal increase usually per quarter is really in the 3% range in the September quarter. And December quarter usually is the weakest quarter of the year. In ordinary times, totally normal inventory times, December quarter will be sequentially slightly down. March quarter will be up again. So we were strongly above seasonal in the June quarter, we're strongly above seasonal in the September quarter, and I would expect that we'll continue to be above seasonal in December and March.

Vivek Arya: Alright. Thank you, Steve. And you know, when we look at several of your peers, they had a strong June. They kind of guided September line as but they expressed some caution as they looked at December onwards. Mainly because there seems to be kind of this renewed threat about the delayed impact of tariffs and whatnot. What's your read, Steve, of the macro environment? Do you think that as you look out beyond September that the recovery is as strong as you thought three months ago? Just how would you contrast the recovery you are seeing versus the slightly more conservative tone that some of your analog peers have indicated on their earnings calls? Thank you.

Steve Sanghi: So, Vivek, our sales went down much more significantly than others because of really excessive inventory at the direct customers as well as channels, driven by our PSP program, which was launched during the COVID years and continued well afterwards. Many of our competitors and peers got off the non-cancelable, non-returnable treadmill, I think a year earlier than Microchip Technology Incorporated did, and therefore, we continued to ship large amounts of products to our customers and distributors in accordance with the PSP rules. Therefore, when we eventually corrected, our sales went down much, much harder than others. So what we are seeing right now is the trifecta effect we talked about.

Inventory is going down at our distributors' customers, they're going down at distributors. Our sales in are catching up to sales out from distributors. Our direct customer inventory is going down. So we believe the dynamics that are taking place at Microchip Technology Incorporated are more driven by those kinds of factors and not any kind of tariff-related pull-in. We have done substantial analysis on the tariff question. Part of our normal process each quarter is to ask our distributors to explain any significant fluctuations in their customers' quarterly sales. This is done at a very forensic level, covering a large percentage of our customer base.

We did this, and we identified a small number of customers that identified tariffs as the reason for the sequential change in their revenue. When we extrapolated this data, we believe the impact came out to be only mid to high single-digit, $7-9 million range. We have no direct customers that indicated that tariffs were the reason for their increase in revenue. I also want to remind investors that a very high percentage of our direct customer exposure in China actually is manufactured in free trade zones that are not impacted by tariffs. Therefore, the phenomena we're seeing at Microchip Technology Incorporated is really related to inventory digestion than any kind of tariff plan activity. Thank you.

Operator: Thank you. And your next question comes from the line of Harsh Kumar. Thank you. Please go ahead.

Harsh Kumar: Yeah. Hey, Steve. I've got two as well. Steve, I was hoping that in September, you could help us understand the growth between the two key end markets, auto and what I would call as pure industrial. And why I'm saying pure is because you're in defense, and defense is very strong for obvious reasons, and it's skewing things for the industrial category. So I was hoping that just outside of defense, if you could just talk about in September, which ones, you know, how do you see auto versus pure industrial playing out?

Steve Sanghi: So, with such a strong growth of 10.8% sequentially, which you annualize it, it's a phenomenal, enormous rate of growth. With a very, very strong June quarter, we actually saw growth across all of our product lines, end markets, microcontrollers, analog. So it was very, very broad-based and all geographies. Therefore, I think my simple answer would be we saw recovery pretty in all end markets.

Harsh Kumar: Okay. Fair enough. Can I ask you, Steve, if at this point, you feel like sell-through is equal or higher than sell-in at your distributors? And if there's a gap, what kind of gap there is, you know, to the best of your knowledge? I know a difficult one to answer, what kind of gap exists? And your inventory dollars came down, I think, by $124 million, which is a big number. How far do you think you are from where you want to be in terms of optimal inventory level?

Steve Sanghi: I think we gave you the number in our prepared remarks. Let me pull it out again. Sell-through and distribution. Yeah. So maybe I missed this, Steve. Was $49.3 million higher than what sell-in was. And, you know, that's just the distribution piece of our business, which is a little less than 50%. We absolutely believe that our direct customers are draining too and consuming more than we're shipping to them, but we just don't have real-time data to show you. But that $49.3 million compares to a $103 million the quarter before. So the gap is shrinking, but there's still a gap. There's still a $49.3 million gap. So sell-in is rising to meet sell-through.

Now we closed half the gap last quarter. And, you know, we don't know. It could take a couple of more quarters to close the rest of the gap.

Eric Bjornholt: They can't be. Yeah. Progress we're making towards inventory. Right? The inventory target overall. And, Steve, do you want to address or do you want me?

Steve Sanghi: No. So I'll address it. So we are bringing inventory down in days of sales in pretty heavy chunks. It was 266 days of inventory at the December, that came down to 251 days at the March. Came down to 214 days, very large drop, at the June. And we are forecasting that we'll break the 200 and be between 195 and 200 at the September. In dollars of inventory reduction, we reduced inventory last quarter by $124.4 million. So we're making massive progress by shutting down one of our fabs, the Tempe Fab 2, and a substantial scaling down of our other fabs, we are producing products in our factories which is well, well below the rate of consumption.

That's why the inventories are dropping by a very large amount. And you know, that essentially will continue. We will start growing wafer starts in December, as I said in my remarks. And not that, you know, our inventory has fully come down. But if we wait till our inventory is totally normal to then start growing the fabs, we're going to have to grow the fabs by 30, 40% in a single quarter. And that's not possible. So therefore, we have to start early and asymptotically reach the number where the fabs need to run.

Harsh Kumar: Understood, Steve and Eric. Thank you so much.

Operator: Thank you. And your next question comes from the line of Chris Caso from Wolfe Research. Please go ahead.

Chris Caso: Yes. Thanks. Good evening. I guess the first question, maybe following on some of your prior comments, is just getting a sense of how far below end demand you think you're really shipping now. And, you know, recognize you have your best data with distributors, and you talked about how low point of sale is. And I guess the quick math it would seem like I guess you're about maybe 10% below point of sale and distribution. The distributor inventory is also not at bad levels. Do you have a sense of how much by how much you might be undershipping, you know, real end demand at your direct customers?

Steve Sanghi: We have a sense, but sense is not audit-proof and really can't be discussed outside. You know, the number that we could share and we have shared is the gap between sell-in and sell-out because those are two actual numbers. Other than that, how much inventory our distributor customers have is very anecdotal. By asking our distributors, by asking some of the customers that we jointly visit, and since the customer base is so broad, having 110,000 plus customers, you know, even if you do the analysis based on larger customers, it's really, you know, it's not audit-proof. And then when you get to your direct customers, the analysis is even more difficult.

Many of our large industrial customers buy, you know, 900 different line items and produce the product in 26 different factories around the world. You know, and some products have inventory and some products are assured and they're expediting those products. So to get a total feel for it is very difficult. But anecdotally, as we do the analysis, we know many, many line items that have a run rate and they're not buying because they still have inventory. And on other line items, they were not buying two months ago or three months ago, and they're buying now, which means the inventory is running low.

So I think when I put it all together, I believe inventory correction will continue for some time. And our sales will continue to grow towards the more normalized levels. Exactly how far are we and when will that end, I don't think I can put a number with very high confidence.

Chris Caso: Right. I mean, it sounds like and maybe I could ask a different way, which would be easier to answer. Do you think that you're undershipping the direct customers by more or less than the distribution customers? Based on the rough analysis you've been able to do?

Steve Sanghi: Again, just directionally, during the go-go days, we prioritized shipping to direct customers more than to distributors. So direct customers got a more than fair share of the product. And therefore, direct customers in most cases build a higher amount of inventory than the distributors were able to do. So, I think just by that statement, I would say the inventory at the direct customers is probably higher than the inventory at distributors.

Chris Caso: Right. Alright. That's helpful color. Thanks, Steve.

Operator: Thank you. And your next question comes from the line of Blayne Curtis from Jefferies. Please go ahead.

Blayne Curtis: Wanted to maybe I misheard it. I just wanted to know the timing you talked about lead times extending from four to eight, six to ten, eight to twelve. Is that now, or is that where you expect it to go?

Steve Sanghi: So lead times, broadly on most of our products, lead times are four to eight weeks. But on certain products, like I said, in certain pockets, the lead times have gone longer. And some of them are six to ten weeks, and some are even headed towards eight to twelve weeks. And those are cases where we are short of lead frames or short of substrates or in a given pocket, given package type, our subcontractors are overbooked. We're trying to find and negotiate a place. So, you know, this always starts partly like this. And we have a substantial recovery to go through in our sales still. Because we're shipping so much below the end consumption.

This is just a warning shot to our customers. You know, to really bring their backlog healthy because lead time being short, you get very short-term booking, you get very short-term visibility. So it's a message to our investors, but more than that, it's a message to our customers to make sure that they look at their demand for, you know, twelve to sixteen weeks. And give us that backlog so we can buy lead frames and substrates and start wafers and do everything in the right mix to be able to meet their needs.

Blayne Curtis: Gotcha. So I think you kinda answered it, but you said that you had more bookings at this time versus last time, the same time frame last quarter. I guess, lead times, you know, kind of the duration's the part we don't know. When you look at how you set the guide, is the level of turns you're looking for in the quarter the same, or is it different?

Steve Sanghi: Yes. So July bookings were the largest bookings for any month in the last three years. Any month of June quarter, but any month of the prior three years, we had a very, very strong month of July. Now, you know, bookings every quarter are different based on how much backlog you begin with and what the lead times are. If the lead times are short, you get higher turns. If the lead times are longer, you get less. And our backlog started in September quarter stronger than June quarter. And, you know, the turns requirement is about the same. And with the same kind of turns requirement, roughly, I think we'll have a good quarter.

Blayne Curtis: Thank you.

Operator: And your next question comes from the line of James Schneider from Goldman Sachs. Please go ahead.

James Schneider: Good evening. Thanks for taking my question. I was wondering if you could maybe comment on any end markets that you think are materially lagging in terms of end demand? Steve, I know you talked about a number that are doing well as most of them, I believe. Any that are lagging? And, you know, do you see any in the ones that are lagging? The reason I asked the question is because I believe your other products didn't really grow much sequentially and think they were down slightly sequentially? Just trying to understand what happened there.

Richard J. Simoncic: I would say automotive is still lagging more than any of our other markets today. If you wanted to be specific about that. AI data centers or data centers are doing very well and recovering. Industrial, you know, some of the smaller and medium-sized customers are starting to recover. It seems that the one that's probably lagging the most is automotive at this point in time.

Eric Bjornholt: Yeah. And that other category of revenue that you're referring to is, you know, everything other than the microcontrollers and analog and includes licensing and some other things that tend to be a little bit more lumpy. So that can drive some of that fluctuation quarter to quarter, Jim.

James Schneider: Okay. That's helpful. Thank you. Then maybe just as a follow-up, relative to President Trump's press conference yesterday, he talked about tariff exemptions for companies with U.S.-based investment or increased U.S.-based manufacturing investment. Just wanted to confirm, is it your understanding that your existing U.S. manufacturing investments qualify you for that exemption, or do you have to do more or do you not know yet?

Steve Sanghi: Yeah. So I think, you know, anything President Trump says is never clear and often changes a week or two weeks later. But the way we understand what he said is it's not by products that are made in the U.S. and the products that are made overseas. So we make some products here, and we make some products overseas in TSMC and other places. So it's not that you have to pay a tariff on the products that are made overseas. But you qualify as a company. Now as a company, we make a large amount of manufacturing in the U.S. And then we also buy wafers from foundries outside.

So because we make so many investments in the U.S., and a large amount of our manufacturing in the U.S., our interpretation is that we will qualify to be exempt from tariffs. And if that is the case and if that holds, then I think we are okay. And maybe in better shape than some of our competitors, like the Japanese competitors and others.

James Schneider: Thank you very much.

Operator: And your next question comes from the line of Timothy Arcuri from UBS. Please go ahead.

Timothy Arcuri: Thanks a lot. Steve, you said bookings are the highest since July 2022, but in reference to another question, you're guiding up 5%. Yes, it is better than seasonal, but it's not that much better. And then you just said the turns are about the same in Q3, unless I miss what you said. So to me, that kind of implies that a lot of these bookings are filling in Q4, as in the December, you know, rather than, you know, calendar Q3. So is it fair that you can say at this point that December should be another really good quarter?

Steve Sanghi: Yeah. I think I'm not willing to get that far. I think I said in my commentary that I expect us to continue to be above seasonal in September, December, and even in March. You know, a good quarter is anybody's definition. I don't know. Without numbers, what that means. But what happened on July 1, our backlog for the September quarter was meaningfully higher than our backlog for the June quarter on April 1. And if you get about the same amount of turns this quarter as we got last quarter, then we'll have a good September quarter.

Having said that, you know, there are strong bookings this quarter, some are turns, and some are going into the calendar fourth quarter.

Timothy Arcuri: Okay. Thanks. And then you did say that lead times are lengthening, and you actually said you're encouraging customers to expedite orders. I think a lot of us see what happened to, you know, last cycle and worry that when we hear that, that it could scare customers off a little bit. Because of the potential to get back into a PSP sort of a dynamic. So if lead times are already sort of doubling for some products and you barely even come off the bottom, how are you managing this messaging to customers to avoid what kind of, you know, happened last cycle? Thanks.

Steve Sanghi: Well, first of all, you know, we're not asking any customers to expedite orders. We're simply asking them to place the order with a scheduled backlog. You know? So today, a lot of the orders are very short-term orders because lead times are very short. And what they need in Q4, they think they can place the order in late September and still get the product. And we're simply saying look a little bit farther ahead and lay it in the backlog for every month going out four months. Which is not the same as expediting orders. We're not asking them to take the product early. We're not trying to ship above demand.

We're simply asking them to place the orders. Secondly, we're not changing the rules of cancellation. So if they give us a higher visibility, and their demand changes, higher or lower, or they want to change the product, the product is cancelable. It's not a non-cancelable order. So they have complete flexibility. Therefore, there is no comparison to a PSP environment here.

Eric Bjornholt: Right. Yeah. The other thing that we are seeing from customers, and Steve kind of alluded to this earlier, is we are seeing them, they'll have an order already on the books, and then they ask to pull that in. And sometimes that can be challenging without visibility to be able to meet their new requested date. So, you know, having better backlog visibility helps us better service the customer. So that's really all we're saying here.

Richard J. Simoncic: Yeah. And at least having extended backlog, even if they do wind up pulling that in, that is still better for us because it allows us to plan capacity and purchase materials that we may need to build that product.

Timothy Arcuri: Okay. Thank you all.

Operator: Thank you. And your next question comes from the line of Harlan Sur from JPMorgan. Please go ahead.

Harlan Sur: Hi, good afternoon. Thanks for taking my question. Steve, on the accelerated demand signals from Asia, Asia was up about 14% sequentially versus Europe and North America at about eight. Even if I exclude the mid to high single digits millions of dollars, which may be pulled forward, Asia was still up strongly at about 12 or 13% sequentially. And then on a year-over-year basis, Asia in the first half was down only about half of what the US and Europe was through the first half of the year. So what's driving the relative strength in Asia both sequentially and through the first half of this year?

Steve Sanghi: I think a lot of the Asia strength is a proxy on what's happening in the US and Europe. Because, you know, we build our customers, you know, European and US customers build a lot of their product in Asia. So we report sales by, you know, where we sell, where we ship the product. Not where it is designed or where the origin of the customer is. So a lot of our US customers, you know, asking us to ship the product in China or Taiwan or Vietnam or Asia or wherever.

So I don't think you can quite look at it, you know, by numbers you could say, you know, Asia is stronger, but a lot of that strength is coming from US and European customers.

Eric Bjornholt: Yeah. And I think another impact that we see and saw in June is you're comparing it to March, which has the Chinese New Year. Right? So there's some of that effect that's reflected in the June results.

Steve Sanghi: That's true. More shipping days.

Harlan Sur: Yeah. That makes a lot of sense. Okay. And I apologize if I missed this. I think you did mention something about turns business, but, you know, in addition to the strong rising orders that you saw in March, June, and a cyclical recovery, we typically do see stronger turns business, right, orders placed and fulfilled in the same quarter. I know your turns business rose as a percentage of sales in March. Did that turns percentage grow in the June quarter? And what are you guys seeing thus far here in the September quarter?

Eric Bjornholt: Yeah. So I would say that, you know, turns were strong in the June quarter, and, you know, that's not surprising because we obviously beat on revenue. So turns were higher, and lead times are really short for the vast majority of products. And we would expect turns to continue to be a pretty high number for us, given where lead times are today. And, obviously, if lead times stretch, that'll change over time.

Harlan Sur: Great. Thank you.

Operator: Thank you. And your next question comes from the line of Quinn Bolton from Needham and Co. Please go ahead.

Quinn Bolton: Hi, guys. I just wanted to ask on the gross margin guidance. Can you give us some sense, what total charges for underutilization and write-offs you're assuming in that 55 to 57% range?

Eric Bjornholt: So we don't break that out. You know, we did say that we'd expect the underutilization charges to be modestly lower, and I would say that is mainly driven by activities increasing in our back-end factories. The wafer starts, as Steve indicated, are really planned to go up in December. And we expect the inventory write-offs to be lower. It's a hard number to forecast, quite honestly, but we do expect it to be lower as, you know, the comparison because we start this by looking at twelve months of trailing demand for the calculations. And that is getting to be a better metric for us with the revenue increases that we're seeing.

And then, obviously, our overall inventory dollars are coming down, which helps with that. So it will be lower, but giving you an exact number is difficult to do.

Steve Sanghi: We ship, you know, hundreds of thousands of SKUs in the quarter. So and this inventory write-off is SKU by SKU, looking at every SKU, what its inventory is, and comparing it to the last twelve months of shipments. So it's a complicated calculation, and you can't make an accurate forecast of it.

Quinn Bolton: Understood. Okay. And then the second question I have is just on those products where you're seeing lead time stretch out to the size six to twelve weeks, how much of that is sort of substrate or packaging related versus wafer related? And if it's wafer related, is it mostly outsourced wafers or internal wafers? Because obviously, wafers take probably the longest in the manufacturing cycle. So I'm kind of wondering on at least on those products where you're seeing lead times extend, why you wouldn't be increasing the wafer starts now rather than waiting to December?

Richard J. Simoncic: The majority of that is in substrate or packages, and that's typically how that all starts as business starts to turn around. We still have quite a bit of die stores or die inventory on many of our devices. So it tends to be a matter of just pulling that product out of die stores and ensuring that the substrates and the rest of the assembly materials are in place to bring that out. That's what shifts it a few weeks at a time.

Steve Sanghi: Yeah. We're not seeing shortages on our internally produced product yet. It's mostly back-end like Richard said, and, you know, there could be one or two places where, you know, we have our products coming from a large number of fabs at foundries because this company is built up of acquisitions with Microsemi and Atmel and SMSC, and everybody bought product from different fabs. So we buy product from a large number of fabs, and I think there are a handful of fabs where certain nodes are constrained. So just very, very spotty. There are a few places where, you know, external die is constrained, we're trying to beef that up.

But all the rest of it in Foundry and all of the internally we are printing a capacity, and we're printing a die.

Quinn Bolton: Yeah. But it sounds like it's more back-end than front-end at the current point in time.

Eric Bjornholt: You're correct. Yeah.

Quinn Bolton: Okay. Thank you.

Operator: Thank you. And your next question comes from the line of Joshua Buchalter from TD. Please go ahead.

Joshua Buchalter: Hey, guys. Thank you for taking my questions. Maybe a follow-up on Quinn's. Can you maybe speak to us about what it, you know, what you're looking for that's gonna give you signal that it's all clear to raise utilization rates? Is there a certain inventory target? Is there sell-through demand that you're looking for? I guess I'm curious to hear why there's so much conviction that December will be the right time given you are seeing some cyclical signals improving and, you know, while at the same time, levels are elevated, just curious to how you're thinking about that holistically? Thank you.

Steve Sanghi: So I think the fact is that our current production output from our two fabs with the third fab closed is so far below our shipment rate that if we do not start increasing utilization in the fabs, then there'll be a point where we'll have to double the capacity just to get to the shipment rate. And fabs take a long time to ramp. You can, you know, grow a certain percentage every quarter. So therefore, we have a forecast over the next two years and how much die will be needed for that. Bounce off the die inventory, how long will it take for that to deplete?

And then what is the rate of growth by which we can grow our both Oregon and the other fabs? And then that is solving a math problem on when we need to begin.

Joshua Buchalter: Okay. Thank you. And oh, go ahead.

Steve Sanghi: Oh, you just have to begin well before, you know, well before your die inventory goes too low. Because once the die inventory goes too low, you know, then you get in trouble very rapidly because we're producing only half the product that we need every quarter.

Joshua Buchalter: Okay. Thank you. And I guess on, you know, on that note, understand you don't want to break out the auto utilization and write-down charges, you know, by quarter. But any rules of thumb that we should think about as to how those charges should unwind? Is there a certain revenue level? Or any other factors that we could think of, again, as we think about modeling those charges coming out of the model? Thank you.

Steve Sanghi: I think we gave you incremental gross margin. Didn't we give you incremental gross and operating?

Eric Bjornholt: We did. But maybe it'd be helpful to say that, you know, we expect those underutilization charges to take longer to come out of the system than the inventory write-offs. Like, the inventory write-downs happen quicker, and the ramping of our factories will be gradual over time. So, hopefully, that helps a little bit.

Joshua Buchalter: Yeah.

Steve Sanghi: Okay. Thank you both.

Operator: Thank you. And your next question comes from the line of William Stein from Truist. Please go ahead.

William Stein: Great. Product gross margin, as you highlighted, was 66.3%. And your long-term target is lower than that at 65%. And I wonder, does that imply that you're somehow exceeding your long-term target because of mix or pricing or maybe help us reconcile why product gross margin once these unusual charges go away would decline from where it is now.

Steve Sanghi: But, you know, number one, charges don't ever go to zero. Now there's always some mix issues where certain product is built and the demand went away. You know, number two, when you're 12 percentage points away, you know, I wouldn't quibble about a percent here and there. You know, what I'm simply trying to say is many investors ask us, how are you confident that you'll get to 65 gross margin? And we're saying that, you know, that is achievable based on the math.

William Stein: But is mix or something else going to change such that, you know, perhaps it's the defense end market exposure that's quite high now and as that mix normalizes, does that have an effect of dragging gross margins?

Steve Sanghi: You know, we ship hundreds of thousands of SKUs every quarter. We, you know, have 20 business units, some exchanges every quarter. You know? Some of our, you know, so if I think you're making too much of that, you know, 65 versus 66, I don't differentiate those two numbers.

Eric Bjornholt: Yeah. I would agree with that. And, you know, you shouldn't look at this, but long-term, we think that our product gross margins are going to go down. You know, we're introducing lots of really high-margin products. You know, we talk about 10-based T1S, you know, our Ethernet products. Those are going to be higher than corporate average. You know, we have a lot of confidence in how our FPGA business is going to grow over time. That's higher than corporate. So there's a lot of moving parts there, William. I understand your question. But, as Steve said, we're really just trying to frame this that we have confidence in getting to our long-term model.

And, you know, the mix will have some effect over time, but we've got high confidence that we can get there, and it's just going to take us some time.

William Stein: That helps a lot. If I could squeeze one more in. If sell-in and sell-through sort of continue in September as they did in June, you should be pretty well aligned by the end of the quarter. Is that the right way for us to think about this such that maybe by the time we get to December, we're looking at sell-in being aligned or maybe even higher than sell-through?

Steve Sanghi: I would not think that. I think there is a lot of slow-moving product in distribution. We call it sludge. And it's just not a perfect mix. You know, the product it was bought two years ago in a certain mix, the demand always comes out in a different mix. So I think this will take, you know, more than just the September to close. We're not telling you that September will be sell-in and sell-through will be equal.

Eric Bjornholt: Yeah. There'll be a difference still. And, you know, I've kind of been saying, you know, I think maybe by the end of the fiscal year, we're pretty much aligned, but that's a guess.

Steve Sanghi: Yeah.

William Stein: Thank you.

Operator: And your next question comes from the line of Christopher Danely from Citi. Please go ahead.

Christopher Danely: Just real quick on the incremental gross margins. Eric, I think you said 76% for the September or excuse me, for the June quarter? The December quarter, since you guys are turning the fabs back on or at least increasing utilization rates, would that incremental gross margin go up? And if so, roughly how much?

Eric Bjornholt: No. I think it will be roughly in that same ballpark. If you look at our guidance, you'd look at the revenue change and where we've guided gross margin to. I think it'll be about the same. And I think our fall through to operating profit too would be in a similar range to what we saw in June.

Christopher Danely: Great. Thanks. That's super helpful. And then a question for Steve. So, Steve, now that you've been back in the front seat of the Microchip Technology Incorporated minivan here for, you know, a good nine months, how would you describe Microchip Technology Incorporated's competitive positioning, especially on microcontrollers? Are you, you know, have you seen any improvement? Has it been better than you thought, worse than you thought? How do you see your share going forward? Maybe talk about a, you know, path to gaining back market share. Anything there?

Steve Sanghi: So I think, you know, market shares are kind of hard to decipher when you're dealing with such a large inventory change. When you, you know, simply measure by revenue divided by the total revenue of the industry, it would seem that the market share is much lower. But if some of that revenue comes back when our customer's inventory goes away, and if you grow higher than, you know, the overall industry, which seems to be the case, I have compared, you know, our numbers against semiconductor industry's June ending report for microcontrollers. And we grew substantially more in microcontroller. Can we grow double digits roughly?

Eric Bjornholt: We did. Yes. Yeah.

Steve Sanghi: And the industry was up only about six, six and a half percent sequentially. So that means, you know, we gained share in the June quarter. So some of that share gain is coming back. I think it's going to take a little longer for us to go down this journey before we can really tell what happened. But one of the things which we have corrected is we were weaker at the very low end of 32-bit microcontrollers because we were serving those functionalities with 8-bit microcontrollers. And as customers wanting to be in 32-bit microcontrollers, we had a good portfolio of midrange parts and high-end parts, but we didn't have entry-level parts.

You know, we were competing with 8-bit on that. And I think that's one thing I corrected after I returned. And there are, you know, a couple of very, very good low-end 32-bit parts that we're developing at a very, very good price point. So for one of them gets introduced to the market nearly the start of the next calendar year. So those will strengthen our position further. But I think, you know, more than that, there are a few things we have done. One other thing was, you know, for 8-bit and 16-bit, we had our own proprietary architecture. You know, thick architecture. We didn't use ARM or anybody, any industry standard architecture. All the tools were ours.

We developed our own tools. So when we went to 32-bit microcontrollers and adopted ARM as well as MIPS to build it, our internal strategy remained that we brought those parts on our own tools, which were proprietary tools. And ARM has a substantial market share at a 32-bit level. All of the competitors build ARM-based products, and many of those companies don't even build the tools because they just simply send the customers more industry standard tools from like IAR and Seger and others. Kyle and a number of other companies. So, basically, when we compete with a customer, you know, we're trying to jam our proprietary tool where they already have an industry standard tool.

And if our products will simply work on that industry standard tool, we'll have a lower resistance level. So I think that's one thing we have changed, you know, in the last nine months where we have enabled all of our 32-bit products to be able to run on industry standard tools. And we're even working with one company at least who will even support our 16-bit DS tech on industry standard tools. So there are, you know, things we are doing to make our lines more competitive, make it easier for our customers to do business with and adopt products.

The other thing that Richard talked about was this coding assistant that we have developed, is a first in the industry, and we're giving it to our customers. It saves almost 40% time for development. It basically writes a code for you. And nobody else has come up with a tool like that. So, you know, everybody would, but we're the first. So, you know, I would say, you know, I think our position is still good, still very competitive. But we did lose share with our PSP strategy. And we hope that some of it is not permanent. And as our sales are growing, we will come back.

Christopher Danely: Alright. Thanks a lot, Steve.

Operator: Thank you. And your next question comes from the line of Tore Svanberg. Thank you. Please go ahead.

Tore Svanberg: Yes. Thank you. I had a question on the pace of the decline of the underutilization charges. So I appreciate you're going to start increasing utilization in December. And I think right now, obviously, those charges are coming down by a few million dollars, obviously, because you still have inventory. But when do we see more step function, you know, in the utilization charge? Is that going to be when you get to that 130, 150 inventory day target, or could we potentially already see it before you get to that level?

Steve Sanghi: It would happen well before that. As I said, if we wait till the inventory comes down to between 130 to 150 days, then we're going to require a very large step function increase in our fabrication output in the following quarter, which is impossible. So therefore, you have to grow over five, six quarters, and we have to start much earlier. So utilization will start improving, you know, well before our inventory gets to those kinds of levels. I think you should see a substantial improvement in utilization probably in December and then continue every quarter after that.

Tore Svanberg: Yeah. That's great color. And then on your cash flow, so great to see the cash flows are now going to be big enough to cover the dividend. You did say that any excess cash flow is going to be used to pay down debt. What's sort of the new target level for debt? That we can try and understand when the buybacks are going to start to pick up again?

Steve Sanghi: So I think what we have said is, and I have this only number as approximate, you know, as may have one number. I think we borrowed about through this quarter, we would have borrowed about $300 million. It's about $350 million to cover the dividend in the last x number of quarters since cash flow became less than the dividend. So the next $350 million of excess cash flow over the dividend will go to bring that debt back to where it really was. So that's factor number one. And factor number two is, you know, our leverage is still very high. We just finished the quarter with a leverage of 4.2.

And if you recall, when we started to increase the dividend and started to buy back, you know, stock and all that, we had said we want the leverage to one and a half or lower. So it's quite a way to go before we, you know, get back to that kind of leverage and a very strong investment-grade rating. So I wouldn't look for a, you know, stock buyback in the near term.

Tore Svanberg: Great color. Thank you, Steve.

Operator: And your next question comes from the line of Vijay Rakesh from Mizuho. Please go ahead.

Vijay Rakesh: Yes. Hi, Eric and Steve. Just a question on the underutilization charges. I think your inventory write-downs and underutilization charges are running fifty-fifty. Do you guys think most of the inventory write-downs get done by September?

Eric Bjornholt: I don't. I don't. I think it takes longer than that, Vijay. But what we expect is that the amount of the inventory write-downs will continue to decline as we move through the fiscal year. So, you know, it's going to take some time, but the charge dropped from $90 million to $77 million last quarter. We expect it to be lower than the $77 million this quarter, and that cadence to continue now for multiple quarters as we see into the future. And underutilization, I think we've talked about a little bit more in response to some of the other analyst questions. It's going to go down modestly this quarter.

And when we increase wafer starts in the factories in December, it will take another step function down. But that one's going to take a little bit longer because we are significantly underutilizing our factories today. And we'll grow it back over time as inventory declines and revenue improves.

Vijay Rakesh: Got it. And, Steve, in response to your section 232 on some of the exceptions that could get with investing in the US, is your understanding that, you know, I'd put you at a much better version versus, this STMicro and Infineon and some of your peers there? Thanks.

Steve Sanghi: Well, I would hope so. I don't really know fully, you know, what the rules are. But I think we produce a higher percentage of our product in the US, you know, than some of the companies you mentioned do. But I don't know whether it makes a difference what percentage it is. I think it's going to be more black and white. If you do some manufacturing in the US, then you know, you qualify for no tariff. I don't know what the rules will be. You know, I think some of those companies have fabs in the US. Some others don't. And I don't know the rules clear enough to be able to interpret that.

I hope we have an advantage. But I'm not sure.

Vijay Rakesh: Got it. Thank you.

Operator: Thank you. And your next question comes from the line of Christopher Rolland from Susquehanna. Please go ahead.

Christopher Rolland: Hey, thanks for the question. Just maybe a clarification or just understanding tone here. I guess, first of all, typical seasonality for December and March, I know it changed since the addition of Atmel. I think the last up down 5% in December and negligible for March, but down a little bit. Maybe if you could update us on that. And then, Steve, you said, you know, you thought you'd be better than the seasonal, but you know, I think the street was at plus 5% or something like that for the December quarter. So like, is that tone as much as 1,000 basis points better than seasonal? If you could update us there, that'd be great.

Eric Bjornholt: Let me maybe start by saying, you know, I don't think seasonal in December is down 5% for us. I think maybe it's down a couple percent. And then maybe seasonal, you know, it's been a long time since we've been seasonal, but maybe seasonal in March would be up a couple percent. So maybe start with that. And, you know, we are not at a point where we want to provide any guidance or able to provide any guidance yet for December. We think our business is trending in the right direction. But, we're not ready to provide. So I'll start with that and see if Steve wants to add anything to it.

Steve Sanghi: I think exactly I wanted to say that, you know, your numbers have a larger bracket on it. I think December is usually down a couple and March is up, you know, two or three maybe. I'm sorry. Up by, you know, two or three. And my expectation is that the business would be better than seasonal in those both quarters without being able to put numbers on it.

Christopher Rolland: Okay. Thank you for that. And then secondly, maybe on AI, I know there was some stuff in the prepared remarks, but you guys had any updates on the percentage or the dollars contributed from AI and if there were any products that are just going gangbusters just above your expectations, whether they're, like, PCIe switches or retimers or FPGAs, or timing products, just anything that's significantly outperforming your expectations. Around AI, that would be great.

Eric Bjornholt: But we haven't broken that out.

Richard J. Simoncic: So we are seeing more and more uptick from our customers using the tools. You know, it's still relatively new. We just launched this in the February time frame in terms of AI code support. It's been used behind our firewall for over a year by our internal engineers and our support engineers supporting customers. And it's improved productivity within our own engineering force quite a bit. On the FPGA front, where we're seeing most of the uptick are used of AI is in vision detection or vision systems. For detecting people or visual inspection in factories are probably the fastest growing areas that we're seeing AI and acceleration used in our products.

Christopher Rolland: Yeah. Any data center products not the AI coding tool. I apologize.

Richard J. Simoncic: No. We have not put out data in terms of pertaining to the AI coding tool. In terms of what it benefits. Right now, the only number that we've given is that typically, customers and engineers that are using it are reporting about a 40% productivity improvement. Which in the end translates to time to revenue improvements.

Christopher Rolland: Thanks, guys.

Operator: Thank you. And your next question comes from the line of Janet Ramkissoon from Quadra Capital. Please go ahead.

Janet Ramkissoon: Congratulations and a nice turnaround, guys. Most of my questions have been asked, but just a couple of little things. Given the recent decline in the US dollar, how does that affect you? And if we see higher budget deficits and higher need to sell more debt and which may lead to a further decline in the dollar, how is that likely to affect you in the next couple of quarters?

Eric Bjornholt: Yeah. So, you know, the foreign currency fluctuations don't have as large an impact on us as some of our competitors that are not as US-based as us. You know, we really sell 99% plus of our revenue is in US dollars. A lot of our assets are going to be US dollar-based. So I think that the impact to us is smaller than what you would see with some of our European competitors as an example.

Janet Ramkissoon: Okay. And secondly, if I may, any comment about your Chinese business or trends? Any insights into what's going on in that market? Thank you.

Steve Sanghi: Chinese business? I think our business in China was very strong. It bounced back very strong from March, which is the Chinese New Year quarter to June, up, I think, 14% or something. So our business is doing very, very well. You know, everybody is talking and concerned about what's gonna happen with tariffs. And I think that's dominating the agenda. But on a business level, it's not really having an impact today.

Janet Ramkissoon: Okay. Thanks very much. Congrats again.

Operator: Thank you. There are no further questions at this time. I will now hand the call back to Steve Sanghi for any closing remarks.

Steve Sanghi: Well, I want to thank all the investors and analysts for hanging in with us. I think we're on our way to making a very, very strong recovery from the, you know, lows in the business environment. And we'll see many of you at a number of conferences we'll go to starting early September, I think.

Eric Bjornholt: Yeah. We actually have a conference as early as next week. So we'll be at a lot of conferences this quarter, and we look forward to further discussions with everybody.

Steve Sanghi: Thank you.

Operator: This concludes today's call. Thank you for participating. You may all disconnect.

Where to invest $1,000 right now

When our analyst team has a stock tip, it can pay to listen. After all, Stock Advisor’s total average return is 1,047%* — a market-crushing outperformance compared to 181% for the S&P 500.

They just revealed what they believe are the 10 best stocks for investors to buy right now, available when you join Stock Advisor.

See the stocks »

*Stock Advisor returns as of August 4, 2025

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. Parts of this article were created using Large Language Models (LLMs) based on The Motley Fool's insights and investing approach. It has been reviewed by our AI quality control systems. Since LLMs cannot (currently) own stocks, it has no positions in any of the stocks mentioned. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Image source: The Motley Fool.

Date

Aug. 7, 2025 at 5:00 p.m. ET

Call participants

• Chief Executive Officer — Peter Beck
• Chief Financial Officer — Adam Spice
• Head of Communications — Murielle Baker

Need a quote from a Motley Fool analyst? Email [email protected]

Takeaways

• Total revenue-- $144.5 million (GAAP) for Q2 2025, representing 36% year-over-year growth and 17.9% sequential growth, above prior guidance.
• Space systems revenue-- $97.9 million, a 12.5% sequential increase, driven by satellite components businesses.
• Launch services revenue-- $66.6 million, a 31.1% sequential increase, with growth from Electron, Neutron, and Haste missions.
• GAAP gross margin-- 32.1%, exceeding the 30%-32% guidance range, due to higher Electron average selling price and favorable product mix.
• Non-GAAP gross margin-- 36.9%, above the 34%-36% guidance, benefitting from increased component sales.
• Total backlog-- Approximately $1 billion, with 41% allocated to launch and 59% to space systems.
• Backlog recognition outlook-- 58% of backlog expected to be recognized as revenue within the next twelve months.
• Electron launches-- Five launches completed in Q2 2025, including two back-to-back within two days and four in June.
• Electron international contracts-- First direct European Space Agency contract for a navigation constellation satellite pair and another sovereign space agency launch deal signed.
• Backlog additions-- Three Neutron missions currently in backlog, with further demand expected after a successful test flight.
• NASA and ESA contracts-- New NASA mission contract for early 2026 launch and first direct ESA mission confirmed this quarter.
• GEOST acquisition status-- Antitrust review cleared; closing expected imminently, adding missile warning sensor manufacturing and vertical integration in payloads.
• Adjusted EBITDA loss-- $27.6 million, better than guidance of $28 million-$30 million, due to higher revenues and gross margins, partially offset by increased R&D spend.
• GAAP operating expenses-- $106 million, above the $96 million-$98 million guidance, mainly from higher Neutron development and headcount-related expenses.
• Non-GAAP operating expenses-- $86.9 million, above guidance, reflecting Neutron-related prototype and production scaling.
• Total headcount-- 2,428 at quarter end, up by 85 from the prior quarter, with increases in production, R&D, and SG&A.
• Capital expenditures-- $32 million in Q2 2025, up $3.3 million from Q1, supporting Launch Complex 3 construction, engine test facilities, and Neutron development.
• GAAP operating cash flow-- Negative $23.2 million, improved from negative $54.2 million in Q1, driven by increased cash receipts from satellite programs.
• Non-GAAP free cash flow-- Negative $55.3 million, improved from negative $82.9 million in Q1, with continued usage tied to Neutron development and infrastructure investments.
• Liquidity-- $754 million in cash, cash equivalents, restricted cash, and marketable securities, enhanced by a $300.8 million at-the-market equity raise for M&A and corporate purposes.
• Neutron development progress-- Flight hardware completed for shipment, Launch Complex 3 site opening scheduled for Aug. 28, production capacity for up to three vehicles in 2026, and first Neutron launch targeted by year-end 2025.
• Engine manufacturing capacity-- Archimedes engine production line established with output of one engine every eleven days and ongoing qualification testing with three to four hot fires per day.
• Regulatory progress-- FCC license secured for Neutron, FAA launch license application accepted, and all necessary transport and site agreements in place for Wallops Island.
• Electron launch outlook-- 20 or more launches expected for full year 2025, including three Haste missions in the second half.
• SDA Tranche 2 program-- Satellite production entered full-scale phase, increasing revenue recognition and positioning for future Tranche 3 opportunities.
• Golden Dome program opportunity-- Positioned to participate as a prime, sub, or component supplier in the $175 billion Golden Dome next-generation missile defense program.
• R&D spending-- GAAP R&D expenses increased by $11 million sequentially; R&D headcount increased by 12 in Q2 2025.
• Outlook — Q3 revenue-- Forecast revenue between $145 million and $155 million, with further gross margin improvement anticipated for both GAAP and non-GAAP metrics.
• Outlook — Q3 gross margin-- Expected GAAP gross margin of 35%-37% and non-GAAP gross margin of 39%-41%, reflecting improved Electron pricing and overhead absorption.
• Outlook — Q3 operating expenses-- GAAP operating expenses estimated at $104 million-$109 million; non-GAAP operating expenses expected at $86 million-$91 million, mainly from continued Neutron development spending.
• Outlook — Q3 adjusted EBITDA loss-- Forecast adjusted EBITDA loss to improve to $21 million–$23 million as higher revenue and margins offset ongoing investment.

Summary

Rocket Lab(NASDAQ:RKLB) reported record quarterly revenue, driven by both launch services and space systems, and advanced its Neutron launch vehicle program with key manufacturing and regulatory milestones. The company secured new contracts with NASA and the European Space Agency, expanded its backlog to $1 billion, and is nearing completion of the GEOST acquisition to enhance its payload and sensor capabilities. Management highlighted operational agility with rapid Electron launch turnaround and noted that positive free cash flow is more likely in 2027 due to ongoing Neutron investments. Liquidity was strengthened by a significant equity raise, supporting both organic and inorganic growth initiatives.

• Management stated Electron launches in June 2025 set a "record turnaround," demonstrating infrastructure optimization.
• Peter Beck said, "For us, a successful launch of Electron will be a success, you know, successfully getting to orbit. And making sure the vehicle is ready to scale," clarifying high standards for Neutron's first flight.
• Management noted that positive free cash flow is "much more likely to be in 2027" given ongoing Neutron scaling investments, even under a success scenario.
• Adam Spice reported that in the first half of 2025, Solero solar business gross margin exceeded long-term 30% targets, contributing to normalization of space systems margin profile.
• Three Neutron missions are already present in backlog, but management anticipates considerable demand to be "unleashed" post inaugural Neutron launch, particularly from risk-averse commercial and government clients.

Industry glossary

• Electron ASP: Average selling price for the Electron small launch vehicle, reflecting contract value per launch excluding ancillary services or bespoke configurations.
• Haste: A variant of Rocket Lab's Electron vehicle specialized for hypersonic test payloads and suborbital flight for missile defense applications.
• Golden Dome: U.S. Department of Defense's next-generation missile defense program, representing a large, multi-year space and national security procurement.
• SDA: Space Development Agency, a U.S. agency overseeing proliferated satellite constellations for national defense.
• Tranche: A defined batch or phase of contract awards, often used in reference to satellite constellation deployments and procurement cycles within government space programs.
• Archimedes engine: The primary engine under development for the Neutron launch vehicle, designed for reusability and diverse flight profiles.
• Solero: Rocket Lab's integrated solar manufacturing business segment, supplying space-grade solar arrays for satellites and spacecraft.
• LC III (Launch Complex 3): Rocket Lab's new Virginia-based launch pad dedicated to Neutron missions and NSSL program activities.

Full Conference Call Transcript

Murielle Baker: Thank you. Hello, and welcome to today's conference call to discuss Rocket Lab USA, Inc.'s Second Quarter 2025 Financial Results. Before we begin the call, I'd like to remind you that our remarks may contain forward-looking statements that relate to the future performance of the company. These statements are intended to qualify for the safe harbor protection from liability established by the Private Securities Litigation Reform Act. Any such statements are not guarantees of future performance, and factors that could influence our results are highlighted in today's press release. Others are contained in our filings with the Securities and Exchange Commission.

Such statements are based upon information available to the company as of the date hereof and are subject to change for future developments. Except as required by law, the company does not undertake any obligation to update these statements. Our remarks and press release today also contain non-GAAP financial measures within the meaning of Regulation G enacted by the SEC. Included in such release and our supplemental materials are reconciliations of these historical non-GAAP financial measures to the comparable financial measures calculated in accordance with GAAP. This call is also being webcast with a supporting presentation, and a replay and copy of the presentation will be available on our website.

Our speakers today are Rocket Lab USA, Inc. founder and chief executive officer, Peter Beck, as well as chief financial officer, Adam Spice. They'll be discussing key business highlights, including updates on our launch and space system programs, and we will discuss financial highlights and outlook before we finish by taking questions. So with that, let me turn the call over to Peter Beck.

Peter Beck: Thanks, Murielle, and thanks to everybody joining us today. Look, we've delivered impressive financial results this quarter with another record revenue of $144.5 million, above the high end of our prior guidance and up 36% compared to last year. Our GAAP gross margin expansion exceeded expectations as quarter two, and the consecutive growth of the company is really exciting to drive. No surprises here that Electron continues to be the leader of the small launch industry. We had five launches across the quarter, two of them back to back from Launch Complex 1 in two days. Demand for its services is also increasing from different countries, with multiple international space agencies signed up for Electron launches this year and next.

We made rapid progress towards the pad with Neutron this quarter. Launch Complex 3 is ready for its grand opening, and we've got the first rocket parts on their way to Virginia. More to share across the program in the up and coming slides here. And finally, in space systems, our prime contractor status is expanding with our imminent acquisition of GEOST. Being able to quickly build and deploy entire satellite systems is the cornerstone of the future US defense strategy. And we're in a prime position to play within those large opportunities within launch spacecraft, and now payloads added to our end-to-end capabilities. So let's get into those details now.

We're very close to finalizing the acquisition of GEOST, a maker of missile tracking satellites for national security missions. Having cleared through the antitrust review, we're on track for signatures on paper here pretty shortly. I'll let Adam take you through the financial details later, but if there's one thing to take away from this deal, it's adding payloads on top of launch and spacecraft really cements their status as a one-stop shop for national security. We're already a trusted disruptor in the launch and prime contractor for Constellation Builds. And this acquisition adds to our competitive advantage. It will bring an extensive inventory of space-based missile warning sensors and manufacturing facilities in Arizona and Northern Virginia.

That secures the domestic supply chain of this critical technology for next-generation missile defense initiatives, like the Golden Dome and SDA constellations. The $175 billion Golden Dome program could prove to be one of DOD's largest procurements to date, and we're in a great position to capitalize on opportunities here. Our strategic investment and the way that we've scaled the company to uniquely meet its needs positions us strongly to win either as a prime contractor, even as a sub, or even as a component supplier. Our pursuit of the Golden Dome extends just beyond payloads. Across its entire ecosystem, we have the technology and capability ready to serve.

We operate the world's most reliable and responsive small launch vehicle, Electron, operating at the fastest cadence of any small launch vehicle in history, having just completed its sixty-ninth launch. With our hypersonic testing variant, Haste, we are revolutionizing the way missile defense technology is tested in a hypersonic environment. A new reusable rocket, Neutron, perfectly answers the call for a diversified launch of the national security and can deploy entire constellations of spacecraft at once to build out the dome's proliferated architecture. We've already won more than half a billion dollar contract with the FDA to build and operate a significant piece of their PWSA network. There's a golden opportunity to build upon that here with our existing capability.

And, look, the list goes on. But I won't belabor the point. Our advantage is our commercial speed and proven execution. The way programs like this have been built in the past, dominated by the large defense primes, just won't work the same time this time around to meet the administration's urgent timeline. It needs agility and innovation, vertical integration, and on-time delivery and execution. That's what we've delivered time and time again across our programs to date, and what we stand ready to deliver for the Golden Dome. There's no better mission on the books that demonstrates the full depth of our capabilities than the Victor's Hayes mission for the Space Force.

Across its tactically responsive space program, we're the only provider delivering a complete end-to-end launch plus spacecraft solution. We're bringing the full stack of offerings across the satellite design, component integration and testing, flight software, ground, mission, and launch license and the launch itself and on-orbit operations. We own the entire mission life cycle and its capability for national security that very, very few others can provide. It's also a great demonstration of how commercial capability like ours can be leveraged to bring the concept of responsive space into operational reality. Exactly what the US administration is seeking with Golden Dome.

This mission has a twenty-four-hour call-up requirement, which quite frankly is business as usual for Rocket Lab USA, Inc. these days, and we recently cleared the program milestone, Victor's Hayes. That moves us into the final integration and testing phase of our spacecraft for the mission and launch of Electron later this year. Another program with major milestone tick is a transport layer constellation bill for the SDA. The program has signed off our satellite design and approach for manufacturing, which means we can now move into full-scale production of these 18 spacecraft and further revenue from this $515 million program.

As this constellation gets underway, we're also preparing for a much larger opportunity within the SDA and its next tranche of satellite contracts. This is where our strategy of bringing key satellite technologies in-house makes us an attractive commercial partner. Our incoming sensor payloads, for example, are also in play for an SDA award and through other bidders. We can control the cost and reduce the schedule risk through our vertical integration in a way that others can't, and we hold the keys to that technology and components that are foundational to these contracts. Excuse me. And finally, for space systems, another strategic area of focus for this past quarter has been in supporting the administration's plans for Mars exploration.

It was great to see a $700 million provided for a Mars telecommunications orbiter in a recent budget. The path to Mars for human spaceflight must begin with the ability to communicate there. And this is something that we've always strongly pushed for. In fact, we were the only company that proposed an independently launched Mars telecom orbiter as part of the end-to-end, Mars sample return mission. So our ambition is clearly in line with the administration's vision for Mars. Much of our technology is already across major Mars missions like NASA and Sight Lander, the Ingenuity helicopter, the cruise stage that brought perseverance to Mars, and, of course, the escapade spacecraft that are ready for launch here soon.

We have got the experience in delivering mission success for Mars exploration and a vertically integrated approach reduces complexity, controls, and provides schedule certainty, all under a firm fixed price. Now on to Electron. Once again, another busy quarter for Electron as demand and launch cadence continues to soar. The beauty of Electron is being able to choose when, where you want to fly. Sometimes for us, that can mean flying very in very close succession, like the four launches in four weeks that we saw in June. And two of those flew just days apart, a record turnaround for us at Launch Complex 1.

We've since racked up launch number 69, and number 70 is scheduled for lift-off next week, keeping us on track for 20 or more launches by this year's end. These missions are a great showcase of how quickly we can turn around launches as the manifest demands. With the infrastructure, production, and capability to place and support a launch a week, as the demand for small dedicated launch continues to expand. Beyond Electron's proven heritage as America's most frequently launched small rocket, international space agents are coming to rely on it for access to orbit as well.

We signed our first direct launch contract with the European Space Agency this quarter to launch a pair of satellites for the continent's future navigation constellation before the end of this year. The mission urgency stems from ESA's need to meet spectrum requirements by early 2026. But with few domestic rides to space available for them, Electron is stepping up to the task of responsive launch. It's a similar situation faced by another sovereign space agency that came calling for Electron too. I can't quite reveal the full details of those missions yet, but it's fuel on the fire to Electron's international expansion and leadership as a small lift in the smaller market globally.

Now to cap off the list of space agency launch contracts, we secured another NASA mission on Electron for launch early 2026. Time and time again, we've proven Electron to be the premier small launcher for NASA science missions, and we're looking forward to delivering the same, precise orbital deployments that they've come to expect. Now on to our Neutron update, for the quarter. Let's start with a top-down view of where things stand today. We're building more than just our first rocket. We're laying the foundation for long sustainable programs. We know that from experience that building the first one is hard, building the system that gets you to launch number ten and twenty and beyond is much harder.

Most of the capital of any rocket program goes into building out the infrastructure. And we believe we've got all the critical elements in place now. Our launch and test sites are substantially complete. Recovery infrastructure is on track. The Archimedes engine manufacturing line is now capable of knocking out an engine every eleven days, and we believe that we've scaled our operations to be ready to support, to move into multiple flights a year after the first launch gets off the ground. On the launch vehicle side, the teams are working literally day and night to get Neutron to the pad.

We're in a good spot with lots of core elements like the hungry hippo faring, major structures, second stage, engine qualification, etcetera. It's a green tick for stage two flight hardware and its qualification program. The brains of the rocket, the flight computer and GNC, are ready for flight. So lots of green across the vehicle as you'd expect. There's been lots of action on the regulatory approvals front as well. We've been grounded at FCC license for Neutron's first launch. And the FAA has accepted our launch license application that puts us on track for a launch license to fly from Complex 3 by the end of the year.

We've also had the critical agreements in place to transport flight hardware to the launch site on Wallops Island. You've likely seen a bit of activity on that front around expanding our operations and dredging in the channel, but these improvements are related to increasing operational flexibility as launch cadence up. It's not a gate to Neutron's debut. Importantly, the schedule is not sequential. Everything is happening in parallel, and a lot of the progress markers that are underway or still pending are probably gonna stay that way up until just before we launch.

There are still some risks to retire, like propulsion and full integration of stage one testing, which we're taking our time on to make sure we're successful. And when the rocket is on the launch pad. But over the next few slides, I'll take you through the latest engineering updates and lay out the current expectations for the next few months ahead. First up, an exciting moment on the path to launch. Neutron's flight hardware is on its way to the launch site. Over the past couple of months, we've put the second stage through many, many tests to validate its readiness for launch.

Having completed its critical testing phase, it's headed to the Launch Complex 3, for final integration in preparation for stage testing at Wallops Island. Large structures that make up the first stage, like propellant tanks and thrust structures, are expected to be on the test stands before they're shipped out to the launch site shortly. Once they've completed a major structural test, they'll progress into a final integration and stage testing. As we move out of R&D into production for the next rockets in our fleet, our factories are all humming. We've automated the production of the largest composite rocket structures in history with our 90-ton AFP machine that we installed there last year.

We're pulling flight parts off the machine now for the stage one barrels and the pallet domes. And it allows us to scale efficiently. And we've made long lead commitments for manufacturing equipment that puts us in a good place to build three vehicles next year. For Archimedes, engine testing is accelerating. And this is the most crucial and time-consuming aspect of any rocket development program and always the longest pole in the tent. We're running the engine to full mission duration and the operational test cadence is hitting up to three or four hot fires a day now, seven days a week. As we work diligently through all the engine qualification program.

In between hot fires, the team's making improvements and iterating on the design quickly, then getting right back into the next engine test, fire it on the stand. We expect these tweaks to, all the way up to Neutron's debut launch and beyond. For those who are interested, take a look at the latest mission duration fire video we just shared. Moving on to launch complex 3, I'm pleased to say that we have an official date for the site opening later this month. The team in Virginia is well and truly into Launchpad activation. While we close out the final construction activities.

The water deluge system was activated last quarter, and now the team is meticulously making their way through system by system to prepare for static fire operations on the launch mount once the flight hardware arrives. Launch Complex 3 is set to be a hugely important national asset. There's a spaceport bottleneck at the other federal sites right now, and that shows how important launch site diversity really is. National security must take priority, and, with Neutron onboarded to the NSSL program earlier this year, a rocket will be the first to fly for NSSL out of Virginia when we pick up missions under that contract. We'll be cutting the ribbon for Launch Complex 3 on August 28.

We're also opening up a limited number of spaces for retail shareholders to join us on Wallops Island. So I encourage anybody who is interested to check out the details on our website. All in all, we continue to push extremely hard for end-of-year launch. We're continuing to run a green light schedule with Neutron, which means every single thing needs to go to plan for the schedule to hold. But I also want to stress that we're not gonna rush and take stupid risks to get, you know, a launch Neutron before it's ready. In the context of the life cycle of the vehicle and the program, a couple of months here or there is completely irrelevant.

What's really important is performance reliability, scalability right from the get-go. There'll be no cutting corners here to just rush to the pad for an arbitrary deadline. I think everybody has heard me say it before. In fact, I'm a little bit infamous for it now. I'm not built to build shit. So with that, I'll hand it off to Adam, and he can run through the financial highlights for the quarter.

Adam Spice: Great. Thanks, Pete. Second quarter 2025 revenue was a record $144.5 million, which was above the high end of our prior guidance range and reflects significant year-over-year growth of 36%, driven by strong contribution from both business segments. Second quarter revenue increased 17.9% sequentially. Our space system segment delivered $97.9 million in the quarter, reflecting a sequential increase of 12.5%, driven by increased contribution from each of our satellite components businesses. Our launch services segment delivered revenue of $66.6 million, reflecting an increase of 31.1% quarter on quarter. Now turning to gross margin. GAAP gross margin for the second quarter was 32.1%, above our prior guidance range of 30% to 32%.

Non-GAAP gross margin for the second quarter was 36.9%, which was also above our guidance range of 34% to 36%. The sequential increase in gross margins is primarily due to an increase in Electron ASP, paired with favorable mix within our space systems business, driven by increased contribution from our higher margin component sales. Relatedly, we ended Q2 production-related headcount of 1,150, up 62 from the prior quarter. Turning to backlog, we ended Q2 2025 with approximately $1 billion of total backlog, with launch backlog representing approximately 41% of this, and space systems 59%.

In the quarter, launch backlog continued to take increasing share with promising underlying trends as we convert a very strong pipeline of Neutron, Electron, and Haste opportunities. Space systems bookings remain lumpy given the timing of increasingly larger needle-moving customer and program opportunities remains at a healthy level despite a step up in revenue run rate for the past few quarters. Upon the anticipated near-term closing of the GEOST acquisition, and given an increased line of sight to the Minaric acquisition closing, the composition of backlog will likely skew a bit back in favor of space systems and further underpin incremental future growth. We continue to cultivate a healthy pipeline, multi-launch deals, and large satellite manufacturing contracts.

That, as mentioned earlier, can create lumpiness in backlog growth given the size and complexity of these opportunities. We expect approximately 58% of current backlog to be recognized as revenues within twelve months. And we continue to get relatively quick turns business that drive top-line growth beyond the current twelve months backlog conversion. Turning to operating expenses. GAAP operating expenses for the 2025 $106 million above our guidance range of $96 million to $98 million. Non-GAAP operating expenses for the first quarter were $86.9 million, which was also above our guidance range of $82 million to $84 million.

The sequential increases in both GAAP and non-GAAP operating expenses were primarily driven by continued growth in prototype, and headcount-related spending to support our Neutron development program. Specifically, investment has increased to support propulsion as we continue to qualify our committees. As well as production of mechanical and composite structures ahead of Neutron's anticipated inaugural flight later this year. In R&D specifically, GAAP expenses increased $11 million quarter on quarter, due to ramping up our committee's production. Paired with increased expenses related to mechanical systems and composites that just mentioned. Non-GAAP R&D expenses were up $10.2 million quarter on quarter, driven similarly to the GAAP expenses.

Q2 ending R&D headcount was 935, representing an increase of 12 from the prior quarter. In SG&A, GAAP expenses increased $600,000 quarter on quarter, due to an increase in nonrecurring transaction costs as we continue to advance a robust pipeline of M&A opportunities, partially offset by a step down in stock-based compensation in the quarter. Non-GAAP SG&A expenses decreased by $200,000 due primarily to a decrease in audit fees, partially offset by increased legal expenses. We are encouraged by our ability to constrain SG&A spending as we look to scale the business more efficiently at this point. Q2 ending SG&A headcount was 343, representing an increase of 11 from the prior quarter.

In summary, total second quarter headcount was 2,428, up 85 heads from the prior quarter. Turning to cash. Purchase of property, equipment, and capitalized software license were $32 million in the 2025, an increase of $3.3 million from the $28.7 million in the first quarter as we finalize LC III construction activities. Continue to invest in the engine test facility in Stettus, Mississippi, and make initial investments into the fit-out of the return on investment barge. As we continue to invest in Neutron development, testing, and scaling production, we expect to maintain elevated capital expenditures leading up to Neutron's first flight.

GAAP operating cash flow was a negative $23.2 million in 2025, compared to a negative $54.2 million in the first quarter. The sequential decline in negative GAAP operating cash flow of $31 million was driven primarily by increased cash receipts from our SPA satellite program. Similar to the CapEx dynamics mentioned earlier, cash consumption will continue to be elevated due to Neutron development, longer lead procurement for SDA, investment in subsequent Neutron tail production, and related infrastructure to scale the business beyond our initial test flight. Overall, non-GAAP free cash flow defined as GAAP operating cash flow, sorry.

Defined as GAAP operating cash flow less purchases of property, equipment, and capitalized software in the 2025 was a use of $55.3 million, compared to a use of $82.9 million in the first quarter. The ending balance cash, cash equivalents, restricted cash, and marketable securities was $754 million as of the end of the 2025. The sequential increase in liquidity is due to the at-the-market equity offering that we announced earlier in the year generated $300.8 million in the second quarter, which in part is intended to fund acquisitions such as the announced Minaric acquisition, GEOST acquisition, and other targets in a robust M&A pipeline, along with general corporate expenditures and working capital.

We exited Q2 in a strong position to execute on our organic expansion opportunities, as well as inorganic options to further vertically integrate our supply chain and grow our strategic capabilities and expand our addressable market. Consistent with what we have done successfully in the past. Adjusted EBITDA loss was $27.6 million in the 2025, better than our guidance range, a $28 million to $30 million loss. The sequential decrease of $2.4 million of adjusted EBITDA was driven by an increase in revenue, paired with increased gross margin, partially offset by increased R&D expenses related to 2025. We expect revenue in the third quarter to range between $145 million and $155 million.

We expect a further uptick in both GAAP and non-GAAP gross margins in the third quarter, with GAAP gross margin to range between 35% to 37% and non-GAAP gross margin to range between 39% to 41%. These forecasted GAAP and non-GAAP gross margins reflect improvement in launch ASP, and overhead absorption. We expect third quarter GAAP operating expenses to range between $104 million and $109 million and non-GAAP operating expenses to range between $86 million and $91 million. These modest quarter-on-quarter increases at the midpoint of our guidance are to be driven primarily by continued Neutron development spending across staff costs, prototyping, and materials. Though the spend is beginning to shift from R&D to flight two inventory.

I'm encouraged given the impressive progress made towards Neutron's first flight that we're getting closer to moving beyond the past few years of elevated R&D spend on the path to generating future meaningful operating leverage and positive cash flow.

Peter Beck: We expect

Adam Spice: third quarter GAAP and non-GAAP net interest expense to be $1.3 million. We expect third quarter adjusted EBITDA loss to range between $21 million and $23 million and basic weighted average common shares outstanding to be approximately 528 million shares, which includes convertible preferred shares of approximately 46 million. Lastly, consistent with last quarter, we believe negative non-GAAP free cash flow in the third quarter will remain at an elevated level consistent with the prior couple of quarters, excluding any potential offsetting effects of financing under our existing equipment facility. And with that, we'll hand the call over to the operator for questions.

Operator: Thank you. We will now begin the question and answer session. Star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. And today's first question comes from Michael Leshock with KeyBanc Capital Markets. Please proceed.

Michael Leshock: Hey. Good afternoon. Wanted to ask on Neutron and specifically the Archimedes engine. I appreciate all the commentary there and around the hot fire test. Where does Archimedes stand today in terms of performance? Are there any other performance metrics that you could share what you're seeing in those tests? And, you know, how is there a way to frame it? How close you are relative to what is required for performance to power a Neutron flight.

Peter Beck: Yeah. Hi, Michael. Yep. So from a performance perspective, we're very happy. One of the unique things about a reusable launch vehicle is you have a tremendous number of different environments the engine has to start and operate in. So, you know, normally, you have an ascent profile where there's a couple of throttle points and especially on a stage one, and it's a fairly simple thing. But, of course, we have a reentry burn and a landing burn. So you know, you have to start the engine at different propellant temperatures, different head pressures, all these kinds of things.

So it creates a much, much enlarged run box or set of conditions that you have to be able to operate the engine in. It's much more challenging to do. But from a basic performance of the engine, we're very happy where it is. And, yeah, it's like I say, it's just a much more complicated qualification program to get through because you're qualifying ascent and ascent at the same time.

Michael Leshock: Great. And then shifting to a longer-term question. You've talked about a satellite constellation potentially being a long-term opportunity for the company. How close are you to begin working on a constellation of your own? We saw release of earlier this year and the focus of it designed to scale. Is a Rocket Lab USA, Inc. constellation something that is being developed or talked about today? Or is it more likely a longer-term opportunity, maybe five or more years down the road? Thanks.

Peter Beck: Yeah. Sure. So we've always, as you pointed out, we've always made our ambitions clear here, and, you know, we think that is the power of being an end-to-end space company is when you have the ability to build whatever satellite you need, launch it at will, it's a very powerful position to be in. However, I'm also very aware of entrepreneurial drift where someone doesn't finish one thing before they start the next. And while we've been methodically building all of the capabilities and vertically integrating all the satellite components and whatnot, need to be able to do exactly what we want to do until Neutron is finished in flying.

That's the key element of being able to deploy a disruptive infrastructure of satellites. So, you know, I wouldn't expect any huge announcements from us on constellations until, you know, the big piece of the puzzle, which is Neutron, starts to absorb less of their focus.

Michael Leshock: Great. Appreciate all the detail. Thank you, guys.

Operator: And our next question is from Erik Rasmussen with Stifel. Please proceed.

Erik Rasmussen: Yeah. Thanks for taking the questions, and great to hear all the progress. And I'm happy to hear the noise around the dredging seems like there's not really an issue in the near term of getting to your schedule. Just wanted to ask about backlog and I think a lot of this is continued upon the SDA right now. I know you've also talked about the Golden Dome, but it looks like tranche three. Maybe just if you could just update us on what your thinking is around potential timing around the RFP process, you know, where Rocket Lab USA, Inc. will compete.

And I guess then with this in the vein of sort of the backlog, at what point will you start to include Neutron into the backlog?

Peter Beck: Hey, Erik. I'll answer some of those, and I'll let Adam answer some of them as well. But, you know, more generally in backlog, the kind of things that we're chasing now are really large programs. So by nature, these programs are pretty lumpy. The SDA is a great example. You know, I think we've put ourselves in a very strong position. We're executing against our current SDA contract very strongly. And, you know, you've seen us acquire things like GEOST that put us in a very strong position to provide solutions that are not plagued by delays and things like that.

And also our recent, you know, penny acquisitions of things like, are, you know, one of the key elements in the SDA program. So I believe the timing of the announcement is somewhere between September and October for the tranche three. It's always a little bit opaque as they work through those awards, but that's sort of a similar time frame. But at any one point, you know, we're working very large proposals, both government and commercial. And just by their very nature, you know, they take a little bit longer to solidify. But I'll let Adam maybe if you've got any comments on backlog.

Adam Spice: Yeah. No. I think, Pete, I think you hit it right. I think, look, we've got diversity in the things that we're chasing. It's easy to focus on something like SDA tranche three because it's kind of a big shiny object that a lot of people are actually chasing. But we've got a lot of diversity in the things that we're going after. To your question on Neutron's influence on backlog, we do have, you know, three missions of Neutron in the backlog today. Those were added, you know, over the last few quarters.

And I would say that, of course, we expect after a successful flight of Neutron that we will start to gain a lot more momentum because as you can imagine, you know, launch customers are, you know, they're betting a lot when they choose a launch vehicle. It's a long-term choice, and there are limited choices out there today. So everyone's being very careful about what they do. So we do expect that demand to be kind of unleashed, if you will, once we have a successful test launch.

I would say that if you look across all of our businesses, again, we're starting to see the diversity benefits where if you look at the opportunities we're chasing across our subsystems business across Electron, both commercial government, Haste variants, seeing strong demand across all of them. So it's just a matter of kind of converging. And if you look at the trend of backlog over the last year, actually, launch has been the bright spot. Right? We had a huge step up when we put the SDA tranche two award in the backlog. And then, basically, you know, we've been working against that as we recognize some of that revenue and then launches continue to build in the backlog.

And that is that's continue to be we believe to be the case once Neutron kind of gets past that next big milestone or achievement of initial launch.

Erik Rasmussen: Great. Maybe just sticking with launch, and Electron, you already did 11. Sounds like you have the 12 coming up pretty soon, your seventieth launch. What would you say the mix between your traditional Electron launches and maybe Haste missions in the back half of the year, what does that look like?

Adam Spice: Yeah. So if you look in our backlog right now, if you look at the mix, we're expecting about two, I think it's three of the remaining launches this year will be Haste missions. So, you know, as Pete talked about, we're on path to do at least 20, hopefully more than 20 launches this year. We nice growth off 2024. And so we haven't had any Haste launches yet this year. So we're looking at roughly, you know, three launches and then all of them in the back half of the year.

Erik Rasmussen: Great. Maybe just my final question on Neutron. I'm just trying to sort of parse through some of the words that Peter had mentioned. In terms of cadence with, you know, I think previously, we were expecting, you know, the first test launch, so you have more of the one-three-five launch cadence or the first few years. But given the strong demand signals, insurance of launch and then maybe just if I'm reading right, is it possible that's something that you can accelerate? Or what does that look like? Are we still sort of targeting that one-three-five?

Peter Beck: Yeah, Erik. I mean, I get ridden every day on that question. The reality is it just takes time to roll in the learnings between flights. So, you know, we proved with Electron that was the right kind of scale-up cadence. And if you look historically across rocket programs, that's it's even pretty aggressive. So, you know, we'll with that one-three-five and but who knows? But the moment, from where we are in the program, that feels like the right kind of place to target everything.

Erik Rasmussen: Thanks. Good luck.

Operator: And the next question is from Andres Sheppard with Credit Suisse. Please proceed.

Andres Sheppard: Hey, guys. Andres here from Cantor Fitzgerald. I'm not sure what that was. Uh-huh. Hey, Pete. Hey, Adam, and hey, Patrick. Congrats on the quarter and all the great success. I'll limit myself to two questions just to be respectful to all the other analysts. Maybe one on space systems and one on launch systems. On the space systems, Adam, I'm wondering if you can maybe remind us kind of what does the revenue recognition look like for the SDA tranche two award both for this year for next year. And I know you mentioned, obviously, you're exploring several opportunities.

But just to come back to SDA tranche three, if I'm not mistaken, right, that could potentially be the largest contract in company history. And so how would you characterize maybe the likelihood of success there? Thank you.

Adam Spice: Yeah. I can comment on kind of the rev rec, you know, generally for the SDA program tranche two transport layer that we have. That we're executing against. So, you know, these programs typically, you know, the award was, I believe, in late 2023. So you get typically, when the program kicks off, you're doing a lot of the kind of initial finalizing the design and so forth. So where you really experience the meat of the revenue recognition is when you're actually starting to take possession of the bill materials to build the satellites with.

So right now, as Pete mentioned, you know, that's we're kind of getting in now for that sweet spot where we're going full-scale production of those vehicles. So gonna see a ramp in spending or sorry. A ramp in spending and a ramp in rev rec resultantly from that. So, you know, I think that, you know, you should expect that revenue will be pretty, I would say, evenly balanced between the second and the third year of the program with 2025 being the second year in reality and next year is kind of the third year, and then it'll tail off. You have kind of tails on either end. With most of the revenue recognition in '25 and '26.

I mean, just if you wanna just think broad strokes, you know, for contribution in 2025, it's probably, if you wanna think in the order of kind of a $150 to $200 million is the right range to be in. And then, again, that should look somewhat similar in 2026, assuming that we continue to like we have. And then if you look at SDA tranche three tracking, should we be fortunate enough to win that program, as you said, it would be the biggest program by a significant margin that the company has earned to date, and it didn't have a similar profile.

I mean, there's a chance that there could be some revenue recognized early in the program, even as early as some of it later this year. And then you'd have kind of the buildup, you know, where 2026 would look for that program would look probably like 2024-ish look for 80% of the revenue being recognized within the middle two years of the four-year program. So that's probably the best guidance I can give to you right now on that.

Andres Sheppard: Got it. That's super helpful. Thanks, Adam. And maybe a quick follow-up, if I may. Maybe one for Pete on the launch systems. You know, as we're getting closer and closer to Neutron, I'm curious if you're seeing perhaps an uptick from customer demand or prospective customer demand for future flights? Obviously, you have the track record, the heritage from the Electron and Haste, you know, Neutron still coming up. But, you know, given the, what do you wanna call it, the conflicts between the administration and SpaceX management team. Just curious if you've seen perhaps, you know, an uptick in interest for Neutron for future Neutron missions?

And any color there since Neutron essentially will be the only viable alternative to the Falcon 9. Right? So just curious on what you're seeing. Thank you.

Peter Beck: Yeah. Thanks, Andres. Well, I mean, look. I think it's, you know, the market does need a competitor to the Falcon 9. I think that was very clear, and that was presented to us both from our commercial customers and our government customers. So, you know, there's a lot of anticipation and pent-up demand for that vehicle to come to market, and that continues to increase all the time, not just from, you know, sort political events or geopolitical events, but also from just, you know, large programs being added, things like the Golden Dome. I mean, that is gonna be one of the largest DoD programs in the country's history.

And they're all spacecraft in space, and they all need to get there. So, yep, no. We're seeing, you know, growing demand and also I think it's fair to say, realization that, you know, sorting out from the real players from the players that are less likely to be able to provide.

Andres Sheppard: Excellent. Thank you so much both. Congrats again on the quarter. I'll pass it on.

Operator: The next question is from Ron Epstein with Bank of America. Please proceed.

Ron Epstein: Yeah. Hey. Hey. Good afternoon, guys. So, Pete, just maybe broadly, when we think about the first launch of Neutron, for you, I mean, just to kind of level set, what would a successful launch be?

Peter Beck: Yeah. Hey, Ron. Well, you're not gonna hear some rubbish about just clearing the pad as a success. That is not. For us, a successful launch of Electron will be a success, you know, successfully getting to orbit. And making sure the vehicle is ready to scale. Think you saw us come out of the gate with Electron, you know, going to orbit and then straight away, you know, three missions after that. Successfully delivering customers to orbit. So that will be the definitions of success. The bit that we'll be a little bit more flexible on is obviously the reentry and soft landing of the first vehicle. There's a lot to learn there.

You know, we think we've got a good head start, but that's the bit that is always requires a bit of iteration. So, you know, like I say, we'll declare success when we're in orbit. If we don't soft splash down on the first flight, I think there's a little bit of tolerance there for learning. But apart from that, yeah.

Ron Epstein: Gotcha. Gotcha. Thank you for that. And then, Adam, maybe what drove the strong Electron ASP in the quarter? And is that a reasonable way to think about Electron pricing going forward?

Adam Spice: Well, you know, we've been well, there's a few things to drive that, but probably the most, I would say, dominant force would be the mix of Haste in the manifest. So as we've talked about, you know, the Haste missions require very unique, you know, I'd say, mission assurance and other things. The vehicles are unique and so forth. So that makes sense that the ASP would be significantly higher. But it's really driven primarily by that. I'd say overall, if you look at, you know, commercial tastes, so commercial Electrons, those trends have been trending up nicely as well.

So we've really had we benefited from the fact that we've got customers coming back, and they're doing bulk buys of Electrons and the significantly higher ASPs than we've seen in the past. If you were to rewind the clock two or three years ago, we would get customers coming that wanted to buy bulk buys, but they were wanting a significant discount to do that. And so in order for us to build, you know, to manifest and be able to, you know, kind of continue to drive the market, you know, we did that. And I think now we're in a position where we really don't have to accept any significant discounts, and we're getting bulk buys.

I think part of the strength as well is we're getting a lot of support, as Pete mentioned in his comments, from the international community. Sovereign, you know, countries are coming forward with strong demand, and I think that, you know, it's a testament to the fact that execution in this market is so, so, so difficult. A lot of people can talk about it. They can put spec sheets on web pages and whatever else, you know, and pay with user guides. But at the end of the day, you know, we're the only one that has had 69, you know, launches of a small dedicated launcher.

And I think right now, we're benefiting from all of that hard work and execution. And so we really don't have the distraction of people kind of doing some false pricing in the market to put pressure. I mean, now it's pretty clear, you know, execution's key. You gotta pay for execution.

Ron Epstein: Gotcha. Gotcha. Gotcha. And then that's actually a nice segue into my last question. You know, when we think about, you know, the Minaric acquisition and Electron adding the European Space Agency, what do you see as, you know, potential, you know, is there a potential European national security opportunity for you guys in space?

Peter Beck: Ron, I think if you look out, the US, what is the next biggest market in space? And it's Europe. And you'd be a fool not to be in there. So, you know, Minaric is a kind of stepping point in. And as you've seen, obviously, you point out, the European Space Agency contracts, you know, we'll continue to expand into Europe and, you know, we have a lot of unique capabilities that only reside with us. So, you know, we'll look to apply those.

Ron Epstein: Got it. Alright. Thank you. Alright. Thank you.

Operator: Our next question comes from Edison Yu with Deutsche Bank. Please proceed.

Edison Yu: Hey, good afternoon. Thank you for taking our questions. Wanted to ask, I think probably for Pete, latest thoughts on orbital transfer vehicles, space tugs, you know, there was a bit of craze several years back in Leo that kind of flamed out a bit. But now it seems there's a lot of offerings coming to market maybe trying to go farther away. Bigger. And so is that an area of interest to you? I know you have the kick stage, but would you try to kind of tackle that more directly or more broadly? Going forward?

Peter Beck: Yeah. It's a good question. I've never really seen the business opportunity and the business case for those because, you know, you start off with a relatively cheap ride share, and you end up with a really expensive delivery. So as you point out, they've had a couple of starts. So, look, you know, if it turns into being a real market, it's completely elementary for us to go after it. I mean, you know, we operate a kick stage on the top of Electron essentially. And, you know, all the components to be able to do it, you know, we have.

So if it turns out to be a real market and a real opportunity, you know, the time that it would take us to deliver a product to market would be extremely short. But at the moment, I just don't see it worth us investing in.

Edison Yu: Understood. And then on Electron, want to ask about the TAM. In the context of, you know, have this big slide, obviously, on Golden Dome. Hypersonics, historically, I think the TAM maybe 30 plus launches. Do we think that the TAM now for Electron could be, you know, much, much bigger than that like, 50, 60 launches. Going forward? At some point in the future?

Peter Beck: Well, you're talking to a conservative engineer by nature, Edison. So it's hard for me to get too bullish, but if you just look at some of the programs like the Golden Dome, the amount of testing that's gonna require and the amount of suborbital kind of, you know, hypersonic missile simulants that you're going to need to deploy to be able to validate that system. There's, you know, there's a pretty significant number there that would be required. So in Haste alone, you know, I think we're expecting that to continue to grow.

But year upon year, the, you know, the TAM continues to grow, and the exciting thing is that Electron is helping to create and open up that TAM. You know, we see a lot of satellites these days that are made specifically to just fit on Electron envelope its environment, and it's enabling a lot of stuff. So I think, you know, we continue to see the TAM expand, and I think, you know, I don't see any sign of that decreasing in the future.

Edison Yu: Great. If I could just sneak one housekeeping one. On the GEOST. Any color on how much revenue that could potentially bring in after it closes and what kind of, you know, growth profile or backlog that has going forward? Thanks.

Adam Spice: Yeah. I'll take that one. Look, as we can't really say too much about it. It's still a pending acquisition. You know, as Pete mentioned, we got through the antitrust review, which is great. I think, you know, close should be imminent. But we'll hold back any comments and color on that business until we actually own it. If you don't mind.

Edison Yu: Totally. Totally understood. Thank you.

Operator: The next question is from Jeff Van Rhee with Craig Hallum. Please proceed.

Jeff Van Rhee: Great. Thanks for taking the questions. I guess, Peter, on Space Systems, when you kind of flesh it out in your mind what you envision space systems ultimately being, what percent of the way to your vision are we in terms of the capabilities that segment currently has?

Peter Beck: Yeah, Jeff. Great question. So the toolbox is looking pretty full, actually. So, you know, from a purely like, a nuts and bolts component level, you know, the Minaric optical terminals are an important one. And, you know, the vast majority of stuff is kind of come into focus. We will see us spend a lot more time now is on payloads, and GEOST was the first kind of beginning to that. And that really shifts you from being able to provide, you know, just a satellite bus to be able to provide a complete thing. So, yeah, the nuts and bolts, I'd say we're largely done.

You know, there'll still be little add-ons we want to do, but our focus will be on payloads and really rounding out the system.

Jeff Van Rhee: Yes. Helpful. And Adam, on the margins as it relates to Space Systems, just correct me if I'm wrong, think 40% was the target there. You've made some really good progress. Is 40% still the right number? And any sense of a timeline or sense of scope that it might take to get to that 40%?

Adam Spice: Yeah. You know, there's a pretty wide mix, I would say, you know, of margin profiles within our space systems business. You know, if you think about the margins on putting together a full turnkey, you know, platform solution, they tend to be lower. You know, if you think about those margins, kind of if you wanna think about a range in the twenties to thirties, but we have good scale with them because of the size of the contract that are involved. And, you know, actually, those are much better margins than most other people would expect to achieve and that's because we're so vertically integrated.

Now when you look at the subsystems, we also have a very wide range there. We have some products where, you know, the margins are in the twenties, but we have some more margins are well north of 60 points. So if you look at a blended average, you know, for I would say, the overall space systems between the waiting. And right now, it's kind of split evenly between subsystems and platforms. As we start to mix in applications, we'll get even it'll get different in a good way. Should think about 40%. We're not that far actually from that target. So I think our target was probably set a little bit on the modest side.

So but if you think of 40 to 45 points, kind of as the real target for margins, I think that's probably a pretty good place to be. That can be pretty good, you know, at the as far as contribution to the bottom line because there's not a lot of R&D that goes into those businesses. Right? A lot of it's customer-funded R&D. So when you look at the contribution margin, it's very, very healthy. So, again, I think that, yeah, we've been we set the bar.

We like to kind of set expectations low and kind of over-deliver to those, and I think that we're on the path to the same thing with our space systems business when it comes to margins.

Jeff Van Rhee: Yep. Very helpful. Maybe last for me. Peter, you mentioned production, and I missed a little bit of it. On Neutron, obviously, you're spending a lot of time building scale manufacturing capabilities. Just where are you in terms of Neutron's now in terms of how many are you initially building? And what is the manufacturing capacity that you're putting up to give us a glimpse in terms of how you're thinking in number of ships, you know, this year, next year, year after?

Peter Beck: Yeah. Sure. Sure. So, you know, some areas are at a high production rate, like, you know, engines. We're pushing for one engine every 11 days. And it's kind of because it's a reusable launch vehicle program, the whole production cycle is literally turned upside down. So we need the most number of vehicles in production at the start of the program rather than ramping and scaling as you go along. So, you know, as we talked about, there's multiple vehicles that we're building even now. And, you know, a stage one can be reused 10, 20 times. So, you know, you're not actually, every year, you're not building that many stage ones.

So the most amount of stage ones we'll ever build is probably, you know, year two or three. Of course, the stage two is expendable, but, you know, that's been, you know, highly refined for a very quick production and low-cost rate. So yeah, I mean, as I said before, you know, sort of three stage ones is next year is the right way to think about.

Jeff Van Rhee: Three stage ones. Got it. Okay. Thanks so much.

Operator: Our next question is from Andre Madrid with BTIG. Please proceed.

Andre Madrid: Hey. This is Ned Morgan on for Andre today. Thank you for taking the question. I was just wondering, I've seen a lot of partnerships lately in support of Golden Dome, and I was just wondering if you guys are looking at doing something similar as opposed to doing any M&A.

Peter Beck: Yeah. It's a good question, Ned. The reality is that, you know, we are very, very vertically integrated. And, you know, there's still obviously a piece of technology that we partner with as we've shown on the SDA program. But I guess there's probably slightly less of a need for us to, given, like I say, given our vertical integration and just the breadth of stuff that we've got, you know, we don't need to partner with that many people to deliver a solution.

Ned Morgan: Okay. Makes sense. And then maybe one more for me. Regarding tranche three, how different would the upside look if you guys are selected as a prime versus a sub through, for example, GEOST?

Peter Beck: How do you mean the upside need? What do you mean by that?

Ned Morgan: You know, if you guys are selected as a prime, I would imagine, you know, revenue contribution would be significantly more than as a sub. Through your GEOST prior bids, I was just wondering how things would look if they run that.

Adam Spice: I can take that one. I can take that, Pete. Yeah. Basically, if you look at the value of the subsystem that GEOST provides, you can think of that as being kind of somewhere around the, you know, 30% of the total value is in the payload. So obviously, it's a much bigger opportunity as prime than it's just as the sub for a subsystem. Now there, you know, there is the opportunity where you could have a, you know, goalie lock situation where you select as the prime. But also, you know, GEOST was bidding with other primes as well for that opportunity.

So there's a range of outcomes there, but, yeah, certainly, our goal here is to select this prime.

Ned Morgan: Got it. Thank you very much.

Operator: The next question will come from Kristine Liwag of Morgan Stanley. Please go ahead.

Kristine Liwag: Hey. Good evening, everyone. Peter, you've been very clear about your disciplined approach to pricing regarding Neutron. And considering the tightness of supply of launch, I'm a little surprised that you still haven't built out a sizable backlog for the program. Can you provide more color on how advanced your discussions are with incremental customers for Neutron? What they're waiting for, to commit to an order, and how to think about the competitive landscape especially as you got a competitor, Rocket, coming into market that's fairly well capitalized too.

Peter Beck: Yeah. Hi, Kristine. Well, I mean, you know, you can split this into both into commercial and government. I mean, we were onboarded onto the NSSL program, which obviously is an extremely large opportunity, $5.6 billion, if I remember. And then on the commercial side, you know, we've talked about this before where, you know, they want to see a rocket that works before they commit because a lot of people have been burnt, signing on vehicles that either delayed or even, you know, some cases never turned up.

And, you know, we've always talked about it as well as we want to make sure that when we sign one of these customers that consume a large amount of our manifest that they actually turn up on time and all the rest of it. So, you know, we maintain that discipline going through. We, you know, it does nobody any good to fill up a, you know, a whole bunch of manifest with a bunch of launches. That or a bunch of payloads that don't turn up in time, and you kind of lift 10 holding the bag.

So the most important thing, I think, for everybody is, you know, we get to the pad and we start launching it, and then, you know, we'll make the decision who are the best customers and most reliable customers for us, and the customers will make the same decision back. And, you know, on competition, you know, I think I'm not sure I quite view that the same way.

Kristine Liwag: Thanks, Peter. And, Adam, as a follow-up, you mentioned expectations for elevated cash consumption. Beyond Neutron's first flight as you scale up. How should we think about the capital intensity following this initial launch? Should we still expect 2026 to be a positive free cash flow year?

Adam Spice: Yeah. Look. I think the cash consumption will continue after the first launch because as Pete mentioned, we're building, you know, the subsequent tails. And so if you think about the cost to build a booster, and I think we've kind of used this we've communicated this term or this figure before, but you assume around $60 million for a booster. You're building several of them, you know, in series or in some cases here. You know, you could consume additional capital from that. You know, the key thing for us is getting through that first test flight. We've gotten to the point where we've gotten the infrastructure largely in place.

We do have some incremental scaling investments that need to be made such as this return on investment barge that we've talked about. So, yeah, I mean, I think the business could continue to consume money through 2026. So I would say more realistically for, you know, I would say, you know, positive free cash flow 2026, you know? Again, given how aggressively we're moving forward, given the demand signal that we're getting, I think that's probably not likely. I think it's much more likely to be in 2027. But, you know, it depends. We could come across opportunities that generate, you know, enough offsetting, you know, incoming cash flow that it kind of balances that out.

But right now, I'd say you should think of Neutron as being continued to even in a scenario, in particular, in a success scenario. Continuing to consume cash as we kind of build out that capability and put all the other scaling infrastructure in place.

Kristine Liwag: Great. Thanks for the color.

Adam Spice: Yeah. I think it's important, Kristine, to differentiate, though, that I believe that, you know, the P&L will obviously look much, much better once we get through the initial net kind of successful test launch of Neutron. So I think it's important to separate the kind of the free cash flow from the P&L optics. Right? Because I think P&L does get much, much, much friendlier. Much sooner. And then I think like a lot of other growth businesses, you know, we're gonna be, you know, continuing to invest to grow, but the P&L should start to look much more attractive. And I think that's we're keeping our eye on both, obviously.

Kristine Liwag: Great. And as a follow-up to that, I mean, look. It's a good problem to have if you have a product that works and if you can scale up very quickly. Those are all good problems to have as a growth company. But when we think about the capital size that you might need, if you can build, like, in a bull case scenario, how much capital could you potentially consume, like, free cash flow in 2026? And when you think about the cash balance today, is that enough? Or would you need to raise capital to meet the demand should you be really successful and have that bull case scenario play out?

Adam Spice: Yeah. Look. I think we have sufficient capital to scale Neutron. So really, if you look at where when we're raising additional capital, it's really not for Neutron. It's really all about doing things like, you know, the Minaric and GEOST and other things that we have in our funnel. Yes. We could put a lot of money to work to kind of respond to the demand signal as it evolves for Neutron that continue to demand cash. I don't see it outstripping kind of even what we have today. So, again, I think that, you know, you're right. It's a good problem to have. I don't think that any liquidity constraints would be driven by Neutron.

I think it would really be driven by how aggressively we want to go after and enable inorganic TAM expanding kind of type of opportunities.

Kristine Liwag: Great. And I'm tempted to ask one more, so I just might. So when you look at that opportunity, I mean, it seems like the capital markets are fairly open. Your stock is at record high levels. How aggressive do you want to accelerate some of those growth, TAM opportunities, and where are those verticals? Where are you most interested in? What does that look like?

Adam Spice: I'll let Pete comment obviously on as well. But I would say, look. We continue to see opportunities to further vertically integrate our supply chain. So we've done that very successfully in the past. We'll continue to find those high types of opportunities. I would say that when you look at, you know, the ultimate, you know, end-to-end vision obviously has applications elements to it, which is, you know, Pete talked about some of that earlier. But I would say right now, it's probably too early to show a lot of leg on kind of where we're going there.

Because as Pete said, you know, given the focus or and the risk of entrepreneurial drift, we're very, very, very focused on getting Neutron delivered, establishing, you know, very key fundamental and foundational payload capabilities. And then the rest is, you know, to be kind of put into focus a little bit later. But Pete, I'll kick it over to you.

Peter Beck: Yeah. No. You said it very well, Adam. I mean, Kristine, we're not finished yet, that's for sure, on M&A opportunities.

Kristine Liwag: Great. Thank you.

Operator: The next question is from Ryan Koontz with Needham and Company. Please proceed.

Ryan Koontz: Great. Thanks. And, you know, most of my questions have been answered, but I'll touch on space systems a bit. Nice progress on gross margins, obviously. I know you had acquired the solar business and some backlog there that was lower margin. How do you think about that business going forward? And have the margins in that business now kind of normalized with new contracts and such that make you comfortable with the directory and continue to see some uplift on space systems? Thanks.

Adam Spice: Well, I can take part of the tactics on that one real quickly. So if you actually look at the progress on gross margin for the Solero business, you know, for support has been very, very strong. You know, when we acquired that business, we were looking at high single-digit gross margins. And, you know, in the first half of 2025, we delivered margins that were above the long-term target that we'd set for that business. We'd set a target of 30%.

That business is subject to the margin volatility is subject to kind of when some of the, again, that early contract, which still hasn't completely kind of flowed its way through the books yet, that there's still some to be delivered on that. And so it's the timing of when that kind of comes in and out of deliveries. But I would say, look, if you just kind of look at where we'll be for the year, we're gonna be pretty much spot on our long-term target of 30%. And I think longer term, there's upside to that.

And I think more importantly, that deal has really or that acquisition has really kind of fulfilled strategic import of, you know, kind of really taking control of a very critical and tricky component in supply chain for being a long-term kind of system provider and owner. So I think on that front, hopefully, that gives you some color and then, you know, I think maybe, Pete, you can speak to maybe the types of opportunities that we see in that business going forward and of where you expect margins to land for those?

Peter Beck: Yeah. No. Thanks, Adam. Yeah. So, you know, we continue to expand capability in that business. And, obviously, you would have seen that we were successful with some chips money, which has enabled us to completely modernize or will enable to completely modernize the reactor fleet in there. And that drives in itself efficiencies. But, you know, if you look at programs like the Golden Dome, there is an unprecedented amount of spacecraft and power that's needed to fulfill that. And there's three space-grade suppliers in the world, and we're currently the, you know, one of the largest, if not the largest. So I see a lot of exciting opportunities for that business going forward.

I mean, we are one of the preeminent providers for national security solar. So that's a pretty exciting future.

Ryan Koontz: That's great. Thanks so much, Pete.

Operator: Our next question is from Suji Desilva with ROTH Capital. Please proceed.

Suji Desilva: Hi. Hi, Pete. Hi, Adam. Adam, can you just remind us or tell us how the Neutron cost of flow maybe from OpEx to COGS as the first launch goes and whether that might be material to the gross margin so we could anticipate that? As these first few launches go off.

Adam Spice: Yeah. That's gonna be a really challenging thing to model for you guys. I think that and that's a function of the fact that they had the first, you know, the test flight, of course, all that's flying through, flowing through R&D. Right? And now we're actually starting to for this subsequent tails, that's not gonna flow through cost of goods sold with revenue cover associated with it. So the P&L is gonna fluctuate quite a bit, you know, to the positive, as I mentioned to an earlier question.

Now when you start talking about the reusability and what that introduces to the volatility to margins, you can imagine that as we progress through quote, unquote, hardening Neutron's reusability, you know, how many reuses will, you know, for example, we'll be able to assume for, you know, for amortizing over, you know, the future missions, that's gonna be a great influence over gross margin.

So can imagine if the rocket is only kind of assumed initially to do x number of reuses, but it actually surpasses that, or comes in underneath that, you're gonna have a lot of volatility because you gotta have a situation where you have a fully amortized booster with all the revenue going forward on it, or you could have made assumptions where you expect to supply a certain number of times it and it underachieves to that. And so you have a lot of, you know, incremental cost for future missions that weren't assumed. So it's gonna be a tough one to manage.

I think that, you know, the only thing that we can really point to, it's a bit different because it wasn't designed to be reusable from the outset with Electron. And we've been able to bring down Electron cost dramatically. Right? And that's without reusability. So, you know, we have a track record of successfully kind of scaling and bringing down cost. As we've talked about many, many times, another big influencer to gross margins is overhead absorption. So, yeah, I suspect that Neutron will be a little bit different, but not fundamentally different from the fact that what's gonna drive gross margins is gonna be cadence. Right?

So it's reusing cadence and but, you know, cadence is something that we, again, we saw we understand how that works with Electron. The huge benefits you get when you get the cadence up and that's gonna be a large driving factor for Neutron as well. Again, also coupled with our success in getting this vehicle to be reasonable as quickly as possible. And for as long as possible.

Suji Desilva: Okay. Great. I'm gonna get my quantum computer out. And the other question I have is on payloads. Is GEOST kind of your entree here? Do you have, you know, efforts in-house for payloads as well as this inorganic effort, or will that segment be grown through inorganic exclusively? Thanks.

Peter Beck: Yeah. So a little bit of both. The reality is that, you know, often these payloads, especially when you're looking to bring solutions to bear in national security, have very, very long development cycles and a lot of heritage associated with them, which kind of naturally lends itself to, you know, acquisition more than organic creation. But there's certainly some elements of payloads internally that we're looking at that we will just go, you know, go under our own steam, and then some things, you know, like GEOST, you know, best in class. It would take decades to recreate that. So an acquisition is by far the most efficient way of opening that opportunity up.

Suji Desilva: Okay. Helpful color. Thanks, Pete. Thanks, guys.

Operator: And the next question is from Anthony Valentini with Goldman Sachs. Please proceed.

Anthony Valentini: Hey, guys. Thanks for the question. I'm just curious if, you know, I recognize you guys are, you know, laser-focused on Neutron here. But is there any reason to think that, you know, you guys would introduce a new launch vehicle in the future that is either larger than Neutron or maybe even in between Electron and Neutron in terms of the capacity that it can take into orbit?

Peter Beck: Yeah. Good question, Anthony. So certainly not, we don't really believe there's really a market between the Electron and Neutron side. There's it's a very limited opportunity in that range. Now if we need to go large, I guess, the good news is that, you know, the vehicle is very scalable. You know, it's a seven-meter diameter stage one tank, so it's a very short dumpy vehicle. So, you know, typically, that's what governs your ability to increase the vehicle sizes, your tank diameter. Otherwise, you end up with big, long, skinny pencils. And that becomes challenging. So, you know, we have no intentions at this point in time.

We think we've got the market accurately sized and we've proven historically that we're not bad at making those kind of calls. But, you know, for whatever reason, the market drastically moved to a larger scale, you know, we have a vehicle architecture that's very, very easy to scale.

Anthony Valentini: Great. Thank you.

Operator: And at this time, we are showing no further questioners in the queue. And this does conclude our question and answer session. I would now like to turn the conference back over to Peter Beck for any closing remarks.

Peter Beck: Yes. Thanks very much, operator. So before we close out today, should be some slide here of our upcoming events conferences that the team will be attending. We look forward to sharing more exciting news and updates with you there. And, otherwise, thanks for joining us. That wraps up today's call. We look forward to speaking with you all again about the exciting progress that we make here at Rocket Lab USA, Inc. Thanks very much.

Operator: Thank you for attending today's presentation. You may now disconnect your lines. And have a pleasant day.

Where to invest $1,000 right now

When our analyst team has a stock tip, it can pay to listen. After all, Stock Advisor’s total average return is 1,047%* — a market-crushing outperformance compared to 181% for the S&P 500.

They just revealed what they believe are the 10 best stocks for investors to buy right now, available when you join Stock Advisor.

See the stocks »

*Stock Advisor returns as of August 4, 2025

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. Parts of this article were created using Large Language Models (LLMs) based on The Motley Fool's insights and investing approach. It has been reviewed by our AI quality control systems. Since LLMs cannot (currently) own stocks, it has no positions in any of the stocks mentioned. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

The Motley Fool has positions in and recommends Rocket Lab. The Motley Fool has a disclosure policy.

Image source: The Motley Fool.

Date

Thursday, August 7, 2025, at 5 p.m. ET

Call participants

• Chairman and Chief Executive Officer — Jim Litinsky
• Chief Financial Officer — Ryan Corbett
• Chief Operating Officer — Michael Rosenthal
• General Counsel — Martin Sheehan

Need a quote from a Motley Fool analyst? Email [email protected]

Takeaways

• DOD Agreement Structure-- Announced a $400 million convertible preferred equity investment from the Department of Defense, a $150 million low-interest loan, and a warrant for the Department of Defense, which together will make the DOD the company's largest shareholder post-conversion.
• Price Floor Mechanism-- Set a $110 per kilogram price floor for all NDPR-containing products, effective beginning in Q4 2025, providing downside protection and including an upside-sharing feature above the threshold.
• Magnet Manufacturing Expansion-- U.S. magnet manufacturing capacity will rise from 1,000 to 10,000 metric tons annually with the build-out of the Independence and new Tenet X facilities. The new Tenet X Facility's output is 100% contracted to the DOD under a cost-plus arrangement, which includes a $140 million minimum EBITDA guarantee.
• Apple Partnership-- Entered a long-term contract for over $500 million in magnet purchases beginning in 2027, including $200 million in milestone-based prepayments from Apple over the coming years to support recycling and production expansion.
• Revenue Growth-- Consolidated revenue increased 84%, driven by increased sales of magnet precursor products and record NDPR oxide output.
• Adjusted EBITDA Performance-- Adjusted EBITDA improved year-over-year, reflecting higher sales and lower per-unit NDPR oxide production costs year-over-year, partially aided by $8.3 million in lower inventory reserves.
• REO Production Results-- Achieved 13,145 metric tons of REO—the second-highest quarterly result, 45% higher than the prior year, despite a two-week planned shutdown.
• NDPR Oxide Production-- Up 6% sequentially to 597 metric tons, with monthly production records in May and June; NDPR oxide production output more than doubled year-over-year.
• NDPR Sales Volumes-- NDPR sales volumes increased 226% year-over-year, with volumes expected to track production roughly on a one-quarter lag due to channel fill timing.
• Market Pricing-- NDPR market price increased about 10% sequentially and roughly 19% year-over-year (market price for NDPR, Q2 2025 vs. Q2 2024).
• Cash Position-- The company reported nearly $2 billion in cash on the balance sheet as of Q2 2025, before receiving $200 million in Apple prepayments.
• Capital Expenditures-- Year-to-date CapEx was $47.3 million, including $12.2 million reimbursed by the DOD as part of the year-to-date investment; the full-year 2025 capital expenditure expectation remains $150 million-$175 million.
• Production Outlook-- Management guided to a 10%-20% sequential increase in NDPR oxide production for Q3 2025.
• Sales Channel Shift-- No longer selling concentrate to external parties due to the DOD agreement, effective for the foreseeable future as stated in the Q2 2025 earnings call. Excess production will be stockpiled until further NDPR oxide ramp, as stated under the new DOD agreement.
• Independence Facility Progress-- Magnet production for EV traction motors has achieved customer specifications, with commercial ramp targeted for later in the year.
• Recycling Platform Launch-- Apple will provide post-consumer and post-industrial magnet feedstock, accelerating commercial-scale recycling at Mountain Pass.

Summary

Management confirmed that none of the new Department of Defense contracts permit sales to the Chinese market and clarified that all future NDPR oxide sales will target strategic customers, particularly in the Japanese, South Korean, and Southeast Asian markets. MP Materials(NYSE:MP) will cover most capital needs for expansion projects and recycling using new prepayments from Apple and DOD investments, with further details on timing and budget forthcoming as stakeholder engagement progresses. The company holds all key equipment on-site for heavy rare earth separation, with major installation expected to begin by the fourth quarter in alignment with downstream production ramp targets.

• Corbett said, "The HCL facility that you see in the transaction agreements is the same thing as the chlor alkali facility," emphasizing its primary role in achieving cost savings and redundancy for Mountain Pass processing inputs.
• Litinsky stated, "10x is a 100% sold out," referring to the new magnet facility, with all output already committed through commercial and DOD agreements.
• Rosenthal highlighted, "we have a fully vertically integrated site … unique versus … standalone [facilities]," enabling flexible processing of various feedstocks, including potential expansions in heavy rare earth separation.
• Corbett explained Apple’s $200 million in prepayments will be disbursed on a milestone basis ahead of the 2027 production start, as stated in the agreement with Apple, but would not discuss specific contract details.
• Rosenthal guided that the recycling line is initially built to serve Apple and internal needs but said it is modular and could potentially process third-party and end-of-life materials over time.
• Management reiterated the intention to pursue capital-light international opportunities only after executing core U.S. projects, leveraging the current "fortress balance sheet."

Industry glossary

• NDPR: Neodymium-Praseodymium oxide, a critical rare earth compound used in high-strength magnets for electric vehicles and electronics.
• REO: Rare Earth Oxide, generic term for a suite of separated rare earth products processed from ore.
• Independence: MP Materials' dedicated, vertically integrated facility for downstream rare earth magnet production.
• Tenet X Facility / 10x: Planned large-scale U.S. magnet manufacturing facility designed to expand magnet capacity to 10,000 metric tons per year for MP Materials.
• Chlor Alkali Facility: On-site chemical plant used to produce hydrochloric acid (HCL) and caustic soda, vital reagents in rare earth separation and refining processes.
• Stage Two Facility: MP Materials' midstream NDPR oxide production circuit at Mountain Pass.

Full Conference Call Transcript

Jim Litinsky: Thank you, Martin, and good afternoon, everyone. When we gathered on the first quarter call in May, I said we had reached an inflection point. The rare earth supply chain long built on a single point of failure had cracked. I said that Humpty Dumpty was not getting put back together again, and that this moment would be transformational and remembered. Today, it is clear that what has emerged in its place is something fundamentally new and MP Materials Corp. is squarely at the center of it. The strategic partnerships we announced with the Department of Defense and Apple, building on our foundational relationship with General Motors, have fundamentally transformed MP Materials Corp.

These agreements validate the mission we have pursued since day one and mark a new chapter not only for our company but for the country. This is a moment of strength for all our stakeholders: our shareholders, our customers, our employees, and The United States Of America. And with the nonmarket externalities that were once outside of our control now largely addressed, our focus is firmly on execution. Let me briefly walk through the DOD and Apple agreements and then I will turn to some operational highlights from the second quarter. Beginning on slide four. I will not rehash every detail of the DoD agreement. You can find our July webcast on our website and YouTube.

And the agreements are filed with the SEC. But I want to emphasize that we view this partnership as a win-win-win. A win for MP Materials Corp. shareholders, a win for US commercial and national security interests, and a win for taxpayers. The DOD partnership rests on three pillars. First, DOD made a transformational investment in MP Materials Corp. consisting of $400 million in convertible preferred equity along with a $150 million low-interest loan to fund the build-out and expansion of our heavy rare earth separation circuit.

The DOD also received a warrant which when exercised and combined with the preferred equity post-conversion, would make them our largest shareholder positioned to benefit from the upside they helped enable through an incredibly well-structured partnership. Second, a $110 per kilogram price floor for all products containing NDPR. This mechanism counters nonmarket forces that have historically suppressed the development of a secure domestic supply chain. It ensures our shareholders earn a fair return on our past investments as well as the significant investments we will make to scale this mission and bring the supply chain home for good.

Included in this commitment is some upside sharing with DOD if, as we suspect to occur over time, prices go materially above one tenth. Third, we are accelerating the build-out of independence and constructing a new Tenet X Facility which together will expand our US magnet manufacturing capacity from 1,000 to 10,000 metric tons annually. Given the warp speed nature of the build-out and the mission we have been tasked with, the DOD has committed to purchase 100% of the output from the new facility on a cost-plus basis, including a $140 million minimum EBITDA guarantee.

We expect to syndicate a large portion of this output to commercial customers at improved economics, creating meaningful upside potential some of which we will share with DOD. On the heels of the DOD announcement, we signed a landmark agreement with Apple. While the timing may make these two agreements appear related, that was really a coincidence. This partnership is the result of five years of quiet technical collaboration with Apple and reflects our methodical approach to building win-win customer relationships. Apple is one of the world's most sophisticated supply chain managers and one of the largest and most experienced users of rare earth magnets, making it an ideal customer and a powerful validation of MP Materials Corp.'s capabilities.

Apple embodies everything we hoped for in a flagship commercial partner to follow GM. They will be the foundational customer for our commercial recycling business, anchored by the construction of a dedicated recycling circuit at Mountain Pass, and the expansion of Independence. This long-term contract will result in over $500 million in contracted magnet purchases beginning in 2027. We expect the economics to reflect attractive returns on our capital and significant commitments to this partnership. Apple will also provide $200 million in milestone-based prepayments over the coming years, supporting the build-out of both the recycling circuit and Independence. Importantly, Apple will leverage its global supply chain to provide post-consumer and post-industrial magnet feedstock.

This significantly accelerates MP Materials Corp.'s entry into recycling at scale with substantial potential upside. Recycled feedstock should reduce unit production costs, and over time, the ability to recover more material at Mountain Pass could expand our production profile beyond current targets. I want to recognize the extraordinary efforts of our team whose execution over the past several years has earned us the right to enter into these transformative partnerships. I also want to acknowledge General Motors whose early commitment to our mission helped catalyze this moment. Turning to operations. Our materials and magnetic segments continued to deliver strong execution.

In our material segment, we achieved 6% sequential growth in NDPR oxide production despite a planned biannual plant shutdown in April. This result was consistent with our expectations and more than double last year's output. Our upstream operations also delivered the second-highest quarterly REO production in the history of Mountain Pass with record recoveries driven by ongoing optimization work. In our magnetic segment, we expanded both NDPR metal production and sales volumes, which led to significant revenue growth and EBITDA generation. At Independence, we are now consistently producing magnets that meet our customers' demanding specifications for EV traction motors, a critical milestone. The next step is transferring this capability from trial production to scale production.

Commissioning at the factory is accelerating. Momentum is building as we progress toward commercial magnet production later this year. Michael will provide a detailed operational update in a few minutes, after Ryan covers our second-quarter results. Ryan?

Ryan Corbett: Thanks, Jim. Turning to slide five and our consolidated results, second-quarter revenue increased 84% compared to last year, driven by the ramp-up in sales of magnet precursor products as well as the record production of NDPR oxide at Mountain Pass. The sequential comparison was impacted by our strategic decision to end sales of concentrate to external customers in the quarter. With the new DoD agreement, I would point out that for the foreseeable future, we will no longer sell concentrate to third parties, but stockpile any excess production until we further ramp NDPR oxide output from our midstream assets.

Importantly, beginning in Q4, we will begin benefiting from the DoD price floor agreement, with first cash payments likely to be received in Q1. I would also add that we continue to work through all of the accounting mechanics of the various features of the DoD contract. For example, how the top-up payments for stockpiled products will be recognized. We will call out the major conclusions in our Q3 or Q4 call.

Moving to the middle of the slide, you'll see adjusted EBITDA also improved year over year driven by the higher sales of magnet precursor products, as well as continued improvements in per unit NDPR oxide production costs, including $8.3 million and lower reserves on work in process and finished good inventories at Mountain Pass, which at this point is mainly related to early production of lanthanum products. Sequentially, adjusted EBITDA declined primarily due to the lower sales of REO and concentrate.

And moving to the far right, adjusted diluted EPS improved compared to the second quarter of last year, mainly due to the improved adjusted EBITDA, partially offset by lower interest income and income tax benefit as well as higher depreciation, depletion, and amortization compared to last year. Moving to slide six and the material segment KPIs and starting on the left, with the upstream. You can see the world-class performance by the Mountain Pass team, as we produced 13,145 metric tons of REO in the quarter, 45% above last year. Recall last year, we had unplanned downtime that interrupted production for roughly three weeks.

This quarter's 13,000 plus metric tons was our second-best quarterly volume ever, which is even more impressive given the two-week planned maintenance shutdown we took at the beginning of the quarter. You can see the impact of our decision to halt sales of concentrate in the middle left of the slide with realized pricing on the product we did sell remaining in the mid 4 thousands, which included the impact of a 10% tariff applied during the quarter on our final Chinese sales. Moving to the midstream on the right side of the slide, we had a modest increase in sequential production of NDPR oxide, approximately 6% to 597 metric tons, in line with our discussion last quarter.

Material improvements in throughput offset in the reported metric by the planned downtime from our maintenance turnaround at the April. Importantly, we set a monthly record for production in May followed by another record in June. As we stated, we were generally at about the 50% mark of our targeted total throughput in May and June. Michael will provide more insights on our refining progress shortly, including his thoughts on targeted production for Q3. In the middle right, you can see NDPR sales volumes continued to be strong year over year, up 226%, generally following the ramp in production.

Timing of shipments is always a factor in our results, particularly as a significant amount of our production continues to go through Southeast Asia to be told into metal before being sold to our end customers. These volumes remain on our balance sheet and are not recognized as revenue until passed along to the final customer. We continue to expect sales volumes to follow production on roughly a one-quarter lag with some amount of lumpiness as seen this quarter as we continue to rapidly fill tolling channel with growing oxide production.

Moving to the far right of the slide, you can see that the market price for NDPR did experience solid lift both sequentially, up about 10%, and year over year, up roughly 19%. Slightly better than our expectations in early May. Flipping to Slide seven and our segment financials. On the left, you can see our material segment revenues increased nearly 20% year over year, due to the strong NDPR sales volume growth. Combined with the improved pricing environment. The sequential decline was solely due to the reduced sales volumes of concentrate, compared to Q1. Segment adjusted EBITDA also improved as mentioned earlier, due to the improving per unit costs of NDPR production.

As well as the lower inventory reserves as well as last year's higher maintenance costs from the thickener repairs. Sequential results similar to revenues were driven by the decline in concentrate sales. Moving to the right in our Magnetic segment, the team at Independence ramped production nicely, thanks to completing the commissioning of our second electrolysis cell, though not without the usual growing pains. And while we continue to work at improving all aspects of the metallization process, our team has done a terrific job. Bringing these assets online and working through the inevitable startup challenges. The growth in production led to strong sequential increases in revenue as well as adjusted EBITDA.

In closing, the last month has been truly transformational for the company. Reinforcing our role as a national champion with scale, durability, economic firepower to lead this reindustrialization effort The United States. Following the Department of Defense, and Apple agreements, we have a clear pathway to continued shareholder value creation as we transform the business into the vertically integrated magnetic solution provider we have been building towards since day one. With the investment in convertible preferred stock, and the recent funding of the heavy rare earth loan by the DOD, as well as our recent equity offering, today, we have nearly $2 billion of cash on the balance sheet to execute on our plan.

This is before $200 million of prepayments we expect from Apple as we hit certain milestones on our path to expanding independence building out our leading recycling platform at Mountain Pass. Regarding CapEx, our year-to-date investment has been $47.3 million which includes the impact of $12.2 million of reimbursement from the Department of Defense from our earlier heavy rare earth related grant. We continue to expect to spend between $150 million and $175 million in 2025 unchanged from the beginning of the year assuming we are executing on the same project pipeline announced at that time.

Which included the completion of independence to its initial 1,000-ton capacity, continued progress on heavy rower separation, and other investments including chlor alkali at Mountain Pass. Following the agreements with DOD and Apple, we are in detailed planning on the timelines for our further capital investments, including the expansion of our heavy separation circuits to accommodate samarium separation the expansion of independence, the construction of dedicated recycling capabilities at Mountain Pass, and the development and construction of the 10x facility.

As you can appreciate, we have spent significant time and resources planning for these projects, but as we have only just recently agreed to the specifics, with our two new stakeholders, we will provide relevant updates on timing and budgets as we progress in our engagement with them. But to provide some high-level guidance, I would note that we expect the prepayments from Apple to cover the vast majority of the capital investments required to expand independence and build out our scaled recycling capabilities. Further, expect the heavy worth loan DOD's preferred investment and our recent capital raise combined with our remaining financing commitment to fund the projects we will undertake as part of our partnership with DOD.

We believe we are extremely well positioned with a fortress balance sheet and will remain opportunistic as ever in balancing risk and reward to deliver durable shareholder value over the long term. With that, let me turn it over to Michael to go through our operations. Michael?

Michael Rosenthal: Thanks, Ryan. Moving to operations. We are seeing excellent progress across our upstream, midstream, and downstream operation. This quarter demonstrates our improving execution capability and the momentum building across the business. We had an outstanding quarter in our upstream operation, which benefited from extremely high uptime record high recovery, and optimization work that is now bearing fruit. As previously mentioned, we have been increasingly focused on improving concentrate quality rather than simply maximizing volume. And our teams responded by delivering our highest ever concentrate grade this quarter. We believe this is contributing to improved performance in the midstream circuits.

While I would caution against annualizing this quarter's concentrate numbers, the results clearly demonstrate our ability to optimize our process and the tremendous long-term potential of the Mountain Pass resource. Progress in the midstream circuits continue at a pace. We reported a 6% sequential increase in NDPR oxide production in line with expectations. But that figure alone does not fully capture the underlying progress. There are meaningful operational improvements occurring across many midstream circuits. Particularly in purification, separation, and our brine treatment areas. These improvements help to unlock greater throughput and reliability even as we work through some lingering first-quarter challenges in leach and purification. The positive trajectory is clear. And we are encouraged by the foundational progress being made.

Product finishing also improved during the quarter. Although short stints of unplanned downtime impacted operating costs, and, to a lesser extent, production volumes. In late July, we implemented several upgrades that have immediately improved operability. These upgrades should also meaningfully enhance throughput capability and reduce operating and maintenance burden. Starting later this quarter. Looking ahead, executing our midstream production ramp remains our top priority. We are steadily increasing throughput while maintaining consistently strong quality. Most areas are now demonstrating higher uptime and higher throughputs. Our separation circuits are performing quite well, and are outpacing the rest of the process.

This gives us confidence in our ability to steadily increase production while focusing on the most impactful opportunity areas to achieve our near-term target of a 6,000-ton per annum NDPR oxide run rate. At Independence, our teams continued to gain valuable experience in metal reduction furnace operations. We can now say with growing conviction that we understand the conditions required to consistently produce world-class quality NDPR metal. Commissioning activities beyond metallization expanded rapidly in the second quarter to include strip casting, powder production, pressing, and sintering. With site acceptance testing for parts of machining also underway. The team has done an outstanding job staying on schedule to commence commercial production by year-end.

While we know that there will be tremendous challenges in starting commercial production, our production plans and customer commitments are grounded in realistic assumptions and the factor in team are coming together impressively. As part of our Department of Defense and Apple agreements, we have committed to completing several projects across the Mountain Pass operations. Jim has addressed most of the key details. But I will add a brief update on heavy rare earth separation. Preconstruction work within legacy buildings has accelerated. All key separation equipment is on-site, and procurement of other major equipment is nearly complete. We expect to begin major equipment installation by the fourth quarter.

We remain confident that our terbium and desprosium production schedule aligns with the needs of independents as it ramps up commercial magnet production. And our vertically integrated platform provides unique flexibility regarding the type of and purity of feedstocks that we can accept. And this would give us the opportunity to secure additional feedstocks. I will continue to provide updates on this and other projects in the coming quarters. In terms of production outlook, we expect to achieve a 10 to 20% sequential increase in NDPR oxide production and stronger product sell-through in the third quarter despite taking some extra time to implement the upgrades to product finishing I mentioned earlier.

Relative to last year's very strong third-quarter results, concentrate production will likely be down slightly year over year as we execute a full plan trial of a potential pre-flotation process. This trial may modestly impact near-term recovery but is designed to drive long-term improvement in midstream performance. With that, I will turn the call back to Jim.

Jim Litinsky: Thanks, Michael. As I close today's prepared remarks, I want to take a moment to reflect on the MP Materials Corp. journey. Many of you know the history but we introduced MP Materials Corp. to the public markets in July 2020. Almost exactly five years ago. At the time, MP Materials Corp. was a rare earth concentrate business with a bold and important vision. To restore the full rare earth supply chain to The United States Of America. We laid out a roadmap, first to build refining capacity, and eventually one day, to enter the magnetics business. We were clear-eyed about the scale of the challenge. In fact, we told investors back then that magnets were a 2025 plus opportunity.

A long-term ambition that would take time, capital, and conviction. Well, it is now 2025. And here we are. Through years of relentless execution, this team has transformed a bankrupted and abandoned mine site into a vertically integrated American national champion with a strategic and economic platform that matters. Not only for national security but for the most promising business of our time. The rise of physical AI. There have been ups and downs along the way. And, yes, plenty of skeptics, critics, and naysayers. But if you ignored the noise and stayed with us from the beginning, you have compounded at over 43% annually.

It was not a straight line, and the path has been quite unconventional, to say the least. But here we are. Now as we look ahead to the next five years, I see a familiar setup. A bold vision, a clear strategy, and obsessive focus on execution and a platform with the potential to evolve far beyond what most can imagine today. Back in 2020, few could have foreseen just how far MP Materials Corp. would come. Today, I believe we are once again at the beginning of something extraordinary. We have the platform, the partners, and the perspective. To seize another enormous runway of opportunity.

And it does not hurt that we have a front-row seat and an important role in what may well become the most significant business transformation of our generation the era of physical AI. None of this would be possible without the extraordinary people of MP Materials Corp., our team on the ground, in the plants, and across the company. Their dedication talent, and belief in our mission are what turned vision into reality. To all of you, thank you. We are just getting started. With that, let's open it up for questions. Operator?

Operator: Thank you. At this time, if you would like to ask a question, please click on the raise hand button, which can be found at the black bar at the bottom of your screen. When it is your turn, you'll receive a message on the screen from the host allowing you to talk and then you'll hear your name called. Please accept, unmute your audio, and ask your question. We will wait one moment to allow the queue to form. Our first question comes from George Gianarikas from Canaccord and ingenuity. Please unmute your line and ask your question.

George Gianarikas: Hey, everyone. Good afternoon, and thank you for taking my questions.

Jim Litinsky: Hey. Good afternoon, George.

Ryan Corbett: So I just had a question about Magnetic's margins, which were pretty impressive this quarter. Can you just help us understand if the broad strokes of what you just reported in that segment could be used to sort of think about the, you know, the magnetics margins when you build you know, 10,000 tons, you know, in the future?

Jim Litinsky: Thank you.

Ryan Corbett: Yeah. Hey, George. It's Ryan. Obviously, with the state of maturity of the magnetics business at this point, we're obviously, you know, very pleased and impressed with the result. I think at this time, given we're in the stage of producing magnetic precursor products and delivering those to our foundational customer, it's not necessarily a perfect proxy for how the revenue and cost structure will look once we are in full production of finished magnets. However, I think that this level of earnings is something that, you know, likely can be expected for the next several quarters we're in production with magnets.

And then once that is ramped, certainly, expect a nice step change up as we begin delivering magnets from a total EBITDA perspective. You know, we won't get into specific details on margin and cost structure, particularly given the chunky nature of our existing customer relationships. And certainly, when you think about 10x, there's a wide variety of product types and customer contract types that we expect within that facility. I think the great thing, of course, about our contract with the Department of Defense is we do have the guaranteed minimum earnings level.

And then certainly, if you extrapolate what you see at independence, to the 10x facility, from an overall pricing perspective I think that paints some pretty significant upside to the potential earnings power of 10x versus that minimum level.

George Gianarikas: Thank you. And just as a follow-up, different question, but first, you know, congratulations on all the incredible deals you've been able to put together over the last month. But along with that comes a lot of work to do, you know, over the next few years. You know, how comfortable do you feel with building out the ecosystem required, getting the equipment in place, hiring the right people, you know, all the grind work that you have to do to build out the additional facilities in time to, you kind of hit the contract timelines that you articulated to us.

Jim Litinsky: Thank you. Well, thanks, George. We are hiring, so send us your resumes.

Martin Sheehan: I mean, obviously, we have a lot of execution to do,

Jim Litinsky: I think we've been an execution culture since day one. So we certainly understand the scale of the challenge that's ahead of us, and we're confident that we'll get it done. These things are never, you know, perfectly in a straight line. But we are already maniacally at work at the various pieces that we have to put together and we've been planning for this for quite some time. But Michael, do you want to add a little bit from your perspective?

Michael Rosenthal: Yeah. Thanks, Jim. On top of that, we have a core team with experience having built similar assets over the last several years. And, of course, now we're growing the team, as Jim referenced. We think we can scale that ability over the next several months and year. To help us execute better. You know, in addition, we've built vendor relationships. We have engineering drawings. We have plans. We have a lot more data than we did several years ago. So our ability to execute these projects, now versus where we were two years ago was significantly improved.

On top of that, we have a DPASS DX rating to help us engage with vendors and service providers to help accelerate progress there. So we're very confident we can meet, you know, both the DOD's aggressive schedule as well as the complementary and projects at Mountain Pass and for Apple.

Martin Sheehan: Thanks.

Operator: Our next question comes from Ben Kallo with Baird. Please go ahead.

Ben Kallo: Hi. Good evening. Thanks for taking my question. First, could you talk to us about the separation facilities you know, capacity or your thoughts around increasing capacity? From what I understand, there's no ceiling on how much concentrate you process. So could you be a processor for third parties and just maybe any kind of color around that?

Michael Rosenthal: Thanks, Ben. Guess I wish it were the case that there's no ceiling, but I think there is some ceiling. But I think, importantly, we have a lot of flexibility because we have a fully vertically integrated site. We have flexibility as to what kinds of feedstocks we can process. And what kinds of impurities we can handle, which I think is unique versus most sort of separation facilities that may be standalone that don't have that ability. So, yeah, that will be very helpful as we look at more heavy rich feedstocks to add as complement to our concentrate business.

So we expect our existing concentrate business to ramp up to the 6,000 tons per annum of NDPR oxide that we've talked about. And then hope to build particularly in regards to heavies, the additional separation, you know, for those heavy rare earths.

Ben Kallo: Isn't my follow-up is just on, you know, signing new magnets for 10, magnet agreements for two ten x. How do you guys think about, you know, just the cadence of both you and your customers you know, wanting to enter a deal, but do you want your customers want it to be more de-risked and the facility be closer to completion? Or are they clamoring to sign a deal now and how do you guys approach that? Thank you guys very

Jim Litinsky: Ben, am I already getting the what have you done for me lately question?

Ben Kallo: I was gonna go much bigger than that, like but I thought I'd hold off until next quarter. Yeah. Cool.

Jim Litinsky: I mean, obviously, we're still having a ton of conversations. And you know, so that continues. But I just remind you that 10x is a 100% sold out. And so we have you know, well, really, our entire magnetics business for the next decade is a 100% sold out. Obviously, we're going to syndicate commercially the vast majority of 10x, but I think we have the ability to be very thoughtful about how we do that. And I think hopefully, we have good track record at this point in you know, being patient and methodical and selecting the right sequencing of customers.

And making sure that we do so in a way that is frankly, attractive for our business, but also create win-win partnerships for us and the customer. And I think, you know, our expectation is we'll continue to do that as we build out 10x.

Ben Kallo: Great. Thank you guys very much.

Martin Sheehan: Sure.

Operator: Our next question comes from Lawson Winder with Bank of America. Please go ahead.

Lawson Winder: Great. Thank you, operator, and Jim and Ryan, thank you for today's update, and congratulations on everything you've achieved over the last quarter. Thank you. Don't forget, Michael.

Michael Rosenthal: But thank you. Sorry, Michael.

Lawson Winder: Not definitely not forgotten. Your work is very much appreciated also. Thank you. Wanted to ask about the assumptions around the $650 million minimum guidance for materials plus 10x magnets plus independence magnets. What does that include in terms of assumption around oxide sales to third parties? And is there an assumption baked in there that some oxides will be sold to China?

Ryan Corbett: Hey, Lawson. It's Ryan. Sure. I'll take that. We are under the DoD agreements no longer selling any of our products into the Chinese market. So it does not assume any oxide sales into the Chinese market. I would say though, if you do the math, depending on the type of magnet that you're talking about, certainly, bringing our total capacity to a finished magnet equivalent of 10,000 tons that does leave room for external sales. And so I think the good thing about these agreements is the way the price protection works is that's really a payment stream, you know, directly into the material side of the business.

That makes us in many ways indifferent between selling to a third party or selling internally. Where the magnet business will maintain, you know, the market-based approach to pricing based on, you know, market levels of oxide pricing. And so the overall assumption there is that we get to our targeted throughput and cost structure for the material segment from a separated product perspective, but just at that 6,000 tons, it does not embed upside from recycling or upside from further products. Including NDPR products that could come from heavy rich feedstocks. And so that's the big portion of the material side of that assumption.

And then on the magnetic side, that six fifty just assumes the minimum contracted EBITDA from the Department of Defense for the 10x facility, which as I laid out, I think has some very significant upside, some of which, of course, we share with our partner in DoD as that facility scales into producing for commercial customers as well. And it assumes relatively conservative assumptions as to our build-out and ramp of independence. And so in the slide deck that we provided in the prior conference call, you can sort of see the relative sizes of all of those pieces. That's the underlying overall set of assumptions.

Lawson Winder: That's great. Thank you, Ryan. As a follow-up, can I ask about another investment related to the with the Department of Defense? And that is the hydrochloric acid facility at Mountain Pass. Is that in addition to the chlor alkali facility? And then should we expect that investment to further reduce your cost of that very critical input of hydrochloric acid to your separation process? And then just drawing that to the final conclusion, I mean, could we see an improvement in the in the low $40 per kilogram marginal cost assumption that you guys have made for a fully ramped up separation facility?

Ryan Corbett: Sure. Lawson, you're stuck with me again on that one. You know, wouldn't say that it necessarily spells, you know, a change in our overall cost structure target. I think, you know, actually had a slide in last quarter's earnings deck had a very strategically shaded area that spoke to potential upside from lower overall production costs from the chlor alkali facility. The HCL facility that you see in the transaction agreements is the same thing as the chlor alkali facility to be clear. And from our perspective, we think that this investment is not just one in cost savings, but redundancy and resiliency.

You know, we believe that we will always have some level of external hydrochloric acid and caustic soda. Production for our business. We are a very large consumer of both of those products. And so having the flexibility both to pull from the outside market as well as produce internally in a full closed loop, we think, is important. We strategically launched our separations facilities by breaking that closed loop and building out the infrastructure and supply chain that's required to support our levels of production.

And then we believe bringing portions of that HCL facility or chlor alkali facility online methodically and continuing to support our external supply chain will be the best way forward both from a cost and redundancy perspective.

Lawson Winder: Okay, fantastic. Thanks very much, Ryan.

Operator: Our next question comes from David Deckelbaum from TD Cowen. Please go ahead.

Jim Litinsky: Hey, David.

David Deckelbaum: Thanks for your time. I wanted to just follow-up on just the some of the records set 60 k or are they part of it? I guess I'm just thinking about, you know, as we progress to up upstream 60 k, it seems like some of the tweaks are perhaps happening sooner than anticipated, but you know, kind of curious if this is viewed as a as a recovery tweak on top of that just with having a higher grade.

Michael Rosenthal: Thanks for the question. I'd say these are part of upstream 60 k. I think upstream 60 k included category of optimization. And I'd say our metallurgy team and operations teams have done an incredible job of implementing and executing changes. And I think we continue to be impressed that our ore body is able to support higher grade concentrate. As we focus on that, in order to help the midstream business. So I wouldn't say it's incremental, but we are hopeful that we can achieve the same goals with less capital and more optimization.

David Deckelbaum: Appreciate that, and that just as a follow-up, just on NDPR oxide, I know you all guided obviously, you'll be stockpiling concentrate at this point. The DoD agreement goes into place in the fourth quarter. From an NDPR oxide production perspective, should we anticipate that you'll continue ramping production throughout the year but stockpiling the product? For sales you know, once the DoD agreement is in place. I guess I'm I'm just wondering the as we assess the ramp of the stage two facility, know, was that going to be more evidential into '26, or should we be able to track those KPIs throughout the year?

Ryan Corbett: Yeah, David. I'll start, and I'll flip some of the production specific portions to Michael. But as it relates to sales, continue to have a really robust order backlog and sales pipeline for third-party customers for NDPR Oxide. And so we're continuing as we ramp production to expect to sell the vast majority of NDPR oxide out into third parties. Of course, as our metal production magnet production at Independence ramps, you know, we will become a larger internal customer of our own oxide. But, we do expect, you know, to continue to for the most part, focus on our strategic customers, particularly in the Japanese market, the South Korean market and broader Southeast Asia.

Mike, I'll flip it to you on your thoughts on production.

Michael Rosenthal: As you referenced, we plan for 10 to 20% increase over the next quarter, and that's largely consistent with the sort of progressive growth that we've seen over the last and a half. And we would expect that sort of pace to continue, not in a linear basis, but just generally speaking, step by step improvement getting better every day.

David Deckelbaum: Thanks, guys.

Lawson Winder: Thanks, David.

Operator: Our next question comes from Laurence Alexander with Jefferies. Please go ahead.

Laurence Alexander: So hello. Just wanna tease out your how you relate the concept of being in kind of the branding as a national US national champion and the bandwidth and the highly high degree visibility on returns. I mean, for the next decade. So can you tease out first are you allowed to sell into European or other countries? Can you expand the number of countries you sell product into, or does the DOD agreements in any way restrict that? Secondly, can you tease out or lay out sort of ramifications for the MOU that sought in for the potential project in Saudi Arabia. Do you have bandwidth to continue exploring that? And then third, I appreciate that there will be announcements just filling in the capacity that the DOD is underwriting.

But if you but given you have such a strong visibility on the returns on that, what would be your return on capital hurdle to look at any other uses of capital or uses of MP you know, bandwidth. Sure. Thanks, Lawrence. Well, first off, there's nothing that restricts us

Jim Litinsky: from selling into Europe. You know, obviously, as part of DOD, we just won't be selling to hostile states. And then as far as you mentioned Saudi modern I think if you look at the vertically integrated player that we've built, I mean, we are the only company in the world, and that includes China, that has all aspects of this business, which I believe is and, you know, as we've said from the beginning, is sort of the right structure to really scale and be low cost, accelerate, you know, at a, you know, astonishing pace, so to speak, in doing all of these pieces.

And, obviously, that, relate that relationship speaks to us as being the right partner around the world to add to this supply chain, particularly as America's national champion. I would tell you that as far as bandwidth and capital, certainly from a capital standpoint, and, frankly, from a focus standpoint, we are maniacally focused on investing and executing in The United States Of America. We need to deliver for GM Apple, and DOD. And so our focus, is on delivering on our domestic investments. That said, I do think we're gonna continue to grow the business. And so the modern opportunity is very exciting. We're we're you know, focused on that as well.

But I think you'll you should expect to see that and others that could come like that as more capital light opportunities. I think you're gonna see our investment focused in The US. And then I think you're gonna, you know, see that and others over time. And, obviously, from a return you mentioned returns. From a return on capital standpoint, standpoint, for MP.

I think it's actually an accelerant for our shareholders in the sense that because we have this capability and position, which brings a number of attributes, that we're gonna be able to continue to grow the business again, in a more capital light way but, you know, potentially having some of the same economics, which mathematically means higher returns on capital.

Laurence Alexander: Thank you.

Jim Litinsky: Thanks. Next question.

Operator: Our next question comes from Carlos De Alba with Morgan Stanley. Please go ahead.

Carlos De Alba: Yeah. Thank you very much, guys. A couple of questions. First one is, can you maybe share a little bit of color on what are the milestones that you need to get for Apple to, these boards $200 million in the coming years that you may as you mentioned. And, also, any progress on the $1 billion financing you know, that would support the development of the 10x facility.

Ryan Corbett: Hey, Carlos. It's Ryan. I'm not gonna get into specific, you know, contract details on our agreement with Apple. You know, I think that what we have made clear is that those disbursements will come on a milestone basis, ahead of production. And so we've targeted production for mid-2027. So, you know, hopefully, that gives you a pretty tight range of when the cash is gonna come in.

I think we tend to try to set up our customer relationships as Jim laid out in a win-win fashion where you know, we ensure that we are maximizing our cash on cash returns while ensuring that our customers see visibility into forward progress on, you know, the items that we've promised them. And we think the structure works quite well for both of us. As it relates to your question on the billion-dollar bridge facility, you know, I think I wouldn't overly focus on that facility, particularly because our recent equity raise gets netted against that. You know, a bridge is exactly what it sounds like.

It's a temporary solution that's put in place as part of an announcement, often an M and A announcement. And so for us, really served its purpose. You know, what we expect to do over the next several years is exactly what we've done, frankly, over the last five plus years as a public company, which is be extremely thoughtful about our balance sheet, ensure that, at this point, frankly, we are well capitalized to execute on the projects that we've laid out. We'll continue to focus on efficiency, both on the expenditure side and the balance sheet side, and we'll be opportunistic as we always are to ensure that we're financing all of this growth in the right way.

Jim Litinsky: Yeah. And one thing to just add, Carlos, In the prepared remarks, you may have heard, but if not, you know, Brian mentioned we have post the funding and the raise, etcetera, a we have approximately $2 billion of cash on our balance sheet right now. So that and then as you look out over the coming years where we have a dramatic step function change upwards, in cash flow generation that's contracted over the next decade. You know, we really have a fortress balance sheet to be completely opportunistic in how we manage going forward. So we feel really good about our position.

Carlos De Alba: Yeah. No. For sure. Alright. Thanks. And maybe stepping back and thinking more strategically, I would like to understand how scalable will the recycling line or recycling facility that you are building, you will be. Could this potentially allow you to become much bigger in magnetics without the need of mining you know, feedstock.

Michael Rosenthal: That's a great question, Carlos. Initially, our build is obviously to satisfy our requirements for Apple. In addition, our own magnetics plans will produce swarf and other byproducts that will have the opportunity to recycle. And from that, recover and optimize maximize the heavy rare earth content and ensure we maximize that usage. You know, on top of that, obviously, the 10x facility will produce its byproducts. You know, from there, we have the opportunity to make to build a facility that's modular that can grow with the market, that can recover end of life materials and or third-party feedstocks. And this both extends the life of mountain pass and creates opportunity for future growth.

But, you know, related to previous comments earlier, there's not unlimited capacity or capability, so we would you'll have to have to balance that in the in the medium term.

Carlos De Alba: Alright. Fantastic. Well, thank you very much, guys, Jim, Brian, and my

Jim Litinsky: Yeah. Thank you.

Operator: Our next question comes from Bill Peterson with JPMorgan. Please go ahead.

Bill Peterson: Yeah. Hi. Good afternoon. Congrats on all the progress and strong execution in the quarter. Maybe following up that last recycling question, guess, how do you plan on approaching this internally developed recycling processes? Acquiring technology, partnerships with third parties? And, you know, maybe what does Apple bring to this, you know, recycle this sort I guess, the early stages of the recycling program?

Michael Rosenthal: Think so the question. I think as we mentioned in, in other forum, been working on recycling in cooperation with Apple for over five years. So we have made a lot of progress. And I think over the next several years, we have other plans to cooperate with our customers and technical partners on further advancing our technical capability both in recycling and using recycled materials. And optimizing magnet properties.

Jim Litinsky: Sorry. That was yeah. I think does that get your question, Bill, or did you have a second part to that?

Bill Peterson: No. No. I didn't sorry. I know if you continuing the thought. No. I do have a second question. In terms of in terms of magnet readiness, I guess, for your lead customer, are there any sort of remaining technical areas to address before commercial ramp? How are the you know, is the products performing from a technical point of view? And you know, I just wanna get a sense for how you're you're tracking to the commercial launch you know, in the coming quarters.

Ryan Corbett: Yeah. Sure, Bill. It's Ryan. I think we're really pleased with the technical progress. I think we mentioned in some of the prepared remarks, and in the deck, our consistent execution on producing on spec products for our customers. As you know, EV traction motors are some of the most demanding end use cases for magnets. And, you know, we have been consistently producing to spec. And, frankly, you know, continuing to optimize from a heavy rare earth perspective, you know, make really significant strides. They're actually probably more than I even expected. Despite having pretty high expectations for that team.

You know, really what is left at this point is taking what we've been doing in our new product introduction facility which as you saw is much more than a pilot line. It's sort of a factory within a factory that's allowed us to iterate quickly to be able to generate the types of results that we have and just transferring what we've done there into larger commercial production. With any startup, it is not a straight line, so I will not promise a straight line. But we have a lot of confidence in the team, particularly given, you know, what they've demonstrated to date. A lot of the major process areas are already either in commissioning or commissioned.

And, you know, seeing those operate give us further confidence in the underlying assumptions that we built in into the business case and operating case. And so, you know, the proof will be in the pudding over the next several quarters. But that's what's left is going from trial to commercial.

Bill Peterson: Thanks, Ryan, Michael, Jim. And, really, again, nice job in execution.

Jim Litinsky: Thank you.

Operator: Our last question comes from Matt Summerville with DA Davidson. Please go ahead and ask your question.

Matt Summerville: Excuse me. Can you guys hear me?

Michael Rosenthal: Yes. Hey, Matt. Okay. Cool.

Jim Litinsky: Hey. Thank you. So I wanna get back to some comments you made regarding stage one.

Ben Kallo: What's driving the improvement in concentrate grade? And I guess I wanna understand how you modulate going after incremental volume versus going after incremental grade. And do you need the incremental grade to get stage two output to where you ultimately you know, hit the nameplate.

Michael Rosenthal: Thanks, Ben. I guess in a stable environment, there's a trade-off between grade and recovery. Historically, we have tried to hold a stable grade and increase the recovery to increase production volume. In recent quarters, we had seen that we were kind of able to tweak upgrade without significant sacrifice of recovery. Some of the optimizations, through some of the previous initial stage upstream 60 k projects. I think we're still harvesting some of those gains. In addition, as we've simplified parts of our circuit, it's enabled us to get grade higher without sacrificing recovery. And I think those opportunities continue. Some of our next initiatives do relate to creating even higher quality concentrate.

And that should have follow-on benefits to the primarily the cost structure of the stage two, the midstream operation. But also to yeah. The ultimate throughput capability of that. So I don't say it's absolutely necessary at this point. I think we're very comfortable with the ability to ramp the facility with the current concentrate. But incrementally, pure concentrate will make that even better.

Matt Summerville: So should I is it just as a follow-up, should I take that to mean that you feel you can push the limit of that six zero seven five tons of oxide absent major incremental capital investment, or should I not make that conclusion? I wouldn't connect those two together.

Lawson Winder: So

Michael Rosenthal: I don't we don't need any improvement in the concentrate in order to hit that nameplate.

Matt Summerville: K. Got it. I'll leave it there. Thank you.

Operator: Concludes the question and answer portion of today's call. I will now hand the call back to Mr. Litinsky for closing remarks.

Jim Litinsky: Sure. Hey, everyone. So, obviously, this was an extraordinary quarter. We are really proud of what we achieved. Obviously, operationally, but in particular, the agreements with, DOD and Apple. And, clearly, the platform that we have that we've been building for a number of years has changed, for the better. Dramatically, and we expect to take this new position and keep on reaching to continue to build on the gains that we've had thoughtfully. And so with that, we will get back to work. And have a have a great day, everyone.

Where to invest $1,000 right now

When our analyst team has a stock tip, it can pay to listen. After all, Stock Advisor’s total average return is 1,047%* — a market-crushing outperformance compared to 181% for the S&P 500.

They just revealed what they believe are the 10 best stocks for investors to buy right now, available when you join Stock Advisor.

See the stocks »

*Stock Advisor returns as of August 4, 2025

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. Parts of this article were created using Large Language Models (LLMs) based on The Motley Fool's insights and investing approach. It has been reviewed by our AI quality control systems. Since LLMs cannot (currently) own stocks, it has no positions in any of the stocks mentioned. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

The Motley Fool has positions in and recommends Apple. The Motley Fool recommends MP Materials. The Motley Fool has a disclosure policy.

Image source: The Motley Fool.

Date

Thursday, Aug. 7, 2025, at 5 p.m. ET

Call participants

• President and Chief Executive Officer — Cary Grace
• Chief Financial and Operating Officer — Brian Scott

Need a quote from a Motley Fool analyst? Email [email protected]

Risks

• Brian Scott reported a non-cash goodwill impairment charge of $110 million related to the Physician and Leadership Solutions segment, resulting in a GAAP net loss of $116 million.
• Cary Grace cited uncertainty about government policy impacts, which placed the healthcare sector in a more cautious stance and caused declines in staffing orders and traveler extensions.
• Grace noted academic medical centers, which constitute about 20% of consolidated revenue year to date, have taken the strongest measures to reduce spending in response to cuts in federal funding for research.
• Scott said, "Adjusted EBITDA margin for the quarter was 8.9%, down 380 basis points from the prior year period and 40 basis points sequentially."

Takeaways

• Revenue-- $658 million, at the high end of guidance, but down eleven percent year over year. Interim leadership revenue decreased five percent sequentially.
• Gross margin-- 29.8% consolidated gross margin, eighty basis points above guidance range. Consolidated gross margin increased one hundred ten basis points sequentially, but decreased one hundred twenty basis points year over year.
• Adjusted EBITDA-- Adjusted EBITDA was $58 million, down 38% year over year compared to fiscal second quarter ended June 30, 2024, and down 9% sequentially.
• Net loss-- GAAP net loss was $116 million, compared to net income of $16 million in fiscal second quarter ended June 30, 2024, and a $1 million GAAP net loss in the previous quarter, driven by impairment charges.
• SG&A expenses-- $155 million reported SG&A expenses; adjusted SG&A was $140 million, reflecting $5 million in professional liability reserve adjustment and $2 million in higher bad debt expense, offset by lower employee-related costs.
• Nurse and Allied revenue-- $382 million Nurse and Allied revenue, down fourteen percent year over year and eight percent sequentially, with segment volume down sixteen percent year over year.
• Travel nurse revenue-- $208 million travel nurse revenue, a 25% year-over-year decline, and down 4% sequentially.
• Allied revenue-- $146 million, down four percent year over year and one percent sequentially for Allied revenue; Allied orders in July were up 3% from March, highlighting outpatient therapy and imaging strength.
• Physician and Leadership Solutions revenue-- $175 million, down 6% year over year and flat sequentially; Locum Tenens revenue of $103 million was flat year over year and up one percent sequentially.
• Locum Tenens demand-- Locum Tenens demand so far in fiscal third quarter ending Sept. 30, 2025, is 5% higher than in fiscal second quarter ended June 30, 2025. Management expects year-over-year growth to begin in fiscal third quarter ending Sept. 30, 2025.
• Physician and Leadership gross margin-- 28.2% gross margin for the Physician and Leadership Solutions segment, down two hundred thirty basis points year over year, but up ninety basis points sequentially.
• Technology and Workforce Solutions revenue-- $102 million revenue for the Technology and Workforce Solutions segment, down nine percent year over year, driven by declines in VMS and outsourced solutions; segment gross margin was 55.1%, a decrease of 510 basis points from the prior year period in Technology and Workforce Solutions segment gross margin.
• Language services revenue-- $76 million language services revenue, up 1% year over year and sequentially; utilization was up 6% year over year, offset by competitive pricing pressure.
• Smart Square sale-- Completed in July 2025 for $75 million ($65 million cash, $10 million note). This will reduce annualized revenue by approximately $17 million and adjusted EBITDA by about $6 million starting in fiscal third quarter ending Sept. 30, 2025.
• Labor disruption revenue-- $16 million labor disruption revenue, down from $39 million in fiscal first quarter ended March 31, 2025, and zero in the prior year quarter; $5 million is included in fiscal third quarter ending Sept. 30, 2025, guidance, with upside possible from further contract wins.
• Impairment charges-- Scott reported a non-cash goodwill impairment charge of $110 million related to the Physician and Leadership Solutions segment and a non-cash intangible asset impairment charge of $18 million (Nurse and Allied).
• Operating cash flow-- $79 million operating cash flow, with capex of $10 million; cash flow was impacted by an approximately $50 million increase in client deposits related to labor disruption events.
• Debt position-- Ended the quarter with $42 million in cash, $920 million total debt as of June 30, 2025, and $70 million on the revolver; net leverage ratio of 3.3x.
• Guidance-- Fiscal third quarter ending Sept. 30, 2025, consolidated revenue is expected to be between $610 million-$625 million; gross margin is projected to be between 28.7% and 29.2% for fiscal third quarter ending Sept. 30, 2025; SG&A (reported) is projected to be approximately 23% of revenue for fiscal third quarter ending Sept. 30, 2025. Operating margin is expected to be six percent to 6.5% for fiscal third quarter ending Sept. 30, 2025; adjusted EBITDA margin is expected to be 7.7%-8.2% for fiscal third quarter ending Sept. 30, 2025.
• Travel nurse orders-- Travel nurse orders fell fifteen percent from March to June 2025 and have been "stable since June 2025," but remain below prior year levels. July 2025 traveler extension rates rebounded sharply.
• Academic medical centers-- Represent twenty percent of consolidated revenue year to date; have implemented the strongest spending reductions in response to federal research funding cuts.
• Vendor-neutral vs. supplier-led MSPs-- Pipeline now shows a "slight bias back to supplier-led MSPs" for 2025, reversing a previous trend.
• Passport platform-- Now serves travel and per diem nurse, allied, and locum tenens specialties; surpassed 300,000 registered users as of fiscal second quarter ended June 30, 2025. More than twenty percent of Nurse and Allied placements are now assisted by Passport automation.
• International nurse staffing-- Revenue for international nurse staffing is down roughly $100 million from the 2023 peak ($225 million in 2023 to approximately $125 million). Double-digit growth in revenue and EBITDA is anticipated for 2026 in the international nurse staffing business as retrogression improves.
• Days sales outstanding-- Fifty-four days, nine days lower than a year ago and one day lower sequentially.

Summary

Brian Scott stated that consolidated gross margin rose one hundred ten basis points sequentially, driven by unique quarter-specific items, but decreased by one hundred twenty basis points year over year. Cary Grace highlighted that competitive pricing in language services offset six percent growth in utilization, resulting in modest segment revenue growth. Management emphasized that the sale of Smart Square would trim annualized revenue by $17 million and adjusted EBITDA by $6 million beginning in fiscal third quarter ending Sept. 30, 2025. Volume declines in Nurse and Allied, travel nurse, interim leadership, and search were identified as primary drivers of consolidated revenue and margin contraction, while Locum Tenens remains flat or modestly positive. AMN Healthcare Services(NYSE:AMN) signaled a stabilization of order and extension rates entering July 2025, pointing to potential sequential improvement in fiscal fourth quarter ending Dec. 31, 2025, while reasserting a strategic focus on diversified solutions, automation, and technology platforms.

• Cary Grace reported that "extension rates in July rebound sharply back … delayed decision-making [is] really start[ing] to break free as we've entered the third quarter."
• Management expects "double-digit volume growth" in the allied school business in fiscal fourth quarter ending Dec. 31, 2025, with July bookings indicating improvement over earlier quarters.
• Brian Scott noted that proceeds from the Smart Square sale will be partially offset by repayments of approximately $50 million in client deposits in fiscal third quarter ending Sept. 30, 2025, affecting cash balances and liquidity metrics.
• Cary Grace stated international nurse staffing will return to volume and revenue growth in fiscal fourth quarter ending Dec. 31, 2025, with "outsized growth opportunities over the next two to three years as visa retrogression dates move forward."
• Management described competitive stability in nurse and allied bill rates and confirmed that operational changes and new client contracts are expected to improve fill rates and incremental order capture through the back half of 2025.

Industry glossary

• Visa retrogression: A regulatory delay in processing employment-based visas due to annual quota limits, directly impacting foreign nurse staffing deployment.
• Labor disruption revenue: Income from staffing services provided during strikes or collective bargaining-related labor shortages at healthcare facilities.
• MSP (Managed Services Program): A vendor arrangement in which a single provider manages the procurement and administration of contingent healthcare staffing for a client organization.
• VMS (Vendor Management System): Technology platform used to manage and procure contingent labor across multiple staffing vendors.
• Passport automation: AMN Healthcare Services' in-house digital tool used to streamline placement and assignment management for clinical staff.

Full Conference Call Transcript

Cary Grace, President and Chief Executive Officer, and Brian Scott, Chief Financial and Operating Officer. I will now turn the call over to Cary.

Cary Grace: Thank you, Randle, and welcome to our second quarter conference call. Second quarter revenue of $658 million was at the upper end of our guidance range. Adjusted EBITDA of $58 million and gross margin of 29.8% exceeded the high end of guidance. At the end of the second quarter, the balance on our revolving line of credit was down to $70 million after we repaid $80 million during the quarter, and we expect further debt reduction this quarter. Through the quarter, uncertainty about government policy impacts placed the healthcare sector in a more cautious stance compared with the first quarter, directly impacting our industry. The strongest indications we had of clients' uncertainty were declines in staffing orders and extensions.

Travel nurse orders in June were 15% lower than March, and our rebook retention rate for travelers fell through the quarter. Our Language Services business also billed fewer minutes in June compared with May. Hiring freezes hampered our physician search business and likely affected demand and volume in locum tenens. Our academic medical center clients have taken the strongest measures to reduce spending in response to cuts in federal funding for research. Academic medical centers made up about 20% of our consolidated revenue year-to-date. Other hospitals have seen some slowing in patient utilization, though still growing year over year.

With the new tax bill now finalized, our clients have some clarity on future changes to reimbursement and their insured population mix, much of which will happen gradually over several years. July saw improvement in key metrics across most of our businesses. In Nurse and Allied, traveler extension rates rebounded sharply in July, which underscores that our clients still have the need for flexible staffing. Travel nurse is largely an acute care business, and while orders have been stable since June, they are running below prior year levels, and we need to see higher order levels to regain volume growth. Allied draws from a more diverse client base with about half of its business coming from non-acute care.

While travel nurse orders fell more than 10% from March to July, Allied orders in July were up 3% from March, benefiting from our strength in outpatient therapy rehabilitation and imaging. We also anticipate a strong year for our allied schools built on robust bookings in the first half selling season and the benefit of innovative solutions like our Televate virtual care platform. Q3 is the seasonally lowest quarter of the year for school staff, and our improved bookings will be more visible in Q4, where we expect double-digit volume growth from the prior year. Our international nurse staffing business is positioned to resume sequential growth in volume and revenue in the fourth quarter, with growth trends continuing into 2026.

We expect this business to have outsized growth opportunities over the next two to three years as visa retrogression dates move forward. Language services revenue was up 1% year over year in the second quarter, with utilization up 6% from a year ago, mostly offset by competitive pricing pressure. Utilization declined from May to June and grew again in July, and our sales pipeline continued to increase and progress over the past three months. Revenue for our Locum Tenens business was flat year over year in the second quarter, and we see good opportunity to deliver consistent year-over-year growth starting in the third quarter. Locum Tenens demand so far this quarter is 5% higher than Q2.

We recently completed the last stages of the MSCR integration and are seeing traction in adding more locums programs into our existing MSP clients as clients seek consistency and cost efficiency in their locum spend. We expect MSP revenue to reach a historic high this year with higher same-client sales and new opportunities for additional growth in Locum. Our labor disruption business has had a successful start to the year, and we could have more activity from now into 2026 supporting a number of clients in large upcoming collective bargaining agreements. Our recently completed AI-enabled event management technology has had positive client reaction and combined with our deep expertise enables us to scale to support more clients.

The staffing industry analysts recently released 2024 market share rankings, showing that AMN Healthcare Services, Inc. retained market share in an intense competitive environment in Travel Nurse and Allied while gaining share due to acquisition in Locum Tenens. In May, AMN Healthcare Services, Inc. was named the largest healthcare leadership search firm by Modern Healthcare. This year to date, our growth strategy to serve all market channels has progressed, supported by our Workwise technology infrastructure. Our operational speed and automation initiatives have resulted in steadily improving fill rates in both our AMN-led MSPs and vendor-neutral programs.

These efforts have been greeted by a healthy pipeline of vendor-led and vendor-neutral MSP opportunities, and we are also building up our client list for direct staffing relationships. We continue to make good progress on diversifying our revenues and building on our technology-enabled services. AMN Passport is one of our best success stories. Passport, our industry-leading app for healthcare professionals, now covers travel and per diem nurse, allied, and locum tenens specialties. We also have extended Passport capabilities to manage float pool work and labor disruption events. These additions have given a boost to Passport, which recently surpassed 300,000 registered users. More significant is the impact Passport is making on our efficiency and user engagement.

More than 20% of our Nurse and Allied placements are now assisted by Passport automation. We have seen other early successes from our rollout of AI capabilities across all facets of our operations, and this will continue to be a key area of focus for us. In early July, we completed the sale of our Smart Square scheduling software to a new commercial business partner, Simpler. This transaction enables us to expand the potential Workwise network of technology partners to deliver workforce planning, staffing, and talent deployment to the benefit of our current and future clients. In two and a half years, we have rebuilt our ability to address all channels of the healthcare staffing market.

We have stabilized and, in some areas, modestly grown our staffing market share, and we are well-positioned to win as demand recovers. For the near term, we continue to manage our cost structure and drive for operational efficiency. Our financial strength and level of innovation stand out in the industry at a time when many competitors are struggling. Now I will hand over the call to Brian for a review of second quarter results and third quarter guidance.

Brian Scott: Thank you, Cary, and good afternoon, everyone. Second quarter consolidated revenue was $658 million at the high end of guidance, driven primarily from better-than-expected performance in our Nurse and Allied segment. Revenue was down 11% from the prior year and down 5% sequentially. Consolidated gross margin for the second quarter was 29.8%, 80 basis points above the high end of our guidance range. Year over year, gross margin decreased 120 basis points, while sequentially, gross margin increased by 110 basis points. Consolidated SG&A expenses were $155 million compared with $149 million in the prior year and $148 million in the previous quarter.

Adjusted SG&A, which excludes certain expenses, was $140 million in the second quarter, compared with $137 million in the prior year and $136 million in the previous quarter. The sequential SG&A increase was primarily due to a $5 million unfavorable professional liability reserve adjustment and $2 million in higher bad debt expense, more than offsetting lower employee costs and other expense management efforts. The majority of the professional liability reserve adjustment was recorded in the Nurse and Allied segment, while the bad debt charge was in the Physician and Leadership Solutions segment. Second quarter Nurse and Allied revenue was $382 million, down 14% from the prior year, driven mainly by lower volume, partially offset by labor disruption revenue.

Sequentially, segment revenue was down 8%, primarily due to lower layered assessment revenue and seasonally lower volume. Labor disruption revenue in the quarter was $16 million compared with $39 million in the first quarter and zero in the prior year quarter. Year over year, segment volume decreased 16%. Average rate was down 2%, and average hours worked were down 1%. Sequentially, volume was down 3%, while the average rate and hours worked were both flat. Travel nurse revenue in the second quarter was $208 million, a decrease of 25% from the prior year period, and 4% from the prior quarter. Allied revenue in the quarter was $146 million, down 4% year over year and 1% sequentially.

Nurse and Allied gross margin in the second quarter was 23.9%, an increase of 10 basis points year over year. Sequentially, gross margin was up 120 basis points due to lower payroll taxes and a favorable business mix. Moving to the Physician and Leadership Solutions segment, second quarter revenue of $175 million was down 6% year over year, driven by lower volume across the search and interim leadership businesses. Sequentially, revenue was flat. Locum Tenens revenue in the quarter was $103 million, flat year over year and up 1% sequentially. Interim leadership revenue of $23 million decreased 25% from the prior year period and 5% sequentially. Search revenue of $9 million was down 29% year over year and 2% sequentially.

Gross margin for the Physician and Leadership Solutions segment was 28.2%, down 230 basis points year over year on a lower bill-pay spread and an adverse revenue mix shift. Sequentially, gross margin increased 90 basis points mainly due to a favorable sales allowance adjustment in the Locums business. Technology and Workforce Solutions revenue in the second quarter was $102 million, down 9% year over year, primarily driven by declines in our VMS and outsourced solutions businesses. Sequentially, revenue was flat. Language services revenue for the quarter was $76 million, up 1% both year over year and sequentially. VMS revenue for the quarter was $19 million, a decrease of 31% year over year and 2% sequentially.

Segment gross margin was 55.1%, down 510 basis points from the prior year period, primarily due to lower revenue from VMS outsourced solutions. Sequentially, gross margin declined 40 basis points. In July, we completed the sale of Smart Square for $75 million, with $65 million paid at closing and $10 million in an eighteen-month note. This business was included in our Technology and Workforce Solutions segment. Starting in the third quarter, this transaction will reduce annualized revenue by approximately $17 million and adjusted EBITDA by about $6 million. Second quarter consolidated adjusted EBITDA was $58 million, down 38% year over year and 9% sequentially.

Adjusted EBITDA margin for the quarter was 8.9%, down 380 basis points from the prior year period and 40 basis points sequentially. During the second quarter, we recorded a non-cash goodwill impairment charge of $110 million related to our Physician and Leadership Solutions segment. We also recorded a non-cash intangible asset impairment charge of $18 million related to our Nurse and Allied segment. Second quarter net loss was $116 million, driven by the goodwill and intangible asset impairment charges. This compared with net income of $16 million in the prior year period and a net loss of $1 million in the prior quarter. Second quarter GAAP diluted loss per share was $3.20.

Adjusted earnings per share for the quarter was $0.30, compared with $0.98 in the prior year period and $0.45 in the prior quarter. Days sales outstanding for the quarter is fifty-four days, which was nine days lower than a year ago and one day lower sequentially. Operating cash flow in the second quarter was $79 million, and capital expenditures were $10 million. The quarter and year-to-date cash flow has been favorably impacted by an approximately $50 million increase in client deposits related to labor disruption events. These deposits will be repaid during the third quarter, somewhat offsetting the proceeds received from the Smart Square sale.

As of June 30, we had cash and equivalents of $42 million and total debt of $920 million, including $70 million drawn on a revolver. We ended the quarter with a net leverage ratio of 3.3 times to one. Moving to third quarter guidance, we project consolidated revenue to be in a range of $610 to $625 million. This revenue guidance includes $5 million related to labor disruption support. Gross margin is projected to be between 28.7% and 29.2%. Reported SG&A expenses are projected to be approximately 23% of revenue. Operating margin is expected to be 6% to 6.5%, and adjusted EBITDA margin is expected to be 7.7% to 8.2%.

Additional third quarter guidance details can be found in today's earnings release. And now let's go back to Cary for some closing remarks.

Cary Grace: Thank you, Brian. Before I open the call for questions, I want to acknowledge the recent passing of AMN Healthcare Services, Inc.'s former Chairman, Doug Wheat, last month. Doug will always be a pivotal figure in both the growth story of AMN Healthcare Services, Inc. and as a friend and mentor to so many of us. Doug served on our Board of Directors for twenty-six years and was the Board's Chairman for seventeen years. Doug's legacy lives on in the values he championed, the people he impacted, and the continued impact of AMN Healthcare Services, Inc. on the lives of healthcare professionals and patients across the country.

We are grateful for his extraordinary contributions and extend our deepest sympathies to his wife Laura and his entire family. I know I speak for many in saying how deeply he will be missed. Among the many great things about AMN Healthcare Services, Inc., our people and our culture are the foundation of what makes AMN Healthcare Services, Inc. so special, and we are grateful for the many years Doug was a part of the wonderful AMN Healthcare Services, Inc. team. Operator, you can open the call for questions now.

Operator: Thank you. At this time, we will conduct a question and answer session. As a reminder, to ask a question, you will need to press 11 on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. Please standby while we compile the Q&A roster. Our first question comes from Trevor Romeo with William Blair. Your line is now open.

Trevor Romeo: Hey, good afternoon, everybody. Thanks for taking the question. The first one I had was, you would just love, I guess, any more color on how your clients are kind of thinking about their contingent labor needs at this point. I think, Cary, you noted the slower decision-making in Q2 followed by some improvement in July. I think there were a few comments you already had on kind of the demand levels, but would love maybe just more color on how you saw the trends move throughout the quarter and maybe more importantly, what your clients are telling you as far as where their contingent labor needs could go forward with the various uncertainties out there?

Cary Grace: Yeah. So let me take demand first, and then I'll maybe more broadly talk about what we're seeing in terms of their needs around workforce solutions. So I mentioned this in the call, but what we really saw as we kicked off the year is a very healthy start to the year. We saw year-over-year increases in demand. As we got into the second quarter, we really started to see the uncertainty of some pending policy changes, whether it was around tariffs, around healthcare funding as part of the spending bill, and for academic medical centers, potential cuts in research budgets. And so we saw that uncertainty result in delays in decision-making throughout the second quarter.

What we've seen really starting in July, and we've, you know, we're only kind of a week into August, but we have seen demand stabilize in nurse. We are seeing demand up in allied and in locum. And we saw extension rates in July rebound sharply back. And so we've seen some of the delayed decision-making really start to break free a little bit as we've entered the third quarter. Now what we experienced in the second quarter plays through to what we see in the third quarter. And so some of the stabilization or increase in demand we would expect to start to come through more in the fourth quarter or towards the end of the year.

If I step back and think a little bit about what clients are thinking about contingent labor, we really are at a period where for many clients, they have normalized both their utilization of labor. And when we look at where premium contingent cost over fully loaded permanent cost is, we're down to high single digits. This past quarter, we were more at 9%, which is at a really kind of low end of what you would see historically. And so we've seen that contingent spend normalize. As systems were focused on permanent hiring, and they were focused on building flexibility, whether that was in flexible or other ways.

We are very focused on helping them across all of their total talent solutions. So throughout this, we help them in permanent hiring. We help them with building up their internal float pools, whether we're running that or they're running that. Whether they want to do programs or they want to do per diem. So we are seeing the start of broader conversations about how you're really gonna manage and sustain a quality, cost-effective workforce in the future. Things like predictive analytics, more data, we're seeing interest in program management, particularly in historically decentralized areas like Locum.

And so we would expect, Trevor, those trends to continue, particularly as organizations are dealing with still increasing patient utilization and a limited supply of clinicians.

Trevor Romeo: Interesting. Yeah. Thank you very much, Cary. That's really helpful color. And then I guess I also just wanted to ask on your gross margins, particularly in the Nurse and Allied segment. I think they picked up nicely from last quarter. I was just wondering if you could give us a little bit more color on the drivers there. I think Brian talked about a favorable mix, but did you actually see underlying spreads improve a bit there or the competitive activity stabilize? And then what's your outlook for spreads in kind of the core Nurse and Allied moving forward?

Brian Scott: Yeah. Thanks, Trevor. Yeah. The underlying spreads in Nurse and Allied have been more stable. So we did have a little bit of better gross margin performance from what we guided in both the Nurse and Allied and Physician Leadership segments. But most of that was more either a couple of one-time items like sales allowance. We had a payroll tax benefit in the second quarter as well. And then we picked up a little bit of additional international perm placement revenue at a very high margin. So there were a couple of good guys in the quarter, which helped out. Same on Physician Leadership, we had a sales allowance reduction.

So with the same thing in locums, we didn't see an improvement in margin. And so as we think about our focus right now, it's actually on just trying to drive as much volume as possible, and there's been pretty stable bill rates. And so that has led to pretty stable margins. And we would expect to see that as we go into the third and fourth quarter as well.

Trevor Romeo: Got it. Yeah. Nice to see some stabilization there. Thank you both. I really appreciate it.

Cary Grace: Thank you.

Operator: Our next question comes from Kevin Fischbeck with Bank of America.

Kevin Fischbeck: Great. Thanks. I was just wondering if you could provide a little more color, I guess, in when you kind of think that these numbers will have kind of actually bottomed. I guess when you talk about some of the firming and demand that you're seeing, are those comments like seasonally adjusted? I know that oftentimes, timing through the year can change when orders start to rebound or would be expected to rebound. So just wanted to get more color on when you thought we might start to see year-over-year growth again.

Cary Grace: Yeah. Number one, welcome back. Nice to hear your voice. Thanks. A couple of things in demand. If I look at second quarter year over year, and what we're seeing in clients, if you look at the decrease in utilization, the vast majority of that year-over-year decrease came from a concentrated number of clients. And the majority of that concentrated group of clients was academic medical centers. And so we saw the biggest change in utilization from a relatively small group of clients. In the remainder of the utilization declined year over year, it was concentrated in clients that were at the tail end of rolling off that we had lost in 2023 or early 2024.

So think of that as really that tail end has played through. If we look at what we're seeing in the early days of Q3, we are seeing academic medical centers in aggregate, their volumes up from what we saw over the past four quarters. So, Kevin, what I would say is in terms of where we have seen some of the declines, we're seeing even into this quarter some stabilization of those clients. And you're always gonna have puts and takes in any given month or quarter for some clients. But I think some of the challenges that we had seen over the past year, we've seen that play out over the past couple of quarters.

Brian Scott: Yeah. I'd just add. So when you, as Cary mentioned at the beginning of the call, we saw the extension rates decline during the second quarter. That had some nominal impact on Q2, but you were gonna feel it more in the third quarter, which is reflected in the guidance in the sequential decline in travel nurse. And, again, the decline in orders that also, yeah, we started to see a little bit in April, but more so in May and June. That also compounded the impact we're seeing on volume in the third quarter. Orders have been stable now for the last, you know, two-plus months. Still at a lower level than they were earlier in the year.

But they've, you know, with the extension rates picking back up again, and stability in order levels, it feels like we're kind of at this current normal level right now. We've had some better booking trends. And so our expectation is that as we go through the back half of the year, just like, conservatively, is that we'll start to see more winter orders come in the next, you know, sixty days. We're already having some conversations with clients about that. And so that as you think about the shape of our volume, you'll see some declines from July through the end of the quarter, which is already really just a function of what happened in the second quarter.

But as we continue to look at our booking trends and moving into the fourth quarter, that will start to turn back positive on a month-to-month basis heading through the fourth quarter. And as we move into 2026 as well. So overall, it feels like the backdrop is stable. Now it's a question of just if that extension rate is kind of the first sign of clients getting back to a little bit more normal buying behavior. The next thing we'd wanna see is orders start to improve again as well. And in the meantime, of course, we're not just waiting for that to happen.

We're making very proactive steps around improving our fill rates with the orders that we have, building our pipeline of MSP opportunities to access more orders. And we talked about improving our internal capture on third-party as well. All those things are gaining traction. And so that would be incremental as we move into the back half of the year.

Kevin Fischbeck: Okay. And then I guess I appreciate the commentary around legislative uncertainty, I guess, particularly among teaching hospitals. But I guess we did also see during the quarter sequential declines in growth rates of volumes. You know, I guess, to what extent have hospitals been talking to you about that and how it might relate to their need for temp staffing?

Cary Grace: What we're seeing is when you get into kind of July and into August, we start to see demand either stabilize in nurse and or pick up in allied and in Locum, we would typically see, Kevin, and clients have told us to expect similar timing this year. We would start to see winter order needs come in the end of this month and early September. So we kind of look at demand both in terms of what we've been seeing in the base business, and then we would expect in the next, you know, six weeks, eight weeks to start seeing some future orders come in around some of their winter needs.

Brian Scott: But I don't, you know, this does rate of growth in patient volume has slowed down, it's still up. You know, it was up last year. It's still up on a year-over-year basis. I don't think that's really the major, you know, driver of any change in client's buying behavior. I think in some of these other factors that we've talked about, that have been, you know, more impactful but really haven't had, you know, client feedback around with the volume slowing down so that's a big driver of any change in their buying.

Kevin Fischbeck: Alright. Great. That's helpful. Thank you.

Operator: Our next question comes from A.J. Rice with UBS.

A.J. Rice: Maybe the flip side of these academic medical centers and hospitals generally putting hiring freezes on and being a little tougher on the permanent hires might be a step up in people being willing to consider travel nurse assignments or allied assignments. Have you seen what's happening with respect to new applicants and so forth?

Cary Grace: So we have seen we still have healthy supply. Take aside, you know, certain specialties or locations. This really is about demand, not about supply. And so if you have an order that is priced right, we don't have a challenge filling it. And in fact, you know, even when, you know, people will pull up and look at, like, demand week to week, if you have orders that come in that are priced appropriately, that'll get filled immediately. It won't even kind of, you know, have more than a couple days of time. And so it's not a supply challenge right now and an interest challenge. It's is the package attractive enough for them to sign on?

That is true overall. I'd say that's particularly true in locum, where you still see, you know, healthy demand in locums and have seen that throughout the year. It really is you have to have attractive pay packages to be able to get them to sign on because they have a number of options.

Brian Scott: I mean, A.J., it's a good point. I think that's, you know, slowed down in some slowdown in healthcare hiring. They're still hiring, but usually, there's a lag effect of that. So if they go through, if they continue to slow down on their permanent hiring, and you have, you know, kind of normal attrition, it takes a few months, but then we've seen that before where then you start to start to feel more of a tension on their staffing levels. And that's where you could see demand pick up. But it hasn't, we haven't seen that yet, but it's certainly we've seen that trend historically.

A.J. Rice: Okay. You called out some wins in MSP. I wondered if you could step back. There was some debate a while back, but it seemed like it was normalizing. People either moving away from MSP or people churning contracts generally. What are you seeing now? Are you seeing more activity? And that's part of what you're picking up? I know the market is somewhat disruptive with deals out there and so forth. Is that creating opportunities? What's happening on the MSP side and your ability to potentially grab incremental share?

Cary Grace: Yeah. What we have seen so far is coming out of COVID, we saw two things around programs. Number one is almost no matter what model a client was in, they weren't happy with what the outcomes were during COVID. So they were open to new models. We have seen, we still see clients that may look at different models. But we've seen, you know, I'd say, a little bit of normalization of that sentiment coming out that we saw coming out of COVID. The other thing we saw is we saw a bias towards vendor neutral, really in 2023 and '24. In 2025, if you look at our pipeline, we have a slight bias back to supplier-led MSPs.

And so you are seeing some of that normalize. We've had a couple of examples in our pipeline where we had a client who may have gone to a tech-only solution. They're having challenges filling. And so they're open now to going back in more of a risk-aligned, risk-sharing type of program, like a supplier-led MSP. So our strategy has been to serve clients in the model that they choose, whether that's a supplier-led or vendor-neutral MSP, whether that's direct. We have had success in all of those over the past, you know, eighteen months, which is really why you saw an SIA with the recent market share rankings, us holding our market share.

And so we want to serve that growing group of clients that wants MSPs. We also simultaneously want to serve clients who want vendor-neutral and direct relationships and build from there.

A.J. Rice: Okay. Thanks a lot.

Brian Scott: Pleasure.

Operator: Our next question comes from Tobey Sommer with Truist.

Tobey Sommer: Thanks. We want to start out with just a question on the guidance. How do we square the revenue below and gross margin down but SG&A better? What are the moving pieces? Bonus accruals came to mind, but perhaps there are other moving pieces you could illustrate for us.

Brian Scott: Hey, Tobey. Well, no. I'll just start on the SG&A. As you mentioned in the prepared remarks, our second quarter SG&A, the team's done great work in, you know, trying to manage our cost effectively. You know, made process and automation changes to be able to bring down some of our costs. And so that was really playing through in the second quarter, but then we had the actuarial adjustments and higher bad debt that, you know, collectively was, you know, $7 million and change. So if you remove that and look at the underlying SG&A, you're looking at something, you know, in the low one-thirties.

And then with the sale of SmartSquare, kind of third quarter is the first quarter reflecting about a $2 million reduction in SG&A from that as well. So we're in the low one-thirty range of SG&A, which is what's that's adjusted SG&A. So excluding stock-based comp and a small amount of the write-backs, that's where you end up with the guidance that we gave for the third quarter. And that and reflecting through to the EBITDA margin. On the gross margin side, I kind of mentioned that Q2 had a couple of unique items that were favorable. The SmartSquare divestiture, it's about a 30 basis point impact to gross margin on a consolidated basis. 100 to the segment.

But if you think about the second quarter actual to the third quarter guide, of the midpoint, again, about 30 basis points related to that sale. And then the balance of it is a few things that happened in the second quarter that aren't gonna occur in the third. Underneath that, you've got a pretty stable margin profile across the businesses. Appreciate that. Thank you.

Tobey Sommer: With respect to Strike opportunities going forward, are you still managing that aspect of your business only for kind of your best core clients where you can manage the whole experience, or are you pursuing business sort of more broadly in a different fashion?

Cary Grace: We are using our strike support to support our clients. So both our MSP clients as well as our VMS clients. And there is strong interest in both of those groups. The technology that we have built enables us to be able to scale more effectively in supporting strikes without disrupting our core business. The challenge we had historically, Tobey, is, you know, when we were supporting a strike for a strategic client, it really took so many resources away from our core business. That it was hard to do both simultaneously. We've made a lot of operational efficiencies. Brian just talked about a number of them.

And the technology that we built that we can do both, and we were able to do both in the fourth and first quarter. In the strikes that we supported. We have a healthy pipeline that we were intentional about building for the back half of the year that we are supporting a number of clients in some large CBAs that they are negotiating. You never know if a strike is gonna go or not. But we feel like this is both an important capability that matters greatly to clients that we wanna support, and we have a differentiated ability to support it now than we did in the past.

Brian Scott: Thanks. If I could sneak one in and then, you know, get back in the queue one more about language services? What's the growth algorithm and expectation from here, after, I think, what you described as a slowdown in February. Thank you.

Cary Grace: Yeah. Let me tell you a little bit about what we're seeing in language services. So first, we love this business. It is an important service that we provide both in acute and non-acute settings. When we look at quarter over quarter, we had mid-single-digit growth in utilization, but that was offset. We've seen significant competitive pressure on price per minute. And so that resulted in, from a net basis, very, very modest growth. We would expect those trends to continue. From a top-line standpoint, the softness in utilization that we saw really kind of in the second quarter going into the third quarter. When we talk to others in the industry, they are seeing something similar.

So our focus is not just on, you know, continuing to strongly manage this business. But we have built over the past couple of quarters a strong pipeline that we would expect to progress as we go through the next couple of quarters that would help us get back some stronger top-line growth ending this year going into next year.

Brian Scott: Thank you.

Tobey Sommer: Thanks, Kevin.

Operator: Our next question comes from Brian Tanquilut with Jefferies.

Brian Tanquilut: Hey. Good afternoon. You've got Jack Slevin on. Just wanted to maybe turn a little more broadly just to the competitive environment. And appreciate your comments on sort of being able to hold share with some of the latest SIA data that's out there. But maybe thinking about opportunities to potentially win share. I guess, the chatter we get is that plenty of the private comps of yours are under significant pressure. And I'm just wondering if you could maybe just dive into a little bit of what you're seeing in terms of actions, whether it's on price or other things from the competitors in the landscape?

And then maybe just how you think about what does that look like on a multiyear basis if you are to sort of win out in the market? Is it more of just the same and then waiting for others to capitulate, or is there, you know, more action that needs to be taken? Thanks.

Cary Grace: Yeah. So a couple of things. One, I'll talk about just the, you know, kind of winning share dynamics. And then I know we've also started to see what we think are the beginnings of consolidation that will continue. The industry is still relatively fragmented. So in terms of what we're seeing from a competitive dynamic, our goal is to gain share. And so stabilizing and, in some cases, growing our share, which, you know, happened in 2024, is a step to gaining market share. We are very focused on how we do that in a couple of ways. One is how do we continue to build on net new clients? On strategic net new clients.

So net new wins, expansions, net of losses, year to date, we are up modestly. We continue to build our pipeline and progress our pipeline. To be able to get new brand new clients to be able to sell more of our solutions to. Second is how do we continue to expand, which we have had success in. I'd say particularly in locum, strike, and to a lesser degree in language services, to some of our MSP clients. And then how do we fill more? So Brian talked about this a little bit earlier in some of our operational initiatives. We have higher fill rates both on our internal capture of our MSPs, but also on our own VMS platforms.

And you will see us continue to focus on those areas. So that is the trifecta of how we continue to work on gaining market share. From a competitive standpoint, we think that the challenging position that some of our competitors are in is gonna give us an ability to continue to have differentiated solutions to be able to win more clients with. Strike is a great example of a very important solution for clients that have unionized populations. That we now can uniquely support in ways that other competitors can't. What we're doing with Passport and being able to support float pools is another great example.

So we think that we will extend our differentiation during this period with competitors having challenges. We've also seen the beginnings of some consolidation over the past two quarters. We think that will continue into 2026. And we think there's always opportunity over the coming years. That consolidation will benefit us.

Brian Tanquilut: Okay. Got it. Really, really helpful color. I'll just jump with one quick follow-up here and just say on the international piece, appreciate some of the updated commentary there. I'm wondering if you can just dig in a little bit deeper in terms of exactly we see the turn probably later this year, but then what the path to sort of grow that over time, you know, I guess, what the checks we would wanna see are to know that is on track and the extent of the recovery in revenues that you can get on a multiyear basis? Thanks.

Cary Grace: So let me give you a little bit of the shape of what that will look like. And then between Brian and I, we can talk through, you know, different scenarios of what that could look like. So we expect an international that we will go back to growth. It will be very modest in the fourth quarter. The bigger thing for us in the fourth quarter is that this has been a significant headwind for us for the past two years as retrogression has taken place. So us getting back to being neutral with a very slight positive in the fourth quarter is important to us.

As we get into 2026, we would expect, even under conservative assumption, for us to grow both revenue and EBITDA in the double digits depending on different scenarios of how much forward movement of retrogression you would get. That could, you know, range, you know, more highly in terms of how you get the recovery. It'll be a multiyear recovery. But we know enough now and even under conservative assumptions that you will get into double-digit growth both top and EBITDA for international next year.

Brian Scott: Yeah. I'll say if we, you know, all the talk of immigration, it's, let's say, it hasn't, we have ever listened directly impact the business as much. Maybe a little bit of a slowdown in some of the state department processing, but, you know, those visas that are allocated still exist. And so, you know, we still see, you know, good demand from clients. There's still a, you know, we have a large and growing pipeline. And so to Cary's point, it's as we talked about before, it's still feel like it's not a matter of if, just a matter of when. It's just very difficult to predict, you know, how the dates will continue to move forward.

We know they will. There'll be, you know, got a new budget year coming up soon. We typically see in the heels of that, you know, movement on the dates, and so we're, you know, we're just being a little bit cautious on our forecast of what that will look like. If you went back into history, we've had retrogression. There's been periods where there's been pretty significant movement forward. But we just, it's just really hard to predict at this point what's gonna happen. But to Cary's point, even in very conservative scenarios, we absolutely expect to resume growth, particularly as we move into 2026. It's just that the magnitude is still the part that we can't quite predict.

Cary Grace: And the last piece that I'll mention is whether it's, you know, the hospital association or other lobbying groups, there's really broad support for bringing in clinicians. It is an incredibly important source of clinical supply really for all, but I'd say really acutely for rural hospitals. And so we would expect, you know, there to continue to be a strong level of support into 2026.

Brian Tanquilut: Got it. Super helpful. Appreciate all the questions.

Operator: Our next question comes from Mark Marcon with Baird.

Mark Marcon: Afternoon. Most of my questions have been asked, but I wanted to just dig in a little bit deeper on some of them. So starting with visa retrogression, can you remind us, like, what was the peak level of revenue on the international nursing side? Where is it currently so that we have a base level that we're gonna build double digits from?

Cary Grace: Brian's getting you that number. Yeah. I mean, just as a reminder, we've come down by about $100 million from the peak in 2023. So we were at about $225 million of revenue in 2023. We're running it now more like $125 million. So that's when we've talked historically, you know, previously about just, you know, just getting back to that level, that $100 million and the flow through from. And we have pipeline that could take us beyond that, but that gives you kind of more magnitude in our EBITDA margin is north of 30% in that business.

Mark Marcon: Great. And then on the labor disruption side, it sounds like we're building it. We did $16 million last quarter. We're building in $5 million for this quarter, but it sounds like there are a lot of CBAs. So is $5 million a really conservative number?

Cary Grace: We have line of sight to the $5 million in the third quarter. We always put mark $5 million in because we can't really, you know, with any degree of precision, like, both timing and magnitude, be able to predict more than that. There is upside in the third quarter from that number. If some of those CBAs, if the union strikes, there is also upside potential in the fourth quarter as well. Based on the CBAs that we know we are supporting. So there is both third quarter and fourth quarter upside.

Brian Scott: Yeah. It's but it's a bigger, the more likely the larger revenue I pay would be season four and first quarter next year. There are a couple of smaller things that could happen in the third quarter, but, again, it's just we have good, like I said, we have contracted work that supports the guidance we gave. There's a couple others that may or may not happen that are smaller that, but, you know, I don't feel conservative. You know, maybe, but I think it's appropriate based on what we know right now.

Mark Marcon: Okay. And then on the competitive environment, you, we all know there's a number of players out there that are struggling, and then we also have consolidation. In terms of the players that are struggling, are there any sort of negative impacts that you're currently seeing from a pricing perspective just as they struggle to maintain viability, or is pricing staying from a competitive perspective staying, you know, fairly stable? And then how should we think about pricing as we do get that stabilization or rationalization in terms of industry capacity?

Cary Grace: I, you know, I think what we've seen more in terms of the pricing is just the competitive environment, and we've really been in that for several years. So I don't know that anything has incrementally changed. I think, Mark, when you look at, you know, we've had relative stability in bill rates in nursing. You know, revenue per day in locums has continued to increase. But you've seen relative stability in our Nurse and Allied business. So what you'd really wanna see as you get into 2026 is you still have underlying increases in, you know, wages that are going on, and you'd really want to see that reflected in bill rates.

Because the premium spread from contingent to permanent is high single digits. And so I don't know that there's a lot of room to go from there. So that's what you wanna see more competitively. And I think that, you know, regardless of financial position, there's gonna be an interest in, you know, all players being able to maintain some level of margin.

Mark Marcon: Great. And then you have the SmartSquare divestiture. You're not anticipating any other divestitures, are you?

Cary Grace: No. You know, from a background standpoint, I know we talked about this in the press release, what we were seeing in SmartSquare, which really led to the strategic decision of a divestiture is it's a great platform. It's a great team. That buy and the implementation was increasingly becoming part of a broader ERP buy and decision. And it was tied in a lot of cases to time and attendance. And so for us, we looked at it as a win-win, which is we found a great partner in home in Simpler. It was a great outcome for the clients of that platform.

And for us, it allows us to focus our CapEx spend on areas that are growing more strongly. And it really created for us an ability to more robustly partner with all these different providers that also have some scheduling systems. We had kind of a competitive friction with them in the past. So we view that whole opportunity as a very strategic decision.

Mark Marcon: And then just from a financial perspective, you've got that $50 million that you're gonna be paying back, but then you ended up getting the cash. How are you thinking about, and then you also mentioned that you plan to pay some more of the revolver. Where do we think cash flow is going to be for the third quarter?

Brian Scott: We'll, on an operating cash flow, we'll have a use of cash because of the debt deposit refund. But at your point, we'll have all the proceeds from that sale. So maybe I'll answer a little bit differently. We are, and we're getting, like other companies, some cash tax benefit from the tax bill. We would expect all of our balance to be somewhere around $30 million at the end of the third quarter. So wait. That's quite easy. Probably trying to get to there. We're obviously continuing to make really good progress on reducing that revolver balance and have, you know, more and more line of sight to getting that fully paid off here.

If not, at the end of the year, you know, shortly thereafter.

Mark Marcon: Fantastic. Thank you.

Operator: Our next question comes from Jeffrey Silber with BMO Capital Markets.

Jeffrey Silber: Hey. Good afternoon. This is for Jeff. I was just hoping to dig into the underlying bill rate and volume assumptions for the third quarter Nurse and Allied guide. I think you mentioned pretty stable bill rates and perhaps some softness on the volume front. Was just hoping to get some more color there. Thank you.

Brian Scott: Yeah. I mean, that's, you've kind of characterized it pretty well. The way it's, the bill rates have been pretty stable, and so we, you know, really, as Cary mentioned, that would be, you know, that would unlock more volume if, you know, clients are still testing low rates in certain markets and certain clients. And so that's, you know, we can fill, but it takes longer. Or in some cases, they just, they can't be filled by us or anybody else. When we get an appropriate price order, we're able to fill them very quickly.

So as you look at the guide we gave for the third quarter, it really, for the travel nurse business, it's the, that decline is really all volume-driven. We really haven't seen any, you know, change in hours worked as well. So that's the bulk of the sequential change. Allied is also a down a little bit, partly just again with the school year. This is kind of the low point in the season. And that's probably the main drivers for the Nurse and Allied segment.

Jeffrey Silber: Got it. And then for the follow-up, was wondering what your exposure is to rural hospitals?

Cary Grace: You know, we pulled that up a couple months ago. I, we don't have, I'd say, kind of disproportionate exposure to rural versus urban. So I'd say it's not kind of oversized or undersized.

Jeffrey Silber: Great. Thank you.

Operator: This concludes the question and answer session. I would now like to turn it back to Cary Grace for closing remarks.

Cary Grace: Thank you for joining our second quarter earnings call. Our entire team appreciates your interest in AMN Healthcare Services, Inc.

Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

Where to invest $1,000 right now

When our analyst team has a stock tip, it can pay to listen. After all, Stock Advisor’s total average return is 1,046%* — a market-crushing outperformance compared to 181% for the S&P 500.

They just revealed what they believe are the 10 best stocks for investors to buy right now, available when you join Stock Advisor.

See the stocks »

*Stock Advisor returns as of August 4, 2025

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. Parts of this article were created using Large Language Models (LLMs) based on The Motley Fool's insights and investing approach. It has been reviewed by our AI quality control systems. Since LLMs cannot (currently) own stocks, it has no positions in any of the stocks mentioned. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Image source: The Motley Fool.

Date

Thursday, August 7, 2025, at 5 p.m. ET

Call participants

• Chairman and Chief Executive Officer — Greg Brown
• Executive Vice President and Chief Financial Officer — Jason Winkler
• Executive Vice President and Chief Operating Officer — Jack Molloy
• Executive Vice President and Chief Technology Officer — Mahesh Saptharishi
• Vice President, Investor Relations — Tim Yocum

Need a quote from a Motley Fool analyst? Email [email protected]

Takeaways

• Revenue-- $2.93 billion P25 system upgrade and LMR Services Order for the City of Chicago in fiscal Q2 2025, up 5% year-over-year (non-GAAP), driven by growth across all three technologies, supported by $39 million in acquisition-related revenue, and $9 million in foreign currency tailwinds.
• Software and services growth-- Segment revenue increased 15% year-over-year, with software and services backlog rising $1 billion year-over-year to a record $10.7 billion, attributed to multiyear contract demand in all three technologies.
• Operating margin-- Non-GAAP operating margin reached 29.6%, expanding by 80 basis points, driven by improved sales and operating leverage (non-GAAP); GAAP operating earnings were $692 million (25.0% of sales), up from 24.5% in fiscal Q2 2024 (GAAP).
• Earnings per share-- GAAP EPS was $3.04. Non-GAAP EPS was $3.57, a 10% year-over-year increase in product orders, supported by higher sales, margin expansion, and a lower diluted share count (non-GAAP).
• Operating cash flow-- Operating cash flow reached $272 million, up $92 million year-over-year; free cash flow improved by $112 million to $224 million.
• Backlog-- Ended fiscal Q2 2025 with over $14.1 billion of backlog, up $150 million year-over-year, with $19 million sequential growth; Product and SI backlog declined by $92 million year-over-year due to strong LMR shipments, while SNS backlog increased $191 million sequentially.
• Orders-- Record fiscal Q2 orders, up 27% versus fiscal Q2 2024, including 10% product order growth and major wins such as an $82 million P25 upgrade and a $2.93 billion P25 system upgrade and LMR services order for the City of Chicago.
• Silvis acquisition-- Closed post-quarter for $4.4 billion upfront consideration; expected to contribute $185 million in revenue in the 2025 stub period and at least $0.20 accretion to EPS in 2026.
• Guidance raised-- Full-year 2025 outlook now forecasts $11.65 billion in revenue (7.7% growth, non-GAAP), non-GAAP EPS of $14.88-$14.98 for fiscal 2025, operating cash flow of $2.75 billion (up 15%), incorporating Silvis and $75 million in associated transaction fees for the full year.
• Shareholder return-- $218 million spent on share repurchases at under $415 per share, $182 million in cash dividends paid, and $48 million in capital expenditures.
• Gross margin outlook-- The company now expects gross margins to increase year-over-year for full year 2025, revising prior full-year guidance, with anticipated 100 basis point expansion in operating margin year-over-year.
• Segment performance-- Products and SI revenue was $1.7 billion, flat year-over-year, with 26.7% operating margin for the Products and Systems Integration segment; notable orders included federal and state LMR and video system upgrades.
• Regional results-- North America revenue was $2 billion, up 6% in North America; International revenue was $738 million, up 4%, led by LMR growth.

Summary

Motorola Solutions(NYSE:MSI) reported record fiscal Q2 2025 revenue and EPS, supported by robust order activity and continued high demand for both software and services. Management highlighted major new multiyear contracts, most notably in LMR, and the integration of Silvis, which materially augments mission-critical network capabilities and is expected to be accretive to EPS by at least $0.20 in 2026. Product innovation, including the launch of the SCX video remote P25 speaker mic and next-generation base stations, provides new hardware and recurring software and services revenue opportunities. Strategic guidance was raised across revenue, non-GAAP EPS, and operating cash flow for fiscal 2025, reflecting both organic momentum and initial contributions from Silvis, as well as disciplined capital allocation through share buybacks and dividends.

• Management said, "we expect Silvis to grow about 20% in 2026," while clarifying that Ukraine-related revenues will be under 15% of Silvis revenue in 2025 and even less in 2026.
• Chief Technology Officer Saptharishi noted, "the other element of Silvis is spectrum monitoring. And it's probably very important to talk about in the context of drones," underlining new capabilities for spectrum-based drone detection and integration into public safety workflows.
• Chief Operating Officer Molloy stated, "We see the TAM for unmanned at about $3 billion and growing ... not be surprised to double it in the next four years," articulating the company's expectation of rapid addressable market expansion driven by the Silvis transaction.

Industry glossary

• LMR (Land Mobile Radio): Wireless communications system used primarily for mission-critical public safety and enterprise sectors, enabling voice and data communications among field users.
• MCN (Mission-Critical Networks): An expanded technology category at Motorola Solutions, now including land mobile radio along with newly acquired mobile ad hoc networks from Silvis.
• P25 (Project 25): A digital radio communications standard designed for U.S. public safety organizations for interoperable communication.
• Stub period: The partial period from the closing date of an acquisition to the end of the fiscal year, during which initial integration and revenue recognition occur.
• Spectrum monitoring: Technology for detecting, analyzing, and managing frequency use in communications systems, used for applications such as drone detection.
• Alta: Motorola Solutions' cloud-based video security platform, noted as a driver of cloud software growth in the video segment.
• SVX / SCX: Motorola Solutions' newly launched body-worn device acting as a video-enabled P25 speaker mic, positioned as both a hardware and a software/applications revenue generator.

Full Conference Call Transcript

Operator: Good afternoon. And thank you for holding. Welcome to the Motorola Solutions second quarter 2025 earnings conference call. Today's call is being recorded. If you have any objections, please disconnect at this time. The presentation material and additional financial tables are on the Motorola Solutions investor relations website. In addition, a webcast replay of this call will be available on our website within three hours after the conclusion of this call. The website address is www.motorolasolutions.com/investor. All participants have been placed in a listen-only mode. You will have an opportunity to ask questions after today's presentation. If you would like to ask a question, you may also press 5 again to remove yourself from the queue.

I would now like to introduce Mr. Tim Yocum, Vice President of Investor Relations. Mr. Yocum, you may begin your conference.

Tim Yocum: Good afternoon. Welcome to our 2025 second-quarter earnings call. With me today are Greg Brown, Chairman and CEO; Jason Winkler, Executive Vice President and CFO; Jack Molloy, Executive Vice President and COO; and Mahesh Saptharishi, Executive Vice President and CTO. Greg and Jason will review our results along with commentary, and Jack and Mahesh will join for Q&A. We've posted an earnings presentation and news release at motorolasolutions.com/investor. These materials include GAAP to non-GAAP reconciliations for your reference. During the call, we reference non-GAAP financial results, including those in our outlook, unless otherwise noted. A number of forward-looking statements will be made during this presentation and during the Q&A portion of the call.

These statements are based on current expectations and assumptions that are subject to a variety of risks and uncertainties. Actual results could differ materially from these forward-looking statements. Information about factors that could cause such can be found in today's earnings news release, in the comments made during this conference call, in the Risk Factors section of our 2024 Annual Report on Form 10-Ks or any quarterly report on Form 10-Q and in our other reports and filings with the SEC. We do not undertake any duty to update any forward-looking statements. And with that, I will turn it over to Greg.

Greg Brown: Thanks, Tim, and good afternoon, and thanks for joining us today. I'll begin with a few thoughts on the business before turning it over to Jason. First, Q2 was another outstanding quarter with record Q2 revenue and earnings per share that exceeded our guidance as we continue to see strong customer demand across all areas of the business. Revenue was up 5% in the quarter, highlighted by 15% growth in software and services. We also expanded operating margins by 80 basis points, which led to record Q2 operating earnings and strong operating cash flow growth, which was a record for the first half of this year.

Second, investments in public safety and security continue to be a priority for our customers, highlighted by our record Q2 orders up 27% versus last year, inclusive of 10% growth in products. We also ended the quarter with over $14.1 billion of backlog, including $10.7 billion of software and services backlog, which is our highest SNS backlog ever and up $1 billion versus last year. And finally, based on our strong Q2 results and our increased expectation for the remainder of the year, we're raising our full-year guidance for sales, earnings per share, and operating cash flow. Now I'll turn the call over to Jason, who will take us through results and outlook before I return for some final thoughts.

Jason Winkler: Thank you, Greg. Revenue for the quarter grew 5% and was above our guidance with growth in all three technologies. Foreign currency tailwinds during the quarter were $9 million, while acquisitions added $39 million. GAAP operating earnings were $692 million or 25% of sales, up from 24.5% in the year-ago quarter. Non-GAAP operating earnings were $818 million, up 8% from the year-ago quarter, and non-GAAP operating margin was 29.6%, up 80 basis points, driven by higher sales and improved operating leverage. GAAP earnings per share was $3.04, up from $2.60 in the year-ago quarter.

Non-GAAP EPS was $3.57, up 10% from $3.24 last year, driven by higher sales and operating margins as well as a lower diluted share count in the current year. OpEx in Q2 was $615 million, up $22 million versus last year, primarily due to acquisitions. Turning to cash flow, Q2 operating cash flow was $272 million, up $92 million versus last year, and free cash flow was $224 million, up $112 million. The increase in year-over-year cash flow was primarily driven by higher earnings and improved working capital. And for the first half of the year, operating cash flow was a record $783 million, up 39% versus 2024.

For the full year, we're raising our operating cash flow expectations to $2.75 billion, up 15% from last year and inclusive of $75 million of transaction fees related to the Silvisax acquisition as well as incremental interest to financing the deal. Capital allocation for Q2 included $218 million in share repurchases at an average price below $415 a share, $182 million in cash dividends, and $48 million of CapEx. And subsequent to the quarter end, we closed the Silvis acquisition for $4.4 billion of upfront consideration, which was primarily funded through $2 billion of long-term notes that we issued in Q2 and $1.5 billion of new term loans drawn subsequent to quarter end.

The remaining consideration of $900 million was settled through a combination of cash on hand and issuance of commercial paper. Moving into our segment results and product and SI, sales of $1.7 billion were flat compared to the year prior, while operating earnings of $442 million or 26.7% of sales were comparable inclusive of additional tariff costs and continued investments in video during the current year, offset by lower material cost. Some notable Q2 wins and achievements in this segment include an $82 million P25 system upgrade for Tri-County systems in the St.

Louis region, a $30 million P25 device order for the city of Miami, Florida, a $22 million T25 system upgrade for the state of Michigan, a $15 million fixed video order for a US federal customer, and an $11 million P25 device order for the Las Vegas Metro Police Department. In software and services, revenue was up 15% compared to last year, driven by strong growth across all three technologies. Revenue from acquisitions was $39 million in the quarter. Operating earnings in the segment were $376 million or 33.8% of sales, up from 32.3% last year, driven by higher sales and improved operating leverage partially offset by acquisitions.

Some notable Q2 highlights in SNS include a $44 million command center order for a US state and local customer, a $2.929 billion P25 system upgrade, and LMR Services Order For The City Of Chicago, a $12 million LMR cybersecurity order for the state of Victoria, Australia, an $11 million services order for the state of New Mexico, and finally, a $9 million LMR services order for a US federal customer. Looking next at our regional results, North America, Q2 revenue was $2 billion, up 6% on growth in all three technologies. International Q2 revenue was $738 million, up 4% versus last year, driven by growth in LMR.

Moving to backlog, ending backlog for Q2 was $14.1 billion, up $150 million versus last year and up $19 million sequentially, driven by strong demand including record Q2 orders, which were up double digits in both of our segments. In the Products and SI segment, ending backlog decreased $92 million versus last year, and $172 million sequentially due to continued strong LMR shipments. In software and services, backlog increased $1 billion compared to last year, and $191 million sequentially, driven by strong demand for multiyear contracts across all three technologies and the impact of foreign currency partially offset by revenue recognition for The UK home office.

Turning next to our outlook, we expect Q3 sales growth of approximately 7% with non-GAAP EPS between $3.82 and $3.87 per share. This assumes a weighted average diluted share count of approximately 169 million shares and an effective tax rate of approximately 24%. For the full year, we now expect revenue of approximately $11.65 billion or 7.7% growth, up approximately $250 million from our prior guidance of 5.5% growth. And expect non-GAAP EPS between $14.88 and $14.98 per share, up from our prior guidance of $14.64 to $14.74. This full-year outlook assumes an effective tax rate of approximately 23%, which is unchanged. And now assumes a weighted average diluted share count of approximately 169 million shares.

Before I turn the call back to Greg, I'd like to share a few thoughts regarding the Silvis transaction. First, when we announced the transaction in May, we shared the strong financial profile of Silvis with expectations of $475 million full-year '25 revenue at approximately 45% adjusted EBITDA margin. Our full-year outlook assumes a $185 million revenue contribution from Silvis this year, representing the stub period following the transaction closed yesterday. It also assumes that Silvis will be slightly dilutive for EPS in Q3 and neutral for 2025. Second, as it relates to our three technologies, we are expanding our LMR technology category to include Silvis under the new name of mission-critical networks, or MCN.

With the inclusion of Silvis, this year, we expect MCN to grow mid-single digits. And from a segment perspective, the majority of the business will be reported under products and systems integration. And finally, our balance sheet remains strong. Following the acquisition of Silvis, and the financing plan I described earlier, and all three rating agencies have affirmed our triple B level ratings. We maintain a balanced maturity profile with approximately eight years of duration, and an average coupon of just under 4.6% on our senior notes.

Strong growth in our earnings power and cash generation has significantly expanded our leverage capacity, which we expect to continue to grow with Silvis, providing us flexibility to deliver on our capital allocation framework, which includes share repurchases as well as additional acquisition. With that, I'd like to turn the call back to Greg.

Greg Brown: Thanks, Jason. First, I'm very pleased with our Q2 results, which highlight the durability of our business and the strength of our portfolio. We continue to invest both organically and inorganically in solutions that are continuing to provide us with sustainable long-term growth. Some recent examples include our announcement of SCX, which is a first-of-its-kind video remote P25 speaker mic that converts to secure voice, video, and AI and eliminates the need for a separate body-worn camera. We started shipping SVX just a few weeks ago, and the customer feedback has been strong.

Since the launch, we've received orders from over 30 agencies, with the majority coming from customers that do not currently use a Motorola body camera, highlighting the opportunity we have to capture future market share in the US public safety body-worn camera space. In drones and unmanned systems, we've made several investments this year that allow us to capitalize on this fast-growing space. With our acquisition of Silvis, we're now a leader in mobile ad hoc networks, which provides the high-speed infrastructure-less communications backbone for unmanned systems in the air, on the ground, and in the water. That have become increasingly important in today's defense environment as well as border security and public safety.

In drone as a first responder, our strategic alliance with Brink provides us with an American-made purpose-built public safety drone that allows customers to reduce emergency response times and deliver critical supplies to those in need. And in drone detection, our alliance with SkySafe integrates their advanced solutions into our command center software and allows customers to detect, identify, track, and analyze drone activity. And finally, we've introduced our next-generation ASTRO P25 LMR infrastructure featuring our D series base stations and AXIS consoles, which bring many benefits, including increased capacity, improved energy efficiency, and greater interoperability through leveraging complementary technologies such as low Earth orbit satellites. We received several large orders this quarter, including from the St.

Louis Tri-Counties and the state of Michigan, and we're building a strong pipeline of large multiyear network refresh opportunities with expanded scope in software and services that we expect to convert to orders over the next several years. Second, I'm very encouraged by our differentiated approach to AI. We began utilizing AI when we entered the fixed video space several years ago to solve complex video security problems, with AI-enabled cameras and video management software. And it continues to be an important driver of growth in video software, which actually grew 25% in Q2 and has grown over 20% annually over the last five years.

Our investments in AI have continued to expand, and just a few months ago, we announced our public safety AI platform, Assist, which is built around the objective of helping everybody involved in the incident workflow, from 911 call takers to frontline responders, make better decisions and save precious time. This comprehensive approach allows us to do things no one else is doing in key areas such as AI-assisted report writing, where our AI solution leverages a holistic view of the incident, including the 911 call, dispatch, and responder voice communications as well as body-worn video recording.

When implementing AI, we're also making sure that we continue to build trust both with our customers and the communities they serve, which is reflected in our recent launch of AI labels, an industry first. These labels provide transparency as to what, how, and where AI is used in customer workflows, which is a critical step in the path to product trust and adoption and further differentiates us from our competitors in this area. And finally, I'm very excited about the Silvis acquisition, which is the culmination of discussions that lasted more than a year. When allocating capital for acquisitions, we remain committed to a very disciplined approach, prioritizing long-term value creation for our shareholders.

With Silvis, we're acquiring a technology leader in a rapidly growing industry that's seen impressive customer adoption and has a very strong financial profile. Their business complements our leadership in LMR and video and provides us with opportunities to leverage our strong customer relationships. Additionally, I'm particularly excited about the exceptional engineering and technical talent that the Silvis team brings us, and I look forward to working closely with them to drive meaningful revenue and earnings growth for years to come. And with that, Aaron, I'll turn the call over to Tim and open it up to questions.

Tim Yocum: Thank you, Greg. Before we begin taking questions, I'd like to remind callers to limit themselves to one question and one follow-up to accommodate as many participants as possible. Operator, would you please remind our callers on the line how to ask a question? The floor is now open for questions. If you have a question or comment, please press 5 on your telephone keypad. If for any reason you would like to remove yourself from the queue, please press 5 once again. We do ask that while you pose your question, please pick up your handset to provide optimal sound quality. Thank you. The first question is from Joseph Cardoso with JPMorgan. Your line is now open.

Joseph Cardoso: Hey, good afternoon, everyone. Thanks for the question. Greg, maybe I just wanted to start off. Last quarter, you put out this in the threes product mid $3 billion product backlog bogey out there for year-end, which based on the 2Q orders looks like you're well on track to. Maybe you can just take a moment and talk about, like, on a product level, where you're seeing this growth in the product orders across your portfolio? Obviously, it sounds like the P25 devices are doing well. You mentioned a couple of deals on the base station. And as well as anything else that you can think of that you think is really driving the momentum there.

And then, you know, as you kinda think about that bogey that you put out for year-end, how are you feeling about momentum tracking towards that bogey, particularly any update just given now that you have Silvis under the belt? And it sounds like that's gonna be levered towards the product side? And thank you. And then I have a follow-up.

Greg Brown: Yep. So, Joe, in regard to the, you know, the ZIP code of MidThrees in product backlog, which I mentioned last quarter, if anything, I feel as good. I actually feel better about that. And just to be clear, that color did not include anything associated with Silvis. So I still feel very good about the MidThrees. Even better than I did in May. And you're right. Coming out of Q2, with 27% record orders, 10% of that in product, I feel really good about that. I think the strong Q2 orders were driven on the product side by LMR device refresh by LMR infrastructure, and the ASTRO NEXT V series and Apex consoles. I mentioned.

We've also had strong fixed video orders and one of the largest fed orders we've ever had in regards to Silent Sentinel. So it was multiproduct. And on software and services, we had one of our largest command center orders ever at $44 million. So it was across the board, really good strength coming out of Q2. Which further supplements even more confidence in, quote, unquote, the mid threes or slightly better.

Joseph Cardoso: No. I appreciate the thoughts there. Sounds wonderful. You know, and maybe as my second question, it more of a big picture question. Like, obviously, it's been, like, a little bit more than a month since we've had the beautiful bill get passed. There's various programs in Europe that are aiming funds towards areas that look alike for Motorola. Particularly now with Silvis under the covers here. So just maybe one, curious as you look across these opportunities, where are you feeling most excited about? And then in both The U.S. as well as internationally, and if there's any difference between, like, the opportunities between the two areas.

And then two, how are you think investors should think about the timing around these opportunities materializing for Motorola? And then, I mean, just to kind of hit it on the nose, are you seeing any of these opportunities trickling into your orders today?

Greg Brown: Trickling into what?

Joseph Cardoso: Orders.

Greg Brown: Okay. So let's start with Silvis. I mean, look. We love Silvis. We spent a lot of time on it as a team. You know, I've heard from some people that said, you know, this thing actually looks too good to be true. And we spent a lot of time on it, and we love the fact that it's a market leader. We love the fact that it was the tip of the spear and has been tested from an efficacy and a performance and a scale standpoint in Ukraine. You know, we expect Silvis to grow about 20% in 2026. It's EPS neutral for the stub period this year, and we expect it to be at least 20% sorry.

20 cent accretive in 2026. And I love the fact that, look, Silvis powers a number of defense and military drone platforms. Including Andoroll and AeroVironment, and it's certified with over 100 leading manufacturers. When I think about the revenue contribution particularly around Ukraine and Silvis, you mentioned Europe and international. We expect the revenue from Ukraine as it relates to Silvis revenue expectations this year to be less than 15% of overall revenues, and we expect Ukraine revenue for Silvis next year to be even less than that. So I like the fact that it's driven by a wide base of US defense ex Ukraine, and unmanned systems.

And I think there'll be a lot of attention and interest in European allies to invest in technologies that I think Silvis will be front and center as an opportunity. As it relates to the one big beautiful bill, and maybe Jack, wanna talk about that a little?

Jack Molloy: Sure, Joe. I think the first thing I'd address is think of the one big, beautiful bill. It's funding over the next four years. So it's a four-year horizon. And it's good news for Motorola. From a DOD standpoint, they've increased funding $150 billion, which would have been good before. But it's even better now that we've acquired Silvis. And as Greg just articulated, their defense border and unmanned systems trajectory. Also, there's money in there, another $70 billion for customs and border. Two customers two of a big customer of ours as well as ICE, another $75 billion. A lot of that funding is being directed at refreshing technology. Both video, secure communications, and services as well.

The last thing I'd say, which probably has been underappreciated is for our enterprise customers. Think of our PCR channel. The accelerated depreciation of CapEx provides them an opportunity to go talk to manufacturing health care customers, the like, and go talk about net refreshing their network and some of the tax benefits that they have. So we're excited about the one big beautiful bill. I would add the final piece of it is that timing of it given it was signed on July 4. And that there's a ninety-day window we're expecting a lot of some of that funding to actually kick in early Q4 this year and that's implied in our guide.

Joseph Cardoso: Yep. Got it. Thank you, Greg. Thank you, Jack. Appreciate all the color.

Tim Yocum: The next question is from the line of Andrew Spanola with UBS. Your line is now open.

Andrew Spanola: Thank you. I want to follow-up on the question on Silvis. The question I've gotten mostly is people are trying to understand why Silvis. And it's interesting. It reminds me a little bit about Avigilon because when you made that acquisition, it wasn't clear why you wanted to be in video. It obviously became a much bigger part of it of public safety. So are you thinking about Silvis that way? Do you see this technology becoming something much bigger to public safety? It's gonna be incorporated into your LMR technology longer term?

Or is this a new avenue that you're going down and we're gonna see you investing more in defense tech acquiring more and creating a new business line. How should we think about it?

Greg Brown: Yeah. Andrew, I think about it as I love the fact that it's a market leader. And it's a market leader that gives us exposure to a market we don't participate in today. Unmanned systems in the air, in the water, on the ground. So it's new. Having said that, it's video and data centric, so it's all about ad hoc high-speed infrastructure-less mobile and data and video communications. We see it in defense. We see it on border security. Obviously, to your point, we see it in mission-critical deployments. Primarily on the battlefield. And adjacencies where there's intense conflict. But having said that, we also see it as complementary. Complementary to LMR, and complementary to video.

We lead in land mobile radio infrastructure and devices. This gives us an opportunity to lead in infrastructure-less ad hoc mesh networks. Given both Silvis and our heritage in LMR, have a radio frequency or RF centricity, I like the fact that I think there's a one plus one equals three proposition. In terms of expansion to new markets, this is a great product. I think one of the limiting factors of their growth is their ability to reach outside The United States and capitalize on a global print footprint where like in Motorola Solutions, Molloy has people in dozens and dozens and dozens of countries.

So I think in the federal business, internationally, it's a new market but I also think of it as complementary as well. To LMR and video. And, you know, maybe you wanna talk, Mahesh, a little bit about the thinking, not just in what they do today, but some of the possibilities going forward.

Mahesh Saptharishi: So besides really offering highly resilient communication, the other element of Silvis is spectrum monitoring. And it's probably very important to talk about in the context of drones. Being able to detect drones in this case. So as part of our overall drone strategy, the ability to detect drones not just with radar, which is the most common way of detecting drones today, but also through RF. I we believe really enhances and make positions us very uniquely in that space. The other very important element about Silvis is that it's and Greg mentioned this It's data. It's data-oriented communication, and it allows for any IP device to be attached to it, including cameras.

So we believe that there's an opportunity there with cameras as well that's coming in the future.

Greg Brown: The only thing I'd add, and as we've discussed, Greg, is that similar to Motorola Solutions, our LMR business as well as our video security business, there's an opportunity to add recurring revenues by way of service. Providing just given the nature of the customer base as well.

Andrew Spanola: Perfect. Thank you very much.

Greg Brown: Thanks, Andrew.

Tim Yocum: The next question is from the line of Keith Housum with Northcoast Research. Your line is now open.

Keith Housum: A question for you on maybe a little bit off the wall here, but the base station that you guys are introducing here, don't remember perhaps last time you actually introduced a new base station here. And is there a pent-up demand here that could perhaps be a little bit more of a growth driver than some of us are thinking here?

Jack Molloy: Yeah. So you're right, Keith. It's been I think I'm gonna you're you're jogging my memory here, but I think it is been, it was probably about it was about twelve years ago that we last had our base station. But the D series, which we're talking about, does a few things. Number one, better capacity. Provides better coverage, but also it leverages less capacity. So think of it as a green base station, less energy consumption, which a lot of our customers have been asking for. It also adds a layer of redundancy with low Earth orbit capability. Extend in certain places. But, we're really pleased.

And I think as Greg said, we've got a few big wins out of the gate. We had wins in the state of Ohio. We had wins with the state of Michigan who's one of the largest LMR customers. The way to think about it, is you know, we've got a significant footprint of statewide countywide citywide networks that all need now to be refreshed. It'll be a multiyear phenomenon in terms of that growth.

The other thing to think about is this continues to build this continues to extend our capabilities and need for us to deliver more services for our comp our customers, meaning cybersecurity services, are up substantially for us this year as well as new software monetization services for the new D Series station. The last piece of it we're really pleased is the access which gives us a new dispatch console through these investments we've made. And an example of that is the city of Chicago, really proud our hometown, we went and displaced a competitor and had a significant pickup in a command center win by way of access console. So again, great opportunity for us.

I think it's multi-year horizon. But also lends itself to new service selling capabilities as well.

Greg Brown: And, Keith, most of our customers are on software agreements that keep them current and ready. What this opportunity presents is in a hardware refresh with a lot of attributes and to Jack's point, comes with yet another opportunity to sell them additional software and services around that new hardware. So we view it as benefiting us long term for sure.

Keith Housum: Great. Appreciate it. And then if I could just ask one follow-up question on the backlog. Obviously, a lot of focus on that recently. But how do we look at the backlog, makeup of Is it similar to the disaggregation of revenue you guys have in the presentation here? Or is there a different mix we should be thinking about within that backlog?

Greg Brown: Well, most of the backlog within SNS, services and software, comes from LMR. So I'd say the power hitter in our backlog contribution, particularly for SMS, is LMR because of the nature of our long-term contracts. And the services and software business that we've built over the years. That would be one indicator. And then you know, the size of LMR includes even in products it's our largest business. So I think those two things give you some insights around the makeup of backlog. And to Greg's point earlier, as we began the year, we expected quick turn, to accelerate, and it's done that.

With our record Q2 orders and 10% growth in products, and we expect that growth to continue into the second half. That's long been a part of our outlook, and our outlook's improved.

Keith Housum: Helpful. Thank you.

Greg Brown: Thanks, Keith.

Tim Yocum: The next question is from the line of Tim Long with Barclays. Your line is now open.

Tim Long: Thank you. Two quick ones if I can. Greg, you talked about SCX. And some of their early momentum on understanding it's only been out a month or so. Could you guys talk a little bit about what you think that will do from a ramp revenue ramp perspective as well as impacting maybe the upgrade cycle to APEX next? Number one. And number two, if you can talk about the video business, still strong growth there, very much driven by the software side. The hardware piece of that still kind of flat to low single-digit type of growth.

I get there's a cloud impact but maybe can you just touch a little bit on the product side there and what we could expect to see to potentially reaccelerate growth there? Thank you.

Greg Brown: Yeah. Just on the SVX and Jack and Mahesh can jump in, but as I mentioned, first of all, I'd say the orders are outpacing our expectations. That's number one. Number two, I love it because we're not selling a product per se. We're selling an ecosystem, and that's just not hyperbole. But SDX is anchored and runs off of an APEX NEXT. We upgraded that device. We upgraded it to dual-banded. To include LTE, 4G, or 5G. To get all the benefits of a dual-banded radio. And you see us enhancing that. We're driving more applications. And recurring revenue off of the APEX NEXT.

And now we have the speaker mic which is tied to every radio we sell virtually. And displaces the need for a body camera. It's kinda like if you want an iPod, buy a body camera. But if you want a multidimensional full-function device, you would just go with the SVX. And SDX is really an ingestion point that does a lot more than just body cams. Which is why I referenced earlier. It's the tipping point that ingests more information on situational awareness, AI around dispatch information around 911, audio logs around the radio P25 system, as well as the body cam video. So it does more than that and I like the early traction. It'll take time.

I also like the fact that we're right in the middle of going through FedRAMP certification process. So that continues to go well. And I'm optimistic about the timeline for that. Which will in turn open up more opportunities for us as well.

Jack Molloy: Greg, the rest of the portfolio, as I think about international in the body-worn cameras that we've been refreshing, we've made some pretty significant wins in Romania, Scotland, France, Bulgaria, a number of agencies in The UK. So our international body camera business which is not SDX, attached Apex Next, which is more North America. Right. Continues to do well. Also.

Mahesh Saptharishi: I agree. And perhaps the last thing I'll say on SVX is we believe we're creating a new category here. This is a body-worn assistant versus a body-worn camera. It's not just recording evidence. It is all about capabilities like translation. And SVX is a gateway into assist, so you can ask questions about either situational awareness questions. It's integrated to assist chat. So at the end of the day, we're creating a new category here. It's not just a body-worn camera.

Jack Molloy: And I think, Tim, the last piece of it is just related to the fixed video business. Really pleased with our Q2 performance, and I'd say refreshed portfolio largely with Alta. Alta leading the engine, meaning our cloud business driving that growth. And I think we continue to see incremental investments we make in our go-to-market team continue to expand our reach, only here in The US and in Canada, but also overseas. We've made surgical investments in Europe and in Australia, we're starting to see the benefits of those investments that we've made there as well.

Jason Winkler: And those investments continue to show up in higher software growth within video, while the category of video or the technology, we expect to grow 10 to 12%. The software portion of that continues to grow much faster.

Tim Long: Okay. Thank you, guys.

Tim Yocum: The next question is from the line of Meta Marshall with Morgan Stanley. Your line is now open.

Meta Marshall: Great. A couple of smaller for me. Just on, you know, you guys have been talking about kind of this software transition, particularly on the video side of the business. Is that any meaningful headwind to revenue growth at this point, clearly kind of helping the backlog transition? So just a question there. And then just second, kind of any update on APeX NEXT? Adoption rates? Thanks.

Jason Winkler: So on cloud adoption within video, we as Jack mentioned, we continue to see the fastest growth within our cloud platform of Alta. Orders are greater than sales. Although we're able to manage through the deferred revenue transition. We haven't outlined a number this year as to what that is. Because we're managing through it and still printing. Significant growth. So I'd say cloud is on path in video. And then the second question in terms of Apex Next adoption, Jack?

Jack Molloy: Yeah. Sure. So Apex Next, couple of things. Q2, let's start there. Double-digit order growth with Apex next. We just spoke about SVX, but it's important to note that the SVX is exclusive to the Apex Next family. Which helps which, you know, from the collaborative aspect there, benefits both SVX as well as Apex Next. The last thing that I would note that we talked about before is it's also driving our application service business. So for every Apex Next radio, and we've got greater 90% attachment rate, $300 of radio and application services, per year. So we continue to see the benefit.

I think SVX has also been a tailwind in terms customers making that conversion and looking to move from Apex original to Apex next.

Meta Marshall: Great. Thank you.

Tim Yocum: Thanks, Meta. The next question is from the line of Amit Daryanani with Evercore ISI. Your line is now open.

Amit Daryanani: Yep. Thanks. And I just have two as well. Maybe to start with, operating margins came in better than our end suite expectations. Can you just touch on, a, what the tariff headwinds were in the quarter for you folks? Then b, just what's the durability of the levers that helped the operating margins here?

Jason Winkler: Yeah. You. So gross margins were up on higher SNS sales, and operating margins were up on both margins in S and S as well as leverage elsewhere. So an update on tariffs. We are estimating that this year's tariff impact will be about $80 million, down from the $100 million. That's in part due to mitigation exercise mitigations and other things that have changed. We began seeing the tariff impact in late Q2. Most of that $80 million is in front of us in the second half. So the operating margin expansion that you saw didn't have a significant impact from tariffs. It was more core to the business on improved mix in the in S and S.

Greg Brown: And, Amit, we, a quarter ago, we said gross margins would be comparable for the year. We now expect gross margins to be up year on year. And to your point on operating margin expansion, we envision about 100 bps, 100 basis points expansion year over year.

Jason Winkler: And that improvement is coming not just from the addition of Silvis, but from also the core business. Both are helping gross margins and operating margins this year.

Amit Daryanani: Exactly. Super helpful. And then, you know, maybe just shift gears a bit. Can you just talk about how do you think you're positioned to address sort of this growing focus in the unmanned systems market as you go forward? And how big do you think this can eventually become for you folks? I get Silvis gives you a really good presence there, but I just want to understand, like, on longer term, how big do think this unmanned systems market can get? And then maybe somewhat specific, do you think Silvis enables you to participate in, like, some of the initiatives that the Pentagon has like, replicated or the DIU autonomy pushes they're making? Thank you.

Jack Molloy: Well, Amit, let me just talk about the TAM first. We see the TAM for unmanned at about $3 billion and growing, probably one of the fastest-growing TAMs we have now. With the addition of Silvis now in the portfolio. And we would expect that TAM not be surprised to double it in the next four years. And maybe just focusing a bit on drones, per se, if you think about our drone strategy right now, we have we have three elements to it. There's drone as a first responder. This is our strategic alliance with Brink. In North America. We also have a solution for international.

Given the increased FAA waivers in 2025, we see that as a significant force, and the strategic alliance with Brink, I think, is important. And we see our mission-critical networks, Silvis in particular, also integrating with Brink in that scenario. For communications, we just talked about it. I think Silvis is dominant in terms of being able to be the most resilient communication mechanisms, low probability of low probability of intercept for drones, which I think is a key driver, that continues to grow. And finally, drone detection. And forensics. We have a partnership with SkySafe and, as I mentioned before, with Silvis we have the ability to detect drones leveraging their spectrum monitoring functionality as well.

So across those three things, for drones as a specific instance of unmanned systems, that is our strategy there.

Tim Yocum: The next question is from the line of Ben Bollin with Cleveland Research Company. Your line is now open.

Ben Bollin: Good afternoon, everyone. Thank you for taking the question. The first one, I'm interested in your thoughts on what the Silvis sales motion looks like. Could you maybe compare and contrast it to your existing sales motion? And any preliminary thoughts you have on getting your existing sales teams up to speed and out there accelerating this and driving more attach? And then I have a follow-up.

Jack Molloy: Sure. So their sales motion, they've had you know, they've it's it's amazing that success that team has had. You know, when we first started a year ago, they had a relatively small sales team. That was largely focused in The US. And some of The US sales resources focused outside the Continental United States would call on bases, etcetera, in Europe and other points abroad. It's a direct sales motion largely. Given the size and the strategic level of the selling process. There's also an element of this that sells to, I think, Jason or Greg articulated, itself to the primes and the integrators, the Andurals, the AeroVironments. We're gonna so that's where it was.

Where is it gonna go? You heard Greg mention earlier, we're gonna put a pretty concerted effort to have local resources in allied countries around the world. Anywhere where we're seeing a dial-up in military exercise, we're gonna quickly be putting salespeople over there. We've already invested in channel salespeople as well. To get after new channels to sell the Silvis Manet software into those elements. And I think the last component of it is lobbying. They have had limited resources in lobbying. We have a Government Affairs Arm. In DC.

We will be looking to address not only lobbying on the hill for approves for DOD, but also lobbying into the different branch of government where I think we can articulate our story. It's US-made technology. It plays really well, I think, with where we wanna go. But yeah. So we're really excited. You know, we've run this playbook before when we got into the video space. I think it's a different playbook, a different end market, but know, it starts with just having a strategic idea of where we wanna go, where we wanna invest in I think you'll quickly see that we're gonna be making moves the next coming weeks and months ahead there.

Ben Bollin: Okay. That's great. I guess the follow-up probably more for you, Jack, I'm interested, you know, a lot of The US states closed their fiscal year, in June. How do you think budgets are coming together into fiscal twenty-six? Just any high-level thoughts on what you're hearing. I understand the orders have been exceptional. Just interested if you've got much visibility into incremental fiscal twenty-six budgets at this point. Thank you.

Jack Molloy: Yeah. Sure. So I think as you articulated record Q2 orders, We've raised our annual guide, but we just took a look because we know we now have a view to what the '26 state and local budgets look like, and the reality is we just had a we just had a went through this in detail with our strategy team a couple weeks back. The budgets look very good. So the budget situation remains very strong. You know, the other piece of it that we always think about is we're a little different because we can tap 911 funds. We get the benefit of the increase in property taxes.

Sales taxes because the reality is invite the sale the seller selling environment is still good, and then we have income tax and incomes are relatively steady. So across the board, the situation looks good, and I think you know, that really advises our confidence in the back half of '25 and beyond.

Ben Bollin: Thank you.

Greg Brown: Thanks, Ben.

Operator: Once again, if you have a question, you may press 5 on your telephone keypad. The next question is from the line of Tomer Zilberman from Bank of America Securities. Your line is now open.

Tomer Zilberman: Hey, guys. Question for you on the core LMR business. If I think about the long-term historical growth trajectory of this market, it's anywhere between 1% to 3%. In the last two quarters, you've been growing 3% to 4%, and I believe you previously guided for that. Similar type of growth rate, 34% for the rest of the year. My question more so is as we think about next year or the next two years, are these trends that you're talking about, about in regards to this ecosystem with Apex Next SVX and the other positive trends you're seeing enough to sustain these kind of above-market growth rates?

Or do you think that these trends have a long enough tail that you know, we might be more exposed to cyclical growth. You know, fluctuations of growth over the next few years.

Greg Brown: Well, from a technology standpoint, you know, we as Jason mentioned already, we are relabeling LMR to MCN, mission-critical networks. And as a result, we now expect mission-critical networks inclusive of LMR, to be mid-single digits for this fiscal year. We're obviously not gonna comment yet on '26, but I think that the strong Q2 orders print the gaining confidence in the product backlog even though it is transitioning more to a quick turn business. But our confidence is incrementally higher than it was a quarter ago. I. E, vis a vis the mid threes, I like that trend. Now remember also, we're coming off of record years last year and the year before.

So we're and as somebody earlier mentioned on the call, given the ecosystem that you just referenced, we're trying to drive more toward recurring revenue, toward more applications revenue, toward more revenue as a service. So as long as we can continue a healthy, robust company-wide revenue growth, and then continue our focus on operating expense operating leverage, improved cash flow, operating margin expansion, and continuing to build backlog particularly around multiyear services, or recurring apps revenues. That's the profile we want for the firm. So, you know, we'll come in and out of quarters. We'll come in and out of years.

But when we take a look where we are now and going forward, and I think of the long-term durability and the criticality of 13,000 networks for LMR, that compose both critical infrastructure and enterprise as well as public safety as well as North America, and international. And, again, just to come back to Silvis, I love Silvis because it's intelligent. High growth, high performance, infrastructure. It can support lots of different drone platforms. Lots of different drone manufacturers, We've had a lot of experience, and I have, in, you know, selling, quote, unquote, devices. Or commodities. You could you could call the drone market depending upon which one you define as a commodity.

We've been very purposeful to invest where we think we can differentiate where we think the revenues and the competitive advantage are sticky, and where we can build a competitive advantage in adjacency for public safety, critical infrastructure, and national security. That's the strategy we're implementing and I feel good about it. And I definitely feel good about exiting Q2 and what we need to get done between now and the end of the year. And, Tomer, as you know, will update you on next year in November.

Tomer Zilberman: Got it. Maybe as a quick follow-up, just a housekeeping question. Apologies if I missed it earlier. Your guidance raise includes a mix of the Silvis acquisition, but also core improvements. Did you break out what you expect Silvis to contribute in Q3 versus Q4? I know you have the stub period going on, so any directional direction you can give us would be helpful.

Jason Winkler: So we're flowing through the Q2 beat. We're flowing to flowing through the improvement of FX and we're articulating that Silvis is about a $185 million in the stub period of revenue for the remaining five months. Post close. We haven't specifically broken out Q3. But if you wanna use weeks, it's a pretty good approximation of where to put the $1.85.

Tomer Zilberman: Got it. Thank you.

Greg Brown: Thanks, Tomer.

Operator: Our final question today is from the line of Louis De Palma with William Blair. Your line is now open.

Louis De Palma: Greg, Jason, Jack, Mahesh, Anne, Tim, and Vicky, good afternoon, and congrats on closing Silvis.

Greg Brown: Hey, Louis. How are you doing? Thanks.

Louis De Palma: Great. I was wondering, does Silvis give you a competitive advantage for your drone as a first responder offering on the law enforcement side? Today, nearly all of Silvis's revenue is for the battlefield, but it seems you can significantly enhance their first responder capabilities, especially if that scale? Or alternatively, do you view you today view Silvis as too powerful of a solution for law enforcement? So are you gonna focus all of your efforts on the battlefield? What's the strategy there with the Silvis expansion?

Mahesh Saptharishi: Louis, I think in the near term, at least, our biggest limitation is going to be spectrum availability. In North America. Because we need to operate within a certain spectrum to be able to take advantage of Silvis's technology within drones specifically license spectrum. So we think it'll happen, but it'll happen in the future. In the meantime, the other important element of us supporting DFR operations is being able to track and being able to detect drones in airspace. And that's where spectrum monitoring comes into play. And being able to do that not just with radar, but also to do it with RF.

I think that gives us the ability to integrate that as part of our DFR program while we figure out the spectrum challenges.

Jack Molloy: And there are a couple of instances, with public safety agencies in The US that have had spectrum waivers where they've been implemented and granted still this has played a role there. Yeah. So there's more we can do.

Greg Brown: Yeah. And the other thing, think the last thing I'd say is we can't sleep on the borders because really, think as Greg said earlier, what Silvis does is Silvis basically builds a bridge to our LMR or the voice mission-critical networks to video. And they're gonna secure the borders leveraging this leveraging this technology. And with that, it's gonna pull through video opportunities for us as well.

Louis De Palma: That makes sense. And, Greg, you mentioned LEO satellite connectivity being integrated into your network. Can you elaborate further there or maybe Mahesh, are you partnering with Starlink or FirstNet via AST Space Mobile there?

Mahesh Saptharishi: So I think it's what Jack referred to in the context of our LMR infrastructure there, Louis. We will support LEO via our base stations because I think that's the better way to attack redundancy and have high bandwidth connectivity to with lower orbit satellites. And, you know, we are having conversations with all the appropriate LEO providers there to give us that flexibility.

Louis De Palma: Great. Thanks, everyone.

Greg Brown: Louis.

Operator: This concludes our question and session. I will now turn the floor over to Mr. Greg Brown, Chairman and Chief Executive Officer, for any additional comments or closing remarks.

Greg Brown: Yeah. I just want to close and say thank you to all the people at Motorola and all of our partners. Really pleased with the strong Q2 performance on revenue, earnings per share, and cash record Q2 orders, in particular, up 27% as we talked about. And as was mentioned earlier on the call, it's fairly broad-based. The performance on record orders. So that's even more foundational and gives us even more confidence.

I'm pleased with the fact that you know, mid-year here, we're able to raise top line, bottom line, and overall raising operating cash flow in the face of $80 million of tariffs, headwind the majority of which is in the back half, and in an increased interest expense as well as $75 million of fees associated with the Silvis acquisition. And expanding gross margins and expanding operating margins. So I'm excited about Q3 and Q4 and really excited about Silvis joining the firm. All the capabilities engineering, technical talent, the sales organization that's coming over as well, I think it's gonna be a great mix and a great team, and I'm excited about it.

And I look forward to talking to everybody again, in three months. Thanks for listening.

Operator: This does conclude today's teleconference. A replay of this call will be available over the Internet within three hours. Website address is www.motorola.com/investor. We thank you for your participation and ask that you please disconnect your lines at this time.

Where to invest $1,000 right now

When our analyst team has a stock tip, it can pay to listen. After all, Stock Advisor’s total average return is 1,046%* — a market-crushing outperformance compared to 181% for the S&P 500.

They just revealed what they believe are the 10 best stocks for investors to buy right now, available when you join Stock Advisor.

See the stocks »

*Stock Advisor returns as of August 4, 2025

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. Parts of this article were created using Large Language Models (LLMs) based on The Motley Fool's insights and investing approach. It has been reviewed by our AI quality control systems. Since LLMs cannot (currently) own stocks, it has no positions in any of the stocks mentioned. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Image source: The Motley Fool.

Date

Thursday, August 7, 2025, at 5 p.m. ET

Call participants

• Vice Chairman and Chief Executive Officer — Hilton H. Schlosberg
• Chief Financial Officer — Tom Kelly
• Chief Commercial Officer — Emily Thierry
• Chief Growth Officer — Rob Gearing
• President, EMEA and Oceania South Pacific — Guy Carling
• Senior Vice President, Investor Relations and Corporate Development — Mark Astrachan

Need a quote from a Motley Fool analyst? Email [email protected]

Takeaways

• Net sales-- $2.11 billion, representing an 11.1% increase in net sales for Q2 2025 compared with Q2 2024, marking the first time net sales have exceeded $2 billion in a quarter and supported by strong international performance.
• Gross profit margin-- 55.7%, up from 53.6% for Q2 2024, attributed to pricing actions, supply chain optimization, and lower input costs; partially offset by geographic mix and higher promotional allowances.
• International sales mix-- 41% of reported net sales in Q2 2025, up from 39% a year earlier, showing increased contribution from non-US markets.
• Monster Energy segment net sales-- Rose 11.2% to $1.94 billion for Q2 2025; foreign currency adjusted increase of 11.4% for this core segment.
• Strategic brand segment net sales-- Increased 18.9% to $129.9 million for Q2 2025; foreign currency adjusted growth was 19.1%.
• Alcohol brand segment net sales-- Fell 8.6% to $38 million in Q2 2025, reflecting continued challenges despite cost-reduction activities.
• Operating income-- Rose 19.8% to $631.6 million in operating income for Q2 2025; adjusted operating income (excluding alcohol brands, litigation provisions, and changes in stock-based compensation) increased 21.5% to $607.9 million.
• Net income-- Increased 14.9% to $488.8 million for Q2 2025; adjusted net income (excluding alcohol brand, litigation, and stock-based compensation) rose 16.7% to $516.5 million.
• Diluted EPS-- 50¢, up 21.1% for Q2 2025 compared to Q2 2024; adjusted diluted EPS (excluding litigation, stock-based compensation, and alcohol brand) grew 23% to 52¢.
• EMEA net sales-- Up 26.8% in dollars for Q2 2025; currency-neutral growth of 23.7% in EMEA, with Monster now ranked the seventh largest FMCG brand in Western Europe and number one energy drink in Norway.
• Asia Pacific net sales-- Grew 11% in both reported and currency-neutral terms in Q2 2025; China saw 19.5% dollar growth, South Korea net sales increased 22.4% in dollars, and India net sales increased 12.4% in dollars.
• Latin America sales-- Dropped 7.8% in dollars in Q2 2025 but increased 1.7% on a currency-neutral basis; segment pressured by Argentina's operating model and weather-related production issues in Brazil.
• July 2025 sales estimates-- Company estimates July 2025 sales rose 24.3% year-over-year on a reported basis and 22.2% on a foreign currency adjusted basis compared to July 2024, cautioning that such monthly figures may not indicate full-quarter trends.
• US price adjustments planned-- Management is in discussions with bottling partners to selectively increase prices and reduce promotional allowances by packaging channel in Q4 2025.
• Innovation pipeline-- Several new flavors and brand variants across Monster Ultra, full-sugar lines, and affordable offerings are scheduled for launches globally throughout the remainder of 2025.
• Stock repurchases-- No shares repurchased in the quarter; $500 million remains authorized for further buybacks.

Summary

Monster Beverage(NASDAQ:MNST) delivered record financial results, led by double-digit percentage growth in both sales and profits for Q2 2025, surpassing $2 billion in quarterly revenue for the first time. Management specifically highlighted increased international contributions, with non-US sales reaching 41% of the total, signaling meaningful geographic diversification. Planned price adjustments and ongoing product innovation underscore the company's intention to sustain momentum despite anticipated modest tariff impacts and higher tax rates. Segment performance varied, as strategic brands outpaced Monster's core products in sales growth, while the alcohol business remained challenged despite cost-cutting actions. Gross margin improved due to pricing, efficiency gains, and input cost declines. Management emphasized the strength of global energy drink demand, with household penetration continuing to increase, and proactive supply chain strategies to maintain competitiveness.

• Schlosberg said, "our second quarter net sales of $2.11 billion are a quarterly record that crossed the $2 billion threshold for the first time in the company's history," underscoring the significance of reaching this scale.
• Geographic mix shifted, with EMEA posting currency-neutral net sales growth of 23.7% and Monster now ranked as the "seventh largest FMCG brand by value" in Western Europe, according to Nielsen data presented in the call (as of Q2 2025).
• Management confirmed ongoing supply chain optimization has achieved a balance of internal production and co-packing, with "our own production ... just around 10% of our sales in the US."
• Tariff-related pressures were discussed as modest for upcoming quarters, and a hedging strategy is in place to mitigate exposure to aluminum cost fluctuations, as stated by management during the Q2 2025 earnings call.

Industry glossary

• FMCG: Fast-Moving Consumer Goods; high-turnover packaged products sold in volume through supermarkets and mass retailers.
• SKUs: Stock Keeping Units; unique product items tracked for inventory and sales purposes.
• Nielsen: Retail scanner data provider, referenced for category and brand sales growth figures in the beverage market.
• FX-neutral (Currency-neutral): Financial metric adjusted to remove the impact of foreign currency exchange rate changes.

Full Conference Call Transcript

Hilton H. Schlosberg: Good afternoon, ladies and gentlemen. Thank you for attending this call. I am Hilton Schlosberg, Vice Chairman and Chief Executive Officer. Also on the call is Tom Kelly, our Chief Financial Officer; Emily Thierry, our Chief Commercial Officer; Rob Gearing, our Chief Growth Officer; Guy Carling, our President of EMEA and Oceania South Pacific; and Mark Astrachan, our Senior VP of Investor Relations and Corporate Development. Mark will now read our cautionary statement.

Mark Astrachan: Before we begin, I would like to remind listeners that certain statements made during this call may be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. These statements are based on currently available information regarding the expectations of management with respect to revenues, profitability, future business, future events, financial performance, and trends. Management cautions that these statements are based on our current knowledge and expectations and are subject to certain risks and uncertainties, many of which are outside the control of the company, that may cause actual results to differ materially from the forward-looking statements made during this call.

Please refer to our filings with the Securities and Exchange Commission, including our most recent annual report on Form 10-K filed on 02/28/2025, and quarterly report on Form 10-Q, including the sections contained therein entitled Risk Factors and Forward-Looking Statements, for discussion on specific risks and uncertainties that may affect our performance. The company assumes no obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise. I would also like to note that an explanation of the non-GAAP measures, which may be mentioned during the course of this call, is provided in the notes in the condensed consolidated statements of income and other information attached to the earnings release dated 08/07/2025.

A copy of this information is also available on our website, www.monsterbevcorp.com, in the financial information section. Please also note that scanner data, which was previously provided on earnings calls, is now included in an exhibit filed with our 8-Ks. We point out that certain market statistics that cover single months or four-week periods may often be materially influenced positively or negatively by promotion or other trading factors during those periods. I would now like to hand the call over to Hilton Schlosberg.

Hilton H. Schlosberg: Good afternoon, and thank you for joining us. We are pleased to report yet another quarter of strong financial results and cash generation. In fact, our second quarter net sales of $2.11 billion are a quarterly record that crossed the $2 billion threshold for the first time in the company's history, with net sales increasing 11.1% compared with the 2024 second quarter. In addition, the percentage growth rates in reported gross profit, operating income, net income, and earnings per share all outpaced our growth rate in net sales. Overall, the global energy drink category remains healthy with accelerating growth. Household penetration continues to increase in the energy drink category, driven by product functionality and lifestyle positioning.

Diverse offerings that appeal to an increasingly broad and loyal consumer base and affordable value offerings in addition to premium offerings. In the United States, according to Nielsen for the recently reported thirteen-week period through 07/26/2025, sales in dollars in the energy drink category, including energy shots for all outlets combined, namely convenience, grocery, drug, mass merchandisers, increased by 13.2% versus the same period a year ago. Trends in our US business remain solid, with continued acceleration from early 2025. In EMEA, the energy drink category, according to Nielsen for our tracked markets for the recently reported thirteen-week period, which differ from country to country, grew at approximately 15.4% versus the same period last year, FX neutral.

In APAC, the energy drink category, according to Nielsen, Sucan, and Intage for our tracked channels for the recently reported thirty-week period, differ from country to country, grew at approximately 20.9% versus the same period last year, FX neutral. In LATAM, the energy drink category, according to Nielsen for our tracked markets for the three months ended 06/30/2025, grew at approximately 13.9% versus the same period last year. Growth remains healthy in local currencies across EMEA, Asia Pacific, and Latin America. Our net sales to customers outside the United States rose to approximately 41% of total reported net sales in the 2025 second quarter.

We believe our portfolio of energy drink offerings is well-positioned to participate in the growing global energy drink category, appealing to a broad range of consumers across geographies, price points, and need states. Innovation continues to be an important contributor to category growth, and we maintain a robust innovation pipeline. Our marketing messaging continues to resonate globally. Highlights from the second quarter include the continued successes of our sponsorship and endorsement activities, including our McLaren Formula One team sponsorship, UFC and MMA, Summer X Games, Supercross and Motocross, and Stagecoach Music Festival, among others.

Relatedly, we successfully introduced Monster Energy Land O Nara Zero Sugar in select EMEA markets in the quarter, with a broader introduction planned for the second half of the year. As an aside, the McLaren Formula One team won a game this past weekend. Building on the successes of our billion-dollar Ultra brand family, we have introduced a new visual brand identity to differentiate and enhance visibility in-store. In particular, we have established new merchandising platforms, including in-store coolers around a zero-sugar flavors unleashed proposition. This will be followed by a digital media campaign in the third quarter, adding to the most recent viral explosion on social media for our flagship Zero Ultra energy drink.

We also have further Ultra innovations planned, including the launch of Ultra Wild Passion in the fourth quarter. During 2025, the impact of tariffs on our operating results is immaterial. In general, while our flavors and concentrates are both in the US and Ireland at the present time, production of our finished products takes place locally in our respective markets. Despite the immaterial impact on our business in the second quarter, the tariff landscape continues to be complicated and dynamic. We import some raw materials into the United States, export certain raw materials for local markets, and export limited quantities of finished products.

We do not believe, based on our business model, that the current tariffs will have a material impact on the company's operating results. However, we expect it will have a modest impact in 2025. We will continue to recognize tariffs on aluminum through the higher Midwest premium and continue to implement mitigation strategies across the business where possible. Turning to our Q2 2025 results, net sales were $2.11 billion for the 2025 second quarter, or 11.1% higher than net sales of $1.9 billion in the comparable 2024 second quarter. Net changes in foreign currency exchange rates had an unfavorable impact on net sales for the 2025 second quarter of $5 million.

Net sales on a foreign currency adjusted basis increased 11.4% in the 2025 second quarter. Net sales, excluding the alcohol brand segment on a foreign currency adjusted basis, increased 11.8% in the 2025 second quarter. Excluding the alcohol brand segment from our reported results is purely illustrative as it remains part of ongoing operations. Net sales for the company's Monster Energy drink segment increased 11.2% to $1.94 billion for the 2025 second quarter from $1.74 billion for the 2024 second quarter. Net sales on a foreign currency adjusted basis for the Monster Energy drink segment increased 11.4% in the 2025 second quarter.

Net sales for the company's strategic brand segment increased 18.9% to $129.9 million for the 2025 second quarter from $109.2 million in the 2024 second quarter. Net sales on a foreign currency adjusted basis for the strategic brand segment increased 19.1% in the 2025 second quarter. Net sales for the alcohol brand segment decreased 8.6% to $38 million for the 2025 second quarter from $41.6 million in the 2024 second quarter. Gross profit as a percentage of net sales for the 2025 second quarter was 55.7% compared with 53.6% in the 2024 second quarter.

The increase in gross profit as a percentage of net sales for the 2025 second quarter was primarily the result of pricing actions, supply chain optimization, and lower input costs, partially offset by geographical sales mix and higher promotional allowances. Distribution expenses for the 2025 second quarter were $82 million or 3.9% of net sales compared with $87.4 million or 4.6% of net sales in the 2024 second quarter. Selling expenses for the 2025 second quarter were $196.9 million or 9.3% of net sales compared with $192.1 million or 10.1% of net sales in the 2024 second quarter.

General and administrative expenses for the 2025 second quarter were $265.9 million or 12.6% of net sales compared with $212.8 million or 11.2% of net sales in the 2024 second quarter. Stock-based compensation was $33.2 million for the 2025 second quarter compared with $18.8 million in the 2024 second quarter. The increase in stock-based compensation for the 2025 second quarter included $7.9 million related to certain equity awards granted late in the 2021 first quarter that contained a new retirement clause. In addition, general and administrative expenses for the 2025 second quarter included $13.8 million of litigation provisions. Operating expenses for the 2025 second quarter were $544.8 million compared with $492.3 million in the 2024 second quarter.

Adjusted operating expenses, exclusive of the alcohol brand segment, the litigation provisions, and the change in stock-based compensation for the 2025 second quarter were $497.7 million compared with $459.3 million in the 2024 second quarter. Operating expenses as a percentage of net sales for the 2025 second quarter were 25.8% compared with 25.9% in the 2024 second quarter. Adjusted operating expenses as a percentage of net sales for the 2025 second quarter were 24%. Operating income for the 2025 second quarter increased 19.8% to $631.6 million from $527.2 million in the 2024 comparative quarter.

Adjusted operating income for the 2025 second quarter, exclusive of the alcohol brand segment, the litigation provisions, and the change in stock-based compensation, increased 21.5% to $607.9 million from $549.7 million in the 2024 second quarter. The effective tax rate for the 2025 second quarter was 24.4% compared with 22.9% in the 2024 second quarter. The increase in the effective tax rate was primarily attributable to higher income taxes in foreign tax jurisdictions. Net income for the 2025 second quarter increased 14.9% to $488.8 million from $425.4 million in the 2024 second quarter.

Net income for the 2025 second quarter, exclusive of the alcohol brand segment, the litigation provisions, and the change in stock-based compensation, increased 16.7% to $516.5 million from $442.7 million in the 2024 second quarter. Net income per diluted share for the 2025 second quarter increased 21.1% to 50¢ from 41¢ in 2024. Net income per diluted share for the 2025 second quarter, exclusive of the litigation provisions and the accelerated stock-based compensation, increased 25.2% to 51¢ from 41¢ in 2024. Net income per diluted share for the 2025 second quarter, exclusive of the alcohol brand segment, the litigation provisions, and accelerated stock-based compensation, increased 23% to 52¢ from 43¢ in 2024.

Turning now to the US and North America sales, net sales in the US and Canada in the 2025 second quarter increased by 8.6% in dollars over the same period in 2024. Growth for the quarter was led by the Monster Energy Ultra family. In the United States, according to the Nielsen reports for the thirty weeks ended 07/19/2025, the Monster Energy Ultra family was the third largest standalone energy drink brand in dollar sales in the energy drink category after Red Bull and Monster for all outlets combined, namely convenience, grocery, drug, and mass merchandisers, including energy shots.

Innovation continues to drive performance with Monster Energy Ultra Blue Hawaiian and Monster Energy Ultra Vibe Squad contributing to the Monster Energy Ultra brand family growth. Our two Monster Killer Brew SKUs and Juice Monster Vikingberry also contributed to US growth. Our revenue growth management team remains focused on long-term value creation opportunities and trade spend optimization. The pricing of energy drinks in the United States has increased at a slower rate than other NALTD beverages in the last decade. We believe this provides for a favorable value proposition with consumers.

To that end, we have initiated discussions with our bottlers and customers and are planning for selective price adjustments by packaging channel as well as reductions in promotional allowances in the United States effective during the 2025 fourth quarter. As communicated at our annual meeting, we are planning to launch two new full-sugar Monster Energy flavors, Monster Energy Electric Blue and Monster Energy Orange Dreamsicle, in the fall. We are also planning to introduce Juice Monster Bad Apple, which was introduced in select EMEA markets in 2024, as well as Monster Energy Ultra Wild Passion in the fall.

Additionally, we are planning a strategic launch of Monster Energy Landonaris Zero Sugar in Texas, Nevada, and California, leveraging the Formula One races in the United States later this year. Turning to sales internationally, net sales to customers outside the United States on a foreign currency adjusted basis increased 16.5% to $869.3 million in the 2025 second quarter. Reported net sales to customers outside the United States were $864.2 million, 41% of total net sales, in the 2025 second quarter compared to $746 million or 39% of total net sales in the corresponding quarter in 2024. Foreign currency exchange rates had a negative impact on net sales in US dollars of approximately $5 million in the 2025 second quarter.

Hilton H. Schlosberg: Turning to EMEA, our net sales in EMEA in the 2025 second quarter increased by 26.8% in dollars and increased 23.7% on a currency-neutral basis over the same period in 2024. Gross profit in this region as a percentage of net sales for the 2025 second quarter was 36.1% versus 34.7% in the same period in 2024. Energy drink category growth remains healthy, with Monster outperforming the category in many EMEA markets. According to Nielsen, in all major channels in Western Europe, excluding Iceland, the Monster Energy brand is now the seventh largest FMCG brand by value. According to Nielsen, for the most recent thirteen-week period, the Monster brand is now the number one energy drink in Norway.

Our affordable brands continue to grow and gain share in their respective markets. Within EMEA, we are also seeing growth of Fury in Egypt and Predator in Kenya and Nigeria. Innovation continues to drive performance in the region, with Juiced Monster Rio Punch and Monster Energy Ultra Strawberry Dreams contributing to the growth in the quarter. In addition, we launched Monster Energy, Landon Norris, Zero Sugar, in five markets at the end of the second quarter. We will continue its rollout throughout 2025 in 33 additional markets in EMEA.

We are especially excited about the launch of this product due to its unique package design, appealing melon yuzu flavor, and strong activation by our sales teams and our Coca-Cola bottling partners. We will be launching various Monster Energy strategic brands and affordable brand products in additional markets in EMEA throughout the rest of 2025, including the rollout of Monster Energy, Valentino, Rossi, Zero Sugar, in a number of countries. Turning to Asia Pacific, net sales in Asia Pacific in the 2025 second quarter increased 11% both in dollars and on a currency-neutral basis over the same period in 2024.

Gross profit in this region as a percentage of net sales for the 2025 second quarter was 41% versus 45.4% in the same period in 2024. The decrease in gross profit margins as a percentage of net sales was primarily the result of higher promotional allowances and geographic sales mix. Net sales in Japan in the 2025 second quarter increased 6.1% in dollars and increased 1% on a currency-neutral basis. We are planning to launch two SKUs of Rainstorm in Japan in the 2025 third quarter. Net sales in South Korea in the 2025 second quarter increased 22.4% in dollars and increased 28.9% on a currency-neutral basis as compared to the same quarter in 2024.

Net sales in China in the 2025 second quarter increased 19.5% in dollars and increased 20.2% on a currency-neutral basis as compared to the same quarter in 2024. Net sales in India in the 2025 second quarter increased 12.4% in dollars and increased 16% on a currency-neutral basis as compared to the same quarter in 2024. During the second quarter, sales growth of the Monster Energy brand remained solid, with Predator growing meaningfully ahead of the energy drink category, in part reflecting its ongoing rollout into new markets and increased production capacity for the Coca-Cola bottlers in India.

Overall, we remain optimistic about the long-term prospects for our brands in Asia Pacific and are excited about the incremental expansion of our affordable brands in China and India. In Oceania, which includes Australia, New Zealand, Tahiti, French Polynesia, New Caledonia, Papua New Guinea, and Guam, net sales increased 8.3% in dollars and increased 11.9% on a currency-neutral basis. Turning to Latin America and The Caribbean, net sales in Latin America, including Mexico and The Caribbean, in the 2025 second quarter decreased 7.8% in dollars and increased 1.7% on a currency-neutral basis over the same period in 2024.

Slower growth in the region on a currency-neutral basis was primarily attributable to a change to the operating model in Argentina, lower net sales in certain countries, primarily due to production challenges and adverse weather in the region, particularly in Brazil. Gross profit in this region as a percentage of net sales was 45.2% for the 2025 second quarter versus 45.8% in the 2024 second quarter. Net sales in Brazil in the second quarter decreased 1.3% in dollars but increased 10.4% on a currency-neutral basis. We are planning to launch Juice Monster Rear Punch in the 2025 third quarter. Net sales in Chile in the 2025 second quarter increased 4.6% in dollars and 4.2% on a currency-neutral basis.

We are planning to launch Juice Monster Pipeline Punch in the 2025 third quarter. Net sales in Argentina in the 2025 second quarter decreased 33.9% in dollars and 30.2% on a currency-neutral basis. The net sales decrease in Argentina was partially due to lower per case revenues as a result of a change to the operating model late in 2025 with the objective to better manage our foreign currency exposure. Net sales in Mexico decreased 7% in dollars and increased 10.8% on a currency-neutral basis in the 2025 second quarter. In the third quarter, we are planning to launch Monster Energy Ultra Strawberry Dreams and Predator Wild Berry.

Turning to Monster Brewing, Monster Brewing results improved relative to 2025 but continued to face challenges in the second quarter. During this 2025 second quarter, we reduced headcount as part of our cost reduction plans. Net sales for the alcohol brand segment were $38 million in the 2025 second quarter, a decrease of approximately $3.6 million or 8.6% lower than the 2024 comparable quarter. We continue to plan for the launch of the Beast in certain international markets, subject to regulatory approvals. We are also planning further innovation in Montserrari in the coming months. For example, a new hard lemonade line, Blind Lemon and Blind Lemon, began shipping nationally in July.

During the 2025 second quarter, no shares of the company's common stock were repurchased. As of 08/06/2025, approximately $500 million remained available for repurchase under the previously authorized repurchase program. Now turning to our July 2025 sales, we estimate that July 2025 sales on a non-foreign currency adjusted basis were approximately 24.3% higher than the comparable July 2024 sales and 24.9% higher on a non-foreign currency adjusted basis, excluding the alcohol brand segment. We estimate that on a foreign currency adjusted basis, July 2025 sales were approximately 22.2% higher than the comparable July 2024 sales and 22.8% higher on a foreign currency adjusted basis, excluding the alcohol brand segment.

July 2025 had the same number of selling days as July 2024. In this regard, we caution again that sales over a short period are often disproportionately impacted by various factors such as, for example, selling days, days of the week in which holidays fall, timing of new product launches, the timing of price increases, and promotions in retail stores, distribution centers, as well as shifts in the timing of production. In some instances, our bottlers are responsible for production and determine their own production schedules. This affects the dates on which we invoice such bottlers.

Furthermore, our bottling and distribution partners maintain inventory levels according to their own internal requirements, which they may alter from time to time for their own business reasons. We reiterate that sales over a short period, such as a single month, should not necessarily be imputed to or regarded as indicative of results for a full quarter or any future period. In conclusion, I would like to summarize some recent positive points. Our record quarterly net sales crossed the $2 billion threshold for the first time in the company's history. In addition, the percentage growth rates in reported gross profit, operating income, net income, and earnings per share all outpaced our growth rate in net sales.

The energy drink category continues to grow globally. We believe that household penetration continues to increase in the energy drink category. Growth opportunities in household penetration, per capita consumption, along with consumers' need for energy, are positive factors for the category. We continue to expand our sales in non-Nielsen tracked channels. Globally, as measured by scanner data, consumer demand remains strong. In the United States, the energy drink category, as measured by Nielsen, accelerated in the 2025 second quarter compared to the 2025 first quarter, with growth remaining strong in July 2025 and beyond. I would now like to open the floor to questions about the quarter.

Operator: Thank you. We will now begin the question and answer session. If you are using the speakerphone, we ask that you please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. In the interest of time, we ask that you please limit yourself to a single question. Today's first question comes from Dara Mohsenian with Morgan Stanley. Please go ahead.

Dara Mohsenian: Hey. Good afternoon. Hey, Hilton. The gross margin performance is particularly strong in Q2. Can you just talk about how sustainable some of those drivers might be going forward? You mentioned some modest tariff pressure going forward. So just any thoughts around higher aluminum costs and the impact going forward? And if you could just clarify, you mentioned some US pricing in Q4. Is that more selective tactical adjustments or looking more at a broad type of price increase? Thanks.

Hilton H. Schlosberg: Well, I think we mentioned that the price increase that is currently being explored will depend on package and channel. So it's still a little premature to say where it will fall out, but we are in discussions with our bottlers and customers. So turning to gross margins, you know, I have always been very passionate about gross margins and where the gross margin can end up in, you know, in the company. But as we look at where we are in Q2 and we look forward into Q3, and, you know, we do not give guidance, so I have got to be careful what I say otherwise.

I get into trouble here with the lawyers, but we do see some modest pressures coming from tariffs in Q3. And in Q4, if the price increase does not materialize, but, you know, we think it will, we will see, you know, some reduction in through tariffs. But we do believe that the price increase will go some way towards, you know, overcoming that. And as I mentioned previously on many calls, we have a hedging strategy in place. So we are not totally exposed to the vicissitudes and changes in pricing in the LME. We are hedged to a limited extent in the Midwest premium, which is where we will see the impact of the tariffs.

Operator: Thank you. And our next question today comes from Bonnie Herzog with Goldman Sachs. Please go ahead.

Bonnie Herzog: Alright. Thank you. Hi, Hilton. Hi, everyone. Maybe a quick follow-up question on that just in terms of your supply chain optimization efforts because, Hilton, I know you have been working on that. So if you have any color that you can share with us in sort of where you are at in that process, and then I would love to hear some color on the category because it has been very strong recently, especially in the US, you know, up double digits. So if you could touch on some of the drivers of the recent strength and how sustainable this might be for the rest of the year and maybe into next. Thanks.

Hilton H. Schlosberg: Okay. So let's talk first about supply chain optimization. What we have been able to achieve is a good balance between our own production, which now accounts for probably just around 10% of our sales in the US, and a very well-balanced co-packing model. You know, the objective always has been to get the lowest delivered price to our customers. And that's been an objective, and it's one of the reasons why we are not producing more in our Phoenix facility because we have got such a great balance of co-packers that are able to achieve that objective of the lowest landed cost price to our customers. So that's supply chain. Let's talk a little bit about the category.

You know, as we said earlier, when we spoke about July sales, sales trends in the category remain strong. You know, per scanner data, the category is up 13.2% in the last four weeks. Monster's up 12%, and our MEC share unfortunately has been impacted by the other brands, not Monster. And really, we have seen strong increases across all regions. You know, we look at where we are in July, and all of our regions are, you know, are increasing nicely. So why, you know, has the market changed? At the end of the day, you know, what we look at is that the pricing of our products at retail is very much competitive with comparable CSDs.

And they traditionally, there was a gap. Historically, there was a gap. But now that gap is, you know, is starting to close. And there's a strong appetite from consumers for functionality. And a move towards, you know, towards our products and our competitors' products. So, you know, overall innovation has driven the growth in the category and in our own sales. And also, you know, there's this whole move that alcohol is not as, you know, as appealing as historically it's been. And we believe that's creating more opportunities for energy and certainly more space for energy in the customers' coolers.

So, you know, there's nothing really more than I can add other than, you know, we are excited to be part of this category. And everyone was, you know, like, kind of concerned last year. And I think at the time, we said that our belief was that this a strong motivation, strong acceleration in the category, and you are now seeing it. So, you know, I'm not sure I can add any more color, Bonnie.

Operator: Thank you. And our next question today comes from Chris Carey at Wells Fargo Securities. Please go ahead.

Christopher Carey: Hey, everyone. Hope that you are all doing well. I wanted to follow-up just on the quarter-to-date number. Exceptionally strong. Hilton, you just said all regions are growing. Is there, you know, any pull forward that you are seeing ahead of those pricing discussions, you know, any timing dynamic that we should be thinking about that's driving, you know, some of that strength? And then if I could just follow-up on this broader topic of the energy drink category. You know, it's been a really strong year, and, certainly, we are already looking forward to next year. And the sustainability of the category. Clearly, you are going to potentially have this pricing in Q4.

But can you just talk about maybe what happened last year, you know, why you think the category slowed, whether it was a lack of innovation, lack of pricing, and how you are starting to think about, you know, the next twelve months between, you know, strength of innovation. Obviously, you are going to have pricing. And any other, you know, tidbits that you might give us to, you know, lessen some of the anxiety as we start, you know, lapping the really strong performance. So thanks for the clarification on quarter-to-date, and sorry for the longer-winded question going into next year.

Hilton H. Schlosberg: Thanks. Okay. Well, let's start with the longer for next year. So there's an easy answer. We do not give guidance. So it's really hard, you know, for us to, you know, to talk about 2026 other than to say that we have got a very strong innovation pipeline, and we are really excited about what will happen in the fall with our innovation. What's happening internationally with and what's what could happen in 2026 with, you know, with our innovation program. You know, talking about what happened last year, it's kind of difficult because I do not think anyone knows. You know, we surmised at the time that, you know, there were lots of issues.

You know, it was pre-election, consumers, you know, there was high inflation. There were high gas prices. Consumers were, you know, holding back. But we have always said, and this, you know, we passionately believe that energy offers a need state. It's a, you know, it's a functional beverage. And we are continuing to see increased household penetration. You know, we regard energy drinks as an affordable luxury. We are seeing a lot of growth of diets versus full sugar. I mentioned the NARTD price comparison, and there's been a big opportunity with the trend in coffee and the, you know, the pricing trends in coffee.

And also, you know, the impact on the coffee industry of the cold brews, which did not do as successful as people expected. So, you know, there's a whole move towards why we believe this category is a good category and why we think it will, you know, it will continue to grow.

Operator: Thank you. And our next question today comes from Steve Powers of Deutsche Bank. Please go ahead.

Steve Powers: Great. Thank you. Good evening. Hilton, pace growth this quarter just notably outpaced realized revenue growth, which, you know, obviously resulted in a lower all-in, you know, price per case in the quarter. I was hoping you could maybe break that apart a bit. You mentioned higher promotional investments this quarter. But obviously, we have also got mix factors both geographic and within the segments. You know, strategic brands outpaced Monster. So just a little bit of if you could just dissect the different drivers of the lower price per case and just call anything that may be anomalous or unique to this quarter versus something that is more extrapolatable. Thank you.

Hilton H. Schlosberg: Thank you. Yeah. I think you answered your own question, to be honest, because as we look at the quarter, you know, 41% of sales internationally is kind of a first, and, you know, you know the impact of gross margin of international versus domestic. Secondly, you know, we are internationally selling a significant amount now of affordable brands. And you correctly spoke about the strategic brand segment growing faster than the energy drinks, the Monster Energy drinks segment in the quarter. So all of those factors, geographic mix, product mix, sales mix, all contributed to the results that you are talking about.

Operator: Thank you. And our next question today comes from Rob Ottenstein with Evercore.

Rob Ottenstein: Great. Thank you very much. Hilton, early on in the call, you mentioned I got I couldn't quite follow you. You mentioned something about, I thought, changing the visual identity on the UltraLine, and then there was something about Unleashed. And I somehow it came in and out, and I didn't quite follow exactly what you are saying. But if maybe you could talk a little bit more detail on what you are doing and why you are doing it, given that the UltraLine has been so successful?

Hilton H. Schlosberg: The UltraLine has been very successful, and it's of late, it's becoming even more successful. And all it is an objective to establish the UltraLine given a separate identity with a silver claw very similar to what we have today, but have separate coolers to be able to better merchandise the product. So it will have a new visual identity, it will have better space to increase the cooler capacity and its own coolers. And, again, promotional stacks on stores, cases on cases on the floor. And, you know, we are great believers in that part of the business.

And I think you probably noticed, as probably a lot of our investors have noticed, a lot of our analysts, is there's a whole kind of viral campaign on Zero Ultra in EMEA that's carried through to the US. And there's a significant amount of passion that we are using to build upon to, you know, really market that line more effectively.

Operator: Thank you. This concludes our question and answer session. I would like to turn the conference back over to Hilton Schlosberg for closing remarks.

Hilton H. Schlosberg: Thank you. On behalf of Monster, I would like to thank everyone for their continued interest in the company. I remain confident in the strength of our brands and the talent of not only our executive management team but also our entire Monster family throughout the world. And I am excited to be working with them all. We continue to believe in the company and our growth strategy and remain committed to continue to innovate, develop, and differentiate our brands and expand the company both at home and abroad. And in particular, capitalizing on our relationship with the Coca-Cola bottling system.

We believe that we are well-positioned in the beverage industry and continue to be optimistic about the future of our company. Thank you for your attendance.

Operator: Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.

Where to invest $1,000 right now

When our analyst team has a stock tip, it can pay to listen. After all, Stock Advisor’s total average return is 1,046%* — a market-crushing outperformance compared to 181% for the S&P 500.

They just revealed what they believe are the 10 best stocks for investors to buy right now, available when you join Stock Advisor.

See the stocks »

*Stock Advisor returns as of August 4, 2025

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. Parts of this article were created using Large Language Models (LLMs) based on The Motley Fool's insights and investing approach. It has been reviewed by our AI quality control systems. Since LLMs cannot (currently) own stocks, it has no positions in any of the stocks mentioned. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

The Motley Fool has positions in and recommends Monster Beverage. The Motley Fool has a disclosure policy.

Image source: The Motley Fool.

DATE

Thursday, August 7, 2025, at 4:30 p.m. ET

CALL PARTICIPANTS

• Chairman & Chief Executive Officer — Daniel O'Day
• Chief Commercial Officer — Johanna Mercier
• Chief Medical Officer — Dietmar Berger
• Chief Financial Officer — Andrew Dickinson

Need a quote from a Motley Fool analyst? Email [email protected]

TAKEAWAYS

• Total Product Sales-- with base business sales (excluding Vecluri) at $6.9 billion, up 4% year over year.
• Vecluri (COVID-19)-- reflecting declining COVID-related hospitalizations.
• HIV Sales-- $5.1 billion, up 7% year over year for Q2 2025, driven by demand and higher average realized prices, and up 11% sequentially due to inventory build and seasonal factors.
• Biktarvy-- and 12% sequentially, with market share in the US increasing two percentage points year over year to over 51% in Q2 2025.
• Descovy-- $653 million, up 35% year over year for Q2 2025 and 11% sequentially, representing the strongest quarter ever for the product, with US PrEP market share above 40% in Q2 2025 and unrestricted access at 88% of US covered lives as of Q2 2025.
• YES2GO (lenacapavir)-- FDA approved as the first twice-yearly injectable for HIV prevention; commercial launch initiated in late June 2025 with high awareness among healthcare providers (72% unaided, 95% aided) prior to launch, J code effective October 1, and initial Medicaid wins in California and Florida.
• Oncology: Trodelvy-- $364 million, up 14% year over year for Q2 2025, buoyed by positive Phase III ASCEND-03 and ASCEND-04 data in breast cancer first-line settings, and offset by the withdrawal of the bladder cancer indication.
• Liver Disease-- with Libdelzi revenue nearly doubling sequentially from $40 million in Q1 2025 to $78 million.
• Cell Therapy-- but up 5% sequentially, reflecting lower demand but higher realized prices and FX tailwinds; FDA removed certain REMS program requirements, reducing patient and caregiver burden.
• Non-GAAP Gross Margin-- 87% non-GAAP product gross margin, up 1% from the prior year, benefiting from favorable product mix.
• Non-GAAP Diluted EPS-- $2.01 non-GAAP diluted EPS.
• Operating Margin-- 46%, or 47% excluding acquired IPR&D expenses (non-GAAP).
• R&D Expense-- Up 9% year over year for Biktarvy, but expected to be flat for the full year 2025 compared to 2024 for non-GAAP R&D expenses.
• 2025 Guidance: Revenue & EPS-- Full-year 2025 product sales (excluding Vecluri) now expected at $27.3-$27.7 billion, up $0.5 billion from prior guidance; total product sales $28.3-$28.7 billion for full year 2025; 2025 non-GAAP diluted EPS guidance raised to $7.95–$8.25, a $0.20 increase at the midpoint.
• Capital Return-- new $6 billion repurchase program approved.
• Medicare Part D Redesign-- Management reaffirms approximately $900 million impact to HIV business and approximately $1.1 billion company-wide for 2025, with no change in full-year assumptions.
• Pipeline Milestones-- Positive Phase III results for Trodelvy were announced in April and May 2025. FDA approval and EU positive CHMP opinion for YES2GO, initiation of purpose 365 trial for once-yearly PrEP, upcoming pivotal update from IMagine-1 trial in multiple myeloma, and ARTISTRY-1 and ARTISTRY-2 HIV treatment updates expected in the second half.

SUMMARY

Gilead Sciences' (NASDAQ:GILD) quarter marked the commercial launch of YES2GO following FDA approval, with immediate uptake, strong provider awareness, and payer access progress, including expedited J code assignment and notable Medicaid inclusion. Management raised revenue and EPS guidance for full-year 2025, attributing increases to robust HIV franchise performance, especially Biktarvy and Descovy, as well as supporting strength in oncology and liver disease. Several key pipeline milestones were reached or initiated, with Trodelvy and cell therapy assets reporting significant late-stage clinical progress that may contribute to near-term portfolio expansion. Gross margin (non-GAAP) improved by 1% to 87% on favorable mix, and the company emphasized ongoing expense discipline and share repurchase commitments. No adjustments were made to assumptions regarding drug pricing policy reform impacts, including Medicare Part D and potential Medicaid MFN proposals, for full-year 2025, as legislative timing and operational safety nets are expected to mitigate short-term downside.

• Johanna Mercier explained "about 25,000 customer calls" have already been made for YES2GO in the first six weeks following launch despite a target prescriber base of 15,000, indicating rapid engagement and repeat outreach.
• YES2GO launch saw the "first prescription ... within hours of approval" and the "first product shipped within 24 hours," suggesting extensive pre-approval readiness and rapid distribution capability.
• US PrEP market expanded to approximately 500,000 active users as of Q2 2025, supported by 88% unrestricted coverage for Descovy.
• Trodelvy plus pembrolizumab achieved "an 11.2 months median progression-free survival" in ASCEND-04, a "35% improvement versus chemo plus pembro" in first-line metastatic triple-negative breast cancer, as presented at ASCO from the ASCEND-04 trial.
• FDA label expansion for Biktarvy now includes people "not virologically suppressed, with no known or suspected resistance." addressing an unmet HIV treatment need.
• No change to YES2GO revenue assumptions for 2025, as "it's still very early" in the launch and broader payer coverage is expected to drive future growth.
• Quarterly capital return included a $527 million share repurchase, part of a larger program, with board authorization for a new $6 billion repurchase capacity intended to offset dilution and enable strategic buybacks.
• In cell therapy, FDA eliminated the CAR T class REMS requirement. FDA also made additional changes to the CAR T product labels, including reducing the time patients need to remain near their treating center by 50% and driving restrictions by 75%, simplifying outpatient delivery logistics.
• Management highlighted ongoing efforts to "reduce the barriers to broaden adoption of cell therapy," with updated data indicating progress in real-world outpatient use for Yescarta.
• Active engagement with policymakers on pricing reforms continues, but management anticipates no "immediate impact at this point in time" from Medicaid MFN proposals or potential changes to US PrEP preventative guidelines.

INDUSTRY GLOSSARY

• CHMP: Committee for Medicinal Products for Human Use (European Medicines Agency body that issues opinions on EU drug approvals).
• J Code: A reimbursement code used in US healthcare billing for drugs administered by a healthcare professional.
• PrEP: Pre-Exposure Prophylaxis, a preventive treatment for people at risk of HIV infection.
• REMS: Risk Evaluation and Mitigation Strategy, an FDA requirement to ensure benefits of a drug outweigh risks.
• PBC: Primary biliary cholangitis, a chronic liver disease.
• CAR T: Chimeric Antigen Receptor T-cell therapy, an immunotherapy for cancer.
• bNAbs: Broadly Neutralizing Antibodies, used in HIV treatment and prevention research.
• Buy and Bill: A process where healthcare providers purchase and administer drugs, then bill payers.
• Step Edit: A requirement to try alternative therapies before coverage is approved for a prescribed drug.
• PD-L1: Programmed Death-Ligand 1, a protein involved in immune regulation, used as a biomarker in cancer treatment.
• MFN: Most Favored Nation, a pricing policy proposal referenced for drug reimbursement in government programs.
• IMagine‑1: The name of a Gilead-sponsored Phase 2 trial studying enido cel in multiple myeloma.
• BigLen: A development-stage combination of bictegravir and lenacapavir for HIV treatment.

Full Conference Call Transcript

Daniel O'Day: Thank you, Jackie, and good afternoon, everyone. The team and I are pleased to be here with you today to share the results of a very successful second quarter. This quarter had special significance, of course, with the FDA approval of lenacapavir or ES2GO for twice-yearly HIV prevention. I want to take this opportunity to thank the many people who contributed to this remarkable achievement. From the Gilead Sciences, Inc. teams who discovered and developed lenacapavir, to the participants in the purpose studies, as well as the KOLs, advocates, community partners, and others who have been part of the lenacapavir journey.

This is truly a milestone moment in the history of HIV with the launch of a groundbreaking innovation that could bend the arc of the epidemic. Moving to the quarterly results, we had another very strong quarter of clinical, commercial, and operational execution. Excluding VICLRII, base business sales of $6.9 billion grew 4% year over year, driven by robust growth across Biktarvy, Descovy, Libdelzi, and Trodelvy. Product sales of $7.1 billion grew 2% year over year. The strong base business performance was partially offset by lower VICLRII sales due to fewer COVID-19 related hospitalizations.

HIV had a very strong second quarter, with demand-driven growth of 7% year over year more than offsetting the anticipated headwinds from the Medicare Part D redesign. Biktarvy grew 9% year over year to $3.5 billion and Descovy grew 35% year over year to $653 million. This was Descovy's strongest quarter ever, highlighting the growth of the HIV prevention market into which we are now launching YES2Go. It is now seven weeks since FDA approval of YES2Go and we are very pleased with what we're seeing so far. Johanna and Andy will take you through our results in more detail. But overall, the strong commercial execution and operating expense discipline year to date support higher expectations for 2025.

As a result, we are increasing our revenue and EPS guidance for the full year. From a clinical perspective, the second quarter was one of the strongest in Gilead Sciences, Inc.'s history. In addition to the FDA approval of Yes2Go, we received a positive CHMP opinion from the European Medicines Agency. With more than one million new HIV infections globally each year, and over 600,000 HIV-related deaths, we believe lenacapavir is one of the most important scientific breakthroughs of our time, which brings a sense of urgency and responsibility to reach the communities most in need as quickly as possible. At the same time, we continue to fully evaluate lenacapavir's potential in the clinic.

For example, we have just initiated purpose 365, a phase three trial evaluating once-yearly lenacapavir for PrEP. Additionally, we continue to develop seven combination regimens that utilize lenacapavir-based molecules for HIV treatment. In the second half of this year, we plan to share updates from ARTISTRY-1 and ARTISTRY-2. These phase three trials are evaluating a potential new single tablet regimen combining bictegravir plus lenacapavir that could further extend the reach of Gilead Sciences, Inc.'s current HIV treatment business. Moving to oncology, we announced back-to-back positive phase three results for Trodelvy with the top-line data from Ascentyl-3 and the detailed data from ASCENT-04.

We now have data that show highly statistically significant and clinically meaningful benefit for Trodelvy across first-line metastatic triple-negative breast cancer. Trodelvy is already the leading therapy for second-line metastatic TNBC. And with these data, we look forward to potentially advancing to the first-line setting where it could benefit twice as many patients. In cell therapy, we expect to provide a pivotal update from the phase two IMagine-1 trial evaluating enetacel for multiple myeloma later this year. Given the compelling efficacy and safety data seen to date, combined with Kite's industry-leading manufacturing capabilities, we believe Inedo Cell is well-positioned as a potential best-in-class therapy for multiple myeloma. In summary, this is a very special time for Gilead Sciences, Inc.

That's underscored with our second quarter results. This highlights the strength of our R&D engine and the level of excellence in our commercial and operational execution. Having built this positive momentum, we're excited by what's to come with continued innovation that will benefit patients and drive growth across our therapeutic areas. With that, I'll hand over to Johanna.

Johanna Mercier: Thank you, Dan, and good afternoon, everyone. We had another very strong quarter of commercial execution, culminating with the launch of YES2GO following FDA approval in late June. Second quarter product sales excluding Veclory of $6.9 billion were up 4% year over year, primarily driven by 9% growth in Biktarvy and 35% growth in Descovy. We also delivered encouraging contributions from Libdelzi in its third full quarter of commercial launch, and Intradalvi, partially offset by lower HCV sales following a very strong second quarter in 2024. Sequentially, sales in our base business were up 10% driven by growth in HIV, oncology, and liver disease. Including Veclary, total product sales of $7.1 billion were up 2% year over year.

While VICLARI's share of US hospitalized patients treated for COVID-19 remains well over 60%, the number of patients impacted by the pandemic continues to decline. This is reflected in second quarter sales of $121 million for Vecluri, and also in our updated full-year guidance. Moving to slide eight, HIV sales of $5.1 billion represented very strong 7% year over year growth primarily driven by increased demand in addition to higher average realized price. Sequentially, sales were up 11% reflecting inventory build, and higher average realized price both typical second quarter seasonal dynamics, as well as higher demand. On slide nine, Biktarvy sales of $3.5 billion were up 9% year over year with commercial execution supporting a strong increase in demand.

Sequentially, sales were up 12% reflecting seasonal inventory build and higher average realized price, as well as higher demand. Biktarvy once again expanded its US market share and increased two percentage points year over year to over 51%. Biktarvy continues to lead in share in major markets around the world. Further strengthening Biktarvy's differentiation, FDA recently granted a label expansion to include the treatment of HIV in patients with antiretroviral history who are not virologically suppressed, with no known or suspected resistance. This new indication addresses an important unmet need for people with HIV specifically those who come off therapy and then restart treatment. This label expansion reinforces confidence in Biktarvy to get such individuals to sustained viral suppression.

Moving to Descovy, second quarter sales of $653 million increased 35% year over year with growing awareness of PrEP and unrestricted access driving both higher average realized price and higher demand. Sequentially, sales were up 11% reflecting seasonal inventory dynamics and higher demand. Partly driven by strong execution from our commercial team, and continued growth ahead of the YES2GO launch, the US PrEP market has now expanded to more than half a million users. This market continues to grow in the mid-teens year over year highlighting progress on our goal of expanding the HIV prevention market. Additionally, Descovy for PrEP's share grew once again this quarter, representing more than 40% of the US market.

Moving to slide 10, we received FDA approval of YES2GO as the first twice-yearly injection for HIV prevention in mid-June. The team has been executing what I consider to be the best-planned commercial launch I have seen to date. Revenue in the first days of launch right at the end of the second quarter reflected planned inventory build, as we expected. While it's still early days, we're extremely pleased with the feedback from both clinicians and consumers as well as the progress of our early discussions with payers and the effectiveness of our launch preparations and execution to date.

Notably, the first YES2GO prescription was written within hours of approval, with the first product shipped within 24 hours, and the first dose administered within days well ahead of our expectation. Prior to launch or any commercial engagement, YES2GO's unaided awareness among healthcare providers was at 72%, more than twice the typical prelaunch awareness with aided awareness at 95%. I look forward to sharing more about YES2GO's early performance in the coming quarters. We are well on our way to achieving our target of 75% access for YES2GO within six months of launch, and 90% within twelve months.

Outside the US, we have just received a positive CHMP opinion and expect a European Commission decision on lenacapavir in the next two months. Our launch preparations in our initial target European territories are underway. Gilead Sciences, Inc. is committed to facilitating access to lenacapavir for those who could benefit from HIV prevention, regardless of where they live. With that in mind, we recently announced a partnership with the Global Fund to bring lenacapavir to approximately 2 million people in primarily low and lower-middle-income countries over the next three years. We were also pleased that the World Health Organization and the International AIDS Society both recently announced new HIV prevention guidelines recommending the use of lenacapavir.

As we look at the rest of 2025 on slide 11, it's clear that we are seeing very strong performance in both HIV treatment and prevention. With that in mind, we're increasing our full-year sales guidance, and now expect HIV sales to grow approximately 3% in 2025 up from our prior assumption of flat revenue year over year. This updated HIV guidance is driven by strong Biktarvy and Descovy performance so far this year and our expectations for the second half. Some additional considerations. First, we've made no change to our assumption regarding the impact of Medicare Part D redesign which at the start of the year, we expected to impact our HIV business by approximately $900 million in 2025.

Excluding this headwind, HIV growth this year would be more than 7%. Second, given the recency of launch, we have made no changes to launch assumptions surrounding YES2GO. And finally, given a broad range of possible policy outcomes, our updated HIV guidance assumes no changes to the current landscape. Moving to liver disease on slide 12. Sales of $795 million were down 4% year over year following a particularly strong 2024. This reflects lower average realized price, and lower patient starts in HCV, partially offset by the very strong launch of Libdelzi as well as demand for HDV and HBV products.

For HCV, US pricing has been impacted year over year by Medicare Part D redesign, while volume was driven by the timing of purchases in both the US and internationally. In primary biliary cholangitis, we continue to be pleased with LIVDELZI's performance in the US, as well as the early launches in Europe, following approval last quarter. Overall, revenue almost doubled from $40 million in the first quarter to $78 million in the second, driven by growing second-line PBC market share, our focus on both market expansion and persistence of therapy. Looking ahead, we are particularly encouraged by the demand we're seeing for Libdelzi in new patient starts.

That said, and after a tremendously strong second quarter, we do expect sequential growth to be more moderate in the third quarter, reflecting continued growth in new patients but a slower uptake among switch patients where the cadence of physician visits remains a gating factor. Moving to slide 13. Trodelvy sales of $364 million were up 14% year over year and 24% sequentially, reflecting Trodelvy's continued strength in metastatic breast cancer and more than offsetting on a year-over-year basis the expected decline associated with the withdrawal of the bladder cancer indication in the US. Internationally, we have seen strong demand growth both year over year and sequentially, where launch momentum and share gains continue across major markets.

Building on our market leadership in second-line metastatic triple-negative breast cancer, we're working towards filing for approval in the first-line setting, based on the potentially practice-changing results from the Ascento-3 and ASCENT-04 trials. As a reminder, there are almost twice as many patients in the first-line metastatic setting compared to second-line, as well as longer duration of therapy, and we look forward to expanding the options available for patients in this earlier line setting. Cell therapy on slide 14, and on behalf of Cindy and the Kite team, second-quarter sales of $485 million were down 7% year over year, primarily driven by lower demand, partially offset by higher average realized price.

As expected, our KITE cell therapies continue to face headwinds, although sales were up 5% sequentially helped by favorable FX impact in addition to higher demand for Yescarta in the US and Ticartis globally. It's taking time to reduce the barriers to broaden adoption of cell therapy, but we're making progress. For example, FDA recently removed the CAR T class requirement for a REMS program, which we believe will reduce the burden of CAR T administration for healthcare providers, patients, and caregivers, and we're pleased to see these changes starting to be rolled out across authorized treatment centers.

FDA also made additional changes to the CAR T product labels that will have a meaningful impact on patient and caregiver quality of life. This included a 50% reduction in the time patients need to remain near their treating center and a 75% reduction in driving restrictions. We continue to believe that outpatient delivery remains key to broader cell therapy adoption. With that in mind, new real-world data shared at ASCO highlighted the viability of outpatient administration for Yescarta. This is also reflected in increasing outpatient adoption over time. Suggesting growing physician comfort, the use of Yescarta in this setting. Our efforts to educate physicians and patients on the potential benefits of a one-time CAR T treatment are also ongoing.

Most recently, we highlighted new five-year overall survival analysis from Takarta's in B-cell acute lymphoblastic leukemia at EHA. The longest follow-up of any CAR T therapy in this indication. Together, these new data support our goals of bringing cell therapy closer to patients and increasing adoption. Wrapping up our second quarter, I want to thank the commercial teams for delivering yet another strong quarter of impact for patients and financial results for Gilead Sciences, Inc. Any commercial organization is energized by new product launches, and we are so fortunate to have several new, exciting, and impactful products in our portfolio.

The YES2GO launch marks a unique moment for Gilead Sciences, Inc., and I know the commercial teams share a sense of both excitement and responsibility given the potential to truly transform the HIV landscape in the coming years. So with that, I'll hand the call over to Dietmar.

Dietmar Berger: Thank you, Johanna, and good afternoon, everyone. I'd like to start on slide 16 by recognizing the years of tireless effort across many research and development teams at Gilead Sciences, Inc., KITE, and our partners that contributed to a spectacular quarter of clinical results. In April and May, we announced positive top-line results from ASCENT-04 and ASCENT-03, that showed Trodelvy regimens demonstrated highly statistically significant and clinically meaningful efficacy with the potential to be practice-changing in first-line metastatic triple-negative breast cancer. In May and June, we shared promising early results from our next-generation BiCistronic CAR Ts in lymphoma and glioblastoma.

In June, we shared updated data from our pivotal IMagine-1 trial in fourth-line and later relapsed and/or refractory multiple myeloma that further reinforce our belief in a needle cell's best-in-class potential. And also in June, we achieved FDA approval of YES2GO, our breakthrough twice-yearly injectable for HIV prevention which we truly believe has transformative potential. We believe lenacapavir will help bring us closer to our goal of ending the HIV epidemic in the years ahead.

You have heard Johanna's excitement about the commercial launch in the US, and in July, we were pleased CHMP adopted positive opinions for our EU marketing authorization application and for EU Medicines for All, which enable a streamlined assessment for WHO pre-qualification and additional global regulatory reviews. These are critical advances in our plans to help make lenacapavir available to people who need to be protected from HIV globally. This is a moment of pride for this Gilead Sciences, Inc. team and has given me personal pause as I recognize and appreciate the brilliance of the team of scientists that we have here.

And the determination to keep out innovating ourselves to achieve the best possible experience and outcomes for those we serve. With that in mind, our work in HIV continues as you can see on slide 17, with the approval of YES2GO, we continue to target up to eight additional HIV product launches before 2033, including five that would come to market by 2030. In HIV prevention, we have initiated our phase three trial evaluating once-yearly intramuscular injections of lenacapavir for HIV prevention, now called purpose 365. If successful, this could launch as early as 2028.

In HIV treatment, we continue to expect an update on our new daily oral combination of bictegravir and lenacapavir in the second half of the year from ARTISTRY-1 in patients with HIV on complex regimens. In addition to ARTISTRY-1, we now expect to provide an update for ARTISTRY-2, the second Phase III trial for BigLen, for virally suppressed people with HIV, or people looking to switch regimens. Looking at our weekly HIV treatment programs, we expect the Phase III update on the lenacapavir plus islatravir combination in 2026, with a view to potential launch in 2027.

As we announced, our wholly-owned weekly Wonders program evaluating the combination of GS4182, one of our lenacapavir prodrugs, and GS1720, one of our long-acting integrase inhibitors, is on clinical hold pending further analysis. We're making progress on our other oral long-acting candidates and continue to expect our wholly-owned once-weekly program to be moving forward with a delay of three to six quarters. Among the rest of our leading HIV programs, three are in phase one, namely our monthly oral, and our quarterly and twice-yearly injectables. We look forward to sharing updates on these in due course. Finally, we continue to plan for our Phase III study, evaluating lenacapavir plus broadly neutralizing antibodies or bNAbs, a potential twice-yearly injectable treatment.

We continue to target commercial launch in 2030. Moving to oncology on Slide 18. Trodelvy's impact in metastatic triple-negative breast cancer was reinforced with highly statistically significant and clinically meaningful results. In the phase three ASCENT-3 and ASCENT-4 studies in the first-line setting. At ASCO, we presented potentially practice-changing detailed data from ASCENT-4, showing treatment with Trodelvy plus pembrolizumab resulted in an 11.2 months median progression-free survival. A 35% improvement versus chemo plus pembro for first-line PD-L1 positive metastatic triple-negative breast cancer. We saw an early trend for improvement in overall survival with Trodelvy plus pembro, though we would note these data are immature.

Still, these results are remarkable given the high share of patients who crossed over to Trodelvy, following disease progression in the control arm, which would be expected to mask a potential overall survival benefit. We will be filing for full approval based on the primary median PFS endpoint for both ASCEND-3 and ASCEND-4 with a potential FDA regulatory decision expected in 2026. We plan to share detailed Phase III ASCEND-3 data at an upcoming medical meeting, which will allow it to be considered for future guideline updates. These results are encouraging as we continue to evaluate Trodelvy in earlier lines of breast cancer.

In addition to ASCENT-3 and ASCENT-4, our other Phase III breast cancer programs include ASCENT-7, in chemo-naive hormone receptor-positive HER2-negative metastatic breast cancer, evaluating Trodelvy following endocrine and CDK4/6 inhibitor therapies. This is an event-driven trial and we will update you in due course. And ASCEND-05 in high-risk early triple-negative breast cancer evaluating adjuvant Trodelvy plus pembro. As would be expected with an earlier line trial, in a potentially curative setting it will be several years before we are able to provide an update. We also remain focused on clinical execution of our five other ongoing Phase III programs, for Trodelvy and dombinalimab across lung, endometrial, and upper GI cancers.

Moving to slide 19, and on behalf of Cindy and the Kite team, we were pleased to present new data from across our cell therapy pipeline at the ASCO and EHA congresses. In partnership with Arcellx, data from the IMagine-1 trial at EHA demonstrated the consistent and compelling efficacy and safety profile of enido cel. We continue to believe enido cel has the potential to offer a best-in-class profile and we look forward to presenting pivotal data from this trial towards the end of the year. As a reminder, we continue to target 2026 for a commercial launch.

From our next-generation construct at ASCO, we presented initial data from the biocistronic CD19CD20, KITE-363 CAR T, which we believe has shown a promising profile in B-cell malignancies, and we have selected KITE-363 to be evaluated in Phase I trials of autoimmune and neuroinflammatory conditions. In the second half of this year, we will decide which program to advance in hematology, choosing between our three next-generation CAR T constructs. Additionally, in collaboration with the University of Pennsylvania Perelman School of Medicine, ASCO data on the biocistronic EGFR IL-13 R8-2 CAR T strengthens proof of concept for expanding CAR Ts to treat solid tumors.

Overall, we remain excited about the potential of our next-generation therapies to offer improved efficacy and safety profiles and to reach patients faster as we work towards our goal of bringing potentially curative therapies to patients. Finally, moving to our pipeline milestones on slide 20. We have had an extremely productive and successful quarter overall. Looking to the rest of the year, we expect the pivotal update from our IMMagine-1 trial evaluating enido cel in fourth-line or later relapsed or refractory multiple myeloma, the European Commission decision on lenacapavir for PrEP, following the recent positive CHMP opinion and a Phase III update for ARTISTRY-1 evaluating BigLen in people with HIV on complex regimens.

We have also added a new milestone, a Phase III update for ARTISTRY-2 evaluating BigLen in virologically suppressed people with HIV. Together, ARTISTRY-1 and ARTISTRY-2 have the potential to support global regulatory filings that could expand the reach of Gilead Sciences, Inc.'s HIV treatment business. With that, I'll turn the call over to Andy.

Andrew Dickinson: Thank you, Dietmar, and good afternoon, everyone. Starting on slide 22, our second-quarter results show continued strength in execution across the company. Our base business was up 4% year over year to $6.9 billion driven by growth in Biktarvy, Descovy, Libdelzi, and Trodelvy. Reflecting fewer COVID-related hospitalizations, Vecluri sales were down 44% year over year, resulting in total product sales of $7.1 billion up 2% year over year. Moving to our non-GAAP results on slide 23. Second-quarter product gross margin was up 1% from the same quarter last year to 87%, driven by a more favorable product mix. R&D expenses were up 9% compared to a relatively low 2024, reflecting investments in clinical manufacturing and study activities.

I'll highlight that we continue to expect full-year R&D expenses to be roughly flat on a dollar basis from 2024, and year-to-date R&D expenses are tracking in line with our internal expectations. Acquired IPR&D expenses were $61 million in the second quarter, primarily driven by the Chimera collaboration we announced in June. SG&A expenses were flat year over year with higher sales and marketing expenses primarily related to our HIV franchise offset by lower G&A expenses. Second-quarter operating margin was 46%, or 47% excluding acquired IPR&D. The non-GAAP effective tax rate was 19% this quarter, in line with our expectations. And finally, non-GAAP diluted EPS was $2.01 for the quarter. Moving to our full-year guidance on slide 24.

We had an extremely strong 2025, driven by our HIV portfolio, and bolstered by the encouraging momentum in both Libdelvi and Tridelvi. With that in mind, we are updating our full-year 2025 guidance as follows. We now expect product sales excluding Vecluri of approximately $27.3 billion to $27.7 billion representing an increase of half a billion dollars in our base business expectations for 2025. This update reflects HIV growth of approximately 3% year over year, driven by the outperformance of Biktarvy and Descovy year to date, FX tailwinds, and softer cell therapy expectations where we now expect a modest decline for full-year 2025 versus full-year 2024. I'll note that our assumptions have not changed in the following areas.

Firstly, our assumptions for the impact of Medicare Part D redesign remain unchanged from the beginning of the year. And we expect approximately $1.1 billion of impact to our business. Secondly, while we're very encouraged by the launch dynamics of YES2GO to date, we are not updating our assumptions for YES2GO revenue in 2025 at this time. And finally, we have not updated our expectations for the impact of potential tariffs or other changes to the broader policy environment. We continue to expect the impact of known tariffs to be manageable in 2025.

Moving to slide 25, we are reducing our full-year 2025 expectations for Vecluri by $100 million, approximately $1 billion reflecting the current path of the COVID-19 pandemic including lower hospitalization rates in the first half and the trends we've seen in the first month of the third quarter. As a result, total product sales are expected to be in the range of $28.3 to $28.7 billion with a half a billion dollar increase in base business expectations partially offset by lower COVID-19 related sales. For other items in the P&L, on a non-GAAP basis, we now expect product gross margin to be approximately 86% reflecting strong performance year to date and a more favorable product mix.

We expect R&D expenses to be roughly flat on a dollar basis from 2024 which is consistent with our expectations at the start of the year. And we expect acquired IPR&D to be approximately $400 million reflecting $315 million of expenses so far this year, in addition to known commitments and expected milestone payments. SG&A expenses are now expected to decline by a mid to high single-digit percentage compared to 2024, updated to reflect higher HIV sales and marketing expenses, and other corporate expenses associated with higher 2025 base business expectations.

Rounding out the P&L, we expect operating income to be between $13 billion and $13.4 billion, our effective tax rate to be approximately 19%, consistent with our prior guidance, and we expect our full-year diluted EPS to be between $7.95 and $8.25 an increase of 20¢ at the midpoint compared to our prior guidance. Looking ahead, we will continue to monitor the macro landscape carefully, we expect that our disciplined approach to operating expense management positions us well to adapt as needed in the months ahead. On slide 26, our capital priorities remain unchanged, and we returned $1.5 billion to shareholders in the second quarter. This included $527 million of share repurchases, currently being executed under our 2020 plan.

We expect to complete the 2020 program over the next several quarters and our board recently approved a new, $6 billion program to support continued share repurchases. These repurchases are intended to offset equity dilution at a minimum, but can also be used opportunistically as you've seen in 2025. Overall, Gilead Sciences, Inc. delivered another very strong quarter of clinical and commercial execution, supported by our disciplined operating model. As we look to the second half of the year, we believe that Gilead Sciences, Inc. is well-positioned for near-term and long-term growth and we remain focused on delivering on our strategic commitments. With that, I'll invite Rebecca to begin the Q&A.

Rebecca: Thank you, Andy. At this time, we'll invite your questions. Please be courteous and limit yourself to one question so we can get to as many analysts as possible during today's call. Again, to ask a question, press 1. And to withdraw your question, press 2. Our first question comes from Tyler Van Buren at TD Cowen. Tyler, go ahead. Your line is open.

Tyler Van Buren: Great. Hey there. Thanks very much, and congratulations on the progress. I know you'll be shocked to hear this question, but can you please elaborate on the early uptake with the YES2GO and whether you expect the early prescriptions to trend linearly from here or if it's still very early in what is expected to be more of an exponential launch curve.

Daniel O'Day: Yeah. Go ahead, Johanna, please. Thanks. Hi, Katherine. We are very surprised to get that question. Shocked.

Johanna Mercier: Tyler, thanks for the question. It's Johanna. Yeah. We're really pleased with the launch so far. And you're right. It's still early days. We're about six weeks in, but super thrilled to see what's been going on. I think number one, a lot of that has to do with the readiness of the cross-functional teams. As you know, the day that we got or I should say the hour we got the approval, everything was basically ready to turnkey and get going. So the teams have hit the ground running and, just really proud to see how they're working together in pods across the US to make sure that this happens.

We've already had over about 25,000 customer calls, executed in the field, and just understanding that our target base is about 15,000, so many of those customers have seen either a representative or a medical sales representative more than once, and that's how we see kind of the uptake and the excitement. When we think about the awareness at launch, it was already kind of double what we usually see in the industry at launch. Right? You're looking at about a 72% unaided awareness, usually, those numbers are in the thirties or so, and then, of course, our aided awareness was 95% plus.

So we really knew that as we were going into this, we were ready, and now it's up to us to pull it through. You heard me say a couple of early data points around first script within hours. Injection within a couple of days, and tracking that super closely. The piece that maybe is important to understand as well is how access is playing out here.

We've always said about 75% or so access at the six months time point and then about 90% at twelve, and the medical exceptions are basically the way people are working through this, and we have a great field reimbursement team that is there to provide that end-to-end reimbursement support to make sure we can pull through those scripts as quickly as possible, but different plans will take different times, and that's what we're obviously very conscious of. At the same time, I will say we have a couple of early wins that we're really proud of.

One, I would say, is the J code, which sometimes is, you know, having a miscellaneous J code is great, but having the J code come through is actually really important. It just simplifies the whole billing and reimbursement process. And we got confirmation that our J code is coming through for October 1. You probably know from other launches, usually, that takes at least two to three quarters. So that's a little bit ahead of our expectation.

And then we've had some early commercial wins where some plans have come in as of August 1, and then we've had also some state Medicaid wins, and namely, I just want to highlight, we have more than this, two out of the four biggest states prevention states, are California and Florida, and both of those are on formally as of August 1. So we're really pleased to see that more and more lives are getting access and working through kind of those medical exceptions as we go. And really high interest from a lot of our payers. To make sure we can have those discussions.

So we've engaged with multiple accounts, over 200 accounts we've engaged with, to make sure they have all the information they need to make those formulary decisions. And so that's what we're working through. And that's obviously going to take a little bit of time, as you know, but I think we're very well on our way to achieve our goals. So super excited. Hopefully, you can hear it, and see all the data to the proof points to support it. I think we have the right team, the right attitude, and the responsibility to make sure we really make a difference here with YES2GO and bend the curve of this epidemic. So stay tuned.

As a little bit more data comes through in the next quarter, and more to come.

Daniel O'Day: Thanks, Johanna. Thanks, Tyler, for the question. I just want to add, I'm really impressed with the team's early launch support here and we look forward to updating you in quarters to come. Can we have the next question, please?

Rebecca: Our next question comes from Terence Flynn at Morgan Stanley. Go ahead, Terence. Your line is open.

Terence Flynn: Great. Thanks so much for taking the question, and congrats on all the progress as well. Joanna, you mentioned Descovy had one of its best quarters ever. I think if you look at the growth trajectory there, it's obviously been very robust and looks to be tracking well above the 8% rate that I think is implied in your longer-term guidance for the PrEP market when you guys look out to 2030. So just wondering how durable this kind of a growth rate is given what you're seeing out there in the market and a lot of the work you're doing that you've done ahead of the YES2GO launch.

Then just one clarification, can you just comment on the accuracy of YES2GO IQVIA data for us if you have any visibility there? Thank you.

Johanna Mercier: Sure. Thanks, Terence. So a couple of things. One is the PrEP market is growing nicely at about double-digit, right, about 15% or so year on year. And that obviously has to do with a lot of the work that we've been pulling through, a lot of initiatives in the field to increase awareness about prevention and the importance of prevention. And that's why we were excited to share that those numbers are growing quite actively and we're at about 500,000 or so active users in PrEP. It's well on our way to kind of those goals that you were referring to of over a million by the mid-thirties.

We do think that there's an opportunity for us to basically continue that growth in the marketplace, especially with the excitement with YES2GO. I think the purpose one and purpose two data are just so powerful. That they're really having an impact in the field. So we will continue to drive that. To your comment around Descovy, and the incredible performance that we've been seeing with Descovy and right that 35% share a lot of that has to do with basically continued favorable access that we've seen over the last six to nine months or so where we're seeing the co-pays come down to $0 in many cases.

Our access basically jumped up a little bit, and we're now at about if you think about unrestricted access, at about 88% of total lives covered. And we are about 98% total covered lives. So about 10% still have a little bit of restriction either step edit or prior op, that's actually a big jump. And then the teams have done an incredible job with those plans that had those changes, is really to increase those shares of Descovy in those plans. So that's what you're seeing in the uptake.

What I would suggest though is that, yes, YES2GO gets traction, and ramps up over the next coming quarters, you will probably see a little bit of a decline because the intent with YES2GO is obviously to look at the total PrEP market and make sure that we're differentiating there across all the orals as well as other long-acting. So you will see a little bit of a shift in the mix, right, as we go forward. Hopefully, that addressed that question. And your quick comment on IQVIA data, listen, it's still really early, but we do believe IQVIA data is directionally aligned.

It's just some accounts, some channels are not IQVIA, as you well know, so they're not reflected in the data. We're gonna need a couple of more quarters to stabilize as you've seen in the past with other launches. Having said that, we were so pleased kind of with what we're seeing in the initial uptake, the customer response, I think I will tell you the excitement is palpable internally, externally, and I would also say that we're also tracking really closely kind of the customer uptake as well, right? So as it goes through into the reimbursement, because our teams are making sure that we can pull those scripts through.

And what really matters through IQVIA is users that are getting the injection. So we're tracking both of those, really closely. So stay tuned. But I think a couple more quarters will help us kind of normalize that data. As a reminder, we ask that you please limit yourself to one question so we can get to as many analysts as possible on today's call. Our next question comes from Umer Raffat at Evercore. Umer, go ahead. Your line is open.

Umer Raffat: Hi, guys. Thanks for taking my question and congrats on all the progress with YES2GO. I figured I'll go in a different direction on potentially a risk factor for the business. In a scenario where the industry does converge around an MFN proposal, which is focused on Medicaid, how do you see the impact to Gilead Sciences, Inc.'s business from a revenue perspective and, obviously, inclusive of the mandatory and CPI rebates, you do pay to Medicaid. Already. Thank you very much.

Daniel O'Day: Yeah. Thanks, Umer. You know, maybe I'll start, and then I'll hand it over to Johanna to talk specifically about the Medicaid portion of it. I just want to be clear that obviously we are having discussions and working with the administration on the whole topic of MFN.

I would say just as a backdrop to all this, that given the general business uncertainty in the country, and also some of the sector-specific uncertainty, it's even more important that we're at this stage in Gilead Sciences, Inc.'s history of driving forward with all these new launches controlling operating expenses, and I remind you, you know, as you know, we have, you know, just very limited patent exposure until 2033 with a very strong clinical development plan to be able to support the patients with that medicine prior to 2033. So, just put that in the backdrop.

Obviously, we very much support the concept of finding ways to have patients better afford their medicine in this country while also preserving the right ecosystem here. Now specifically related to your Medicaid question, I'll hand it over to Johanna to talk about how that could or could not impact us.

Johanna Mercier: Right. I mean, so you know Medicaid business for and HIV, I'm gonna focus on HIV, the biggest piece of our business, is around mid to lower twenties. And so that is something that is important to us. Remember, the co-pays, so the patient out-of-pocket cost for Medicaid is incredibly low. It's either $0 or a couple of dollars per script. And there's a lot of support for that. I mean, obviously, what we're tracking is also not just potential demo projects and things like that with MFN, but we're also tracking the current legislation with Medicaid as to the big beautiful bill.

And, we are tracking that realizing that most of those have implications late 2026 into '27, so no immediate impact at this point in time. Having said that, all of that said, HIV is very different. And it is a disease that obviously if you don't treat it, I think the repercussions and the consequences are not just that individual patient, it could be much broader such as a local epidemic of HIV, in the United States, and so that's why many individuals or most individuals that are diagnosed with HIV, there's really always a safety net program to support them in their treatment and whether that state programs, ADAPT programs, foundations, or even Gilead Sciences, Inc.'s patient access programs.

These are all pieces of the puzzle that we're thinking through to make sure we wrap around to make sure that those patients get coverage and access to the medicines they need. Our next question comes from Evan Seigerman at BMO Capital Markets. Evan, go ahead. Your line is open.

Evan Seigerman: Thank you for the question, and really congrats on the progress. Given the importance of the YES2GO launch and the recent changes to the HHS preventative task force, if PrEP is removed as a preventative medicine broadly, how does this change your approach to commercialization in the US, and is there a potential also impact to COVID? Thank you so much.

Johanna Mercier: I heard most of that. It's Johanna, Evan. I'll take that one. Yeah. So listen, let me start by saying the USPSTF guidance is something we truly support. We believe in preventative services. We think it's very important across all diseases, but namely in HIV when you think about prevention. The current guidelines are well enforced, they support the $0 copay. And without access restrictions or step edits or whatnot, for HIV prevention, and we believe that also includes YES2GO as we're going forward with those conversations with the plan. As I mentioned earlier, Descovy is well covered. 88% of access with no restrictions.

Having said all of that, if there was to be a change in the future, not that we foresee that, if there was to be a change, I just want to remind you that these guidelines didn't really have legs until probably less than a year ago, probably about two, three quarters ago, and before that, the prevention market was still growing very strong, same rates basically, that we're seeing today. And we were very successful with Descovy at about a 40% share or so. We're now closer to about a little bit towards the 44, 45% share now. And the market is still growing at around the same rate.

So we do believe that whether we have USPSTF that's ideal. If it was to change in any way, we still believe we could work through it and just work closer with our payers to make sure that people have access to HIV prevention moving forward just as they do today. Our next question comes from Chris Schott at JPMorgan. Chris, go ahead. Your line is open.

Chris Schott: Great. Thanks so much, and yes, congrats on the progress. I just wanted to ask about the treatment pipeline and specifically just elaborate on your confidence on the 4182/1720, the weekly treatment combo, the Wonders program, following the clinical hold announced earlier this year. I guess just kind of next updates we should be watching for on that combo and just how does that stack up relative to some of the other treatment combos that you're working on? Thank you.

Daniel O'Day: Hey, Chris. We'll get Dietmar to answer that here.

Dietmar Berger: Yeah. Thanks, Chris, for the question. Our confidence in the treatment pipeline is high, right? And remember, we not only work on weekly approaches, we also work on daily, monthly, every three months, and every six months approaches. So the pipeline is deep, we have a variety of different molecules. And if you look at 4182 and 1720, one of them is a lenacapavir prodrug, the other one is an INSTI, and we have several other molecules of those classes in our portfolio. So what we're currently doing is we're trying to understand the data further.

We're doing preclinical and clinical analysis to really isolate the observations that we had to make sure we understand which of the molecules led to that observation, and then to move forward expeditiously with one of our other molecules that we have in the portfolio in a new combination to really get that weekly treatment opportunity to patients. I also want to mention that we have our Phase III island program. It's led islatrovir and lenacapavir, ongoing, which is, you know, currently in phase three, the next update on that program is coming 2026 and the estimated launch for that one is in '27.

With regards to our wholly-owned program, kind of the Wonders program and the succession of that, we will update you in due course.

Rebecca: Our next question comes from Geoff Meacham at Citibank. Geoff, go ahead. Your line is open.

Geoff Meacham: Alright. Great. Hey, guys. Thanks for the question. You had another one on YES2GO. It seems like the OUS contribution, I think it's gonna be much bigger when you compare to Descovy or Truvada in PrEP. You know, Johanna, I'm not asking for guidance, but when you think about the US versus OUS contribution for HIV treatment, could that ultimately mirror what you will see in PrEP kind of at the peak? I guess that's what I'm asking is that the outside of the US market is one that's sort of novel and new for you guys and want to get some context there. Thanks.

Johanna Mercier: Thanks, Geoff. I do think that you're right. I think there's a broader opportunity with YES2GO ex-US, and a lot of that has to do, right, with Descovy, we were kind of challenged in many markets to compare it with Truvada. And Truvada was generic in many of those markets. With YES2GO, I think with the innovation, the transformational value that we are bringing for markets that truly recognize the need for something else in HIV prevention and recognize the value of lenacapavir and what it brings to their populations or their specific target populations where you see an HIV incidence that is very high.

I really do think there's an opportunity for us to have a broader footprint than just where we are today with Descovy, for example. And so I think at, you know, to your point at stable at steady state or at peak, I do think maybe that'll take a little bit of time because I think the challenge from a reimbursement standpoint will not be simple.

But I do think for the countries that have literally said and been very outspoken that they want to bend the curve or that they're not meeting their 2030 targets, which nobody is, this is really an opportunity for us to partner with those stakeholders and make sure that YES2GO is available for those countries. Our next question comes from Mohit Bansal at Wells Fargo. Mohit, go ahead. Your line is open.

Mohit Bansal: Great. Thank you very much. And, Joanna, you are very popular today. So one more for you. So the question is, regarding the logistics as well as the safety side of it. So just wanted to understand for YES2GO the logistics dynamic because this is a prescriber base that is used to orals, and now they're going to use an injection, which is also a doc office. So how are you navigating that? And would it take some time to help understand prescribers the entire dynamic? Would love to understand that. Thank you.

Johanna Mercier: Sure. Sure. And, you know, as we were preparing for this launch, we were leveraging a lot of the learnings of past launches in this space or launches that went from an oral to injectable, just to understand what we needed to do to prepare for it. And one of the key things was education. And making sure that with optionality flexibility, for where they go. So at launch, we were able to offer our customers RHCPs, the clinics, to make sure that they understood that they could prescribe it and do buy and bill in their office.

We also offer them to make sure that if they could prescribe it and then send the script to a specialty pharmacy and they would do all the background work and then send the product back for the injection with the user. Consumer, and or if they didn't want any of that, they could go to an alternate site of care and basically just send with the script the consumer to that alternate site of care for their injection. And do all the reimbursement background work. So, I think we set it up with a lot of flexibility. And what we're seeing, although very early, what we're seeing is exactly kind of what we thought.

We thought at the beginning, we're gonna see a lot heavier towards specialty pharmacy, the buy and bill would be more the clinics that were already doing buy and bill in the past. And a little bit of alternate site of care is happening as well, but few and far between. And so I think it's still very early to kind of assess where that looking for, but I will say one of the biggest is I talked a little bit earlier around cross-functional network and partnership.

The teams are set up across the US so that they have a full cross-functional team, whether it comes with nurse educators, field reimbursement, the medical representative, the commercial sales representative, and they work together in pods what they've done is actually set up meetings with a lot of these clinics around the country together so that they can answer all the questions at the same time to navigate the logistics, for YES2GO. And that has apparently had incredible success. Our customers aren't used to that.

And they've been incredibly appreciative and satisfied with what we've been bringing so that they have all their answers when they need it, so that they can put pen to paper and prescribe for their patients. And so I think we're managing it incredibly cross-functionally and making sure that we simplify the complexity of the logistics, but making sure the customers see it as simple. And so that's our goal. Our next question comes from Courtney Breen at Bernstein. Courtney, go ahead. Your line is open.

Courtney Breen: Hi. Well, thanks so much for taking my question today. Probably another one for Johanna, I think. You spoke a little bit about kind of you being surprised positively so far in the YES2GO launch around access and around kind of the connecting of the dots the team has been able to achieve and the scripts and the actual injection rates. Why didn't you raise the launch expectations or the guidance as you thought about kind of the YES2GO launch for the remainder of this year?

What are the things that are still marks in your mind that would give you confidence to kind of raise your own expectations in terms of this launch for the early parts and what we might see this year? Thank you.

Johanna Mercier: Courtney, great question. And I think I would answer it with two ways. One is it's still very early. Right? We're six weeks into the launch, so that's one. Two is access is critical here. And so we're managing, you know, one-off on medical exceptions every time, you know, our field reimbursement team hears that there is a little bit of a block somewhere. And we're working through it with the plan. But I think more importantly, we really need to see the number of covered lives increase over the next quarter or two to really see that momentum and really pull through those intake calls into scripts and injections.

And so that's kind of the piece that we're waiting to see. And so I think you can ask me that question again in a couple of quarters, and we'll go from there. Our last question comes from Carter Gould at Cantor. Carter, go ahead. Your line is open.

Carter Gould: Great. Thank you. Good afternoon. Congrats on all the YES2GO progress. Maybe just switch things I just wanted to ask on sort of your continued confidence on enido cel approvability based on a single-arm study. I'm familiar with the feedback your partner received some time ago, but since then, there's been bispecific approvals, competitor CAR Ts have had confirmatory data coupled with obviously no shortage of disruption across CBER and FDA. So just how you get comfortable with the feedback from years past still applies and if there's been ongoing feedback that bolsters that confidence. Thank you.

Dietmar Berger: Yeah. I know we're not communicating our regulatory strategy other than to say that we are continuing to have conversations with the FDA and are looking forward to launching in 2026. We don't have any major shifts in the things that we've communicated before and are looking forward to filing enido cel.

Daniel O'Day: Great. This is Dan. I just want to thank everybody for your questions today and for joining the call. Maybe it's just a couple of closing comments from my side. As we've shared today, this has been a really successful second quarter with growth drivers from all three of our therapeutic areas contributing to the 4% growth in the base business. More than offsetting the anticipated headwinds we have from the Medicare Part D redesign just to remind you all, we're incredibly proud, you know, of and much of the call was devoted to this to have delivered the world's first twice-yearly prevention for HIV with lenacapavir in the US, it's really off to a very strong start.

Continue to update on the quarters with that. But in addition, of course, we have the positive CHMP opinion on YES2GO and a great start. Overall with the launch. So we're incredibly, you know, impressed and proud of where we believe this will go. And overall, it's also been one of our strongest clinical quarters we've ever had. You know, we didn't speak about it so much today, but in addition to that, we had the back-to-back positive Phase III results for Trodelvy and we just finished with the last question on enido cel and cell therapy and the broader cell therapy pipeline, I would say. And this top-line performance is transforming down to the bottom line.

And it's a really special time at Gilead Sciences, Inc. with so many launches, imminent launches. YES2GO, Libdelzi, Trodelvy first line potentially coming up as well as enido cel. So, it's a strong time for the team. I just want to take this opportunity to thank the Gilead Sciences, Inc. team for their incredible efforts they're putting into driving this level of innovation. Want to thank all of you for joining us today. As usual, our IR team is available for follow-up and any questions that you have. We wish you a great rest of your day, and thank you for your interest in Gilead Sciences, Inc.

Where to invest $1,000 right now

When our analyst team has a stock tip, it can pay to listen. After all, Stock Advisor’s total average return is 1,046%* — a market-crushing outperformance compared to 181% for the S&P 500.

They just revealed what they believe are the 10 best stocks for investors to buy right now, available when you join Stock Advisor.

See the stocks »

*Stock Advisor returns as of August 4, 2025

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. Parts of this article were created using Large Language Models (LLMs) based on The Motley Fool's insights and investing approach. It has been reviewed by our AI quality control systems. Since LLMs cannot (currently) own stocks, it has no positions in any of the stocks mentioned. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

The Motley Fool has positions in and recommends Gilead Sciences. The Motley Fool has a disclosure policy.

Image source: The Motley Fool.

DATE

Thursday, Aug. 7, 2025, at 4:30 p.m. ET

CALL PARTICIPANTS

• Chief Executive Officer — Peter Jackson
• Chief Financial Officer — Rob Coldrake
• Group Director of Investor Relations — Paul Tymms

Need a quote from a Motley Fool analyst? Email [email protected]

RISKS

• CEO Jackson said, "We were, of course, disappointed to see the state of Illinois introduce a wager fee on July 1, which unfairly impacts our recreational lower handle customers and significantly increases operating costs in the state."
• CFO Coldrake stated net income (GAAP) was reduced by 88% year over year for the second quarter of 2025, driven by an increase in non-cash charges related to the Fox option valuation, amortization of acquired intangibles, and higher income tax expense.

TAKEAWAYS

• Group revenue growth-- 16% year-over-year group revenue growth, with adjusted EBITDA up 25%.
• Net income-- Net income reduced by 88% year-over-year, primarily due to an $81 million non-cash Fox option charge compared to a $91 million credit in the second quarter of 2024, and increased amortization and income tax.
• US revenue-- Revenue was 17% higher year-over-year, with Sportsbook revenue up 11% and iGaming revenue up 42%.
• US adjusted EBITDA-- Adjusted EBITDA of $400 million, up 54%, and adjusted EBITDA margin was up 530 basis points, driven mainly by a 440 basis point reduction in sales and marketing as a percentage of revenue.
• International revenue and EBITDA-- $2.4 billion in revenue and $591 million in adjusted EBITDA, representing 15% and 13% growth, respectively; SNAI and NSX contributed 11 percentage points to year-over-year revenue growth and 7 percentage points to year-over-year EBITDA growth.
• International EBITDA margin-- 24.7%, a 40 basis point reduction reflecting investment in Brazil.
• Net cash from operating activities-- Net cash from operating activities increased by 11% year-over-year, while free cash flow fell by 9% due to M&A and higher technology investments.
• Available cash and net debt-- Available cash rose to $1.7 billion, and net debt was $8.5 billion, with leverage at 3.0x last twelve months adjusted EBITDA (including SNAI).
• Share repurchases-- $300 million in share repurchases completed; up to $1 billion anticipated for 2025 share repurchases, and $5 billion over three to four years.
• Guidance upgrade-- Group revenue is now expected at $17.26 billion, and adjusted EBITDA (non-GAAP) at $3.295 billion, representing 23% and 40% year-over-year growth, respectively, for full-year 2025 adjusted (non-GAAP) group revenue and adjusted EBITDA guidance compared to full-year 2024.
• US 2025 outlook-- Revenue guidance for the US is $7.58 billion, and adjusted EBITDA is $1.245 billion, representing 31% and 146% year-over-year growth, respectively, for expected 2025 US revenue and adjusted EBITDA compared to 2024.
• International 2025 guidance-- Revenue expected at $9.68 billion, and adjusted EBITDA at $2.3 billion for international operations, reflecting 17% and 11% year-over-year growth, respectively, for international revenue and adjusted EBITDA in 2025.
• FanDuel ownership-- 100% ownership secured via Boyd deal, which is expected to generate approximately $65 million in annual cost savings.
• Migration and cost savings-- Nine million Sky Betting and Gaming customers migrated to the shared UKI platform; $300 million cost savings expected by 2027.
• Platform synergies-- SNAI and PokerStars integrations advancing; over 30% online market share in Italy.
• Illinois surcharge-- A 50¢ fee per bet introduced to mitigate state-imposed wager fee starting September 1.
• US live betting and product innovation-- Live betting accounted for over half of US handle; same-game parlay live is the fastest-growing component.
• Cost efficiency-- CFO Coldrake said payment processing fee reductions provided a 90 basis point margin benefit. Fraud and other cost efficiencies are ongoing.
• Acquisition strategy-- Two major deals completed: SNAI (Italy leadership) and NSX (Brazil scale), expanding international leadership and platform.

SUMMARY

Flutter (NYSE:FLUT) Management emphasized that operational momentum, platform migrations, and product innovation delivered material improvements in key markets. Strategic actions included achieving 100% ownership of FanDuel, reshaping US market access agreements, and integrating international assets, thereby expanding market share in Italy and Brazil. Cash generation and disciplined capital returns remain management priorities, with leverage expected to moderate following recent M&A activity.

• CEO Jackson stated, "In the US, we maintained our clear position as the number one online operator in both Sportsbook and iGaming," explicitly confirming market leadership.
• CFO Coldrake affirmed that recent cost transformation milestones and technology investments have strengthened conviction in reaching the $300 million cost savings target by 2027.
• Guidance for full-year 2025 incorporates a $100 million positive impact from US sports results, a $40 million adverse impact from new state taxes, and a $20 million timing benefit from the later Missouri launch.
• Management asserted that Illinois is considered an outlier for punitive tax measures, as evidenced by the introduction of a wager fee on July 1, and management's statement that lawmakers generally will recognize the importance of adopting a balanced approach, with mitigation approaches in place and no expectation of similar measures elsewhere at this time.
• No in-house iGaming content has been introduced to FanDuel yet, though exclusive third-party titles have driven notable engagement; future plans could include leveraging internal studios to optimize costs and differentiation.

INDUSTRY GLOSSARY

• Flutter Edge: Proprietary multi-segment technology and product development platform providing operational, data, and cost advantages across the group’s global portfolio.
• AMPs (Average Monthly Players): Key operating metric representing the average number of unique users active each month.
• SNAI: Leading Italian online and retail betting brand acquired by Flutter in 2025.
• NSX: Entity involved in transactions expanding Flutter’s presence in Brazil.

Full Conference Call Transcript

Operator: Good afternoon, ladies and gentlemen, and thank you for standing by. My name is Kelvin, and I will be your conference operator today. At this time, I would like to welcome everyone to the Flutter Entertainment's Second Quarter 2025 Update Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star one again. Thank you. I would now like to turn the call over to Paul Tymms, Group Director of Investor Relations.

Please go ahead.

Paul Tymms: Hi, everyone, and welcome to Flutter's Q2 update call. With me today are Flutter's CEO, Peter Jackson, and CFO, Rob Coldrake. After this short intro, Peter will open with a summary of our operational progress, and then Rob will go through the Q2 financials and updated guidance for 2025. We will then open the lines for Q&A. Some of the information we are providing today, including our 2025 guidance, constitutes forward-looking statements that involve risks, uncertainties, and other factors that could cause actual outcomes or results to differ materially from those indicated in these statements. These factors are detailed in our earnings press release and our SEC filings.

In addition, all forward-looking statements are based on current expectations, and we undertake no obligation to update any forward-looking statements except as required by law. Also, in our remarks or responses to questions, we will discuss non-GAAP financial measures. Reconciliations are included in the results materials we have released today, available in the Investors section of our website. And I will now hand you over to Peter.

Peter Jackson: Thank you, Paul. I'm delighted to report a strong set of results for the quarter. Across the group, our operational performance was excellent, and we are making meaningful progress against our strategic priorities. This, in turn, is driving our strong financial performance. During Q2, we saw around 16 million average monthly players engaging with our products, driving revenue 16% ahead year over year and adjusted EBITDA 25% ahead. While increased non-cash charges resulted in net income reducing by 88% year over year, cash from operating activities was $36 million higher. Before I provide an update on our US and international businesses, I would like to update you on the excellent progress we are making against our strategic priorities.

Starting with our transition to the US. Following our move to US primary listing in May, Flutter Entertainment plc has become a well-established business within US capital markets. This is demonstrated by inclusion in both the Crisp and Russell indices during Q2, and increased levels of liquidity we now see for Flutter stock. We also believe we remain very well placed with other major US indices. Secondly, we continue to demonstrate our credentials as an end business, deploying capital at high returns organically, through M&A, and returning cash to shareholders. This is again evidenced in July with the extension of our US market access partnership with Boyd.

This deal increased our ownership of FanDuel to 100% at an attractive valuation and also secured US state market access at much more favorable terms. This is also a great example of the longer-term cost levers we have available, which help underpin our confidence in the delivery of our long-term adjusted EBITDA margin targets. Thirdly, on the US regulatory front, I believe our sector is making meaningful progress in encouraging lawmakers to adopt a balanced tax strategy which promotes market growth and investment. We believe our substantial US scale positions us well to mitigate tax changes.

This is based on a direct mitigation perspective as well as benefiting from the market share gains we typically observe market leaders experience over time when regulatory changes are introduced. We were, of course, disappointed to see the state of Illinois introduce a wager fee on July 1, which unfairly impacts our recreational lower handle customers and significantly increases operating costs in the state. As previously announced, starting September 1, we will introduce a 50¢ fee on each bet placed in Illinois to help mitigate this impact. We are confident, as evidenced by the majority approach to date, that Illinois is an outlier and that lawmakers generally will recognize the importance of adopting a balanced approach.

Fourthly, the events contract landscape continues to develop at pace. We have two decades of experience operating the world's largest betting exchange, the Betfair Exchange, which shares similar characteristics with events contracts. This will help inform our views. We are closely monitoring regulatory developments and are assessing opportunities and potential participation strategies this may present for FanDuel. In our international markets, we were able to complete the SNAI and NSX transactions during the quarter, creating a leadership position in Italy and establishing a scale position in Brazil. In Italy, SNAI integration plans are well underway, and our good progress means we have increasing confidence in our synergy targets.

We finished the quarter with over 30% share of the online market, and our attention is now on bringing SNAI customers onto the SEA's market-leading online platform in 2026. Finally, in the newly regulated Brazilian market, we retain a strong conviction that the market opportunity will be very significant and that those operators with scale and the best product will win the largest share of the market. Leveraging the Flutter Edge and local management expertise, our strategy is to elevate our Brazilian proposition. We've targeted quick wins in product and marketing, which we expect will deliver significant improvements to the customer proposition on both Sportsbook and iGaming over the next twelve months.

We believe this will place us well for future success. I'll now take you through progress in our US international businesses during the quarter. In the US, we maintained our clear position as the number one online operator in both Sportsbook and iGaming. We had a great quarter, with revenue growth of 17%, benefiting from the highest gross revenue margin month on record in June for Sportsbook, and excellent iGaming momentum. Our phenomenal iGaming performance, with revenue 42% ahead and AMPs up 32%, is clear evidence of the benefits of our very strong product roadmap.

We launched our FanDuel Rewards Club to all iGaming customers in April and added the second installment of our very successful exclusive Huff and Puff series. Leveraging the Flutter Edge, by the proprietary platform we migrated to last year, we also added a record volume of new titles to the platform. In Sportsbook, continued product improvements drove growth in player frequency, with team handle 7% higher year over year. AMPs were 4% lower as we lapped our very successful North Carolina launch in the prior year when we delivered significant population penetration during the opening months. Activity on the NBA playoffs was encouraging, with four separate seven-game series, including the finals, helping to drive better engagement than expected.

On the sportsbook product, we continue to deliver innovative and engaging features to our customers. Harnessing our next-generation pricing capability, we added same-game parlay plus and profit boost functionality to our Your Way feature during the NBA playoffs. We've been really pleased with engagement and are looking forward to offering a broader product proposition in the upcoming NFL season. FanDuel's same-game parlay experience continues to be by far the standout proposition in the market and underpins the further expansion in our structural gross revenue margin to 13.6% during the quarter. Building on the success of our parlay your bracket offering for March Madness, we added similar features for NHL and WNBA during Q2.

We also expanded same-game parlay live to tennis for the first time, delivering a record Wimbledon for FanDuel. On MLB, our batter-up feature allows customers to pilot outcomes for the next three batters up, was rolled out for all live games, and has been resonating well. These product enhancements supported strong live betting volumes in the period, with live betting making up over half our handle in Q2, and same-game parlay live our fastest-growing component. A seamless live proposition was key to this growth.

As we leverage our global live betting expertise, the Flutter Edge, this includes winning at the core fundamentals, such as optimized in-game settlement, and ultimately delivering an overall player experience that minimizes friction and maximizes ease of use. Our international performance continues to be positive, benefiting from both our scale and diversification. We delivered year-over-year revenue growth of 15% in the quarter, with the benefits of the SNAI and NSX acquisitions. We saw good product delivery in the quarter driven by our focus on the Flutter Edge and have recently launched MyCombo to see sales sportsbook in Italy ahead of the new soccer season.

This same-game parlay proposition is a market first and represents a step change in product differentiation made possible by our global scale and deep industry expertise. In July, we also launched Flutter's first bingo network following the successful partnership between CSAL and Tumbola, which brings the latter's innovative product and deep liquidity pool to SUSO's Italian online bingo customers. We are also executing our cost efficiency program as we successfully migrated 9 million Sky Betting and Gaming customers onto our shared UKI platform. This will give customers access to new exciting features, which will include a version of our super sub product in time for the upcoming European football season.

Reactions to the new Sky Bet customer proposition have been positive, and early performance on iGaming has been very strong. The PokerStars transformation is another significant pillar of the program. We delivered our largest milestone to date in Italy in July with the migration of PokerStars Italian customers onto the shared SEA platform. In conclusion, looking ahead to the remainder of the year, our strong performance in 2025 underlines the strength of Flutter's fundamentals. I feel confident as we head into 2025. Our performance in Q2 positions us well to deliver on our strategic objectives and execute strongly throughout the content-rich calendars for NFL, NBA, and European soccer during the remainder of the year.

I'll now hand you over to Rob to take you through the financials.

Rob Coldrake: Thanks, Peter. I'm really pleased to be presenting you with a strong set of results for the second quarter. Group revenue increased by 16% and adjusted EBITDA grew 25%, driven by the sustained earnings transformation of our US business as it rapidly scales. The benefit of the NSX and SNAI acquisitions and continued growth in international. Group net income was impacted by an increase in non-cash charges. This primarily related to the Fox option valuation, which was a charge of $81 million versus a credit of $91 million in the prior year.

Other movements included the amortization of acquired intangibles related to the new acquisitions and the PokerStars and Sky Bet transformations and an increased income tax expense as historic losses were utilized in 2024. Together, this drove an 88% year-over-year reduction in net income. Adjusted earnings per share grew 45% while earnings per share decreased to 59¢ from $1.45 in Q2 2024 due to the impact of the non-cash items I've just outlined. Turning to the US. Revenue was 17% higher, including sportsbook growth of 11% and exceptional iGaming growth of 42%. Adjusted EBITDA of $400 million was up 54% and EBITDA margin was 530 basis points higher, driven by strong operating leverage.

This came primarily from sales and marketing, which decreased by 440 basis points as a percentage of revenue against heightened investment in North Carolina's launch last year, as well as our decision to reallocate some marketing spend from the quarter into the second half of the year. In international, revenue of $2.4 billion and adjusted EBITDA of $591 million for the quarter reflected growth of 15% and 13%, respectively, as the inclusion of the SNAI and NSX acquisitions contributed 11 percentage points to the year-over-year revenue growth. The result was driven by strong underlying performance in SEA, despite lapping the European football championships, and more favorable sports results in 2024.

This contributed to excellent iGaming growth of 27% for the division, with notably strong performances in UKI, APAC, and CEE. Adjusted EBITDA increased by 13% year over year, with the acquisitions of SNAI and NSX contributing seven percentage points of growth and EBITDA margin reduced by 40 basis points to 24.7%, reflecting our ongoing investment in Brazil. As Peter previously outlined, I've been really pleased with the progress on our cost transformation program. With the delivery of the PokerStars and Sky Bet migrations in Q2, important milestones on this journey. Progress to date gives me even more conviction in achieving the $300 million savings that I shared with you at our Investor Day last September.

We continue to expect the majority of the $300 million savings to arise in 2027, following the final planned migration from the PokerStars technology stack in 2026. From a cash flow perspective, net cash from operating activities increased by 11%, driven by the earnings growth I previously referenced. Free cash flow reduced by 9%, driven by the acquisition of SNAI and higher investment in our technology platforms in Q2 than in the prior year. This technology investment continues to pay dividends as we harness the Flutter Edge and continue to innovate at pace.

Available cash increased quarter on quarter to $1.7 billion, while net debt for the quarter was $8.5 billion, with leverage three times our last twelve months adjusted EBITDA, including SNAI. As Peter already highlighted, we extended our access agreement with Boyd in July, which we expect will deliver approximately $65 million in annual cost savings. We purchased Boyd's 5% holding in FanDuel at an attractive price, which has been financed through additional debt on competitive terms. We therefore expect our leverage to increase in the near term but then reduce rapidly given the highly visible and profitable growth opportunities that exist across the group.

We remain committed to our medium-term leverage ratio target of two to two and a half times. We continue to return capital to shareholders through our share repurchase program, with total repurchases of $300 million in the quarter. We still expect to return up to $1 billion to shareholders via this program during 2025. As an end business, we are highly disciplined allocators of capital. We expect to return up to $5 billion of cash to shareholders over a three to four-year period, while also maintaining the flexibility to invest significant amounts of capital both organically and inorganically. The Boyd deal is a great example of both this flexible approach and the value we believe we can create.

Moving now to the outlook for 2025. Performance since our Q1 earnings from previous guidance was set has been positive. We are upgrading our full-year adjusted EBITDA guidance to include a $100 million positive impact of US sports results, a $40 million adverse impact from US tax changes in Illinois, Louisiana, and New Jersey, which we expect to be almost entirely mitigated by the Boyd market access savings, and finally, a $20 million benefit due to the timing of our anticipated launch in Missouri moving later to December. We therefore now expect group revenue and adjusted EBITDA of $17.26 billion and $3.295 billion respectively at the midpoint, representing 23% and 40% year-over-year growth.

Our improved US outlook includes expected 2025 revenue and adjusted EBITDA of $7.58 billion and $1.245 billion respectively, representing year-over-year growth of 31% and 146%. Foreign currency changes since our previous guidance are not material, and therefore, international revenue and adjusted EBITDA guidance of $9.68 billion and $2.3 billion is reaffirmed, representing year-over-year growth of 17% and 11%, respectively. Additional information on guidance is available in today's release, including additional income statement and cash flow items. With that, Peter and I are happy to take your questions. I hand you back to the operator to manage the call.

Operator: Thank you. Ladies and gentlemen, we will now begin the question and answer session. As we enter the Q&A session, we ask that you please limit your input to two questions. I would like to remind everyone to ask a question. Please press the star button followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star one again. Your first question comes from the line of Ed Young of Morgan Stanley. Please go ahead.

Ed Young: Good evening. My first question is on US marketing. Your gross profit was a little bit better than we had, but your contribution was a lot better in your marketing. It's already in your Investor Day range a couple of years early. And in absolute terms, you mentioned the year-on-year North Carolina telling, but it's actually almost exactly flat with what it was in '22 and '23. I wonder if you could talk a little bit about the drivers of efficiencies and leverage in that line. And can you quantify how much the benefit was from the reallocation into Q4? The second question is on prediction markets.

One of your peers says they're actively exploring and is now explicitly guiding x prediction market investment. And your other main peer is saying it has no desire to be a first mover. And no presumption it has a right to win in that space. So where on the scale has your thinking got on the opportunity to this point, and how should we think about potential investment either this year or into later years? Thanks.

Peter Jackson: Evening, Ed. Let me pick up the prediction market one first, and then Rob will come in and talk to you about the US marketing. Look. With prediction markets, it's clearly a fast-moving space. And for, you know, for those of you on the call who are a bit less familiar with our business, it's worth remembering that we've got sort of two decades of experience operating the world's largest betting exchange, the Betfair Exchange. You know, we offer this product in lots of markets around the world, and it shares some similar characteristics with event contracts, which will obviously be helpful to us as we consider the landscape and any developments.

But, you know, as you said, we're evaluating the various regulatory developments and assessing the potential opportunity this may present for FanDuel. You know, naturally, we've got a lot of important stakeholders that we need to consider, so we're watching this space very closely.

Rob Coldrake: Yeah. Hi, Ed. Just picking up on the sales and marketing question. Obviously, you look at it year on year, we're about four percentage points lower quarter versus quarter. Of that is due to the maturing state profile. We also have the North Carolina launch, if you remember, in Q2 last year. And, you know, as we said proactively in our statement, we have faced some marketing into H2, which will help us in front of a very busy new NFL and NBA season. So which we're looking forward to.

Ed Young: Are you able to quantify that phasing? Are you or you're not?

Rob Coldrake: It's broadly 20 to 25 million.

Ed Young: Thank you.

Operator: Your next question comes from the line of Jordan Bender of Citizens. Good afternoon. Thanks for the question. I want to continue on the conversation with prediction markets for a second, but not the will you or won't you, but rather kind of how you underwrite the risk. So you know, I guess the question is, you know, the total capital outlay could be quite significant. How do you get comfortable investing that type of money given the backdrop that you know, potentially three years from now, there could be a different US administration or even change of political party here in the US? And then the second one, I want to touch the Illinois surcharge.

Was that done on a state basis, or should we view that more as a company policy moving forward that you could look to utilize if states do increase taxes in the future? Thank you.

Peter Jackson: Hey, Jordan. Look. I'll follow the prediction market stuff. But, you know, we're not going to speculate on the, you know, the different ways in which we're assessing this opportunity and what are the potentials of, you know, costs pros and cons of different opportunities are. This is not worth speculating at this time. As it pertains to your second question, the Illinois surcharge, I mean, we're obviously very disappointed that they've pulled this tax into play in Illinois. Now we think it really will hurt the sort of recreational customers and ultimately risk fueling the black market, which is not good for, you know, integrity of sports.

It's not good for player protection, and it's certainly not good for collection of revenue to the state. You know, we didn't think it's a good idea, but, you know, we've introduced this fee, which I think is the fairest way to deal with it. And so we think Illinois is an outlier. We don't expect this to happen anywhere else. Yeah. We will introduce the fee. We'll see what happens.

Jordan Bender: Great. Thanks.

Operator: Your next question comes from the line of Barry Jonas of Truist Securities. Please go ahead.

Barry Jonas: Guys. Just to follow-up on Illinois. Is the transaction fee mitigation and guidance assume the fee is taxable? And if it doesn't, does that change your could that change your strategy at all, whether that's moving to a minimum adjusting pricing or anything else? Thank you.

Rob Coldrake: Yeah. Hi, Barry. It doesn't assume that it's taxable. Obviously, we are monitoring this situation quite closely at the moment. We landed on the transaction fee. It's quite simple for our customers to understand, and it also ties directly to the legislature that was issued. It's also more straightforward to implement from a tech perspective. So you know, we're monitoring and, you know, if there are some changes around the way that the fee is perceived by the state, then we'll address that accordingly.

Barry Jonas: Got it. And then I was hoping you could spend a minute talking about maybe provide any update on how sports betting could look there and how that factors in with, you know, I believe the AG recently gave an opinion on DFS. So just curious how that all kind of comes together in the latest on California.

Peter Jackson: I mean, we've talked about California before. You know, you're right about the, you know, the AG issuing this nonbinding view around DFS. Yeah. Clearly, something in which we're following carefully. I think from our perspective, you know, we have a lot of respect for the tribes and, you know, we will be, you know, very thoughtful about, you know, making sure that, you know, we are, you working with them and listening to them. You know, they're clearly the important stakeholder in the state of California, and we have a lot of respect.

Barry Jonas: Great. Thank you so much.

Operator: Your next question comes from the line of Jed Kelly of Oppenheimer. Please go ahead.

Jed Kelly: Hi, thanks for taking our questions. This is Josh on for Jed. Just wanted to see if you could speak to any of the early July handle trends or hold trends that you guys are seeing.

Peter Jackson: No. In fact, we're not gonna comment on just current trading.

Jed Kelly: Okay. And then maybe you could touch on, I guess, how your Way parlay is kinda progressing into football and just talk about some of the highlights that you've seen in the NBA playoffs using the Your Way parlay? Thanks.

Rob Coldrake: Yeah. Your you know, as a reminder to those of you on the call, you know, Your Way is just one feature in this underlying technology we're building for our sports betting business. And we think, you know, it's gonna be very exciting for customers in the future. It's gonna be a, you know, a revolutionary approach to sports books. And, you know, will allow us to deliver, you know, a meaningful superior experience to customers. Yeah. In terms of the way in which, you know, we were able to utilize it in the NBA playoffs. You know?

We weren't we weren't pushing it, but we saw in a big skew towards, you know, same game parlay within the YourBet capability. And there's some exciting plans we've got, you know, you know, for the products as we get into the football season. Mean, clearly, not gonna put all the details of it into the to our competitors' minds right now. But, you know, rest assured, this is a foundational change that we're making. And I think when you think about how important it is to ensure you've got a broad range of markets, whether that's in live or premarket. You know, the Your Way product allows that's a huge choice.

And, you know, we think it would also allow us to sort of improve the presentation of betting to consumers as well.

Operator: Your next question comes from the line of Bernie McTernan of Needham and Company. Please go ahead.

Bernie McTernan: Great. Thanks for taking the question. Maybe just continuing on the product conversation. If you could just talk to how you're merchandising and pushing players to try same game parlay live, how the retention of those products has been, and what it means for the upcoming NFL season.

Peter Jackson: Live betting for us is something that we've been doing for years in Europe. It's a mainstay of our product offering, you know, in soccer and cricket, tennis, you know, whatever sports you think about. And in fact, you know, it's worth remembering that we invented Cash Out. So this is something that we've been really thoughtful about for a long time. And when I look at, you know, live betting in the US, there are three things which we think is really important. Yeah. One is to make sure you have a really good same game parlay proposition.

You know, people who want to go to then take the appropriate same game parlay depending on what's happening in the game. You know, let's remember sports is inherently unpredictable. And that's what makes it so much fun to watch and so much fun to bet on. So, you know, making sure that we can, you know, reduce the friction for consumers that are watching the game. They can select that same game parlay very quickly. It is important. And that's an immersive front-end experience to ensure that they can discover that, you know, that same game parlay. They can track it and then they get the scoreboards and other visualizations of four.

So, yeah, look, when we combine all those things, position first. Very well with the leading live products in the US market.

Bernie McTernan: Understood. Thank you. Then maybe just a more broad one on iGaming. Just, you know, given the impressive results accelerating in the quarter on difficult comparisons, just where can it go from here? And do you think you're expanding the market, or you're or you're taking share?

Peter Jackson: If we look at our gaming at the moment, you know, the penetration rates have still got a, you know, a long way to go. So I think that we are, you know, still, you know, early in where penetration can get to in iGaming. And we're clearly with the FanDuel business very focused on acquiring direct to casino customers. In early days, we're focused on cross-sell, but, you know, the biggest opportunity is the direct casino customers. And when I look at what we've been doing with, you know, the rewards club, exclusive content, there's a lot of great product work with them, which has been really helping push FanDuel to be number one.

And there's a long way to go, a lot more opportunities for us, big opportunities to increase penetration in the states we're operating.

Operator: Your next question comes from the line of Brandt Montour of Barclays. Please go ahead.

Brandt Montour: So guys, when I look at the guidance for '25 and the changes that you made here, it's all sort of non-core things, and you laid it out very cleanly. And I go back last quarter, you know, again, it's sort of the same thing where there was no changes to your underlying thinking. And I just want to level set for the first six months of this year, do you feel better or the same across those core KPIs, like handle hold, promo, iGaming? I know that's a sort of a convoluted question, but just want to understand the evolution of your confidence on those core KPIs. Sort of halfway through here.

Rob Coldrake: Yeah. Hi, Brandt. Yeah, I think in summary, we feel really good about the momentum that we've got at the moment. Particularly moving from Q1 into Q2, definitely seeing some strength in the underlying KPIs. Regards to the guidance for the full year, as you mentioned, it's largely mechanical, the moves. We did slightly beat our expectations for Q2 on an underlying basis. And that was a combination of the marketing phasing that I talked about earlier. And some slightly better underlying Sportsbook and iGaming performance. But listen, it's early in the year. You can't extrapolate the summer performance. We're going to take a reasonably prudent approach given the seasonality of the business.

And, you know, we're really pleased with the underlying fundamentals.

Brandt Montour: Okay. Thanks for that. And actually, another one for you, Rob, if I may. The deal with Boyd and the access agreement renegotiation. That sort of really did set a new low mark on what the value of those access fees could be worth. What is that going through that negotiation and that deal? What does that sort of make you feel about your other access agreements? Is that a one-off, or do you think there's opportunity there for you?

Rob Coldrake: Yeah. Listen. There's definitely opportunity for it. It's longer term. These are very long-term agreements. You know, they were signed a few years ago when it was a different landscape and a different backdrop to market access. So there are definitely opportunities, but we consider them as longer-term opportunities. And they will be material when they come around, but it's largely from 2030 onwards. In the meantime, as we've previously said and laid out at the Investor Day, you know, we are confident that we've got other levers within our cost of sales, you know, that can act as mitigation for other cost increases.

Brandt Montour: Right. Nice quarter, guys. Thank you.

Operator: Your next question comes from the line of Joe Stauff of Susquehanna. Please go ahead.

Joe Stauff: Thank you. Hello, Peter, Rob. I wanted to ask on FanDuel. You know, as we think about, say, your guide and the outlook in the new sports calendar, you know, how to think about your sports AMP growth and the outlook. You know, is this a season essentially where you press the monetization levers a little bit more, say, than volume levers that you've pressed historically? And then my follow-up is to that is just on the previous marketing spend question, you know, it is down. Rob, you commented on it.

But is there is FanDuel in a position where the preference is to use the promotional line versus, say, the advertising and marketing line for engagement and user growth similar to where you are in other jurisdictions, or is it too early?

Peter Jackson: Joe, hi. Nice to hear from you. I think if you go back to some of the conversations we've had historically around the acquisition, it's worth remembering that we've always been very focused on acquiring as many customers as we can whilst ever they meet us at CAC LTV criteria. You know, that's it's always been a set mainstay of the business, and it will remain so. We also think in the same way though around, you know, the application of generosity. You know, that as well.

And, you know, I think when we think about how we've been applying generosity, you know, over the course of this year and how you get it to the right customer segments, that's also really important. So I think your the characterization of this shift in volume to monetization may it may not be right, but I think we've always been very focused on, you know, that's a CAC TV dynamic. And that's what we use to drive both, you know, where and how we're applying this to generosity and also how hard to push from a customer acquisition perspective.

Rob Coldrake: Well, from an AMP perspective, Joe, clearly, you know, there's there's a couple of dynamics to this for the for the quarter now looking at it for the rest of the year. But we're obviously seeing phenomenal growth in our iGaming AMPs, which were up 32% in the quarter. We've seen a slight retracement in the sportsbook AMPs in the quarter, but as we explained that, that's largely due to the North Carolina launch last year where we effectively picked up one in 20 of the adult population at that launch. So, you know, we're feeling reasonably sanguine about the volume and the handle that we're seeing.

But as we previously articulated at Q1 and Q4, handle is just one metric that we look at. And, you know, we're seeing great frequency. We're increased frequency from our customers seeing excellent retention from those customers that we want to retain. And we continue to see the extension of our parlay penetration. So lots of strong attributes to the program.

Joe Stauff: Thank you, guys.

Operator: Your next question comes from the line of Paul Ruddy of Davy. Please go ahead.

Paul Ruddy: Hi, Peter and Rob. Just a quick one on this side of the Atlantic if that's okay on Friday. I think you would lose it to Thursday. Tap for migration. Happening in H1 2026, and you also kinda talked maybe if I don't know if I'm using the right language, but some conservatism around the synergy targets or maybe increased conviction in synergies. Could you flesh out that piece on the increased conviction and synergies a little bit? And then secondly, just on the platform migration, will it require that to happen for kind of the new product maybe you're bringing in to see.

So we brought in Smile, can you start introducing that product, the kind of FlutterEdge product into Smile fairly quickly? And then just very quick follow-up on US tax, if that's okay, just would it be a sensible assumption for next year that the known tax increases can be offset by the Boyd's renegotiation?

Peter Jackson: Hi, Paul. Look, let me just deal with SNAI, and then we'll to you about the US tax piece. I mean, yeah. I think, you know, as you as you pointed out, you know, we're planning to do a migration of the SNAI, you know, business onto the factory to CSAL platform in H1 2026. That will allow us to offer the SNAI customers the full suite of products that CSAL have access to. So things like MyCombi and, you know, the full range of products we have available. The platform. So excited about that. There are things we're doing in the meantime to provide yeah, a step up to for the client customers.

But, you know, it's not long to wait. Until that migration will happen. And, you know, I think the speed at which we can get that done, we've got our hands on the business now. And that's why we sort of we, you know, reaffirmed our confidence in our ability to hit the synergies which we reference.

Rob Coldrake: Yeah. With regards to the US taxes, so, you know, we will see a higher benefit from Boyd last year compared to next year as it annualizes. So for $65 million. As we said, it largely covers for this year. For next year, obviously, that's going to cover a significant proportion of the tax increases that we will see. I think it's important to remember a couple of the other dynamics. So we always talk about first order mitigation where think we can mitigate circa 20% in the first months and that depends on the competitive dynamics in the market. And then you tend to see a second order mitigation and kind of the benefits play out following that.

So we'd expect that mitigation to increase thereafter. So as we've said on a number of occasions, we've got Boyd but we've got a number of other tools in our kind of levers and powers as well to deploy if we do see further tax increases.

Paul Ruddy: That's really helpful. Thank you.

Operator: Ladies and gentlemen, as we resume the Q&A. And your next question comes from the line of Monique Pollard of Citi. Please go ahead.

Monique Pollard: Hello. Evening. Thank you very much for taking my question. Just one question then. Can I just ask on the US gross margin? That's coming very strong for the second quarter. You do mention in the state 90 basis points of benefit from payment processing fees and those are changes you made back in the '24. So, obviously, that then annualizes '25. But do you think there are other things that you're working on, whether it's, you know, further negotiations on payments or other things that could lead to further scaling of the non-part of the cost of goods sold?

Rob Coldrake: Yeah. Hi, Monique. Yeah. As you correctly pointed out, I mean, we have been had some success in this area. So a lot of the payment cost initiatives that we've put into play, we made roughly around Q3 last year. And a number of these relate to our improving our deposit to handle ratio and also renegotiation of payment costs more broadly. And alongside that, we've also been making some efficiencies in terms of the fraud cost line, which continues to come down. And as we've also said in the past, there's a number of other cost items that we're looking at the larger buckets within cost of sales including the geolocation costs and the other large buckets.

So continue to make good progress. We're very pleased with where the cost of sales is and it's very much on track to be within the that we set out at the Investor Day in September.

Monique Pollard: Thank you. Very helpful.

Operator: Your next question comes from the line of Clark Lampen of BTIG. Please go ahead.

Clark Lampen: Thanks very much. Good evening. Peter, you touched on iGaming before and mentioned low penetration. You guys provided a really helpful overview at the start of July of the product and platform work that you guys have sort of done over the last couple of years. I wanted to see if you guys could help us, you know, sort of digest, I guess, the second derivative implications of that. Where do you see the biggest deltas versus peers from a product standpoint?

And if we were to boil it down sort of in a purely quantitative way, you believe that some of the advantages that are translating to share right now are sort of durable that over time, you could have you could be a market leader I guess, for iGaming. Thanks a lot.

Peter Jackson: Well, Clark, we are the market leader for iGaming. And I think that we are the market leader because we have continuously executed on our strategy. We set out at the Investor Day in 2022 that we, you know, that we believe the majority of the iGaming TAM would come from casino direct customers, and I think that's proved to be the case. We also laid out a very clear sort of, you know, three-step approach to how we were gonna get to product leadership, and we've done that.

And I think if I look at it, you know, the stuff I've mentioned earlier, you know, the work we've done around chat bots, the work we're doing with exclusive content, the rewards club, and it's actually leveraging the Flutter Edge as well in terms of bringing new titles out. So we're in a team has done a phenomenal job huge growth in AMPs and revenue. But we're still in very early days. It's, you know, lots of lots of potential to come from a penetration perspective, and I think that we're really well set. We've got the best products and we've got some really exciting plans to keep innovating it.

Operator: Your next question comes from the line of Robert Fishman of MoffettNathanson. Please go ahead.

Robert Fishman: Hi. Thank you. If I could do one more on iGaming. Think in prepared remarks, talked about adding a record volume of new titles. Just curious if you can talk how much of FanDuel's iGaming handle or business, however you wanna talk about it, is driven by in-house or exclusive content versus third-party games or maybe just big picture. What the mix of that in-house games has evolved over the past couple years, where you expect that to end up? Thank you.

Peter Jackson: Hi, Robert. Look. All of our content for FanDuel at the moment is all coming from third parties. Now you know, some of that is exclusive for us, and we have exclusivity provisions for periods of time on it. So, you know, the Huff and Puff and then Huff and even more parts have been exclusive titles for us on our platform. It clearly in the rest of the organization, we do have access to our own enhanced studios and content. And in time, that's something that we can put into the into the FanDuel business to help alleviate some of the costs of procuring that content.

But at the moment, we've been focusing on making sure that we have the broadest and best range available for our customers and delivering things like the jackpots with over 200,000 have been won since launch and the rewards club, which, you know, I think is a very exciting piece of capability. Getting that right has been a priority for us before we start bringing some of the in-house content that we know how to do and we've got good penetration levels in some of our other iGaming markets around the world for in-house content, but it's just it's not something that we've been prioritizing getting into FanDuel yet.

Robert Fishman: Understand. Thank you.

Operator: Your next question comes from the line of Chad Beynon of Macquarie. Please go ahead.

Chad Beynon: Hi, good afternoon. Thanks for taking my question. I wanted to ask about kind of a postmortem question after the lottery tender. So now that the results are final and you won't have a major cash outlay in the next couple years, I guess two-parter on this. One, does it maybe free up some capital to do some things that you would not have been able to do if you had invested in that market? And then second, related to this tender, did it also kind of open up your mind to maybe other things within the lottery space in other geographies? Thank you.

Rob Coldrake: Hey, Chad. Yeah. I can pick this one up. So I'll take the second part of the question first. I mean, we always said with the Italian Lotto opportunity that we thought this was a unique opportunity. Italy. So, you know, we don't have a broader interest per se in other lottery products around the world. With regards to whether or not it frees up capital, as we said on a number of occasions, we are very disciplined when it comes to our capital allocation. We are very committed to bringing our leverage ratio back to the two and a half two to two and a half times that we've talked about in the medium term.

And we believe that we've got a number of opportunities in front of us. As we've said before, we think we can continue to be an end business. So we'll continue to invest behind the business organically. Continue to look at accretive M&A opportunities as they come along. And we'll continue to operate our share buyback, which is operating as we set out previously, we'll buy back up to $5 billion of our stock over the next three to four years. So we feel we're in a really good place here. We're deleveraging very quickly, very cash generative, and that opens up a lot of opportunities for us.

Chad Beynon: Thank you, Rob. Appreciate it.

Operator: Your next question comes from the line of John DeCree, CBRE. Go ahead.

Max Marsh: This is Max Marsh on for John DeCree. Taking my question. Seeing some good growth out of Brazil. Correct me if I'm wrong, but I believe that's your only Latin American market. Is your strong performance there impacting your thinking on expanding to other regulated markets in Latin America? And maybe if you're developing a bit more of a Flutter Edge in that market that might be able to be replicated.

Peter Jackson: Hi, Max. Yeah. Look. We are, you know, the world's, you know, biggest and most, you know, global sports betting and gaming business. And you know, when we sit here and evaluate, you know, what the opportunities are around the world, you know, you're right. We think about Latin America. We think about many markets where we're operating in. But we have to evaluate where do we think is the best place to sort of, you know, deploy our capital. We look there's a lot of soccer goes on in Latin America. You know, there's some interesting opportunities there. So, you know, look.

They're all in the mix of it, you know, as we think about, you know, where we're going to be deploying our capital. And as Rob said, you know, we're in our business. We invest organically in the business. We're doing share repurchase, and we're also doing M&A. So we've only just closed the SNAI acquisition and the Brazil acquisition, but, you know, clearly, the team is thinking about other opportunities around the world in Latin America, Europe, you know, with that.

Max Marsh: Thank you very much.

Operator: Your next question comes from the line of Ben Shelley of UBS. Please go ahead.

Ben Shelley: Just on the international business, can you walk us through the biggest countries of outperformance and underperformance versus your original expectations at the start of the year? Thank you.

Rob Coldrake: Yeah. Hi, Ben. Obviously, there's been lots of overperformance, so I'll probably talk about that for a while and there won't be won't take me long to cover the underperformance. So in particular, I would say the SEA business. Southern Europe and Africa is really outperforming. That business has gone from strength to strength since we first acquired the CSAL business and brought it into the group a couple of years ago. At that point in time, CSAL was doing approximately 400,000 AMPs a month online. It's now surpassed a million. If you look at the profitability inflection of that business, as well, yes, it continues to go from strength to strength.

We've now acquired the Snaitech business, which is a very complementary brand and takes back the gold medal position for us in the Italian market. So, we're very excited about Italy. In addition to that, in that region, we've got Turkey, which is performing phenomenally well. We've recently signed a new contract with our partners in Turkey. And there's a number of other opportunities that are really kind of going to make that quite exciting market for us. I think with regards to some of the more mature markets, I think the growth has slowed down slightly in Australia as we've mentioned before. Some challenges there around horse racing.

But actually, when you look at this quarter, we've actually increased revenue year on year. So we're quite pleased with the performance of Australia in this quarter. Overall, the international portfolio is performing really well. We're pleased with the changes that we made operationally this year. Bring it together as one segment because it really gives us excellent visibility to look at capital allocation opportunities across that as a portfolio. It's really working well for us.

Ben Shelley: Thank you, Chaps.

Operator: Your next question is from the line of Ryan Sigdahl of Craig Hallum Capital Group. Please go ahead.

Ryan Sigdahl: Hey. Good day, Peter. Rob. When I look at the new state, within the guidance, the cost, so $70 million EBITDA loss, assume that's all for Missouri. Online sports betting launch. That's double what your closest peer in the US is guiding for. So I guess curious if you have any change in the in plans from a state playbook launch. I know it's a similar number from last quarter, but just vis a vis what they're planning to spend and how you compare that to previous launches. Thanks.

Rob Coldrake: Yeah. Hi, Ryan. We've not changed our approach. So we've always been very consistent in terms of what we think new state launches cost. We set this out at our Investor Day last year. Where we said, you know, a contribution loss of circa $35 million per 1% of population. Missouri is about 1.8% of the population. I think we've held a number for Missouri. We can't talk for others and their economics, but we're very confident in our own workings.

Ryan Sigdahl: Okay. Thank you, Rob. And I think that's the end of the questions now. There's no further questions on the call. Can see that. I just like to thank everybody very much indeed for joining. And look. As we move into the, you know, second half of the year, you know, we're pleased with how we started Q3, and we're excited to see what we can do when we bring our great product to our customers whether that's with NFL, NBA, or European properties. So thank you very much.

Operator: Ladies and gentlemen, this concludes today's conference call. We thank you for participating. You may now disconnect.

Where to invest $1,000 right now

When our analyst team has a stock tip, it can pay to listen. After all, Stock Advisor’s total average return is 1,046%* — a market-crushing outperformance compared to 181% for the S&P 500.

They just revealed what they believe are the 10 best stocks for investors to buy right now, available when you join Stock Advisor.

See the stocks »

*Stock Advisor returns as of August 4, 2025

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. Parts of this article were created using Large Language Models (LLMs) based on The Motley Fool's insights and investing approach. It has been reviewed by our AI quality control systems. Since LLMs cannot (currently) own stocks, it has no positions in any of the stocks mentioned. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

The Motley Fool recommends Flutter Entertainment Plc. The Motley Fool has a disclosure policy.

Image source: The Motley Fool.

Date

Thursday, August 7, 2025, at 5 p.m. ET

Call participants

• Chief Executive Officer — Dr. Carl Hansen
• Chief Financial Officer — Andrew Booth
• General Counsel — Tryn Stimart

Need a quote from a Motley Fool analyst? Email [email protected]

Takeaways

• Liquidity position-- Approximately $750 million in available liquidity at the end of Q2 2025, consisting of $580 million in cash and equivalents and $170 million in committed government funding.
• Revenue-- $17 million in revenue, with $10 million from one-time licensing fees related to the Triani platform; $7 million in revenue was reported in the prior year, indicating a $10 million year-over-year increase, mainly due to the lump-sum licensing revenue.
• Research fees-- Expected to "continue to trend lower" as focus shifts further to internal and co-development programs, according to Booth.
• R&D expense-- Research and development expenses were approximately $39 million, $2 million less than the previous year, attributed to the timing of program-specific expenditures.
• Net loss-- Net loss was $35 million, compared to $37 million in the prior year. Loss per share was $0.12 basic and diluted.
• Cash usage-- Operating activities used approximately $44 million in cash and equivalents. Capital investments of $36 million mainly funded CMC and GMP capabilities, partially offset by government contributions.
• Clinical pipeline progress-- ABCL-635 and ABCL-575 received Health Canada clinical trial authorizations and initiated or prepared for dosing; ABCL-688 advanced to IND-enabling studies, becoming the third program in the pipeline.
• Molecules in clinic-- Total advanced to 18, including partner-led programs; two are AbCellera Biologics-led, marking the firm's transition to clinical-stage status.
• Manufacturing investment-- New integrated GMP facility remains on track to be operational by year-end, with cash deployment prioritized for this initiative and clinical advancements.
• Clinical trial design for ABCL-635-- Initial single- and multiple-ascending dose cohorts will target 56-60 participants in the ABCL-635 Phase One clinical trial, with up to 80 planned for the proof-of-concept stage in postmenopausal women.
• Key clinical timelines-- Initial safety and efficacy data from the ABCL-635 trial are anticipated in mid-2026; IND submission for ABCL-688 targeted for mid-2026.
• Licensing revenue sustainability-- Booth stated, "this was definitely a one-off payment ... not something that we would expect to have happen in the future," clarifying the nonrecurring nature of this quarter's licensing fee.
• ABCL-575 half-life-- Human half-life predicted at approximately 67 days, supporting semi-annual dosing once confirmed in clinical trials.
• Cash and marketable securities-- $580 million in cash, equivalents, and marketable securities at the end of Q2 2025; $460 million of this is invested in short-term marketable securities.
• Downstream milestone exposure-- 102 partner-initiated programs with downstream participation, with potential for future milestone and royalty revenue.

Summary

Strategic investments advanced AbCellera Biologics(NASDAQ:ABCL) from a platform to a clinical-stage company, highlighted by the initiation of two first-in-human studies and expansion of its internal pipeline. Pipeline progression included ABCL-635 and ABCL-575 reaching Canadian clinical trials, and ABCL-688 entering IND-enabling studies, aligning with management's stated 2025 objectives. Management reaffirmed guidance for sufficient liquidity to fund pipeline advancement and manufacturing buildout well beyond the next three years, supported by $750 million in available resources at the end of Q2 2025. The one-time $10 million licensing fee contributed to a temporary boost in revenue. Management clarified this will not recur, and emphasized a focus shift toward long-term value through clinical-stage assets.

• Dr. Hansen explained that "the main scientific risk for ABCL-635 is whether or not we can achieve sufficient target engagement," with proof-of-concept data expected to provide clarity in mid-2026.
• ABCL-575’s predicted dosing schedule of every six months is enabled by a "human half-life of approximately 67 days," as stated by management in the Q2 2025 earnings call.
• Research fee revenue is projected to "continue to trend lower" due to prioritization of internal and co-development programs, impacting future near-term revenue streams.
• The company expects to advance a fourth program from discovery into its pipeline. The buildout of its GMP clinical manufacturing facility is expected to be completed by year end.
• Government funding from the Strategic Innovation Fund and British Columbia is not included in the reported cash figures, as this available capital does not appear on the balance sheet.

Industry glossary

• NKTR antagonist: An antibody or small molecule therapy that targets the neurokinin-3 receptor (NKTR), often investigated for a role in managing vasomotor symptoms and menopause-related hot flashes.
• TriAni platform: A proprietary genetically engineered mouse technology used for generating fully human monoclonal antibodies.
• CMC: Chemistry, Manufacturing, and Controls — a regulatory classification covering product development processes essential for clinical trial applications and commercial production in biopharma.
• GMP: Good Manufacturing Practice — standards ensuring consistent quality and safety in pharmaceutical manufacturing.
• IND-enabling studies: Preclinical experiments required to support an Investigational New Drug application, often including pharmacology, toxicology, and manufacturing data.
• POC study: Proof-of-concept trial designed to provide initial evidence that a therapy has the intended biological activity or clinical efficacy.
• GPCR: G protein-coupled receptor, a large family of proteins commonly targeted in drug development.
• CTA: Clinical Trial Application — an application submitted to regulatory agencies to begin human trials, separate from the US IND process.

Full Conference Call Transcript

Dr. Carl Hansen: Thanks, Tryn, and thank you, everyone, for joining us today. This quarter, we achieved a major company milestone: receiving Health Canada authorization to initiate AbCellera Biologics Inc.'s first two clinical trials for ABCL-635 and ABCL-575. Today, I'm pleased to announce that dosing has begun in our Phase One clinical trial evaluating ABCL-635 for moderate to severe vasomotor symptoms. This marks the completion of the transition from a platform company to a clinical-stage biotech that we committed to back in 2023. After the end of the quarter, we also opened our Phase One clinical trial for ABCL-575, and we anticipate dosing will begin shortly.

I'm also pleased to announce that we have added a third program to our pipeline by advancing ABCL-688 into IND-enabling studies. We ended the quarter with approximately $750 million in available liquidity, and we are well-positioned to continue to execute on our strategy and are on track to complete our remaining goals for 2025. These include continuing to build our pipeline by advancing at least one more development candidate into IND-enabling studies, completing platform and infrastructure investments, and starting to use these capabilities in clinical manufacturing. ABCL-635 is a potential first-in-class therapeutic antibody being developed for the non-hormonal treatment of moderate to severe vasomotor symptoms, more commonly known as hot flashes, that are associated with menopause.

ABCL-635 is a potential next-generation NKTR antagonist designed to have both an improved safety profile and a more convenient dosing regimen. If ultimately successful, we believe it can be a highly differentiated product that would launch into a large and established market. We successfully completed the CPA process for ABCL-635 in 2025, and today, we are pleased to announce that we have begun dosing participants. The ABCL-635 Phase One clinical trial is a randomized, placebo-controlled, double-blind study in men and postmenopausal women with or without VMS. Its purpose is to evaluate safety, pharmacokinetics, pharmacodynamics, and the frequency and severity of VMS, with subcutaneous doses of ABCL-635.

The primary endpoint of the study is safety, and a key secondary endpoint is pharmacokinetics. As I mentioned on the last earnings call, we believe the main scientific risk for ABCL-635 is whether or not we can achieve sufficient target engagement. We expect this will be addressed through biomarker and proof-of-concept studies that are part of our Phase One design. As previously stated, we expect initial safety and efficacy data from this trial in mid-2026. Turning to our second program, ABCL-575, we received authorization from Health Canada in May to initiate a Phase One clinical trial. The trial was opened in July, and we anticipate dosing our first participant this quarter.

This is a double-blind, placebo-controlled study designed to assess safety and tolerability in healthy participants following subcutaneous doses of ABCL-575. ABCL-575 is an investigational antibody therapy targeting OX40 ligand and is being developed for the treatment of moderate to severe atopic dermatitis, and which also has broad potential in several other I&I indications. Recently presented preclinical data demonstrates it has potent functional activity in vitro that is in line with amotilumab, as measured by cytokine responses across a variety of cytokines, including IL-13, IL-5, and IL-9. As a reminder, ABCL-575 is engineered with half-life extension to support less frequent dosing.

Based on PK data we've obtained from studies in FCRN humanized mice, we predict a human half-life of approximately 67 days. Using this half-life, our modeling predicts that a 300 mg dosing of ABCL-575 every six months should achieve circulating concentrations that remain above the efficacy threshold that was observed for amlotilumab. This prediction, once confirmed in clinical studies, would support a product profile with subcutaneous dosing once every six months. In addition to our clinical programs, we continue to allocate significant resources to internal discovery to build out our pipeline. This quarter, we advanced ABCL-688 into IND and CTA-enabling studies. ABCL-688 is a potential antibody medicine for an undisclosed indication in autoimmunity.

It is the third program in our pipeline and the second program derived from our GPCR and ion channel platform. Similar to ABCL-635, for strategic reasons, we will not be disclosing additional information on ABCL-688 until this program reaches the clinic. Our intent is to submit an IND in mid-2026. For the remainder of the year, our priorities are as follows: executing on our clinical studies with ABCL-635 and ABCL-575, moving ABCL-688 forward in IND-enabling studies, advancing a fourth program from discovery into our pipeline, and finally, bringing our clinical manufacturing capabilities online. And with that, I'll hand it over to Andrew to discuss our financials.

Andrew Booth: Thanks, Carl. As Carl pointed out, AbCellera Biologics Inc. continues to be in a strong liquidity position, with approximately $580 million in cash and equivalents, and with roughly $170 million in available committed government funding to execute on our strategy. We are continuing to execute on our plans with a focus on internal programs and on completing our CMC and GMP investments. Looking at our business metrics, in the second quarter, we started work on five partner-initiated programs, which takes us to a cumulative total of 102 programs with downstream participation. Both ABCL-635 and ABCL-575 received their clinical trial authorizations in the second quarter, thus advancing into the clinic.

They are the first AbCellera Biologics Inc.-led molecules to reach the clinic, taking the cumulative total number of molecules to have reached the clinic, including those led by partners, to 18. As we have previously stated, we view the overall progress of molecules in the clinic as a potential source of near and mid-term revenue from downstream milestone fees and royalty payments in the longer term. Turning to revenue and expenses, revenue for the quarter was approximately $17 million, comprising research fees relating to work on partner programs and amounts related to licensing. This compares to revenue of $7 million in the same quarter of 2024.

The licensing fees of $10 million stem from our TriAni humanized rodent platform and mostly consist of a lump sum amount in this quarter. With respect to research fee revenue, as we have mentioned in the past, we expect these to continue to trend lower as we are increasingly focused on our internal and co-development programs. Research and development expenses for the quarter were approximately $39 million, $2 million less than last year. This expense reflects ongoing investment in our internal and co-development programs. The slight decrease is related to the timing of larger program-specific related expenses, which were larger in the second quarter of last year.

In sales and marketing, expenses for Q2 were about $3 million, a small reduction relative to the same quarter last year. And in general and administration, expenses were approximately $19 million compared to roughly $20 million in 2024. Included in these expenses are the ongoing expenses related to the defense of our intellectual property. Looking at earnings, we are reporting a net loss of roughly $35 million for the quarter, compared to a loss of $37 million in the same quarter of last year. In terms of earnings per share, this result works out to a loss of 12¢ per share on a basic and diluted basis.

Looking at cash flows, operating activities for 2025 used approximately $44 million in cash and equivalents. Excluding investments in marketable securities, investment activities amounted to a net $36 million, mostly in property, plant, and equipment, driven by the ongoing work to establish CMC and GMP manufacturing capabilities. The investments in PP&E were partially offset by government contributions. As a part of our treasury strategy, we have about $460 million invested in short-term marketable securities. Our investment activities for the quarter included an approximately $12 million net increase in these holdings. Altogether, we finished the quarter with $580 million of cash, cash equivalents, and marketable securities.

As a reminder, we have received commitments for funding for our GMP facility and the advancement of our internal pipeline from the Government of Canada's Strategic Innovation Fund and the Government of British Columbia. This available capital does not show up on our balance sheet. With over $580 million in cash and equivalents, and the unused portion of our secured government funding, we have around $750 million in total available liquidity to execute on our strategy. The cash usage for the remainder of 2025 will continue to prioritize advancing our two lead programs through their Phase One clinical studies, building the preclinical pipeline, and completing our investment in the integrated clinical manufacturing capabilities.

Our new manufacturing facility is on track to come online at the end of 2025, as we had indicated in previous calls. With respect to our overall operating expenditures, our capital needs continue to be very manageable. We continue to believe that we have sufficient liquidity to fund well beyond the next three years of increasing pipeline investments. And with that, we'll be happy to take your questions.

Operator: If for any reason you'd like to remove that question, please press star followed by 2. Again, to ask a question, hit star 1 on your telephone keypad. Our first question is from Andrea Newkirk with Goldman Sachs. Your line is now open.

Telani Gisso: Everyone, this is Telani on for Andrea. Thanks for taking our questions, and congrats on the progress this quarter. One quick one from us. Just given the recent news of the delay to elanzanitan, do you guys anticipate any risk to the development path for ABCL-635 from a regulatory perspective? And what do you expect regulators will be most focused on in evaluating the drug profile as it advances in development? Thank you.

Dr. Carl Hansen: You're breaking up a little bit at the end of the question. I did get the first part of it. So yes, there was a delay with elanzanitan. Our understanding is that the FDA requested additional information from Bayer, and that information is forthcoming. I think the comment suggested that there was no concern raised about the approvability. Our expectation is that would move forward to approval later this year. So beyond that, I don't think we have any special insight into that. I didn't get the last part of the question. Could you please repeat?

Telani Gisso: Sorry about that. Yeah. I was just wondering what do you think the FDA and other regulators will be focused on in evaluating ABCL-635's profile as it moves forward in clinical development?

Dr. Carl Hansen: Sure. So you know, there's now, I think, a well-trodden path for the NKTR class, both with and without. Obviously, we need to demonstrate efficacy. As I mentioned in my prepared remarks, we're excited about the upcoming data and the readout midpoint next year. That should give us a lot of information about the efficacy and target engagement, which we do see as the primary scientific risk. On the safety side, as I mentioned on the last call, so far, you know, what has been seen in the class for NKTR antagonists is some liver toxicity or the signal of liver toxicity as well as somnolence or sleepiness.

We believe the somnolence is because of targeting not just NKTR, but also NKTR, which our antibody does not do. We expect that would not be a concern. And similarly, because we are the first-in-class antibody for this indication and antibodies are not metabolized in the liver, as are small molecules. And because there is little evidence of expression of NKTR in the liver, we don't expect that there will be liver tox associated with our drug. But, of course, we need to demonstrate that in the trial. And I'm sure the regulators, as the investment community, will be looking at the two main things which we always look at, which are efficacy and safety.

Telani Gisso: That's helpful. Thank you.

Operator: Our next question is from Srikripa Devarakonda with Truist. Your line is now open.

Srikripa Devarakonda: Hey, guys. Thank you so much for taking my question, and congratulations on the progress this quarter. So for the ABCL-635 Phase One trial, can we first upon getting the trial initiated efficiently. But now that you've initiated the trial, can you talk a little bit more about the specifics? You know, is there a certain what the total number of patients, and if there is a certain ratio of healthy men to postmenopausal women you expect to enroll? And then maybe a bit more broader question. You know, you'd previously said that 50% of menopausal women are hesitant to take HRT because of the concerns around consequences. With Dr.

McCarray being he seems to be a very strong proponent of HRT. Do you think this might change the way the market overall, or do you think you still have a substantial market?

Dr. Carl Hansen: Sure. So first, I'll maybe provide a little bit more information on the clinical trial. So as you might expect, the first parts of the trial are basically a single ascending dose and multiple ascending dose. In a single ascending dose, we'll include both menopausal women and healthy men. Healthy male volunteers. And in that part of the trial, we will be able to assess some biomarkers. In the MAD, we will be recruiting only postmenopausal women, and the combination of the SAD and the MAD, you know, could be roughly, you know, 56, 60 patients or so. Once we progress on to the proof of concept, we expect to enroll up to 80 patients.

And in that phase of the study, we will, of course, be recruiting postmenopausal women with moderate to severe VMS. So to the second part of your question, you know, there has been some discussion lately about the use of menopausal hormone therapy and some revisiting of the women's health study that was, you know, a study that I think cast a bit of a shade on the benefits of menopausal hormonal therapy for the treatment of VMS and other symptoms related to menopause. Our view has always been that the NKTR class is not in competition with hormone therapies.

So it turns out that, you know, there are roughly 20% of the eligible population that either have contraindications, so have risk factors that mean they're not eligible for hormone therapy, or that try hormone therapy and are unable to continue. 20% of the population for which hormone therapy is not meeting their needs. And then, of course, there's some other portion of the 80% that are gonna have a preference not to use hormone therapy. So if you look at the number of eligible patients in the US alone, that's a very large patient population. And we would need to only capture a relatively small portion of that market to have this drug be a terrific success.

So we're still very confident about the market opportunity. And we expect the conversation about MHT will continue. As it should, and that doesn't change our view of the market since we sort of had that in mind from the very beginning.

Srikripa Devarakonda: Okay. Great. Thank you so much for the color. Really helpful.

Operator: Our next question is from Faisal Khushid with Leerink Partners. Your line is now open.

Faisal Khushid: Hey, guys. Thank you for taking the question. Really appreciate it. I just wanted to ask on the partnership and licensing revenue for the quarter. It seemed a little bit higher than kind of where you've been. Should that be an expectation kind of going forward? Or how should we think about sort of the cadence sequencing of those funds coming in? Thank you.

Andrew Booth: Yeah. Good question. This is Andrew here. Speaking, Faisal. No. You should not this was definitely a one-off payment. It really related to activities post the acquisition of Triani. That were completed, really as an earn-out to the former shareholders of Triani. So you'll see in addition to the $10 million licensing revenue, a change in the contingent consideration on our balance sheet, which is really the balancing entry related to that transaction. So it's not something that we would expect to have happen in the future.

Faisal Khushid: Got it. Thank you.

Operator: Our next question is from Malcolm Hoffman with BMO. Your line is now open.

Malcolm Hoffman: Hi, Malcolm. I'm for Evan Seigerman from BMO. Alright. You remind us what key efficacy data we should be looking out for in the ABCL-635 Phase One study? I understand we're largely looking for safety in a Phase One, but what biomarker efficacy measures will start to give us kind of confidence and further development here from a competitive perspective? Thanks.

Dr. Carl Hansen: Sure. So Carl here. So, early in the study, we will be assessing some biomarkers, so LH and FSH in men and women. In the SAD where there will be only healthy volunteers participating, men and women. Obviously, in the men, we'll be able to assess testosterone in the women estradiol. So all of those, I think, are a really positive indication, and we expect to see those biomarkers modulated by treatment at the higher doses. So that's the first check. But that is not equal to efficacy. So the real measure of efficacy needs to wait until the POC study.

As I mentioned, we will be enrolling up to 80 postmenopausal women with moderate to severe VMS, and there we're going to be assessing the frequency and severity of VMS, which is self-reported. And so we won't have that data until sometime in mid-2026. But we think that study is sufficiently powered to give us, you know, coming out of that, if it lines up the way that we hope and expect, a lot of confidence that we've got something that looks like a drug and that we intend to move forward.

Malcolm Hoffman: Appreciate it. Thanks, guys.

Operator: Our next question is from Brendan Smith with TD Securities. Your line is now open.

Brendan Smith: Hey, guys. I think it's supposed to be Brendan. I think Brendan from TD Securities on. Sorry about the confusion there. Thanks for taking all the questions, and all the good color. It's great to see the VMS asset moving along. I actually just wanted to maybe ask another follow-up on that. Actually, just related to target dosing in any respect. Fully appreciate it's still early days. A lot to kind of understand with some of the biomarker data and what that realistically means for kind of uptake down the road.

But, are there any special considerations when you're thinking about, you know, formulation or frequency of dosing that could kind of help you're thinking about the clinical plan down the road and then just any ability to kind of target these kinds of patients from a commercial standpoint?

Dr. Carl Hansen: Yeah. I'm happy to give a little bit of color on that. So, you know, a lot of this rests on our preclinical work. From which we believe that we've got an antibody that has a half-life and a potency that would support once-monthly dosing on a single subcutaneous dose. And that subcutaneous dose would be a high concentration formulation at 150 mg per ml. At 2 ml. So remains to be seen. But based on what we've seen so far, we've got a molecule we believe hits that TPP.

And, of course, that's one of the things we're gonna be testing both in the efficacy and in the bioavailability and PK data that'll come out of the Phase One study.

Brendan Smith: Okay. Got it. Great. Makes sense. Thanks, guys.

Operator: Our next question is from Stephen Willey with Stifel. Your line is now open.

Josh: Hi. Thanks for taking the question. This is Josh on for Stephen Willey, and congrats on the progress. So I noticed the healthy volunteer trial for May is now posted to clinicaltrials.gov. Noticed there was one Canadian site listed, and I guess just looking forward as, like, a longer-term strategy, do you plan on activating any US sites beyond Phase One? Is this unrelated to, like, a capital commitment contingency with the governments of Canada and British Columbia to run all your trials in Phase One in Canada first? And then I just have a follow-up.

Dr. Carl Hansen: Yeah. So we have activated a site in Canada that's an expert in dermatology. We are, you know, very pleased with that site, and we think they have full capabilities to execute the Phase One study. Right now, our focus is on that. You know, from our perspective, the big thesis around May is our belief that the OX40 ligand class is going to be an immense class, not just in atopic dermatitis, but in other autoimmune and inflammatory conditions. We think that the key readout we're gonna get in the near term is going to be bioavailability and PK. Confirming some of the preclinical work we've done and the modeling that I showed during my prepared remarks.

And that the other big catalysts are gonna come from outside of the company, in particular, some of the clinical development with amatilumab and other molecules in the class that are moving forward. So we are currently focused on that. We are also, you know, beginning to engage with the FDA and lay the foundation for the Phase Two studies, which you would likely expect to include US sites. But we haven't triggered that yet, and we have some time before we need to.

Josh: Great. Thanks. And then just a follow-up. I know it's early. You said you won't really disclose any details around ABCL-688 for now, but could you maybe speak to some of the autoimmune indications of interest you might be considering for this asset?

Dr. Carl Hansen: Yeah. I'm afraid we're gonna hold this one close to our chest for strategic reasons. What I will say is that, you know, this is a program that we're very bullish on. I'd put it in a similar category to ABCL-635. It's one where we have a high conviction in the biology and where we think we can get some meaningful data early on. It's got a bit of a different competitive dynamic, but it's also a program that we intend to move forward as quickly as possible. And when we do, that we intend to move very quickly.

And so our focus right now is getting that to the clinic, and when we do, we'll be able to share more details with you. So sorry for being, you know, a little bit reticent on details, but I think it's probably in the best interest of the program.

Josh: No worries. Thanks, guys.

Operator: It looks like there are no more questions, so I'll pass the call back over to the management team for closing remarks.

Tryn Stimart: Just to say thank you, everyone, for the support and for joining us today, and we look forward to updating you as we progress from where we are today into the clinic. Thanks very much.

Operator: That concludes the conference call. Thank you for your participation. Enjoy the rest of your day.

Where to invest $1,000 right now

When our analyst team has a stock tip, it can pay to listen. After all, Stock Advisor’s total average return is 1,046%* — a market-crushing outperformance compared to 181% for the S&P 500.

They just revealed what they believe are the 10 best stocks for investors to buy right now, available when you join Stock Advisor.

See the stocks »

*Stock Advisor returns as of August 4, 2025

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. Parts of this article were created using Large Language Models (LLMs) based on The Motley Fool's insights and investing approach. It has been reviewed by our AI quality control systems. Since LLMs cannot (currently) own stocks, it has no positions in any of the stocks mentioned. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

The Motley Fool has positions in and recommends AbCellera Biologics. The Motley Fool has a disclosure policy.

Image source: The Motley Fool.

DATE

• Wednesday, July 30, 2025, at 11 a.m. EDT

CALL PARTICIPANTS

• Chairman, President, and Chief Executive Officer — Katherine Gates
• Senior Vice President and Chief Financial Officer — Mark Marinko
• Chief Strategy Officer — Shantanu Agrawal

Need a quote from one of our analysts? Email [email protected]

RISKS

• Net income attributable to SunCoke Energy (GAAP) fell to $0.02 per share in 2025, driven by the timing and mix of lower contract coke sales, reduced earnings from the Granite City contract extension, declining CMT volumes, and $5.2 million in acquisition-related transaction costs in Q2 2025.
• Spot coke sales margins are "significantly lower than the contract sold coke sales margins due to the current challenging market conditions," according to Marinko.
• CMT terminal handled lower volumes in the logistics segment owing to "tepid market conditions," contributing to a decline in adjusted EBITDA for Q2 2025.

TAKEAWAYS

• Consolidated Adjusted EBITDA: $43.6 million, down from $63.5 million in the prior year period, primarily due to lower contract coke sales, less favorable Granite City economics, and reduced logistics volumes, partially offset by lower legacy black lung expenses.
• Phoenix Global Acquisition: $325 million purchase expected to close August 1, 2025, on a cash-free, debt-free basis, funded by cash and revolver borrowings, representing roughly 5.4x LTM adjusted EBITDA; projected annual synergies of $5 million-$10 million.
• Domestic Coke Segment EBITDA: $40.5 million, with adjusted EBITDA impacted by adverse contract/spot mix at Haverhill and weaker Granite City performance.
• Logistics Segment EBITDA: $7.7 million on 4.8 million tons throughput. Barge unloading expansion at KRT completed and new take-or-pay coal handling agreement to drive second-half results.
• Liquidity Position: $186.2 million in cash and $350 million undrawn revolver, yielding total liquidity of $536.2 million.
• Dividend Declared: $0.12 per share dividend payable Sept. 2, 2025; $10.2 million paid in the quarter.
• Revolving Credit Facility Extended: Now matures July 2030, down to $325 million from $350 million, with similar covenants.
• Free Cash Flow Guidance: Free cash flow guidance is now expected to be between $103 million and $118 million in 2025, lowered to reflect the Phoenix transaction, debt costs, and a new tax bill in full-year 2025 free cash flow guidance; guidance for operating cash flow unchanged.
• Full-Year Guidance Reaffirmed: Consolidated adjusted EBITDA (non-GAAP) expected to be between $210 million and $225 million for full-year 2025; Domestic coke adjusted EBITDA guidance range of $185 million to $192 million in 2025; Full-year logistics adjusted EBITDA guidance range of $45 million to $50 million.
• CapEx Guidance: CapEx guidance has been lowered to approximately $1 million in 2025 after spending $12.6 million in the quarter.
• Phoenix Integration: Will combine operations with the logistics segment to form a new industrial services segment, bringing new international reach and customer diversification, including electric arc furnace operators.
• Coke Sales Volume Outlook: 2.0-2.1 million tons projected for the second half of 2025 for an annual total of approximately 4 million tons of coke sales in 2025, with per-ton adjusted EBITDA expected to normalize to $46–$48 in the second half of 2025, based on mix.
• New KRT Throughput: The logistics volume increase in the second half of 2025 is anticipated to stem mainly from the KRT terminal's expansion project.
• Phoenix Revenue Profile: Contracts are long-term, carry fixed and pass-through revenue, and limit commodity price risk by avoiding consumables ownership.

SUMMARY

SunCoke Energy (NYSE:SXC) announced it will close its $325 million acquisition of Phoenix Global on Aug. 1, supported by a newly extended $325 million revolving credit facility now maturing in July 2030. Adjusted EBITDA of $43.6 million in Q2 2025 reflected reduced contract coke volume and logistics softness, confirming management's position that this quarter represents the earnings low point for the year. The company reaffirmed full-year consolidated adjusted EBITDA guidance of $210 million to $225 million for 2025 and updated full-year 2025 free cash flow guidance to $103 million to $118 million, citing transaction costs and tax law changes. A quarterly dividend of $0.12 per share was declared, and total liquidity stood at $536.2 million. SunCoke leadership signaled that Phoenix will be integrated as a new industrial services segment, diversifying its customer base and operational footprint.

• Chief Financial Officer Marinko stated, "We believe Q2 2025 to be the trough of the year, and with higher contract coke sales expected in the second half, we are reaffirming our domestic coke adjusted EBITDA guidance range" of $185 million to $192 million.
• Chief Strategy Officer Agrawal explained that reduced revolver capacity will not restrict Phoenix funding, as "$200 to $210 million" is expected to be drawn; the GPI project would require separate financing.
• Management is in "active discussions" regarding contract renewals with the largest customer, despite external commentary on potential reductions in third-party coke demand.
• Lower CMT volumes in May and June shifted into July, supporting management's unchanged logistics segment guidance despite market volatility.
• Phoenix's "last twelve months trailing adjusted EBITDA of about $61 million (non-GAAP, for the twelve months ended March 31, 2025)" remains a baseline as SunCoke completes integration and explores organic growth from new customer exposure.

INDUSTRY GLOSSARY

• CMT: Convent Marine Terminal, a bulk export terminal operated by SunCoke handling coal and other materials.
• KRT: Kanawha River Terminals, a logistics asset for coal and other dry bulk material handling within SunCoke's portfolio.
• Blast Coke: Metallurgical coke used in blast furnace steelmaking, distinct from foundry coke or spot coke sales.
• Foundry Coke: A high-quality coke sold to foundries for metal casting, generally with higher margins than blast coke.
• Take-or-pay Agreement: A long-term logistics contract obligating a customer to pay for a minimum volume, securing revenue for the operator.
• Electric Arc Furnace (EAF): A steel production process that uses electricity to melt scrap and reduce iron, with different coke requirements than blast furnace operations.
• Spot Coke: Coke sold on the open market at prevailing prices rather than through fixed, long-term contracts; typically carries lower, more volatile margins.

Full Conference Call Transcript

Katherine Gates: Thanks, Shantanu. Good morning, and thank you for joining us on today's call. This morning, we announced SunCoke Energy, Inc.'s second-quarter results. I want to share a few highlights before turning it over to Mark to discuss the results in detail. We delivered Q2 2025 consolidated adjusted EBITDA of $43.6 million, driven by the timing and mix of contract and spot coke sales, as well as lower volumes at CMT. During the quarter, we announced the acquisition of Phoenix Global for $325 million. We are happy to share that we received the necessary regulatory approvals faster than anticipated and now expect to close on August 1.

Additionally, we amended and extended our revolving credit facility originally due June 2026 during the month of July. Covenants are similar to the previous agreement, and it is now maturing in July 2030. Earlier today, we also announced a $0.12 per share dividend payable to shareholders on September 2, 2025. From a balance sheet perspective, we ended the second quarter with a strong liquidity position of $536.2 million. I would like to take this opportunity to review the fundamentals of the Phoenix acquisition. Let's turn to Slide four. Phoenix Global is a leading provider of mission-critical services to major steel-producing companies.

SunCoke Energy, Inc. will purchase 100% of the common units of Phoenix for $325 million on a cash-free, debt-free basis, representing an acquisition multiple of approximately 5.4 times on a March 31, 2025, last twelve months adjusted EBITDA of $61 million. This transaction is expected to be immediately accretive for SunCoke Energy, Inc. We will fund the purchase through a combination of cash on hand and borrowing on our amended and extended revolver, which is fully undrawn with $325 million of borrowing capacity. We expect to recognize between approximately $5 million and $10 million in annual synergies from this transaction.

After closing, we will plan to host investor conferences where we will share updated guidance for SunCoke Energy, Inc., including Phoenix. Turning to Slide five to revisit the transaction benefits to SunCoke Energy, Inc. Phoenix is an excellent strategic fit with the core elements of our business, namely customers, capabilities, and contracts. With the addition of these operations, SunCoke Energy, Inc.'s reach will now extend to new industrial customers, including electric arc furnace operators that produce carbon steel and stainless steel. Phoenix's global footprint will add to our existing Brazil footprint, as well as select international markets. Phoenix's operations provide high-value, site-based services that are mission-critical to operational efficiency and reliability for steel mills.

SunCoke Energy, Inc. has a reputation as a critical partner in the steel value chain and as a reliable provider of high-quality industrial services through our logistics business. Similar to SunCoke Energy, Inc., Phoenix's contracts are long-term in nature, with contractually guaranteed fixed revenue and pass-through components. Additionally, under its current contracts, Phoenix does not take ownership of major consumables, reducing exposure to commodity price volatility. Phoenix offers a well-capitalized asset portfolio, having invested approximately $75 million since June 2023 on new equipment or the refurbishment of existing equipment. New customers and new markets provide multiple paths for future organic growth.

By leveraging SunCoke Energy, Inc.'s strong financial position and operational excellence, we will build upon Phoenix's success to better serve our existing and new customers. Following the closing of the transaction, we expect Phoenix's operations will be combined with our logistics segment to form a new industrial services segment. We are pleased to have a strong operator within SunCoke Energy, Inc. to lead the new operations. He will be joined by certain Phoenix employees whose knowledge and experience will be beneficial to the successful integration. We are excited to welcome Phoenix's team members to the SunCoke Energy, Inc. family as we build on the strong foundation set by the business in recent years.

With that, I will turn it over to Mark to review our second-quarter earnings in detail.

Mark Marinko: Thanks, Katherine. Turning to Slide six. Net income attributable to SunCoke Energy, Inc. was $0.02 per share in 2025, down $0.23 versus the prior year period. The decrease was primarily driven by the timing and mix of lower contract coke sales coupled with lower economics from the Granite City contract extension in the domestic coke segment. Additionally, CMT volumes in the logistics segment were lower due to market conditions. Finally, transaction costs of $5.2 million related to the acquisition of Phoenix Global also impacted earnings per share. Consolidated adjusted EBITDA for 2025 was $43.6 million compared to $63.5 million in the prior year period.

The decrease in adjusted EBITDA was primarily driven by the timing and mix of lower contract coke sales and unfavorable economics on the Granite City contract extension in the coke segment, and lower transloading volumes at CMT in the logistics segment, partially offset by lower legacy black lung expenses in corporate and other. Moving to Slide seven to discuss our domestic coke business performance in detail. Second quarter domestic coke adjusted EBITDA was $40.5 million, and coke sales volumes were 943,000 tons. The decrease in adjusted EBITDA as compared to the prior year period was primarily driven by the change in mix of contract and spot coke sales at Haverhill.

Additionally, spot coke sales margins are significantly lower than the contract sold coke sales margins due to the current challenging market conditions. Lower economics and volumes at Granite City from the contract extension also impacted domestic coke results. We believe the second quarter to be the trough of 2025, and with higher contract coke sales expected in the second half of the year, we are reaffirming our domestic coke adjusted EBITDA guidance range of $185 million to $192 million. Now moving on to Slide eight to discuss our logistics business. Our logistics business generated $7.7 million of EBITDA in 2025, and our terminals handled combined throughput volumes of 4.8 million tons.

The decrease in adjusted EBITDA was primarily driven by lower transloading volumes at CMT due to tepid market conditions. Our previously announced barge unloading capital expansion project at KRT has been completed and is operating. We expect to see benefits from the new take-or-pay coal handling agreement starting in the third quarter and reaffirm our full-year logistics adjusted EBITDA guidance range of $45 million to $50 million. Now turning to Slide nine to discuss our liquidity position for Q2. SunCoke Energy, Inc. ended the second quarter with a cash balance of $186.2 million and a fully undrawn revolver of $350 million.

Net cash provided by operating activities was $17.5 million and was impacted by income tax and interest payments as well as $5.2 million in transaction costs. We spent $12.6 million on CapEx and paid $10.2 million in dividends at the rate of $0.12 per share this quarter. In total, we ended the quarter with a strong liquidity position of $536.2 million. Our free cash flow guidance has changed as a result of the transaction costs related to the Phoenix acquisition, extension of the revolving credit facility, and the new tax bill that was recently passed.

We did not previously include transaction or debt issuance costs in our free cash flow guidance, but we now expect to incur between $12 million and $14 million related to these transactions during the year. We are now expecting our cash taxes to be between $5 million and $9 million and have also lowered our CapEx guidance to approximately $1 million during the year. We now expect our free cash flow guidance to be between $103 million and $118 million. Our operating cash flow guidance is unchanged. With that, I will turn it back over to Katherine.

Katherine Gates: Thanks, Mark. Wrapping up on Slide 10. The acquisition of Phoenix is a result of SunCoke Energy, Inc.'s disciplined pursuit of profitable growth to reward long-term shareholders. SunCoke Energy, Inc. is well known for our best-in-class safety, advanced technology, operational discipline, and strong financial position. We remain focused on safely executing against our operating and capital plan and maintaining the strength of our core businesses while working to integrate Phoenix's operations. Phoenix is a service provider of choice for steelmakers, and we look forward to continuously engaging with their customers to find new opportunities to expand the scope of services provided as well as enter into new contracts at other sites.

As always, we take a balanced yet opportunistic approach to capital allocation. We continuously evaluate the capital needs of the business, our capital structure, and the need to reward our shareholders, and we will make capital allocation decisions accordingly. Finally, we see improvement in both logistics and domestic coke in the second half of the year, and we are reaffirming our full-year consolidated adjusted EBITDA guidance range of $210 million to $225 million. With that, let's go ahead and open up the call for Q&A. We will now begin the Q&A session. If at any time your question has been addressed and you would like to withdraw, please let us know. The first question comes from Nick Giles with B.

Riley Securities. Please go ahead.

Nick Giles: Thank you, operator, and good morning, everyone. This is Henry Hurl on for Nick Giles. So to start off, you reaffirmed your annual guidance, and my math implies roughly a 22% increase in quarterly EBITDA for the remainder of the year to reach the low end of your guidance at $210 million. So my question is, can you walk us through the drivers of the improvement from here? And what are your assumptions around last coke sales volumes?

Mark Marinko: Sure, Henry. Thanks for the question. So as we talked about, if you look at our Q1 domestic coke adjusted EBITDA per ton, it was $55, and our Q2 is around $42 a ton. Right? And if you take the average of those two, we are right in the range of $46 to $48. That is kind of our annual guidance. So in Q3 and Q4 or the second half of the year, we expect to kind of get back to our average full-year EBITDA per ton range where the mix, you know, it was all about the mix. That's why we are talking about a mix between contract and spot sales. Right?

In Q1, we were very heavy on the contract side. In Q2, we were very heavy on the spot side. So in Q3 and Q4, this will kind of become normalized, and we will have roughly 2 to 2.1 million tons of coke sales in the second half, getting us closer to the 4 million tons guidance of the total coke sales. With the average domestic coke distributor margin of $46 to $48 a ton. So that's kind of on the coke side. On the logistics side, you know, we saw surprisingly lower volumes in May and June at CMT, and we are already seeing those volumes get picked up in July.

There were a couple of shipments in June that did not, you know, the timing of the ship kind of shifted to July. So we are going to pick that up in Q3. So we will go back to our normal run rate EBITDA for logistics as a whole in the second half. And that's how we are getting to our full-year adjusted EBITDA guidance range of $210 million to $225 million.

Henry Hurl: Understood. Thanks for that.

Nick Giles: And then could you also talk about the macro drivers of Phoenix Global? So I understand you have a large share of fixed and contracted revenues in place. Hoping to get more color on what moves the needle in the long term? Thanks.

Katherine Gates: Sure. So I think the short answer to your question is that we will have a lot more to say on Phoenix when we go out and do our investor days and roadshow following the close. As I said, you know, we are going to be closing on August 1, and then we will be working through, you know, opening balance sheet, taxes, some other valuation work. So we are going through, you know, that process now. I think what I can say in terms of drivers going forward is that we are very excited about having the EAF exposure, which really diversifies our customer base.

And, you know, as I said on our call when we signed, I think it is very, very critical to us that we use this as a platform for organic growth. So when we think about drivers, we see opportunities with our technical and our engineering teams to look to the customers and expand the suite of services that we are providing at sites where we are already operating, as well as looking to new sites to bring on new business. You know, what we said when we signed is that Phoenix had, you know, a last twelve months trailing adjusted EBITDA of about $61 million.

And what I can say today is that, you know, that business, despite some of the cyclicality and some of the challenges in the steel sector right now, that, you know, that is still not an unreasonable number to put out there as you think ahead to Phoenix. So we feel good about the business today in the foundation, and then our opportunity to expand it, bringing our operational excellence and our engineering and technical expertise.

Henry Hurl: Thanks. I appreciate the color there. And then one more for me. Could you also talk about the recent conversations with your largest customer and if there is any potential for renewal of the Haverhill contract? Or any other color on how to think about your contracts that are rolling off this year and the split between contracted versus blast coke?

Katherine Gates: Yeah. Absolutely. You know, frankly, we were extremely surprised by the comments on the Cliff's earnings call, given that we are in active discussions with Cliff on contract renewal. As we said back in January, we knew that Cliff did not need more coke in 2025. And that's why we announced in January that we were sold out even though, you know, the pricing in the spot market is not what we wanted it to be, but we sold out and we sold into the spot market knowing that Cliffs would not need more coke from us in 2025. So that is unchanged.

But at the same time, we were continuing contract discussions with Cliff, and we are continuing those discussions with them today. In terms of specific detail on volumes, etcetera, as you know, we do not talk about the specifics of our contract negotiations with our customers. So I cannot really say more than that, other than that we are in active discussions with them.

Henry Hurl: Okay. Thanks for that. To you and your team, continue best of luck.

Katherine Gates: Thank you. The next question comes from Nathan Martin with Benchmark Company. Please go ahead.

Nathan Martin: Thanks, operator. Good morning, everyone. And maybe just following up on that last line of questioning. Like you said, surprised maybe by some of the comments Cliff made. You know, they indicated they have got plenty of internal coke production post the Stelco acquisition. They do not need any third-party coke, you know, kind of going forward. You know, how if that's the case, like, how do you guys go about finding another long-term contract for that production in Haverhill? Is it a case where whoever Stelco was selling to previously could be a potential option?

Or, you know, could the shift to Cliffs using more internal coke lead to a balance disruption in the market that needs to be addressed with, you know, supply curtailments?

Katherine Gates: Sure. I mean, I think, you know, just the starting point is we continue to be in active discussions with Cliff, but we have also, and you have seen this over time, we have looked for ways to profitably sell our coke when we are not selling on a long-term contract basis. So whether that is selling foundry and selling more foundry going forward, that's certainly a very profitable avenue for us, and we have continued to grow our market share in the foundry market. We would also look to profitably sell our blast coke to other customers.

So while we obviously, you know, cannot get into any sort of discussions on that front, we have been able to profitably sell our blast coke even at these depressed prices. Selling into North America. We would continue to look to sell into the seaborne market if that was profitable. So that will continue to be our focus just as it has been in the past years.

Nathan Martin: I appreciate that, Katherine. Any thoughts, like, does this potentially upset the supply-demand balance here in North America or not necessarily if they continue or start using more internal coke?

Katherine Gates: Well, I think, you know, as we have said before, you know, there is a volume of coke that is needed for the volume of steel that is being produced. So, you know, if, for example, Cliffs is now using more of the Stelco coke, Stelco coke that was being used by another customer, as you pointed out before, would be a customer that we would pursue going forward. So from an overall kind of supply-demand balance, you know, we would understand that as being there today, and we would try to take advantage of that if things were moving.

Shantanu Agrawal: Nate, I would want to add a little bit. This is Shantanu. You know, like, if they are running at full capacity, I think the question is more on the Cliffs side. You know, if there is a capacity rationalization, permanently on their side, on one of the blast furnaces, that definitely disrupts the supply-demand balance of coke. Right? Then the structure looks very different. In the long run, if one of the blast furnaces, which had been running for a longer time, goes down, then, yes, it definitely disturbs the supply-demand balance of coke within Canada and the US, and that makes it a little bit challenging for us, you know, from that perspective. Right?

But if the assumption is that they continue running the blast furnaces, which they have been running and their demand stays the same, as Katherine mentioned, there is demand for that coke to go there.

Nathan Martin: Gotcha. Shantanu, I appreciate that. Maybe shifting to the logistics business. Again, you called out the weakness at CMT. Was that mainly coal, or was that any other product there first? And then how do you view kind of export coal demand over the next few quarters? Are you guys assuming any benefit at all from price adjustment given where the indices are today?

Katherine Gates: Well, in terms of products, you know, we move products other than coal through CMT, including iron ore, including pet coke. So there is a mix of products there, but the vast majority of the volumes there are, you know, are coal for export. We have seen higher domestic pricing and higher demand, you know, as we kind of look at the market today. And so that higher demand domestically can impact volumes being shipped internationally just based on that pricing.

But at the same time, as Shantanu mentioned earlier, we look at, you know, the volumes that we are shipping in July, and we look at what we have in our plan for the balance of the year, and, you know, we are reaffirming our logistics guidance based on what we see going forward. We are comfortable with that. In terms of any sort of, you know, price adjustment mechanism, we have not had a price adjustment thus far under the new contract, and we did not contemplate that in our guidance for 2025.

Nathan Martin: Got it. That's helpful, Katherine. And then just back to the guidance for a second. I know you reiterated your full-year adjusted EBITDA guidance for the segment. But I do not think I saw any update to the volume guidance. So should we assume you still feel good about handling, I think it was around 22.9 million tons for the full year? And if so, is that, you know, increase in tonnage here in the second half versus the first half mainly expected to come from the KRT expansion?

Shantanu Agrawal: That's right.

Nathan Martin: Okay. Perfect. Maybe just one final one. Again, congratulations on successfully amending and extending your revolver. Obviously, capacity did come down a little bit to $325 million from $350 million. You previously said, I think you expected to borrow about $230 million on the revolver for Phoenix. That lower capacity, does that impact your plans at all there for financing? And then does it still leave, you know, enough room to continue pursuing the GPI project?

Shantanu Agrawal: Yeah. So, Nate, I mean, actually, our borrowing amount for the acquisition is lower. It's closer to $200 to $210 million on the revolver, being more having more cash available on the balance sheet. So we are using that. And then, you know, that leaves us more than enough to do kind of, you know, work through the working capital changes. You know, we have been undrawn on the revolver for, like, at least a couple of years. So that leaves us enough capacity for our working capital day-to-day work.

On the GPI side, now that we have done the Phoenix acquisition, if we do the GPI project, that will lead us into a separate borrowing, and it will all be, you know, some sort of term loan or a note or something like that. So that will be a separate financing deal when we get into the GPI project.

Nathan Martin: Makes sense, Shantanu. And I guess I should just go ahead and ask, you know, are there any updates on that GPI project, any additional thoughts on the discussions you guys are having with Nippon at this point?

Katherine Gates: So we are in active discussions with US Steel. I guess, at this point, we would say US Steel because it is truly, you know, US Steel with Nippon, but we are in active discussions, but I do not have anything to share at this point.

Nathan Martin: Got it. I'll leave it there. I appreciate the time, Katherine and Shantanu, and best of luck in the second half.

Katherine Gates: Thank you.

Shantanu Agrawal: Thank you.

Operator: This concludes our question and answer session. I would like to turn the conference back over to Katherine Gates for any closing remarks. Please go ahead.

Katherine Gates: Thank you all again for joining us this morning and for your continued interest in SunCoke Energy, Inc. We look forward to announcing the completion of the Phoenix Global acquisition. Let's continue to work safely today and every day. Thank you for attending today's presentation. You may now disconnect.

Where to invest $1,000 right now

When our analyst team has a stock tip, it can pay to listen. After all, Stock Advisor’s total average return is 1,039%* — a market-crushing outperformance compared to 182% for the S&P 500.

They just revealed what they believe are the 10 best stocks for investors to buy right now, available when you join Stock Advisor.

See the stocks »

*Stock Advisor returns as of July 29, 2025

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. Parts of this article were created using Large Language Models (LLMs) based on The Motley Fool's insights and investing approach. It has been reviewed by our AI quality control systems. Since LLMs cannot (currently) own stocks, it has no positions in any of the stocks mentioned. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Image source: The Motley Fool.

DATE

Wednesday, July 30, 2025 at 12:00 a.m. ET

CALL PARTICIPANTS

President & Chief Executive Officer — James Nesci

Chief Financial Officer — Kelly Pecoraro

Need a quote from one of our analysts? Email [email protected]

TAKEAWAYS

Net Loss—$2 million, or 10¢ per diluted share, representing a $735,000 improvement from the prior quarter.

Net Interest Income—Increased by $896,000, or 8.3%, driven by a 12 basis point expansion in net interest margin.

Loan Growth—Gross loans rose by $47.4 million, with approximately 3% growth, including a $22 million increase in commercial and industrial loans and a $12 million increase in construction loans year to date.

Core Deposit Growth—Core deposits expanded by nearly 4%, or $25.2 million, contributing to total deposit growth of $29.1 million; time deposits increased $3.9 million, offset by a $20 million increase in brokered deposits at lower rates.

Yield on Loans—Increased by eight basis points to 4.8%; yield on total interest-earning assets improved by seven basis points to 4.58%.

Cost of Deposits—Decreased by 13 basis points to 2.62%; cost of funds also fell 13 basis points to 2.72%.

Noninterest Expense—Declined by $90,000 from the prior quarter, primarily due to seasonal occupancy factors.

Provision for Credit Losses—$463,000 provision recorded, mainly for reserves on unfunded commitments scheduled to close.

Purchased Loan Activity—$45 million in credit-enhanced consumer loans and $19 million in residential loans were added to the balance sheet; consumer loans up by $76 million year to date through June 30, 2025.

Net Interest Margin Expansion—Net interest margin increased by 12 basis points, marking the third consecutive quarterly improvement.

Tangible Book Value Per Share—Rose by 6¢ to $14.87, up from the prior quarter.

Share Repurchases—406,000 shares repurchased at a weighted average price of $9.42, below tangible book value.

Capital Ratios—Tangible equity to tangible common assets at 15.1%, among the highest in the industry, according to management.

Asset Quality—Nonperforming assets and loans both increased by three basis points, reaching 30 basis points and 38 basis points of total assets and loans, respectively.

Allowance Coverage—Allowance for credit losses to total loans dropped one basis point; allowance to nonperforming loans fell to 211% from 230% sequentially.

Loan Pipeline—Letters of intent exceeded $40 million at quarter-end, mainly for commercial lending with anticipated yields above 7%.

Consumer Loan Strategy—CFO Pecoraro said, "We are comfortable going to about 7% to 8% of the loan portfolio over the next couple of quarters" for credit-enhanced consumer loans.

Expense Outlook—Noninterest expenses are expected to remain in the "mid to high $13 million range" over the next several quarters, with potential modest increases for variable compensation in the second half of the year.

Margin Guidance—CFO Pecoraro said, "We are only looking at a couple of basis point expansion probably in the third quarter," suggesting limited net interest margin expansion in the second half of 2025.

SUMMARY

Blue Foundry Bancorp(NASDAQ:BLFY) reported a sequential improvement in net loss and continued progress on strategic objectives, including portfolio diversification and disciplined capital management. Management emphasized the focus on higher-yielding asset classes, such as owner-occupied commercial real estate and credit-enhanced consumer loans, to drive returns and manage risk. Deposit growth was attributed to deepening commercial banking relationships and new product strategies in a competitive rate environment. Adjustments in deposit pricing, including the introduction of short-duration and eight-month CDs, were aimed at balancing funding cost and customer retention. Share repurchases were executed below tangible book value, and capital ratios remain among the highest in the industry. Asset quality metrics remain stable, with only modest increases in nonperforming assets and loans on a low base.

CFO Pecoraro detailed the future repricing schedule, noting approximately $75 million of loans set to reprice in 2026 at a current rate of 3.75% and $23 million scheduled to reprice in the remainder of 2025.

Purchased credit-enhanced consumer loans carry a 3% reserve, affecting allowance methodology.

CEO Nesci affirmed continued focus on operating efficiency, stating, "We are looking at everything. Constantly, especially expenses," and highlighted ongoing efforts to leverage technology and optimize staffing to control expenses.

Management highlighted strategic efforts to grow core deposits through comprehensive client relationship management, particularly within commercial banking.

INDUSTRY GLOSSARY

Core Deposits: Stable, non-brokered, typically lower-cost customer deposits considered more reliable during market disruptions.

Credit-Enhanced Consumer Loans: Consumer loans structured or purchased with additional protective features, such as third-party guarantees or reserves, to reduce loss risk.

Tangible Book Value: Book value of equity excluding intangible assets, frequently used to assess a financial institution's shareholder value and capital strength.

Full Conference Call Transcript

James Nesci: Thank you, Operator. And good morning, everyone. We appreciate you joining us for our second quarter earnings call. As always, I am joined by our Chief Financial Officer, Kelly Pecoraro, who will review our financial performance in detail following my update. Earlier today, we reported a net loss of $2 million or 10¢ per diluted share. We are pleased with the progress made toward our strategic objectives in the second quarter, and thus far in 2025. Despite the competitive environment, we are able to grow core deposits and the net interest margin for the third consecutive quarter.

This, coupled with our expense discipline of approximately $1 million versus last quarter, our strong capital liquidity position continues to support our transformation into a more commercially focused institution. This quarter's increase in core deposits reflects the deepening of our relationships with the businesses and communities we serve and marks continued progress. We achieved approximately 3% loan growth during the quarter while improving the yield on our loan portfolio by eight basis points. This was supported by $29 million in deposit growth, including an almost 4% increase in core deposits and a 13 basis point reduction in our cost of deposits. Together, these results contributed to a meaningful 12 basis point expansion in our net interest margin.

Loan production year to date totaled $180 million with $90 million produced during the second quarter at a weighted average yield of approximately 7%. Year to date, our diversification efforts have led to a $22 million increase in commercial and industrial loans, including owner-occupied commercial real estate. Additionally, construction loans increased $12 million while we thoughtfully decreased our multifamily portfolio by $37 million. We also saw a $76 million increase in consumer loans through June 30, primarily driven by purchases of credit-enhanced consumer loans at attractive yields. As we continue to execute our strategy of portfolio diversification, we remain focused on prioritizing asset classes that deliver higher yields and better risk-adjusted returns.

Growth in our owner-occupied commercial real estate and construction lending reflects our disciplined approach to supporting local businesses while managing credit exposure. Additionally, our investment in credit-enhanced consumer loans further enhances returns while maintaining a strong risk management framework. These portfolio shifts are aligned with our goal of driving earnings and long-term value creation. Our loan pipeline remains healthy, with executed letters of intent totaling more than $40 million at quarter-end, primarily in commercial lending with anticipated yields above 7%. We expect this momentum to continue in the coming quarters. Tangible book value per share increased to $14.87, up 6¢ from the prior quarter. We remain committed to enhancing shareholder value through disciplined capital management.

During the quarter, we repurchased 406,000 shares at a weighted average price of $9.42, a significant discount to our tangible book value and adjusted tangible book value. Both the bank and holding company remain well-capitalized, with tangible equity to tangible common assets among the highest in the industry at 15.1%. Our capital position and credit quality remain strong, and we are encouraged by the sustained momentum across both lending and deposit fronts. We believe these efforts will continue to support balance sheet and income growth in the coming quarters. With that, I will turn the call over to Kelly for a deeper look at our financials. After her remarks, we will be happy to answer your questions. Kelly?

Kelly Pecoraro: Thank you, James. And good morning, everyone. Net loss for the second quarter was $2 million. This is a $735,000 improvement to the prior quarter. We are encouraged by the positive momentum in net interest income, driven by unfunded loan commitments. Net interest income increased by $896,000 or 8.3%, driven by a 12 basis point expansion in our net interest margin. Interest income expanded $725,000, primarily due to loan growth. Interest expense declined by $101,000, reflecting lower deposit costs. The yield on loans increased by eight basis points to 4.8%, and the yield on total interest-earning assets improved by seven basis points to 4.58%. Our cost of funds declined by 13 basis points to 2.72%.

The cost of interest-bearing deposits decreased 13 basis points to 2.62%, and the cost of borrowings decreased nine basis points to 3.3%. Noninterest expense decreased by $90,000 compared to the prior quarter, driven primarily by seasonal occupancy expense. We are pleased that expenses have remained relatively stable over the past several quarters and continue to expect them to stay within the mid to high $13 million range. As we progress toward our growth targets and achieve corporate goals, we anticipate a modest increase in compensation expense in the second half of the year due to higher variable compensation costs.

For the quarter, we recorded a provision for credit losses of $463,000, primarily attributed to reserves required on unfunded commitments that are scheduled to close. As a reminder, in Q3, the majority of our allowance is derived from quantitative models, and our methodology continues to assign greater weight to the baseline and adverse economic scenario. From a balance sheet perspective, gross loans increased $47.4 million during the quarter. Organic growth was primarily in owner-occupied commercial real estate and construction. We also purchased $45 million in credit-enhanced consumer loans and $19 million in residential loans to support our residential portfolio. Our available-for-sale securities portfolio, with a duration of 4.1 years, declined by $2.4 million due to maturities, calls, and paydowns.

This was partially offset by purchases and a $1.7 million improvement in unrealized loss. Deposits increased $29.1 million or 2%. We experienced $25.2 million or approximately 4% growth in core deposit accounts. Importantly, growth in core deposits was fueled by full banking relationships with commercial customers, emphasizing our strategic focus on deepening client engagement in a competitive market. Time deposits increased $3.9 million as we strategically repriced promotional thinking and backfilled runoff with $20 million in broker deposits at lower rates. Borrowings increased slightly to help fund loan growth. Lastly, asset quality remains strong. Nonperforming assets increased due to a slight rise in nonaccrual loans.

Nonperforming assets to total assets picked up by three basis points, and nonperforming loans to total loans also ticked up by three basis points. Both remain low, at 30 basis points and 38 basis points, respectively. Allowance coverage decreased slightly, with the allowance for credit losses to total loans declining by one basis point, and the ratio of allowance for credit losses to nonperforming loans decreased from 230% to 211%. With that, James and I are happy to answer your questions.

Operator: Thank you very much. To ask a question, please ensure your device is unmuted locally. Our first question comes from Justin Crowley from Piper Sandler. Your line is open. Please go ahead.

Justin Crowley: Hey, good morning. Just wanted to start off on the margin and some of the drivers as you look ahead here. Can you quantify for us what loan repricing looks like through the back half of this year and then as you get into 2026? Just any detail on volume and then what the rate pickup looks like. I think you have mentioned previously that it is really next year when you see a lot of that multi-portfolio start to turn, but just wondering if you could put the numbers around that for us.

Kelly Pecoraro: Yeah. Sure. No problem, Justin. You are right. 2026 is really where we see a lot of the repricing taking place. In '26, we have about $75 million that is standing at a rate of about 3.75%. That is due to reprice not exactly equally during the year, but spread over the year in '26. For the remainder of '25, we have just about $23 million that is today at a rate of that is sitting at a rate of 75 that is going to reprice. Important to keep in mind throughout Q3 and Q4, we also have maturities that are coming in. Those maturities, the majority of them sit in the construction portfolio.

And there are current market rates while we have a nice pipeline of construction coming in, as you know, do not fund all upfront. So we will see a little lag in terms of the construction portfolio having maturities.

Justin Crowley: Okay. Got it. And then, I guess, on the CD side and maybe just assuming flat rates for a moment, through year-end. Who knows what we will get out of the Fed? But, you know, has the pricing opportunity there largely grown its course? And so would it really just take lower rates from here to see funding costs move appreciably lower? What is the thinking there?

Kelly Pecoraro: Well, from a CD perspective, we were keeping the book relatively short right around that three-month time frame. But we did introduce an eight-month CD that has extended that maturity. So we will not see that repricing of that book until January or February, as those CDs will mature.

James Nesci: Justin, I think there is also a market component to that question. It depends on what our competitors do in the marketplace. So we are obviously working through the market competition like everybody else, and we are keeping an eye on our deposit base and trying to make sure we produce products that our customers are interested in purchasing.

Justin Crowley: Okay. Helpful. And I guess just sort of putting it all together, obviously, a decent step up in the NIM through the first half of this year. Given kind of all the puts and takes, would you kind of expect expansion to be more limited through the back half of this year with 2026 really being when we start to see kind of more significant improvements in margin?

Kelly Pecoraro: Yeah. Justin, you have it absolutely right. We are only looking at a couple of basis point expansion probably in the third quarter. And then when we get to the fourth quarter, you know, that will depend upon pipeline and what is coming on and what happens in the market. But the expansion will be limited in the back half of the year.

Justin Crowley: Okay. I appreciate that. And then in terms of the consumer purchases, I know in the past, you said there is not necessarily a magic number in mind. But, you know, with the book at 5% of loans today, can you just give us a sense for thinking on adding to that portfolio from here, how that fits in?

Kelly Pecoraro: Yeah, Justin. So right. The it is right now, we are comfortable going to about 7% to 8% of the loan portfolio over the next couple of quarters.

Justin Crowley: Okay. And then can you just remind us that, you know, as far as the credit enhancements that come along with those, can you just boil down the exact structure of these credits and how much in the way of potential loss you are protected from?

Kelly Pecoraro: Right. So these come with a 3% reserve against these credits. So, you know, they do run through our normal allowance calculation. We look to see if there is any additional exposure there. But they are we have a 3% credit reserve against.

Justin Crowley: Okay. And then maybe just one last on a bigger picture question. You know, profitability is obviously still strained here, but at least moving closer to being in the black and, you know, it seems like, particularly next year, there are some margin tailwinds that will help over time. But, you know, is there anything else behind the scenes that you are looking into or weighing, whether that be from an expense standpoint? I know you gave guidance there. So either there or just wherever that could help accelerate that progress?

James Nesci: So what I would tell you is we are looking at everything. Constantly, especially expenses. And I noticed some of the early notes mentioned, you know, expense discipline. Kelly and I are very focused on looking for any dollars we can find. It is expensive to run a bank in today's age. It just takes people to run the bank. We have kept a close eye on our headcount. We have our people working as efficiently as we can. But with AI, we are always looking to gain new efficiencies. So those are the things that we are working through. What else can we do with fewer people and getting a greater output from our existing staff?

So those, I cannot give you a timing of when that happens, but I can tell you that is the type of stuff that we are constantly looking at.

Justin Crowley: Okay. Got it. Well, I appreciate everything. I will leave it there. Thanks so much.

James Nesci: Thanks, Justin.

Kelly Pecoraro: Thanks, Justin.

Operator: Our next question comes from David Conrad from KBW. Your line is open. Please go ahead.

David Conrad: Yes. Hey, good morning. Justin kind of went through the quarter pretty good there. So really just kind of have a very longer-term picture question. Kind of looking regarding, you know, the asset generation, but also kind of tied to the noninterest-bearing deposit levels. You know? I think it is kind of early days on C&I, but are you kind of thinking about, you know, how can we get that mix up and thinking about what type of assets you can generate maybe to grow the noninterest-bearing deposits?

James Nesci: Well, good morning, David. Thank you for joining our call today. Good morning. Yes. We are looking at it. The noninterest-bearing is obviously a key point for us to focus on. So we are not just looking at C&I. We are looking at our commercial real estate borrowers and we are trying to make sure that we get a full relationship from all borrowers, regardless of what asset class they may be borrowing in. And that has been working really well. We believe by providing good products to our customers, commercial or consumer, that we will get more of that core type deposit. And, again, it seems to be working. We are encouraged by that pathway.

And we will keep reaching out to our existing customers on the loan side to say, we really like your full banking relationship. So, yes, that is clearly part of the strategy, and we think it is working and will continue to work going forward.

David Conrad: Great. Perfect. Thank you.

Operator: We currently have no further questions. I would like to hand back to James Nesci for some closing remarks.

James Nesci: Thank you, Operator. I want to thank everybody who dialed in today to listen to the earnings call. Again, we are encouraged by the quarter and what we are starting to see, and it all stems from our dedicated employees out on the line working hard every single day. I want to acknowledge all of our customers and shareholders that have been with us. Some of you for a very long time have been shareholders that have stuck with us as we recreate our strategy and try to drive towards profitability. With that, I just want to say thanks again, and hope to speak with all of you again next quarter. Thank you.

Operator: This concludes today's call. We thank everyone for joining. You may now disconnect your lines.

Where to invest $1,000 right now

When our analyst team has a stock tip, it can pay to listen. After all, Stock Advisor’s total average return is 1,039%* — a market-crushing outperformance compared to 182% for the S&P 500.

They just revealed what they believe are the 10 best stocks for investors to buy right now, available when you join Stock Advisor.

See the stocks »

*Stock Advisor returns as of July 29, 2025

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. Parts of this article were created using Large Language Models (LLMs) based on The Motley Fool's insights and investing approach. It has been reviewed by our AI quality control systems. Since LLMs cannot (currently) own stocks, it has no positions in any of the stocks mentioned. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Image source: The Motley Fool.

DATE

• Wednesday, July 30, 2025, at 10 a.m. EDT

CALL PARTICIPANTS

• Chairman and Chief Executive Officer — Albert Nahmad
• President — A.J. Nahmad
• Executive Vice President and Chief Financial Officer — Paul Johnston
• Executive Vice President — Barry Logan
• Executive Vice President and Chief Digital Officer — Rick Gomez

Need a quote from one of our analysts? Email [email protected]

RISKS

• Sales declined: Management stated, "Sales declined 4% as double-digit pricing gains for new equipment were offset by lower volumes."
• SG&A increased 6%: The company incurred extra costs from the A2L transition and the addition of new locations, with core SG&A growth higher than management's preference in a down quarter.
• Inventory peaked above expectations: CEO Albert Nahmad stated, "it's more than we had hoped for," with Inventory peaked at $2 billion before being reduced to $1.8 billion in Q3 2025.
• Residential new construction market down 15%-20%: Management cited, "RNC is probably down 15 to 20%."

TAKEAWAYS

• A2L Refrigerant Transition: Approximately 55% of historical product sales were affected by the 2025 transition to A2L refrigerants, impacting inventory, supply chain, and branch staffing.
• Sales Performance: Total sales declined 4% as double-digit equipment price gains were offset by lower volumes, with residential and international segments subdued.
• Gross Margin: management does not expect the 29% gross margin to be sustained in the back half of 2025 ("I don't want us to extrapolate that 29% into the back half").
• EBIT and EBIT Margin Growth: EBIT increased and EBIT margin expanded, driven by OEM pricing actions and digital pricing optimization, despite lower sales.
• SG&A Expense: SG&A rose 6% due to transition-related inefficiencies and acquisitions; approximately 25% of that SG&A growth was from recent acquisitions, with core SG&A trending about 4.5% higher.
• Inventory Levels: Inventory peaked at $2 billion and was reduced to $1.8 billion in Q3 2025, with less than 5% now comprised of legacy R410A and transition in progress to new A2L products.
• Digital and Technology Initiatives: E-commerce is now a $2.5 billion business, or 34% of our sales; Mobile apps now have 70,000 users and grew 17% versus last year; OnCallAir’s annual product volume increased 19% to $1.6 billion.
• Product Mix Shift: Parts and supplies, which carry higher margins, constituted about 30% of sales as of Q2 2025; management launched initiatives to expand this segment.
• AI Implementation: Two AI platforms -- internal and external -- deployed to leverage company and customer data for improved efficiency and growth strategies, with about 21 internal users weekly.
• National Customer Strategy: Watsco One sales platform targeting multi-location institutional customers is in development, planned for 2026 launch, designed to unify offerings and capture incremental opportunity outside core replacement business.
• Balance Sheet: Maintains a solid cash position and no debt, providing capacity for ongoing M&A and strategic investments.
• M&A Pipeline: Management is "having as many of those conversations as we can" regarding acquisitions, with one significant target under consideration.
• Market Mix Consistency: 85% of products sold remain at minimum efficiency levels in the first half of 2025; shift to lower-branded products has not occurred.
• Regional Weather & Demand: Weak volume performance in May was attributed mainly to adverse weather in the North; improvement was noted into July (Q3 2025).

SUMMARY

Watsco (NYSE:WSO) management directly addressed ongoing challenges related to the large-scale product and regulatory transition in 2025, highlighting operational complexity and near-term margin opportunities. Strategic technology investments are accelerating digital channel growth, data-driven pricing optimization, and sales to multiregional institutional customers. The company emphasized that recent peak inventory levels reflected temporary needs of the product transition, with systematic reductions underway. Watsco’s leadership detailed margin drivers and clarified that the extraordinary gross margin performance in Q2 2025 reflected both pricing and mix, not sustainable run rates. The management team remains focused on monetizing technology adoption and expansion of higher-margin parts, while actively positioning for consolidation opportunities in a fragmented HVAC distribution market.

• President A.J. Nahmad said, "We have accelerated adoption of our pricing platform PriceFX. Our goal is to reach a 30% gross profit margin."
• OEM pricing actions early in the quarter were cited as amplifying near-term margin, with Barry Logan stating, "there is obviously an algebraic benefit to margin when OEMs raise prices."
• Watsco’s e-commerce now constitutes 34% of sales; Mobile apps serve 70,000 users; OnCallAir drives higher attach rates for high-efficiency products when utilized by contractors.
• There was greater than 80% A2L sell-through by quarter end and less than 5% of inventory remaining as legacy
• Management’s "dream plan two" targets $10 billion revenue, 30% gross margin, and five times inventory turns, with the latter up from pre-COVID levels of 4.5x on investments in inventory systems.
• The chief digital officer stated, there has been about 200 basis points of gross margin expansion attributable to this price optimization and bringing more technology to how we price over the past two or three years.
• Tariffs and metals inflation are beginning to impact input costs for non-equipment segments, notably a 10% increase cited on copper-heavy products.
• Softness in residential new construction and international sales continues, but July showed sequential improvement over June, and management expects improved efficiency in SG&A as the transition winds down in the second half of 2025.

INDUSTRY GLOSSARY

A2L Refrigerants: New-generation, low-global-warming potential refrigerants with mild flammability used to comply with updated environmental regulations in HVAC equipment.

R410A: A widely used legacy HVAC refrigerant being phased out due to environmental regulation.

OEM: Original Equipment Manufacturer; refers to companies that produce HVAC units Watsco distributes.

OnCallAir: Watsco’s digital sales tool enabling contractors to recommend and sell HVAC products more effectively, with a proven impact on high-efficiency sales mix.

PriceFX: Watsco’s proprietary pricing technology platform used for dynamic price optimization.

Watsco One: Forthcoming unified digital sales and service platform tailored to large institutional, multi-location HVAC customers, scheduled for launch in 2026.

RNC: Residential New Construction; market segment focused on sales of HVAC products for newly built homes.

Full Conference Call Transcript

Albert Nahmad: Good morning, everyone. Welcome to our second quarter earnings call. This is Albert Nahmad, Chairman and CEO. And with me is A.J. Nahmad, President, Paul Johnston, Barry Logan, and Rick Gomez. Before we start, our normal cautionary statement: This conference call has forward-looking statements as defined by SEC laws and regulations and are made pursuant to the safe harbor provisions of these various laws. Ultimate results may differ materially from the forward-looking statements. Watsco delivered healthy second quarter results in soft market conditions. I should say 2025 marks a year of significant product transition to next-generation equipment containing A2L refrigerants. The transition affects roughly 55% of our historical product sales.

This transition affects our inventories, our supply chain, staffing levels in our branches, and other aspects of our business. Regulatory changes have historically been good for our business and good for our customers. We expect that transition to be no different than has happened in the past. The changes are substantial and complete, and we'll look forward to operations and simpler business in 2026. Let me turn to second quarter highlights. Sales declined 4% like the double-digit pricing gains for the new equipment, offset by lower volumes. We had a late start to the summer season. Sales for residential, new construction, and international markets remain subdued. On the plus side, Watsco achieved record gross profit margins.

Our performance yielded an increase in EBIT and expanded EBIT margins despite lower sales. Our results benefited from OEM pricing actions. Our pricing technology platform called PriceFX also contributed. Gross margins remain a focus. There is much potential to improve over time. SG&A increased 6% as we incurred extra costs during the transition. We also added 10 new locations from recent acquisitions. Our balance sheet remains solid. We have a strong cash position and no debt. We continue to invest in innovation and technology to separate us from our competitors. Watsco's technology journey began fifteen years ago, and we have made terrific progress.

For example, e-commerce continues to grow and is now a $2.5 billion business, or 34% of our sales. Mobile apps have now 70,000 users and grew 17% versus last year. The annual volume of products sold through OnCallAir, which is our digital selling platform for customer contractors, increased 19% to $1.6 billion. It's a great assist to our customers. But we're not standing still in terms of ideas and making further investments. We are building on or adding new initiatives to drive growth and to delight our customers. Examples include a new technology-driven sales platform being developed to capture larger national customers. We're talking about national customers here.

This would be incremental to Watsco's core replacement vehicles and is expected to be launched in 2026. We have accelerated adoption of our pricing platform PriceFX. Our goal is to reach a 30% gross profit margin. We have launched an initiative to grow the parts and supplies segment of our business, which today is roughly 30% of sales and can be much larger over time. And we launched two AI platforms, one internal and one external, to harness our data. Artificial intelligence offers the potential to further transform our customer experience, improve operating efficiency, and create new data-driven growth strategies. This is an exciting time, and these are just a few of the many initiatives underway.

Now we will expand on these themes at an investor event in Miami, which will occur after temperatures have dropped a bit. Stay tuned for additional details. Finally, we believe our culture of innovation, along with our scale, entrepreneurial culture, and capacity to invest, are unmatched in our industry. With that, let's turn to Q&A.

Operator: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. And if at any time, your question has been addressed and you would like to withdraw it, please press star then 2. At this time, we will pause momentarily to assemble our roster. And our first question here will come from Ryan Merkel with William Blair. Please go ahead with your question.

Ryan Merkel: Good morning, Ryan. Hey. Good morning, everyone. Good morning. Alright. My first question is just, you know, on volumes in the quarter. Were a little bit worse than I was expecting. I know you mentioned weather, H2L, new. Would just love it to hear from you, you know, I'm gonna ask both Paul and Barry to respond to that. Not as strong as we anticipated going into Q2. You know, what we saw was a kind of a lumpy picture in the marketplace. Where April came in strong, May ended up being very weak, mainly because of the weather patterns in the North. And then in June, they came back again. And it was sure.

You know, RNC is probably the our new construction new construction is probably down 15 to 20%. Replacement is still holding fairly strong. We didn't really see a lot of repair at the beginning of the quarter, which we saw towards the end of the quarter and continues into July. But not enough to offset, you know, the unit sales that were certainly down I mean, on international sales. Yeah. I'll comment on that. Also, on one of the exposures we talked about in the first quarter that repeated itself in the second quarter, was our international, which is Mexico, Mexico is probably the most volatile market.

It's a small part of our business, but a big contributor from a margin point of view. Mexico was down well, let's put it this way. It cost us about 10¢ a share in the quarter. 20¢ a share year to date. In June, it grew. In July, it's grown since then. So I'll take kind of one market that's been irritating which seemed to be a lot better in the last couple of months. As far as July goes, Ryan, I would say it's better. August is bigger than July in our forward-looking commentary.

So if I say that July is better than what we saw in June, that's okay, but it needs to extend itself and extrapolate itself as the year goes on. The good news is that in general, you know, what we can control is margin, pricing, and the wherewithal of our business to support all these new products in the market with our customers. I'm glad we have our balance sheet to do that with. Because it's been a pretty extraordinary product change this year. You can see the building of inventories. That's a customer-focused effort to help our customers get going in this market.

The margin speaks to capturing new pricing on as we say, over half the products we sold we sell, we had to capture price inflation since that price and get off on the right track in margins and be able to say, that's been accomplished. So we like what we can control. We'll be patient about what we can't control. And I think also maybe this is more of a 2026 discussion. But, you know, the entire industry, every OEM we sell products for have been through an extreme product cycle probably for the last two or three years.

And at what point does that serenity, you know, play itself out in terms of growth and market share development and product expansion the blocking and tackling that I think, is particularly good for us and that we're good at. So maybe that's more of a next year event, but we're kinda looking forward to it quite honestly. Yeah. That's fair. Okay. Since you mentioned gross margin, that was the other, you know, metric that was really strong this quarter.

Albert Nahmad: My sense is it's both price cost and initiatives, but you know, my question is I don't I don't want us to extrapolate that 29% into the back half. So just how sustainable is that? Was 2Q kind of temporary due to price cost timing?

Barry Logan: Go ahead, Barry. Yeah. Yeah. I think there is obviously an algebraic benefit to margin when OEMs raise prices. In April and May, we talked last quarter that OEMs had faced some inflationary realities going on with tariffs and raw materials and so on. On top of the like-for-like price increase on the new product they introduced inflationary pricing, early in the quarter. That clearly, you know, helped build a bigger margin this quarter, and the benefit of that you know, kind of. But I'm the one that probably three years ago, talked about 27% as a floor, as a benchmark.

And I, you know, I stand by that, obviously, and if I say now 27% plus I would expect that for, you know, the last half of the year. But we won't have the benefit of those pricing actions that you see in the first half of this year. So somewhere in between would be my conjecture and the market will play out and determine what it is. But so I think I think we have a chance to beat our benchmark and but not have the benefit that we saw as extraordinarily this quarter. In terms of pricing.

Ryan Merkel: Well, that's great. We had very unexpected. Yeah. Thanks. Just wanna add. I mean, this is A.J. Nahmad. Just real quickly. I mean, there is the benefit on the OEM price increases, but also the efforts we're making on our price optimization and the leadership of those teams and the pricing teams. That's also working. So it's a combination of both, but we continue to put points on the board in terms of the pricing efforts that we're taking internally. Yeah. I'll add that. As we move our product mix, which I mentioned in the opening statements, towards parts and supplies, and that's what we're focused on with our technology.

That by its nature, carries a higher margin than equipment sales. So our product mix, hopefully, sometime later this year or into next year, we'll improve margins too because parts and supplies carry higher margins.

Ryan Merkel: Thank you very much. I'll pass it on.

Operator: And our next question will come from Brett Linzey with Mizuho. Please go ahead.

Brett Linzey: Good morning. Yeah. Maybe just a follow-up on that. Let the last point there. So if you could maybe just unpack the year-over-year gross margin contribution. Is there any way to delineate that between the pricing optimization tools versus the parts mix versus some of that raw pricing in just in the marketplace in the quarter? That's an interesting question. Who wants to deal with that?

Rick Gomez: Yeah, Brett. I'll take a stab at that. This is Rick Gomez. This is directional because there's, you know, a lot of art and a lot of science to this as well. And but it's not all science. So when we look at the quarter, there was and when we look at the year as well, pretty consistent. There's about 50 to 60 basis points of gross margin enhancement that we can attribute to the day-to-day job of a distributor in the market. And so gross margins would have been in the high 27s. Absent any of that inflation, and the inflation helps but it's not something that you can underwrite, you know, perpetually, obviously.

So that's what it's amounted to. The way, that's been pretty consistent. If I look back, maybe two or three years in the data, we've been at that you know, we can aggregate and say there's been about 200 basis points of gross margin expansion attributable to this price optimization and bringing more technology to how we price. Keep in mind that the complexity of price in the industry is something that generally benefits a distributor. What I mean by that is that virtually every SKU has a different price to every customer. And so to imagine that we are optimized, well, it's the opposite. We're far from optimized.

And that's why we think there's so much room still to go. And, oh, by the way, just to finish, the thought is that during that period of time, we've also gained market share over that three-year period, if I measure it. So that's mainly attributable to all the technology. And my point there is that has not borrowed from customer acquisition and market growth at the end.

Brett Linzey: No. That's very helpful. You know, appreciate that. And then just a follow-up on the cylinder shortage. Sounds like you guys think it abates by the second half. I know some of the peers think it does persist into the second half. So maybe what was the impact do you think in quarter from the shortage situation? And then are you assuming that some of that does carry into H2?

Paul Johnston: Yeah. I think, you know, what this is Paul Johnston. What we had was we had an allocation situation where we were being allocated refrigerant. What the OEMs did was they came through and did an overcharge in the unit so that they didn't require as much, you know, field installation type refrigerant. And so it's become less and less of a concern as time goes on, as our allocations continue to increase. We feel good that sometime in August, we should be off of allocation. And I think it was very irritating. It was very disturbing that we had to go through that.

But I don't think that really is the total cause of why the market was slower than what it was.

Brett Linzey: Thanks for the color. Yeah. Just editorial on that. I you know, the like-for-like SKUs that we're selling now, A2L versus the prior is a 10% difference in price. And a speed bump on the canisters or refrigerant is that. A speed bump? And the transition itself, if we look forward again to that word serenity I used earlier. We're looking forward to it.

Operator: And our next question will come from Tommy Moll with Stephens. Please go ahead with your question.

Tommy Moll: Morning, Tommy Moll. Morning, Albert Nahmad. Thanks for taking my questions.

Albert Nahmad: Of course.

Tommy Moll: Wanted to start on inventory. Maybe you could characterize for us the investment there versus what you would have expected to need for the transition. Just in dollar terms, is it about what you would have soft circled or maybe a little elevated anything you can do to frame that for us and then also how you think it might trend over the next couple quarters?

Albert Nahmad: Well, the honest answer is that it's more than we had hoped for. And some of that is because we expected not to have the unusual demand industry demand that we the lower industry demand. So we peaked at about $2 billion. But we are now very focused on what to do about it and we've lost in terms of inventory investment, $200 million so far in the third quarter, we're down to $1.8 billion. And plus this transition of product you have to have the old and you have to have the new on the equipment side. And we'll transition out of the old before the end of the year. And that will help reduce the inventory investment.

Paul Johnston: That's a very good question. I'm very dedicated to increasing our inventory turn. And it's been a rough time to do that, but I think that.

Albert Nahmad: Yeah. Pretty stoked.

Paul Johnston: Oh, go ahead.

Albert Nahmad: Yeah. On a raw number basis, you know, we had double inventory. We had about 5% of the total inventory was four ten, and then we had the more expensive A2L product in there. So we probably had a 15% rise just between what we had in four ten left over. And what we experienced when we had price increase. The balance of it is exactly what Albert Nahmad said. You know, the demand just wasn't there to be able to take the inventory back down. That you're going to see come down at the end of the third quarter.

Tommy Moll: Thank you both. As a follow-up, wanted to ask about the M&A environment and pipeline hasn't gotten a ton of airtime lately, but how can you characterize that for us?

Albert Nahmad: That's a very good question. We are eager to see what owners of distribution businesses and HVAC are going to do with this existing very soft market. They may do nothing. They may continue or they may say, well, now it's time to do something. In terms of an M&A. And, of course, we have a great reputation with distributors because the way we treat sellers, we're very careful about relationship build continuing post-acquisition with the pristine leadership of the business acquired. So I can't say it's gonna happen, but I'm sure hoping. We have a very, very strong balance sheet. We could take advantage of opportunities as they come.

That I cannot I can only tell you that well, I can't disclose it, but there is one that we think that without disclosing much more than that, that is of size. We'll see how that turns out. It's still under study.

A.J. Nahmad: Yeah. I would say rest assured we're having as many of those conversations as we can. We're super ambitious, and we have the balance sheet. To support anything we want if we can manage to muster up. So hopefully, it can be an exciting period in M&A.

Tommy Moll: Thank you both. I'll turn it back.

Operator: And our next question will come from David Manthey with Baird. Please go ahead.

David Manthey: Morning, David Manthey. Hey. Good morning. Was wondering if you had any thoughts on consumer preference during this product transition, like are you continuing to see a premium on the R410 systems? And then as people are buying the A2L, are they gravitating to one end or the other?

Albert Nahmad: I wonder who in our Oregon who in our team can respond to that.

Paul Johnston: Well, Paul Johnston, are you the one, Paul Johnston? You always are. Yeah. The industry really hasn't popped as far as high-efficiency product. You know, it's still at the entry level. I mean, we're at you know, basically using the old SEER rating. We're at we're at above 15 SEER for minimum efficiency. So it's high-efficiency product. So we really haven't seen a change in the direction of the industry. It's still very much sliding along the idea that it's going to be whatever the minimum efficiency is. And that represents probably 85% of the market. That has not changed. And then when you get into the brands that we're selling, the brands have been consistent throughout the year.

And they continue to hold steady. You know, we're seeing the Carrier brand and the Rheem brand you know, and the Goodman brands all doing their job and holding up their share of the business. We're not seeing a migration to a lower branded product. No.

David Manthey: David Manthey, I was just to just to just to add to that for the fun of it. If I look at brands, products, markets, customers, geographies, north and south, east and west, and we're selling, you know, close to 20 brands. The first half of the year is very consistent amongst you know, that collection of data points. So nothing stands out, Dave, and I don't think this has been disruptive to what kind of the baseline products being sold is going on.

A.J. Nahmad: Yeah. The exciting anomaly, though, and I think it's in our press release, is OnCallAir. When our customers are using the tool that we've created for them, which we call a sales engine, they are selling high-efficiency systems at a much higher rate, like the inverse amount. Meaning, I think it's, like, 70 or 75% of the time, a contractor is selling using OnCallAir. They're selling high-efficiency systems. When we can help influence that through that tool, that's powerful because the consumer gets a better product, the contractor makes a bigger ticket. As do we. It's a win-win-win.

David Manthey: It sounds good. Thanks for all the color there. My follow-up it's the first time we've seen other do better than the equipment in a long time. And as Paul Johnston said, the residential new construction is not helping. I assume all the ductwork and thermostats and things in the other category. So should we not read into this that there's a stronger fix versus replace trend this quarter? Or is it I don't know, commodities, or I'm just making this up. But any thoughts on that?

Paul Johnston: That's pretty small. You know? When you take a look at the entire marketplace, you know, you just take compressors. You know? The normal demand for compressors in The US was about a million two to a million three. And the balance of them go warranty. Because you have a five and a ten-year warranty on most of the equipment. You take a look at the equipment side, it's seven to 8 million units. So for the offset of a down market, on the unit side, through additional parts, yes, it's gonna help our gross margin. But, no, it's not gonna help the top line. It's not gonna help your revenue line.

The ratio is just too great between what parts represent versus equipment. Are we seeing an uptick? Yes. We started seeing an uptick in June. Which historically is the month in which you're going to see that up. It's continued into July, but we really haven't seen a radical increase in units. We've seen an increase in dollars more than we have units.

Albert Nahmad: Now let's not mislead either. Our sales in the new quarter are not they're pretty flattish. Small incremental. Low digit increase. They're not it's nothing that does not signify a major double-digit increase yet.

David Manthey: No.

Albert Nahmad: Thanks very much, about you yeah. When we talked about unit growth of compressors and coils, things like that, year to date is single digit. It's not, you know, it was not an avalanche of transition to that. It could be us just selling more compressors in the market. And I think you heard Carrier talk yesterday very directly about that, and they're talking to you know, 150 independent distributors when they're answering your question to that. So it's obviously an opportunity to sell more parts, but the wholesale trend is not something that I think is quite in the numbers yet.

David Manthey: Yeah. Thanks, Barry. Well, and somebody mentioned earlier, the M&A. We're very eager to do more M&A. Sometimes opportunities arise when you have these kind of markets. I'm sure hoping for it. Are we shut down again?

Operator: Oh, our next question will come from Jeff Hammond with KeyBanc Capital Markets. Please go ahead.

Jeff Hammond: Morning, Jeff Hammond. Good morning, everyone. Is this Real Al or AI Al?

Albert Nahmad: It's a combination.

Jeff Hammond: You have to figure it out. You see? I know it's the real Al. Yeah. That's a good one. Yeah. To clarify on the flattish sales comment, was that parts for July, or is that overall?

Albert Nahmad: Overall.

Jeff Hammond: Okay. Overall. And then just on invent back to inventories, can you just you know, maybe talk about you know, where you wanna ultimately get your turns to? I know you were kinda running four and a half. Turns a year, you know, pre-COVID and pre all these regulatory changes, and now you're kinda three to three and a half. And know, kinda where you see that happening over and over what time frame?

Albert Nahmad: Well, first of all, let me compliment you on the day. You're right about those turns. I'd like I'm not I'm not gonna put a time limit on this, but I'd like to get to five. At some point in time, giving all the technology we're investing in it, I'd like to get to five.

Paul Johnston: I mean, you could think about it. Pre yeah. Pre-COVID, we were at four and a half. We didn't have the technology investment in inventory systems and the management systems that we currently have. So as we come out of it, I think Albert Nahmad's goal of five is very attainable.

Albert Nahmad: We have what we call the dream plan. We may have mentioned it before. Actually, dream plan two because the dream plan one was achieved after three years of effort, and dream plan two is a new. I mean, may take three years to do that. Dream plan two is $10 billion in revenue, 30% in gross profit margin, and five times on the inventory turn. And that's the those are the targets that we're focused on.

Jeff Hammond: I remember when it was 10% growth and 10% margins for a $100. You guys blew through that one.

Albert Nahmad: Believe it or not, though. Believe it or not, that was twenty years ago.

Jeff Hammond: Yeah. Boy, that's this is a hell of a history lesson here today.

Albert Nahmad: Yeah. Yeah. That's pretty impressive. Yeah. I'm so impressed. For the and for those 20-year-old listening to us, Jeff Hammond is right. We're call Pan and Chemicals a 100. It was called ten and ten equals a 100. We got our management team together and rallied around that. Many of them thought Albert Nahmad was out of his mind. And, obviously, we've blown past that, you know, some time ago.

So we reinstituted that cultural you know, kinda concept about six months ago, actually, a year ago, and got everyone together and some of the initiatives that you're not asking about today that you will ask about as we develop them is built on that dream plan two concept and if we got had 75 other Watsco core managers on this call, you would you'd be able to ask them about it, not just ask us just know that culturally, those kind of things go on, and we have fun with it.

A.J. Nahmad: Yeah. And culturally, I mean, really, the takeaway is that we're super ambitious. And that's why we're investing in these big goals that we expect to hit. In time.

Albert Nahmad: And truth is that we also have an equity culture. That really inspires people to achieve and to meet the goals set by senior management. Which means what is the equity culture? Many, many, employees hold the Watsco shares. Either through a 401k or through the different stock plans. And we like that. We like the ownership culture to be spread out. Throughout the organization. It's very unique. And it's very extensive. And so that ownership culture drives their desire to meet goals, I think. And I've always used it, and it's been working. And I expect it to continue working.

Jeff Hammond: Great. Thanks for the time, guys.

Operator: And our next question will come from Patrick Baumann with JPMorgan. Please go ahead.

Patrick Baumann: Good morning. Morning. Thanks for taking my questions. Maybe I was just curious if you could provide some examples of the large enterprise institutional customers that you cite as offering emerging opportunities for growth? Like, and what and what exactly are you doing to go after them?

Paul Johnston: Sure. Sorry? Paul Johnston? Go ahead, A.J. Nahmad. I would I would have A.J. Nahmad into that. Yeah. A.J. Nahmad? Yeah. So I'll jump in first.

A.J. Nahmad: And know, we teased some of this in our press release and also teased that we want you guys to come down to Miami and spend time with us. And see it and hear it and feel it more succinctly. But it's a there are macro trends going on in our industry including private equity, trying to buy up and consolidate contractors. And between that and home warranty companies and other institutional type customers, they're emerging and have emerged would call it, multi-location contractors who may have some business in Florida, some in Texas, some in Tennessee, you name it. And with our size and scale, we should be able to we should be their preferred vendor.

We should be the most exciting place for them to buy product. But don't necessarily have a unified experience for them to take advantage of our whole offering and our whole scale. That's what we're building. We call it Watsco One. And it will be a it'll be exactly that. It'll be one interface for these large institutional type contractors to buy and secure the products that they need from any of our locations whenever they need it.

Patrick Baumann: Interesting. Is it doesn't. Right. It huge undertaking. It doesn't sound that way just using words. But we are a very, very decentralized system. And to aggregate to meet to aggregate ours. Our inventories, and our pricing systems, and all our support systems to meet the needs of a large national customer. That is it takes a lot of lot of initiative. And we're investing to compare all those tools to do that. But it should have a very significant impact once we've accomplished it. Because no one else has these capabilities.

Patrick Baumann: A follow-up to that. Would you see selling to, like, a larger national account contractor any different than I guess, you said it is, but, like, in terms of, like, they're buying capacity, is that something that you would see as a headwind for your gross margin over time?

Albert Nahmad: Of course. That's one of the Yes. One of the elements.

A.J. Nahmad: Would say yes. But we can also we also have the opportunity to sell them a lot more parts and supplies. But which has been discussed earlier. Have a higher gross margin profile. Right. That's why I think it's not so the answer is not so linear, Pat. It's because today, when we look at those big institutional type accounts we're largely selling them equipment, and we're selling them equipment in bulk. And so to broaden that offering means we're taking all else equal we're taking a customer, and broadening the mix of products we sell them, and that's generally accretive to margin at the end of the day.

Patrick Baumann: That makes sense. Okay. Yeah. I just Pat, I'm just gonna say this again for the more for the fun of it. I mean, a great home service is business you could invest in the last fifty years as Rollins. If you don't know the company, look it up. Mean, technology you know, deployed at Rollins you know, yielded 10% higher EBIT margins for their business over time. Right? So the question is, in our partnership with any customer of any size, do we have a business model, an that can help them grow, help them price products, help them you know, operate their business twenty-four seven. You know?

So part of the visibility of what we've done for most smaller contractors, the question is, is that a pliable technology for larger accounts and larger contractors? And it's not about just selling more stuff. It's about helping any kind of size customer operate their business more profitably through us. And our products just happen to be the one they'll scale with to do that with. So this is as much of a technology play as it is a product or any other, you know, any other kind of label you might put on it?

Patrick Baumann: Thanks. Thanks for the color. Sounds interesting and exciting. Maybe just switching gears on my next question on the operating cost side. I think you cite something in the release about targeting cost efficiencies for the rest of the year. Could you provide any color on, I guess, one, the 6% growth rate in the second quarter of SG&A expense? You mentioned cost of the A2L transition. I don't don't know how that kinda made it made it to SG&A, but if you give color on that. And then can you bend that growth rate in the second half with some of the cost efficiencies you're targeting?

A.J. Nahmad: Sure, Pat. I can I'll take a stab at the so first, let's take let's start with the 6%, and we said in the release that we made some acquisitions. We've opened some new locations. So about 25% of that 6%, is attributable to that. So you can think of you know, core SG&A growth, if we call it that, more in the four and a half percent range. Which is still, you know, higher than it should be in a down quarter. But that's kind of our starting point as we think about it.

Then when you think about just the day-to-day life in a branch, during a transition, if we have more inventory, it means that we've received more inventory. It means you need more people receiving that inventory. It means that you have more trucks coming to your locations. It means that you know, you're not optimizing, you know, what you have. It's not business as usual in the day-to-day of a in the day-to-day life of a branch. During such a large-scale transition and to underscore something we said earlier and mentioned in the release, this impacted every domestic location we have in The US, about 650 of them.

So that's where there was some inefficiency, as I would say, in the you know, the labor and the logistics side. And do we think we can bring that down and bring it more into balance in the end of the year? The answer is yes. Our leaders are working on that right now. One of the things that should naturally help that is that when we look at our inventory today, about five to 7% of that inventory is four ten a product. Which means we've largely received all the new product we're gonna get, and we've largely worked out of all the old stuff.

And that means that the branch can't get back to kind of its routine and should be a little bit more efficient in the back half of the year.

Paul Johnston: Yeah. Just to say it a little. My way. You know, as we sell through four ten a product, we need to make sure that we have system matchups that are selling in location. So there's a lot of transferring product within our network to make sure that we have the right systems in place that are sellable in a market where they are selling. If that makes sense. So there's some extra cost that's gone into that as well.

Patrick Baumann: That makes a lot of sense. Thanks a lot. I really appreciate the color.

Operator: And our next question will come from Damian Karas with UBS. Please go ahead.

Damian Karas: Hi. Good morning, gentlemen.

Albert Nahmad: Good morning.

Damian Karas: I'm curious how you're thinking about pricing through the rest of the year. On the equipment side, know, our price is pretty much set. For the rest of the year, and you're just gonna continue to get that benefit of the higher value mix flowing through. Top line. And do you foresee any changes on your parts and commodity supplies that respect to price? And just thinking about you know, further metals inflation and tariffs?

Paul Johnston: Yeah. I don't think on the equipment side, we're gonna see a lot of price increases going forward. On the non-equipment side, you know, Friday is copper day. 50% tariff start on copper. We've already seen about a 10% increase on some of those products that are heavily endowed with copper. So, you know, it's just it's just a matter of wait and see on some of the non-equipment type product. I think the equipment is pretty much in place, though.

A.J. Nahmad: Understood. Yeah. I would just say, let's just make sure, you know, when we I think what we're talking about is cost. Costing you know, the cost of our products and our equipment products I don't think we're expecting much change from our OEM partners. But on price, meaning our price to our customers, that's a con that's what the tooling and the technology enables. It's because every different customer has a different price on every product we sell and every region and every market. That complexity is opportunity. Trends and patterns and anomalies and outliers and segments that should be priced appropriately.

And so we run different I call them plays where we can measure and track when we make a change and that customer's price or a customer segmentation price or a cohort of customers pricing on different products. We can take that to market. We can measure and track, and we can see the impacts. And either double down or go on to the next play. So pricing will always be opportunity just to clarify that costing versus pricing.

Damian Karas: Got it. Got it. That's helpful. And I know this is never an easy task, but if you had to guesstimate, if you will, how much of a headwind to volumes in the second quarter do you think are attributed to are attributable to weather and the canister shortage you know, versus weaker housing and underlying, market demand? You know, I'm just trying to get a sense for what underlying demand might look like as you move past these more transient issues.

Paul Johnston: Yeah. I don't I know if we can I don't think the canister is a business. Yeah? Have anything to do with, with sales the second half of the year. You know, as far as the refrigerant we receive. I think it's gonna be what the consumer feels like, what the weather patterns are gonna be like, how we're able to react and meet inventory demands that the consumer need or that the contractor needs to handle the consumer. I think it's just gonna be blocking and tackling in the second half.

A.J. Nahmad: Yeah. I mean, I think real it's all been said, but has gotta be the noisiest year in HVAC ever be between the tariffs and the weather and consumer confidence and the canister shortages and the home building changes and interest rates and trading homes isn't happening as frequently. I mean, there's just so many things going on at macro levels, most of which are out of our control.

So it's a lot of noise in the industry, and our job is to win in any environment and emerge bigger and stronger and more profitable and take more share from our competitors, and that's I like where we sit in that equation because of our scale, because of our balance sheet, because of our willingness and ability to invest in technology. You know, I'm very, very pleased to be Watsco given all this noise.

Damian Karas: Really appreciate your thoughts. Good luck out there. Thank you.

Operator: And our next question will come from Nigel Coe with Wolfe Research. Please go ahead.

Nigel Coe: Good morning, guys. Appreciate all the color. Hi, Albert Nahmad. So just I think you mentioned four ten a well, 60% or thereabouts. For the quarter. I'm just curious how that trended or maybe where that's trending you know, right time you know, right now real time. And any concerns that you're holding too much for any inventory just given the demand weakness? And, you know or do are you are you confident you'll be done with that transition, you know, this quarter?

Albert Nahmad: I'm chuckling because that's very much on my mind. And, yes, we're doing something about it. So that we don't have that risk. And, Paul Johnston, you can answer in some detail if you'd like.

Paul Johnston: Yeah. It's less than 5% of our inventory at the pleasant time. You know, where we're really, you know, working our butts off is be able to get the right combinations that A.J. Nahmad mentioned before. Gotta have an indoor unit to go with the outdoor unit. And as you sell the inventory down, the pond gets lower, you end up with an indoor unit sitting in one city, and you end up with the outdoor unit in another. So we're putting those pieces together, which is gonna be a drag on SG&A know, with freight. Know, for a period of time here. But I think each one of our companies hear about it continuously that we need to reduce.

We need to keep the focus on four ten, get rid of it, and focus then on being able to sell the A2L product that we've got.

Nigel Coe: Does that mean that you give.

Paul Johnston: Yep. Yep. Yep. Sorry. Does that mean you're incentivizing, you know, that sell through of that? Sorry. Sorry.

Albert Nahmad: For cutting off that, but any does that mean you're incentivizing that process to make that happen?

Albert Nahmad: That's not how we work. We deal with the markets on a decentralized basis. Those are local decisions made by the local entities that we have.

Nigel Coe: Okay. And, Nigel Coe, I would just add to that. Just to add very quickly in terms of the progression of A2L. It's progressing very, very well. I mean, we ended the we exited the quarter in June with more than 80% sell through of the A2L product. And so that's a function of, obviously, diminishing inventory of four ten a, It's also a function of contractors transitioning and adapting well to the product. So, at this point, it's greater than 80% of our sell through as you'd expect.

Nigel Coe: Okay. That's great color. And then my follow-up is you know, what we've seen from you and from your suppliers is tremendously strong price prices holding, which is good news, but, obviously, volumes are incredibly weak. What are you hearing from your contractors? So are they are they asking for you know, some incentives here to try and stimulate some movements? Or are they content to just wait for rates to turn and perhaps demand picks up? Are you starting to get more inbounds on price reductions or discounts or incentives?

Paul Johnston: I don't think we're really getting a lot of feedback on getting lower prices in the market. There's not elasticity to market. If we drop the price two or 3%, it's gonna it's gonna stimulate a 10 or 12% increase in volume. Ain't gonna happen. So, you know, I think the contractor always wants the lowest price, the best price in the marketplace. So that they can compete fairly. But I don't think we're getting a lot of a lot of pushback right now from most of the contractors on the price.

Nigel Coe: Okay. Makes sense. Thanks, guys. Appreciate it.

Operator: And our next question will come from Sam Schneider with Northcoast Research. Please go ahead.

Sam Schneider: Hey. Hi. Looking forward to morning. How are you? Good. Looking Thank you. Looking forward for an excuse to come down to Miami pay for by my employer. So thank Well, you heard it. You did hear loud and clear. Right? Yeah.

Albert Nahmad: Oh, yeah. Let's wait till it goes out. That was great.

Sam Schneider: We'll welcome you when you're coming.

Albert Nahmad: Oh, yeah. No. Thank you.

Sam Schneider: So, look, just focusing on the mix shift which seemed to benefit margin. On parts. I was wondering if the shift was you know, in part at all due to the canister shortage where have people do more repairs. For the time being?

Paul Johnston: You know, most of the most of the canister shortage occurred in the first and the first in the second quarter. And it was something that we worked our way through. We made it through it. Now, as I said, we're seeing a lot more inventory coming in. It's going out as quickly as it comes in. I see it stopping sometime in early August. Early August is, what, two weeks away. So I don't think it's really playing on demand right now as heavily as it was before. I don't see any bubble capening on repair versus replace because of canisters.

Sam Schneider: Got it. Okay. And then just a real quick follow-up. Sort of on the same topic. But any sort of sizable shift to R32 based systems and if so, is that a temporary thing or more permanent in your view?

Paul Johnston: Well, it's only one manufacturer. Daikin, which we represent very proudly, with our Goodman and Amano lines, is R32. Rest of the industry is four fifty-four. So what we've seen is we've seen you know, excellent response from Daikin. To be able to help us with the 32. There hasn't been a shortage of 32. You know, when you get into the four fifty-four, it's been Carrier, Rheem, American Standard, All of them sell four fifty-four units. Roughly 70% R32. It's a blend. Of 32 plus twelve thirty-four y f.

Sam Schneider: A big one. Are you seeing?

Albert Nahmad: That's happened three times, Harry. Yeah.

Operator: It paused the Operator, are you there? Yeah.

Albert Nahmad: I'm here.

Operator: Yes. I'm here.

Albert Nahmad: Is it Why are we tuning out?

Operator: We can go to the next to the next question? Okay.

Operator: Our next question will come from Chris Dankert with Loop Capital Markets. Please go ahead.

Chris Dankert: Good morning, guys. Thanks for taking the question. I guess circling back to WatscoOne, you guys sound excited and sound this is a pretty big opportunity. Is there any way to get a bigger than a breadbox sense here? I mean, we are we talking about serving 500 customer locations, 5,000, or is it too early to kinda get into that type of scaling?

Albert Nahmad: Well, maybe a better way to approach is what is our existing sales of parts and supplies? And what do we think we could provide? I don't wanna speculate too much. What kind of margin improvement do we think we can get from that? It's a very big chunk of our business, 30%. 30% of $7.5 billion. How much of that could we improve our margins on? I'm not gonna speculate, but there will be an improvement.

A.J. Nahmad: Right. You take any percent of that number and it's meaningful.

Chris Dankert: Makes sense. Makes sense. Well, thanks for that. And I guess maybe just to touch on the AI a little bit here. Can you give us maybe some examples for what the use cases are for App Watsco internally? I mean, how is this kinda helping your associates? Is this inventory positioning? Is it warranty data? What's the real use case here?

A.J. Nahmad: My gosh. There's so many. I'm at How much time do we have? Yeah. It is it's helping marketing folks design content and publish content. It's helping our software engineers write code and publish and push more technology faster. It's helping our their teams sort through data and understand trends and patterns and anomalies. It's helping our customer service folks get to more get through more cases more quickly with more accurate answers. And therefore helping our customers at a greater scale or greater rate. Increasing customer satisfaction I can go on and on and on.

And, like, it could be said in the press release, there's about 21 people a week internally who are using these tools or the tool and the ways that they're using it are more and more creative and fast.

Chris Dankert: So, I mean, it really is holistic then. It. Well, thank you so much for that, A.J. Nahmad, and thank you all for the time.

Operator: Absolutely. Chris Snyder with Morgan Stanley. Please go ahead.

Chris Snyder: K. Thank you. I wanted to on the four ten a inventory. I think you guys have less than 5% of your inventory. Do you have any sense, you know, for what that number could look like across your distributor competitors?

Albert Nahmad: No.

Chris Snyder: I don't think we really have any good intelligence on that. And we try not to figure that. That's irrelevant. But we Yeah. It's being phased out. We don't really care.

A.J. Nahmad: Fair enough. Don't care.

Chris Snyder: Chris Snyder, there's a couple data points. I mean, I think, you know, one peer of ours that also distributes their product gave a data point on that, in terms of what their sell through is, and it was pretty high. The other data point these are all anecdotal. This is not science. It's aggregating anecdotes. Is, you know, when we are talking to M&A targets, what do they tell us about their philosophy and their positioning and as a reminder, most of this stuff was built prior to December 31 and shipped in the first quarter.

So someone would have to make a pretty big bet on inventory and would have to really leverage their balance sheet to do that. And so our sense, just by having these conversations in the channel with the M&A targets, is that they're largely phasing out of four ten a at about the same pace we are.

Chris Snyder: Thank you. I appreciate that. And if I could, you know, maybe follow-up on a different sort of inventory question. I guess it's kind of surprising that volumes remain down materially, it seems like, July. You know, with the weather picking up. Does that change the way you guys think about how much inventory is downstream at your customers? You know, could they have been holding extra stock? And perhaps that's why, you know, the sell through has been softer. Thank you.

Paul Johnston: I would say some of the bigger contractors may have some inventory. Inventory at the contractor level is not really material to our industry. It's being held at the distribution point. Not at the contractor point. So I don't think it's a big deal, you know, with the contractor. I would always also remember that you know, in Florida, it's either hot or hotter. It's not it's not just hot, you know, all the time. It's hot. So we've not had a cold summer down here. We've not had a cold summer in Texas.

Where the weather really impacts us is up north where we've got know, where it's you've got a chance out of every third year that you're gonna have a hotter normal summer. Or a normal summer or a lower than normal summer. And so we are definitely seeing a lot of regional differences in the volume. Based on weather. But in the South, we're not really seeing much movement because it's hot in Florida or hot in Texas. It's always hot.

Chris Snyder: Thanks. I appreciate that, Chris Snyder.

Operator: And this concludes the question and answer session. I'd like to turn the call back over to Albert Nahmad for any closing remarks.

Albert Nahmad: Well, thank you for your interest. I love the questions, and that shows a lot of interest. And I hope we've answered your questions fully. And if not, please contact us on your own. And we'll respond to whatever questions you may still have. And other than that, look forward to having you visit us in the cold months that are coming. We'll give you more detail. Thank you. Bye-bye.

Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.

Where to invest $1,000 right now

When our analyst team has a stock tip, it can pay to listen. After all, Stock Advisor’s total average return is 1,039%* — a market-crushing outperformance compared to 182% for the S&P 500.

They just revealed what they believe are the 10 best stocks for investors to buy right now, available when you join Stock Advisor.

See the stocks »

*Stock Advisor returns as of July 29, 2025

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. Parts of this article were created using Large Language Models (LLMs) based on The Motley Fool's insights and investing approach. It has been reviewed by our AI quality control systems. Since LLMs cannot (currently) own stocks, it has no positions in any of the stocks mentioned. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

The Motley Fool has positions in and recommends Watsco. The Motley Fool has a disclosure policy.