TradingKey- Markets Quotes & Financial News

Crude Oil Price Forecast: US-Iran Tensions Push Brent Crude Above $100 Mark, What's Next for Oil Prices?

Block Tao — Thu, 10 Sep 2026 03:45:54 +0000

TradingKey - Escalating US-Iran Tensions Drive Oil Prices Higher as Brent Crude Crosses $100; How Will the Market Evolve?

On Thursday (September 10), international crude oil prices rose further, driven by re-escalating US-Iran tensions. Among them, WTI crude oil (USOIL) prices briefly surged past $95/barrel this morning, while Brent crude oil (UKOIL) prices breached the key $100/barrel mark, both hitting new highs since July this year.

Deteriorating geopolitical tensions are the core driver of this rally in oil prices. Recently, military skirmishes between the US and Iran in the Strait of Hormuz and the Persian Gulf region have intensified, sparking market fears that shipping through the Strait of Hormuz—a vital artery for nearly one-fifth of the world's crude oil transport—could be completely cut off.

In addition, Yemen's Houthis attacked energy facilities in Saudi Arabia, forcing a temporary halt to some local oil production operations and further worsening fears of supply disruptions in the Middle East. Meanwhile, Ukrainian drone strikes on infrastructure at Novorossiysk, a major Russian oil export terminal on the Black Sea, sounded the alarm over potential disruptions to Russian oil exports.

Currently, crude oil prices breaking $100 are reigniting market concerns over secondary inflation, which could force major central banks such as the Federal Reserve (Fed) to maintain higher interest rates for longer, thereby dampening medium-to-long-term global economic activity and energy demand. To make matters worse, the US-Iran conflict could persist, providing strong support for oil prices.

According to The Wall Street Journal, US officials stated that "senior White House advisors privately suggested to President Trump that a war with Iran could last through the remainder of his term." If so, the Strait of Hormuz could face a prolonged total blockade, potentially driving oil prices even higher. Notably, Goldman Sachs analysts pointed out that if the break above $100 is confirmed on weekly charts, upside technical room will quickly open toward the $110–$120 range.

Brent Crude Oil Price Chart, Source: TradingView

The prevailing market view holds that the Strait of Hormuz remains in a state of fragile operation or partial blockade, keeping risk premiums high and oil prices fluctuating within the $90–$100 range. If the US and Iran unexpectedly reach a short-term ceasefire or escort agreement and shipping traffic through the strait gradually recovers, oil prices could fall back to $75/barrel, although this scenario is considered unlikely.

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US August CPI Preview: Will Inflation Reaccelerate? US Stocks, Dollar and Gold Face Key Test

Alan Long — Thu, 10 Sep 2026 03:41:57 +0000

TradingKey - On Friday, September 11 (ET), the U.S. Bureau of Labor Statistics will release the Consumer Price Index (CPI) for August, the final major inflation report before the Federal Reserve's September 15–16 policy meeting. Against the backdrop of August nonfarm payrolls coming in significantly stronger than expected, international oil prices surging past $100, and U.S. Treasury yields remaining elevated, this CPI data could directly influence market expectations regarding whether the Fed will raise interest rates in September.

Headline Inflation May Accelerate, Core Inflation Expected to Slow Further

In terms of market expectations, U.S. headline CPI for August is expected to rise 0.4% month-over-month, significantly higher than July's 0.1%, while year-over-year growth is expected to remain at 3.4%. Core CPI is projected to increase 0.2% month-over-month, flat from July, and further decline from 2.5% to 2.4% year-over-year.

Recent conflicts in the Middle East have continued to disrupt energy supplies, with Brent crude breaking above $100 and U.S. diesel and other energy prices rising in tandem. Consequently, the market currently expects headline CPI month-over-month growth to rise from 0.1% to 0.4%, making energy a potentially significant factor driving the acceleration in August's headline inflation.

However, core inflation expectations have not risen in tandem. The market expects core CPI, which excludes food and energy, to remain at 0.2% month-over-month, with year-over-year core growth slowing from 2.5% to 2.4%. If the final data aligns with these forecasts, it implies that U.S. inflation may exhibit a structure where energy drives up headline prices while underlying inflation continues to cool slowly.

For investors, the primary focus should be on core CPI as well as sub-components such as shelter and services in this release. If headline CPI exceeds expectations but is mainly driven by gasoline and energy prices while core CPI remains around 0.2%, the Federal Reserve may assess persistent inflation pressures with relative caution. On the other hand, if month-over-month core CPI rises to 0.3% or higher, it would imply that price pressures extend beyond energy and that the cooling of underlying inflation may be slower than previously anticipated.

It is worth noting that the U.S. labor market had previously shown strong resilience. Nonfarm payrolls increased by 162,000 in August, well above market expectations of approximately 56,000, with the unemployment rate holding steady at 4.1%. Following the data release, the market-implied probability of a 25-basis-point rate hike in September briefly rose from 52% to 61% and currently remains around 60%.

If both headline and core CPI for August exceed expectations, particularly if month-over-month core CPI tops 0.2%, it could bolster the case for the Federal Reserve to further hike rates in September. Conversely, if headline CPI is pushed up by energy while core inflation continues to cool, considerable uncertainty will remain regarding policy decisions in September. Federal Reserve Governor Waller previously stated that if upcoming data continues to show progress toward the 2% inflation target, he would lean toward supporting keeping interest rates unchanged.

How Will August CPI Release Affect US Stocks, the Dollar, and Gold?

Regarding U.S. equities, one of the main macroeconomic pressures currently facing U.S. stocks is elevated U.S. Treasury yields. On September 9, the 10-year U.S. Treasury yield rose to around 4.84% at one point, while the S&P 500 Index fell 0.48% and the Nasdaq Composite Index fell 0.64% over the same period.

If August core CPI is significantly higher than the market expectation of 0.2%, the probability of Fed rate hikes and bond yields could rise further, weighing on high-valuation tech and growth stocks; if core CPI meets or comes in below expectations and indicates that underlying inflation continues to cool, U.S. Treasury yields could have room to pull back, which would be relatively favorable for tech stock valuations.

Regarding the U.S. dollar, it has not strengthened continuously despite rising expectations for U.S. rate hikes, partly because expectations also exist for further policy tightening by the European Central Bank and the Bank of Japan. If core CPI comes in above 0.2% while the market further prices in Fed rate hikes, short-term U.S. Treasury yields may gain support, which would be relatively favorable for the dollar; if core CPI is lower than expected while the overall increase stems mainly from gasoline and energy, the support received by the dollar may be limited.

Gold price daily chart, Source: TradingView

Regarding gold (XAUUSD), as the 10-year U.S. Treasury yield recently rose to its highest level since November 2023, gold faces heavy upside pressure. If core CPI comes in significantly higher than expected and prompts the market to further raise rate hike probabilities, gold may continue to be affected by U.S. Treasury yields and remain under pressure to pull back, potentially retesting the $4,300 support level on the downside. If this level fails to hold, gold prices could pull back toward $4,200.

If headline CPI rises but core CPI continues to drop to around 2.4%, the market may ease concerns over persistent inflation re-accelerating, providing a degree of support for gold. Gold prices are expected to test $4,500 on the upside and may even challenge the $4,700 threshold.

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Meta’s Core AI Strategy Suffers Setback as Top Researcher Andrew Tulloch Departs, Sparking Talent Loss Concerns

Block Tao — Thu, 10 Sep 2026 02:48:05 +0000

TradingKey - Tech Giants Trigger Resignation Wave: Following Anthropic, Key Meta AI Figure Andrew Tulloch Also Departs.

According to a Semafor report on September 10, top Meta (META) AI researcher Andrew Tulloch has decided to leave Meta, dealing a heavy blow to Mark Zuckerberg's strategy of poaching talent with astronomical compensation packages to advance AI. As of press time, Meta's stock fell 0.79% in overnight trading, losing the $650 mark to trade at $648.17.

Meta stock chart, Source: TradingView

Andrew Tulloch previously worked at Meta for 11 years before moving to OpenAI, where he participated in training core models such as GPT-4o and o3, and co-founded Thinking Machines Lab. To close the gap in model development progress, Meta poached him back in late 2025 with an astronomical compensation package of $1 billion to $1.5 billion. However, his decision to resign less than a year after returning to Meta highlights the deep-seated challenges Meta faces in pushing forward superintelligence and upgrading its AI strategy.

Tulloch chose to leave the company after the launch of a new series of open-source AI models and the AI assistant Muse this Tuesday. Although this mitigated the impact on the company's AI progress, the departure of a top architect will directly affect the underlying architecture optimization and training efficiency of Meta's next-generation foundation models, such as subsequent Llama series upgrades. Furthermore, cracks have appeared in the talent barrier Meta built by spending heavily, leading the market to reassess whether Meta can truly offer a more attractive AI R&D environment than OpenAI, Anthropic, or Google (GOOG).

Currently, Tulloch has not disclosed his reason for leaving Meta. However, unlike Anthropic core researcher Jacob Coxon, who stepped away from the AI field, it cannot be ruled out that Tulloch might return to OpenAI or Thinking Machines Lab.

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S&P 500 Forecast: Barclays Raises Year-End Target to 7,950, Technicals Target 8,000

Alan Long — Thu, 10 Sep 2026 02:07:59 +0000

TradingKey - Barclays recently raised its year-end 2026 target for the S&P 500 Index from 7,800 to 7,950 points, representing an upside of about 4% from the index's September 9 close of 7,636 points. The bank also maintained its positive medium-to-long-term outlook for U.S. equities, projecting the S&P 500 could reach 8,800 points by the end of 2027.

The main rationale behind Barclays' target upgrade is the sustained strength in U.S. corporate earnings. According to LSEG data, among the 492 S&P 500 companies that have reported second-quarter results so far, 86% beat analyst earnings estimates, significantly higher than the long-term average of 67.5%, with mega-cap tech companies showing particularly strong performance.

With corporate earnings outperforming previous expectations, Barclays also significantly raised its 2026 S&P 500 earnings per share (EPS) forecast from $337 to $365. Barclays strategists believe that expanding investments in AI infrastructure and resilient U.S. economic activity will continue to support corporate earnings growth in coming quarters, which is expected to serve as the primary driver pushing the index higher.

However, Barclays remains cautious about further valuation expansion in U.S. stocks. The bank pointed out that risks facing the market include the sustainability of AI capital expenditures, persistently high U.S. inflation, U.S.-Iran geopolitical tensions, and a hawkish shift in Federal Reserve policy. Year to date, the S&P 500 has accumulated a gain of around 12%, leaving market valuations at relatively elevated levels.

By sector, Barclays downgraded the U.S. utilities sector from "Positive" to "Neutral," citing increased approval hurdles for data center construction in certain regions as well as regulatory policy uncertainties.

Recently, Wall Street institutions have also been upgrading their U.S. stock market outlooks. HSBC previously raised its year-end target for the S&P 500 to 8,100 points, while UBS, Goldman Sachs, and Citigroup all currently expect the S&P 500 to reach or exceed 8,000 points by year-end, underscoring that robust corporate earnings and AI investment remain the core drivers behind institutional bullishness on U.S. equities.

S&P 500 Index Weekly Chart, Source: TradingView

From a technical analysis perspective, on the S&P 500 index weekly chart, the SMA20, SMA60, and SMA144 moving averages exhibit a bullish alignment, indicating that the index's medium-to-long-term uptrend remains intact with strong persistence. Currently, the index has broken above the 0.618 Fibonacci extension level at 7,650, opening up upside potential toward the 0.718 Fibonacci extension level at the 8,000 mark.

On the downside, initial support for the S&P 500 lies at the SMA10 moving average between 7,620 and 7,600. If this level fails to hold, the index could move down to test support at the SMA20 near 7,500.

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Ethereum by the Numbers: What Fee Revenue and Staking Yields Say ETH Should Trade At in 2030

Milko Trajcevski — Thu, 10 Sep 2026 01:53:10 +0000

TradingKey - As the biggest altcoin, there are always a lot of predictions about Ethereum price. Cathie Wood has put up an Ethereum $180,000 valuation by 2030 forecast. And because most of these predictions are hype-based, they remain just that, predictions.

With the speculative days far behind Ethereum, predictions need to be based on facts and numbers, not just hype alone. Let’s explore what two critical numbers, fee revenue and staking yields, say the Ethereum price could be by the end of this decade.

The VanEck Thesis: Why $11,800 Isn’t Just Hopium

VanEck’s Matthew Sigel has given one of the most notable predictions. According to VanEck’s analyst, Ethereum will be priced at $11,800 by 2030. And this prediction isn’t just a five-figure guess.

The firm’s $11.8k base case projection relies heavily on Ethereum cementing its status as the dominant global settlement network. VanEck gives this prediction with one condition. The network must scale.

VanEck’s model anticipates Ethereum capturing a massive chunk of traditional finance applications, alongside an explosion in smart contract utility. According to VanEck’s detailed report, this isn’t just about base layer transactions anymore.

It is about a sprawling ecosystem of Layer-2s funneling value back to the mainnet. When you zoom out, the math actually starts to look conservative. Yahoo Finance highlights how institutional capital is increasingly viewing ETH through the lens of a cash-producing asset.

If smart contracts eat even a fraction of global financial services, the velocity of money moving through Ethereum will justify an $11,800 price tag based purely on the cash flow generated by network usage.

Fee Revenues as the Ultimate Valuation Litmus Test

Things changed a lot on the Ethereum network after the Dencun upgrade. Execution activity shifted violently away from the base layer and toward Layer-2 networks. User costs plummeted. Throughput skyrocketed.

The ultrasound money narrative had fallen apart, however, because of the collapse of fee revenue. Once a weekly bill that would regularly break the $200 million mark, it suddenly dropped to about $10 million early in 2024.

Base fees have decreased, but on-chain figures and the number of monthly active users have increased significantly. The network keeps growing rapidly. CoinShares models that under a high-growth scenario, Ethereum’s fee revenue could still reach a monstrous $5.7 billion by 2031.

How? By assuming decentralized exchange (DEX) volumes grow at a 25% compound annual growth rate (CAGR), and stablecoin supply balloons to $2.8 trillion.

Volume compensates for cheaper individual transactions. If you are valuing ETH based on discounted cash flows, this fee explosion is the exact engine required to push the price deep into the five-figure range.

Staking Yields: The Risk-Free Rate of Web3

You can’t discuss Ethereum’s future without addressing staking. It fundamentally rewrites the asset’s investment profile. Staking is more than just another Ethereum technical term, it’s an important feature for the economics of ETH.

Ethereum staking involves validators locking up their ETH to secure the network. In return, they earn newly minted tokens alongside unburnt transaction fees. It’s pure passive income.

Think of it as the internet’s native bond. When institutional investors look at Ethereum today, they don’t just see a speculative token. They see a yield-bearing instrument.

Reward rates vary wildly based on total network participation and transaction volume. Yet the core principle remains: locking up supply actively reduces selling pressure.

If millions of ETH leave the open market to earn a 3% to 5% APY, the available liquid supply shrinks drastically. Combine a shrinking supply with skyrocketing demand from Layer-2 usage, and the resulting price mechanics become highly combustible.

The $14,135 CoinShares Bull Case

Based on Ethereum’s fee revenue and staking yields, there are other, more bullish predictions. CoinShares published a framework that looks beyond traditional cash flow. They analyze Ethereum as money.

Luke Nolan, their senior research associate, split the valuation into parts. Yes, fee revenue matters. But the monetary premium is the main thing to focus on. If ETH becomes the dominant collateral across DeFi, layer-2 reserves, and corporate treasuries, its overall value cleanly decouples from mere transaction fees.

In their bull case, which they admit requires an "everything works out perfectly" scenario, Ethereum price hits $14,135 by 2031. That specific model assumes Ethereum doesn’t just survive; it has to thrive.

It anticipates expanding Layer-1 market share to 35% and securing a jaw-dropping $420 billion in tokenized real-world assets. When an asset acts as consumable gas, yield-bearing capital, and pristine collateral simultaneously, standard models break. They underestimate network effects.

The Final Verdict: The 2030 Price Tag

So, where exactly does ETH trade at the end of the decade? While bears are screaming about regulatory friction and alternative layer-1s eating market share, the numbers tell a whole different story. If VanEck’s cash flow models and CoinShares’ theories hold water, an $11,800 to $14,135 range is mathematically sound.

Staking yields will inevitably continue locking up the float. Fee revenues will stabilize and scale through sheer unadulterated volume on Layer-2s. Ethereum is quietly building the financial rails of the future. By 2030, the market will finally price it accordingly.

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Over 140,000 Traders Liquidated as Bitcoin Nears $78,000 in Four-Day Drop, Altcoins Broadly Slump

Block Tao — Thu, 10 Sep 2026 01:25:07 +0000

TradingKey - Over 140,000 traders liquidated in crypto market as BTC drops for fourth straight day to test $78,000 level; altcoins crash.

On September 10, the cryptocurrency market experienced a new round of sharp pullbacks. Among them, Bitcoin (BTC) logged a four-day losing streak, falling 0.66% today to approach the key round-number support at $78,000, while Ethereum (ETH), XRP (XRP), and Solana (SOL) among other major tokens fell about 2%, while altcoins such as UNI, ARB, WLD, and TRUMP plunged by over 10%.

Led by Bitcoin's decline, altcoins suffered broad-based, sharp losses, dealing a heavy blow to long positions in the derivatives market and triggering large-scale liquidations of leveraged capital across the network. Over the past 24 hours, 142,000 people were liquidated, with total liquidations reaching $388 million, of which long liquidations accounted for $272 million, or as high as 70%.

Crypto market liquidation data, Source: CoinGlass

The core drivers behind this round of sharp crypto pullbacks are macro risk aversion and surging crude oil prices. This morning, geopolitical tensions pushed up international crude oil prices, with Brent crude (UKOIL) briefly surging past $100 per barrel, reigniting market concerns over sticky inflation and the Federal Reserve's (Fed) rate path, which dampened risk asset appetite. In addition, U.S. tech and semiconductor stocks weakened yesterday while 10-year U.S. Treasury yields remained high, causing a marginal liquidity tightening that triggered spillover selling pressure in the crypto market.

Currently, market liquidity is highly concentrated in Bitcoin and major assets. Lacking sufficient buying support, altcoins typically experience larger pullbacks when market volatility amplifies, and in the short term, a rebound opportunity will emerge only after BTC stops falling and forms a base. The $78,000 level currently serves as Bitcoin's first strong psychological and technical support level; if breached further, the $75,000–$76,000 range below will become the bulls' line of defense.

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Today’s Market Recap: Oil Tops $100, US Stocks Under Pressure as Fed Rate Hike Fears Rise, Meta Bucks Trend to Surge

Alan Long — Thu, 10 Sep 2026 00:49:14 +0000

Tracking Market Trends

TradingKey - On September 9 Eastern Time, the three major US stock indexes continued to close lower. Escalating Middle East conflict pushed Brent crude past $100 a barrel, with rising energy prices further fueling market concerns over persistent inflation, while the 10-year US Treasury yield rose to its highest level since November 2023. Investors are awaiting Thursday's PPI and Friday's CPI data to gauge whether the Federal Reserve will need to raise interest rates further at its September meeting.

At the close, the Dow Jones Industrial Average fell 0.77% to 52,386.25; the S&P 500 Index dropped 0.48% to 7,636.46; and the Nasdaq Composite Index declined 0.64% to 26,253.34.

Among individual stocks, Meta (META) bucked the trend to surge over 6%. The company launched its AI assistant Muse, which can perform tasks such as sending emails, booking travel, and making payments upon user authorization, as the market focuses on the future commercialization capability of Meta's massive AI capital expenditures. AMD (AMD) rose 3.04%, driving the Philadelphia Semiconductor Index up 0.37%.

Alphabet (GOOGL) fell 2.28%. Google announced it will invest at least 13 billion euros, or about $15.1 billion, over the next two years in Finland to build AI infrastructure, including three new data centers. Apple (AAPL) dropped 0.28% as the company introduced its first foldable iPhone at its first major launch event under new CEO John Ternus.

In commodities, international oil prices surged. Brent crude (UKOIL) rose 2.37% to settle at $101.74 a barrel; WTI crude (USOIL) gained 2.57% to close at $96.68 a barrel, both marking their highest closing prices since May. Iran stated that after the US sank five Iranian tankers, it launched attacks on 10 vessels near the Strait of Hormuz, further heightening regional energy transport risks.

In precious metals, gold (XAUUSD) rose 1.06% to $4,401.85. The US dollar remained near a two-week low, which, combined with escalating Middle East risks, provided support for gold; however, rising US Treasury yields and Fed rate hike expectations continued to cap the upside for gold prices.

In cryptocurrencies, Bitcoin (BTCUSD) fluctuated around $78,000, peaking near $79,700 intraday, while Ethereum traded around $2,490. Despite simultaneous gains in oil prices and US Treasury yields, Bitcoin performed relatively stably during the day, though it failed to break back above the $80,000 threshold.

Market News

The US-Iran conflict continues to escalate, further elevating energy transport risks in the Strait of Hormuz. Iran stated that it launched attacks on 10 vessels near the Strait of Hormuz after the US sank five Iranian oil tankers. A latest Reuters survey also showed that even with some tankers turning off AIS for "dark sailings," about one-third of oil exports from the Gulf region have still not recovered to pre-war levels.

The US Department of the Treasury announced a buyback of up to $6 billion in long-term Treasuries. The Treasury will buy back 10- to 20-year Treasuries on September 10, tripling the size of its previous long-term bond buyback, primarily aimed at improving off-the-run liquidity. However, as some investors had previously expected the buyback size to reach $8 billion to $10 billion, long-term US Treasury yields continued to rise after the news was announced.

Google to invest $15.1 billion in Finland to build AI infrastructure. Google plans to invest at least 13 billion euros over the next two years and build three new data centers, while signing a 22-year nuclear power purchase agreement with Finland's Fortum to buy up to 50% of a nuclear power plant's output. This is also Google's first nuclear power agreement signed outside the United States.

Apple introduces its first foldable iPhone Duo, starting at $1,999. Featuring a 7.6-inch inner screen and the A20 Pro chip, the new device marks Apple's most significant form factor adjustment since the 2017 iPhone X. The company also introduced the iPhone 18 Pro series, raising prices by $100 due to rising memory costs.

Most economists still expect the Federal Reserve to stand pat in September. A latest Reuters survey shows that about 70% of economists expect the Federal Reserve to keep the interest rate target range unchanged at 3.50% to 3.75% at its September 15–16 meeting, but this proportion is down from about 90% in the August survey. Meanwhile, financial market pricing indicates an approximately 60% probability of a 25-basis-point rate hike in September, showing that a clear divergence remains between the market and economists.

Barclays raises year-end S&P 500 target to 7,950 points. Barclays raised its year-end 2026 S&P 500 target from 7,800 to 7,950 points and increased its full-year EPS forecast from $337 to $365, primarily citing continued growth in corporate earnings and AI investment. However, the institution also noted that high valuations, inflation, the Middle East situation, and interest rate prospects remain key risks.

US crypto regulation bill faces crucial vote next week. The US Senate is expected to hold a key procedural vote on the Clarity Act on September 15. The bill aims to further clarify digital asset classifications and regulatory authority scope. The crypto and banking industries are currently lobbying intensively around the bill, the outcome of which could impact the future regulatory framework for the US digital asset industry.

Top 10 Most Active Stocks

The table below lists the ten most actively traded stocks in the current market. Backed by massive trading volume and excellent liquidity, these assets have become key benchmarks for tracking global market dynamics.

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Kospi Plunges Toward 7,000, Nikkei Falls Below 65,000 Mark as Samsung Electronics, SK Hynix and Kioxia Tumble

Block Tao — Thu, 10 Sep 2026 00:39:28 +0000

TradingKey - Oil surging past $100 heightens fears of second-round inflation as KOSPI approaches 7,000, Nikkei drops below 65,000, and chip stocks trend lower across the board.

During Asian trading hours on September 10, Japanese and South Korean stock markets both opened lower in early trading, with overall sentiment leaning cautious. South Korea's KOSPI Index fell 0.62% to approach the 7,000 mark, trading at 7,008.00 points. Key tech chip stocks all declined, with Samsung Electronics falling 0.93% to 267,000 KRW, and SK Hynix opening down 0.27% at 1,851,000 KRW.

KOSPI Index chart, Source: TradingView

The Nikkei 225 Index opened down 0.62%, losing the 65,000 mark to trade at 64,743.70 points. Trends diverged between two major heavyweights, with SoftBank rising 0.73% to 6,860 JPY, while Kioxia dropped 0.67% to 56,620 JPY.

U.S. Treasury yields remained high, suppressing the opening performance of high-valuation tech and growth stocks. On the previous trading day (September 9), U.S. stocks continued to decline, with the three major indexes falling for three consecutive trading days as the Dow Jones dropped 0.77% and the Nasdaq fell 0.64%. Star tech stocks such as Nvidia (NVDA) and Apple (AAPL) generally declined, spreading risk-off sentiment into Asian early trading. However, strength in memory-related stocks supported share prices of Samsung Electronics and SK Hynix.

In addition, persistent geopolitical tensions continued to fuel concerns over energy supply. Crude oil prices rose further, with Brent crude (UKOIL) briefly breaching the $100/barrel mark this morning and WTI crude (USOIL) rising above $96/barrel. As economies heavily dependent on energy imports, Japan and South Korea saw the surge in oil prices deepen market anxiety over domestic second-round inflation and rising corporate costs.

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Cognyte (CGNT) Q2 FY2027 Earnings Call: Software Revenue Rises 20.9%

Wed, 09 Sep 2026 23:50:31 +0000

Key Takeaways

Cognyte reported approximately $109 million in Q2 FY2027 revenue, up 12% year over year. Total software revenue increased 20.9% to $100.8 million and represented more than 92% of revenue.
Recurring revenue rose 18.4% to $56.2 million, or 51.4% of total revenue. Management said the shift toward subscription arrangements is improving visibility but can delay reported revenue compared with perpetual licensing.
Profitability grew substantially faster than revenue. Non-GAAP operating income increased 52.5% to $12.2 million, adjusted EBITDA rose 35.7% to $14.9 million, and non-GAAP EPS nearly doubled to $0.15.
Management narrowed its FY2027 revenue outlook around an unchanged midpoint of approximately $448 million, plus or minus 2%. It maintained targets of about $56 million in non-GAAP operating income and $68 million in adjusted EBITDA.
Total RPO was $470.2 million, including $313.4 million of short-term RPO. Including expected renewals and contracts signed after quarter-end, the company said it has visibility into approximately 85% of the revenue required over the next 12 months.
Cognyte added 40 new customers in the first half, compared with 31 a year earlier. Management said the company remains on track to sign $20 million of U.S. deals during FY2027.

Key Financial Data

Metric	Q2 FY2027	Year-over-year change	Commentary
Revenue	Approximately $109 million	+12%	Software and recurring revenue outpaced total growth
Total software revenue	$100.8 million	+20.9%	More than 92% of total revenue
Software revenue	$49.2 million	+34.5%	Includes perpetual licenses, appliances and term-based subscription licenses
Software services revenue	$51.6 million	+10.3%	Primarily support contracts, with a smaller SaaS contribution
Recurring revenue	$56.2 million	+18.4%	51.4% of total revenue
Professional services revenue	$8.4 million	Down from $14.2 million	Less than 8% of revenue versus approximately 15% a year earlier
Non-GAAP gross margin	73.7%	+154 basis points	Supported by the higher software mix
Non-GAAP gross profit	$80.5 million	+14.4%	Grew faster than revenue
GAAP operating income	$4.7 million	+69.7%	Reflects increased operating leverage
Non-GAAP operating income	$12.2 million	+52.5%	Operating expenses grew more slowly than revenue
Adjusted EBITDA	$14.9 million	+35.7%	—
GAAP diluted EPS	$0.06	Up from $0.02	—
Non-GAAP EPS	$0.15	Up from $0.08	—
Operating cash flow	$1.1 million	Up from negative $6.3 million	Included annual incentive payments and seasonal working-capital uses

For the first half, revenue increased 11.2% to $214.7 million. Total software revenue grew 19.8% to $198.1 million, while recurring revenue rose 14.2% to $108.1 million. Non-GAAP operating income increased 47.2% to $22.9 million despite an approximately $7 million unfavorable foreign-exchange impact on operating profitability.

Cognyte ended the quarter with $102.2 million in cash and no debt. It repurchased approximately 1.5 million shares for $13.5 million during the first half and had repurchased $40.2 million since November 2024 under total authorizations of $60 million.

Business and Operating Performance

The revenue mix continued to move toward software and recurring arrangements. Management said customers are adopting subscription structures faster than expected, although perpetual licensing remains the dominant model. Cognyte estimated that growth would have been a few percentage points higher if the perpetual-versus-subscription mix had remained comparable with the prior year.

Management identified AI and sovereign control of data and infrastructure as central customer priorities. Government agencies are seeking AI capabilities embedded in operational workflows while retaining explainability, governance and control over deployment environments, including on-premises systems.

Commercial activity was broad across customer expansions, upgrades and new accounts. Cognyte added 40 customers during H1 FY2027, including a Tier 1 national security agency in a NATO member nation. The company also cited two Asia-Pacific expansions involving network intelligence and border security, including mitigation of unmanned aerial threats.

In the U.S., several federal opportunities moved into procurement after proof-of-concept projects and operational demonstrations. Cognyte also recorded wins with new and existing state and local customers. Management expects some federal contracts to close during FY2027 and remains on track for $20 million of signed U.S. deals.

Management Guidance

FY2027 metric	Management guidance
Revenue	Approximately $448 million, plus or minus 2%
Revenue growth at midpoint	Approximately 12%
Non-GAAP gross margin	Approximately 73.5%
Non-GAAP operating income	Approximately $56 million, up more than 50%
Adjusted EBITDA	Approximately $68 million, up about 40%
Non-GAAP EPS	$0.47 at the midpoint
Operating cash flow	Significantly positive, without a quantified target

Management expects Q3 revenue to be slightly above Q2, followed by sequential growth in Q4. The full-year outlook does not assume that Q2’s particularly high software mix will persist throughout the second half.

Cognyte also maintained confidence in its FY2028 revenue target of $500 million. Management cited healthy demand and approximately 85% revenue visibility over the next 12 months, with the remaining roughly 15% expected mainly from normal book-and-ship activity.

Risks and Watch Items

Subscription licensing can shift revenue recognition timing compared with perpetual sales. Some recurring term-license revenue is recognized at a point in time, meaning recurring revenue is not equivalent to ARR and may fluctuate by quarter.
Reported RPO does not capture the full revenue outlook. Approximately $42 million associated with cancelable subscription periods was excluded at quarter-end, while about $30 million of the RPO change reflected consumption of large multiyear support contracts.
Foreign exchange reduced first-half operating profitability by approximately $7 million, primarily due to a weaker U.S. dollar against the Israeli shekel.
Cognyte is increasing inventory to support expected deliveries amid longer supply lead times and rising prices. Management did not quantify the resulting impact on full-year operating cash flow, replacing the earlier $45 million figure with an expectation for significantly positive cash flow.
Quarterly billings and revenue mix may fluctuate based on contract timing, structure and customer deployment schedules. Q2 billings were $76.3 million, while trailing-12-month billings equaled approximately 95% of revenue.

Analyst Q&A Highlights

Analysts focused on the U.S. federal pipeline, RPO trends, subscription-related revenue recognition and cash flow. Management said successful federal proof-of-concept projects have advanced into procurement and that some contracts are expected during FY2027.

On RPO, management argued that the $470.2 million balance should be considered alongside expected renewals, excluded cancelable subscription periods and post-quarter contract activity. Cognyte said these factors support approximately 85% revenue coverage for the next 12 months.

Regarding cash flow, management declined to reaffirm the previous $45 million figure because the scale of planned inventory investment remains uncertain. The company nevertheless expects significantly positive full-year operating cash flow and said the additional inventory is tied to visible customer demand and delivery plans.

Full Earnings Call Transcript

Complete Earnings Call Transcript

Management Remarks

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Cognyte's Second Quarter Fiscal Year 2027 Earnings Conference Call. [Operator Instructions] Please note that today's conference may be recorded.

I will now hand the conference over to your speaker host, Dean Ridlon, Head of Investor Relations. Please go ahead.

Dean Ridlon

Thank you, operator. Hello, everyone. I'm Dean Ridlon, Cognyte's Head of Investor Relations. Thank you for joining us today. I'm here with Elad Sharon, Cognyte's CEO; and David Abadi, Cognyte's CFO.

Before getting started, I would like to mention that accompanying our call today is a presentation. If you'd like to view these slides in real time during the call, please visit the Investors section of our website at cognyte.com, click on Upcoming Events, then the webcast link for today's conference call.

I would also like to draw your attention to the fact that certain matters discussed on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other provisions of the federal securities laws. These forward-looking statements are based on management's current expectations and are not guarantees of future performance. Actual results could differ materially from those expressed in or implied by these forward-looking statements.

The forward-looking statements are made as of the date of this call, and except as required by law, Cognyte assumes no obligation to update or revise them. Investors are cautioned not to place undue reliance on these forward-looking statements. For a more detailed discussion of how these and other risks and uncertainties could cause Cognyte's actual results to differ materially from those indicated in these forward-looking statements, please see our annual report on Form 20-F for the fiscal year ended January 31, 2026, and other filings we make with the SEC.

The financial measures discussed today include non-GAAP measures. We believe investors focus on non-GAAP financial measures in comparing results between periods and among our peer companies that publish similar non-GAAP measures. Please see today's presentation slides, our earnings release and the Investors section of our website at cognyte.com for a reconciliation of non-GAAP financial measures to GAAP measures.

Non-GAAP financial information should not be considered in isolation from, as a substitute for or superior to GAAP financial information, but is included because management believes it provides meaningful information about the financial performance of our business and is useful to investors for informational and comparative purposes. The non-GAAP financial measures that the company uses have limitations and may differ from those used by other companies.

Now I would like to turn the call over to Elad.

Elad Sharon

Thank you, Dean, and hello, everyone. Q2 was a strong quarter for Cognyte. We are growing, executing against our operating plan and strengthening the business as we scale. Total software revenue grew 21% year-over-year and recurring revenue grew 18%, both meaningfully faster than total revenue. Profitability expanded significantly faster than revenue, reflecting the leverage we have built into the model.

Beyond the performance is a healthy environment across the markets we serve. Governments in our market are prioritizing national security, military intelligence, border security and public safety, and they're investing to build their intelligence capabilities these missions now require. Threats are moving faster, data volumes are growing and agencies need technology they can trust, explain and control. That is why AI and sovereignty are now the center of customer discussions.

First, AI is reshaping how intelligence work is done, transforming both the threat and the opportunity. As investigative environments become more data-intensive and time-sensitive, customers are looking for AI and agentic capabilities embedded directly within their operational workflows. AI helps agencies not only work faster, but differently, uncovering hidden connections, surfacing insight that would otherwise be missed, taking the routine work off analysts, so their expertise goes where it counts.

But a commercial AI engine on its own does not do that. It is only a starting point. What turns it into something an agency can use are 2 things. The first is domain expertise, knowing how intelligence work is done, what the data means and where the answer is likely to be. The second is governance. In mission-critical work, an analyst has to know why the technology reached a conclusion and be able to stand behind it. Agencies do not accept the black box, so they are not buying AI tools. They are buying platforms powered by AI, built by domain experts who understand the mission.

That is much harder thing to build. And the reason it is hard is the nature of the work. Intelligence work is not made of common cases. It is the rare, the obscure and the deliberately hidden. A general-purpose model handles the common well. That is not where our customers' investigations live.

Second, sovereignty. Agencies want their intelligence capabilities under their own control, their data, their infrastructure, their operations. Security agencies can't afford to depend on systems they do not own and control. They want the data to stay where they decide, the systems to run where they decide, and the ability to keep operating whatever happens around them.

Putting AI and sovereignty together with what we shared with you before, the growth in the volume and complexity of data and how fragmented most agencies' environments have become, you can see why the Cognyte platform is such a strong fit. Agencies need to work with more data than ever, faster than ever with AI, they can trust and explain and on infrastructure they control. This is the environment our platform is built to serve.

We win for a few reasons. Agencies choose us because we cover the whole spectrum from the field to the decision. They can run it under their own control in the environment they actually operating. And we bring domain expertise built from working with government customers around the world, which we then keep feeding back into our solutions.

These advantages are helping us win against competitors, including in-house built systems, and we saw that translate into strong commercial traction across expansions, upgrades and new logos. New logo activity remains strong across geographies with 40 new customers in H1 compared to 31 in the same period last year. One of them is a Tier 1 National Security Agency in a NATO member nation who were referred to us by another agency we serve. We expanded within our customer base. Among our expansions this quarter, 2 in Asia Pacific stand out, one to expand its network intelligence capabilities, and another to secure its borders, including mitigating unmanned aerial threats.

In the U.S., we made progress across all priority segments. In federal, several opportunities have moved into procurement following strong proof of concepts and operational demonstration. And in state and local, we won with both new and existing customers.

We are on target to achieve $20 million of signed deals in the U.S. this year. That momentum across our growth pillars has continued since quarter end, with several additional significant agreements signed. We'll provide more details on these wins in the coming weeks. The takeaway is simple. Our growth strategy is working and the momentum is broad and global.

We took part in major events across 4 continents. These events spanned a range of intelligence missions, including law enforcement, military intel and national security. In the U.S., at the largest law enforcement event, NATIA, inbound interest was high. In addition, agencies are approaching us directly after reading about Cognyte in the trade and business press or on referrals from other agencies or from industry experts. In this market, agencies rely on what their peers have already deployed, and that works in our favor. Reputation is key.

What we hear from prospects and customers in these engagements is the same thing we have been describing to you for several quarters. Agencies are drowning in data they already hold. The environment is fragmented. They are under pressure to move faster than their systems allow. And now on top of that, they have to decide how to bring AI into work, where every conclusion has to be defensible on infrastructure they control. These are the problems we are built to address. Customers are bringing us into strategic conversations early as they shape their future plans and think through what next-generation intelligence solutions should look like.

That engagement works both ways. They look to us for perspective and innovative solutions, and we listen closely to their priorities, using that insight to help shape where we invest. Those relationships take years to build, and the trust behind them is what lets us keep growing with customers as their missions evolve.

On the organization, Adam Philpott joined us as Chief Revenue Officer early last month to lead our global commercial organization. Adam brings deep experience building and scaling go-to-market teams in the security industry globally, and he joins Cognyte at an important time, with strong customer momentum and a healthy demand environment that presents a significant opportunity. His priorities are the same 3 growth drivers: expanding with existing customers, winning new agencies and accelerating our growth in the United States. I'm excited to have Adam on the team and look forward to working with him as we build on the momentum across the business.

In closing, Cognyte is stronger, more focused and better positioned than a year ago. The market is moving directly towards what we have built for, mission-critical intelligence in complex, high-stakes environment, powered by trusted AI, sovereign control and continuous innovation, all grounded in deep domain expertise earned through long-term relationships with customers around the world. Our strategy is working. Our momentum is global and the quality of our business continues to improve. With strong execution and clear visibility ahead, we remain confident in our full year outlook and fiscal '28 targets. We have built the platform, the expertise and the trust this market now demands, and we are moving forward with confidence and ambition.

With that, I'll turn the call over to David for a deeper review of our results and outlook.

David Abadi

Thank you, Elad, and hello, everyone. Elad talked about the quality of the business improving. That is exactly what our financial model is designed to deliver. We drive profitable growth by increasing the contribution from software and recurring revenue, expanding gross margins and maintaining discipline around operating expenses. That model is working. Revenue was approximately $109 million, up 12% year-over-year. Total software revenue grew 20.9% to $100.8 million and represents more than 92% of total revenue in Q2. Recurring revenue grew 18.4% year-over-year to $56.2 million and represented 51.4% of total revenue.

Professional services represented less than 8% of total revenue, compared with approximately 15% a year ago, reflecting the increasing software content of our business. This ongoing mix shift supports higher quality revenue, stronger margins and greater scalability. Put simply, software revenue grew at nearly twice the company overall growth rate, while recurring revenue also grew significantly faster.

As a result, both are becoming larger contributors to our overall revenue mix. A point to note about recurring revenue is that our model is different from a traditional SaaS model. A portion of our recurring revenue comes from term-based licensing arrangements that are recognized at a point in time rather than ratably over the life of the contract. As a result, recurring revenue is not the same as ARR and can fluctuate between quarters based on the timing of revenue recognition. What matters strategically is that recurring revenue is growing faster than the company overall and becoming a larger part of our business, enhancing revenue visibility and supporting long-term growth.

Now I will review the results in more details. Breaking down the revenue mix, software revenue grew 34.5% year-over-year to $49.2 million. Software revenue is comprised of perpetual licenses, appliances and term-based subscription licenses. Software services revenue grew by $4.8 million or 10.3% year-over-year, to $51.6 million, coming mainly from support contracts and to a lesser extent, cloud-based SaaS subscriptions. Total software revenue was $100.8 million, up 20.9%, growing significantly faster than total revenue and up by $17.5 million year-over-year.

Software revenue now represented more than 92% of total revenue versus approximately 86% 1 year ago. Professional services revenue was $8.4 million in Q2, compared to $14.2 million last year. Recurring revenue increased by 18.4% to $56.2 million, representing 51.4% of total revenue.

On gross margin and profit, we continue to improve year-over-year. Q2 non-GAAP gross margin was 73.7%, an expansion of 154 basis points. Non-GAAP gross profit grew 14.4%, or $10.1 million, to a total of $80.5 million. Again, faster than revenue. Our model continues to deliver strong financial leverage and profitability is expanding significantly faster than revenue.

The majority of the year-over-year increase in operating expenses reflected foreign exchange movements, primarily the weaker U.S. dollar against the Israeli shekel. We continued to partially hedge future periods. We partially offset that impact through ongoing efficiency initiatives across the organization, including increased use of enterprise AI. Despite the FX headwinds, operating expenses grew more slowly than revenue, allowing profitability to grow significantly faster.

Q2 non-GAAP operating expenses were $68.2 million. GAAP operating income increased 69.7% year-over-year to $4.7 million against revenue growth of 12%. Non-GAAP operating income increased 52.5% to $12.2 million. Adjusted EBITDA increased 35.7% to $14.9 million. Non-GAAP EPS was $0.15, nearly double the $0.08 we generated last year. GAAP diluted EPS was $0.06, compared with $0.02 a year ago, reflecting the significant improvement in our profitability. These results demonstrate the operating leverage we have been working to build. Revenue grew 12%, while non-GAAP operating income grew more than 4x as fast.

Looking at the first half, the same trends are evident. H1 revenue was $214.7 million, up 11.2%. Total software revenue was $198.1 million, up 19.8%. Recurring revenue was $108.1 million, up 14.2%. GAAP operating income was $9.1 million, up 85.1% year-over-year. Non-GAAP operating income was $22.9 million, up 47.2%. Importantly, we achieved these results despite approximately $7 million of net unfavorable foreign exchange impact on operating profitability in the first half of the year. So across both the quarter and the first half, we are seeing consistent execution against our financial model. Compared with a year ago, Cognyte is generating more revenue with higher quality, more software revenue, higher recurring revenue, higher gross margins and meaningfully greater profitability.

Turning to RPO. Total RPO at quarter end was $470.2 million, including $313.4 million of short-term RPO. As we have discussed previously, RPO remains an indicator of future contracted revenue, but movement in the metric can also reflect contract structure, duration, renewals and the consumption of large multiyear agreements. Reported RPO excludes the cancelable portion of subscription contract.

At July 31, approximately $42 million of future revenue associated with those arrangements was therefore not included in reported RPO. In addition, approximately $30 million of the change in the RPO reflected the consumption of large multiyear support contracts as we delivered against those agreements and recognized the associated revenue.

Short-term RPO is an important component of our revenue visibility, but it does not capture the full picture. When we combine short-term RPO with expected renewals of recurring business and contracts signed since quarter end, we have visibility into approximately 85% of the revenue required to support our plan over the next 12 months.

The remaining approximately 15% is expected to come primarily from normal book and ship activity. That level is well within our historical execution range and supports our confidence in our growth objectives. This level of visibility is one of the reasons we believe we remain on track to achieve our FY '27 outlook and FY '28 revenue target of $500 million. Q2 billings were $76.3 million. As billings can vary significantly quarter-to-quarter based on contract terms, we believe the trailing 12-month measure is more informative. On that basis, billings were approximately 95% of revenue, which we believe reflects the underlying strength of the business.

Turning to cash flow. We generated $1.1 million of positive cash flow from operations in Q2, compared to net cash used in operating activities of $6.3 million in Q2 last year. This improvement reflects stronger collections and profitability, as well as disciplined working capital management. The second quarter also includes our annual incentive payments and other seasonal working capital uses.

Turning to our balance sheet. Our financial position remains strong. We ended the quarter with $102.2 million in cash and no debt, providing us with significant flexibility. During the first 6 months of fiscal '27, we repurchased approximately 1.5 million ordinary shares for $13.5 million. Since launching our first repurchase program in November 2024, we have repurchased approximately $40.2 million of shares through the end of Q2 FY '27, out of the $60 million authorized across the company's repurchase programs.

Our capital allocation priorities remain unchanged. We'll continue investing organically to support growth, evaluate strategic M&A opportunities where we see the potential to create returns significantly in excess of our cost of capital and use share repurchases opportunistically where we believe they represent a compelling use of capital.

Turning to our outlook. Our first half's performance remains strong and the demand environment is healthy. Based on our execution to date and the visibility we have into the remainder of the year, we are narrowing our full year revenue range around an unchanged midpoint. We now expect full year revenue of approximately $448 million, plus or minus 2%, representing approximately 12% year-over-year growth at the midpoint. We continue to expect recurring revenue to grow faster than total revenue and become a larger contributor to overall business. As we have discussed, the increasing adoption of subscription agreements can shift the timing of reported revenue recognition compared with our historical perpetual model.

While this can affect reported growth in a particular period, we believe the continued shift towards recurring arrangement strengthens the long-term visibility and durability of our revenue base. Total software represented a particularly high percentage of revenue in Q2. We expect quarterly mix to continue to fluctuate based on the timing and composition of customer activity. And our full year outlook does not assume the Q2 mix persists throughout the second half.

From a quarterly cadence perspective, we currently expect Q3 revenue to be slightly higher than Q2, followed by sequential growth in Q4, consistent with the seasonality reflected in our full-year outlook. We also remain confident in our profitability outlook. We expect non-GAAP gross margin of approximately 73.5% for the year, an improvement of 50 basis points from last year. We continue to expect non-GAAP operating income to be about $56 million, growth of more than 50% year-over-year and adjusted EBITDA of approximately $68 million, growth of about 40%. We continue to expect annual non-GAAP EPS of $0.47 at the midpoint of the range.

On cash flow, we continue to expect significant positive operating cash flow for the full year. Given the customer demand and future growth opportunities, we are making targeted inventory investment to support expected customer deliveries. As a result, the timing and the level of cash generation this year is expected to be affected. It reflects a deliberate working capital investment rather than any change in the underlying performance of the business. To close, the progress we are making reflects the strength of our strategy and the discipline of our execution.

We are building a higher-quality business, one with a greater contribution from software, a growing recurring revenue base, stronger margins and increasing operating leverage as we scale. This is not only about the first half or even the fiscal year. It's about building a more durable, more predictable and more profitable Cognyte for the long term. With healthy demand, strong customer momentum and clear visibility into the opportunities ahead, we remain confident in our FY '27 outlook and on track to achieve our FY '28 targets.

Operator, we are ready to take questions.

Operator

[Operator Instructions] Our first question in queue coming from the line of Eric Martinuzzi with Lake Street Capital Markets.

Question-and-Answer Session

As for the demand and what we have in our hands, it gives us a lot of confidence into the end of this year and also when we enter into the next year. The visibility is high. You mentioned percentage, 12% and 15%. The way that we look at that is that we are working with our customers to see deployment and what can be done. And based on that, I think putting our guidance, and we are feeling comfortable with the guidance. And if we will need to update, we'll be more than happy to do it.

Elad Sharon

Taz, let me add on this, that actually, while we are growing top line, we are improving the quality of the revenue a lot. So as David mentioned, software mix is growing, the recurring revenue is growing, profitability is expanding. So actually, if you would compare the perpetual equivalent versus the subscription that we see today, actually, the growth would be higher if you continue to deliver the same as perpetual license in a few points. So actually, the growth rate is faster than it looks in the numbers.

Imtiaz Koujalgi

Yes. No, fair point. And then, David, last quarter, we had a little bit of weakness on the operating cash flow due to, I guess, the shift to subscriptions and also FX. This quarter also, the cash flow looks negative. Any comment on -- I know last year, you -- last quarter, you said the full year guide was maintained at $45 million. Any comment on the full year expectations for cash flow for this year?

David Abadi

Yes. Thank you, Taz. So cash actually in Q2 was strong. What we see in Q2 that we were able to generate a positive cash flow from operations and actually pleased from the quarter. Q1 -- Q2 actually is the Q that we had some specific expenses that related to annual bonus and stuff like that, that's taking place usually in Q2. And although this seasonal expenses, we were able -- seasonal payment, we were able to drive a strong cash flow from operations. Actually, if you look this year, we're generating $1.1 million of cash from operations. Last year, Q2 was negative $6.3 million. So actually, if you look at Q2 versus Q2 last year, you're seeing a strong cash from operation.

This concludes today's conference call. Thank you for your participation. You may now disconnect.

Find out more

Wealthfront (WLTH) Fiscal Q2 2027 Earnings Call: Platform Assets Reach $99 Billion

Wed, 09 Sep 2026 23:41:09 +0000

Key Takeaways

Total platform assets reached $99.0 billion at quarter-end, up 12% year over year and 2% sequentially. Wealthfront subsequently surpassed $100 billion in August, ending the month at $100.9 billion.
Investment advisory assets rose 30% year over year to $54.1 billion, while cash management assets declined 4% to $44.9 billion. Quarterly net deposits totaled $1.1 billion, all from investment advisory.
Revenue increased 1% year over year to $91.9 million. Investment advisory revenue grew 31%, offsetting a 10% decline in cash management revenue.
Adjusted EBITDA fell 15% to $38.1 million, with margin contracting eight percentage points to 41%, reflecting lower cash management revenue, client incentives and continued investment in Wealthfront Home Lending.
The company plans to convert its stock investing account into the Wealthfront Brokerage Account in October, adding more order types and a broader list of investable securities.
Management said near-term margins will face pressure from Home Lending investment, but it continues to believe adjusted EBITDA margin can exceed 40% over the long term.

Core Financial Data

Metric	Fiscal Q2 2027	Change / Commentary
Total platform assets	$99.0 billion	Up 12% YoY and 2% QoQ
Investment advisory assets	$54.1 billion	Up 30% YoY and 5% QoQ
Cash management assets	$44.9 billion	Down 4% YoY
Net deposits	$1.1 billion	Included $1.1 billion from investment advisory
Funded clients	1.1 million	Up 14% YoY
Funded accounts	1.97 million	Up 15% YoY
Revenue	$91.9 million	Up 1% YoY
Cash management revenue	$61.8 million	Down 10% YoY
Investment advisory revenue	$28.8 million	Up 31% YoY
Gross profit	$81.1 million	Down 1% YoY; 88% margin
GAAP expenses	$75.1 million	Up 45% YoY
Adjusted operating expenses	$58.7 million	Up 17% YoY
Adjusted EBITDA	$38.1 million	Down 15% YoY; 41% margin
GAAP diluted net income	$17.6 million	Diluted EPS of $0.10
Operating cash flow	$47.3 million	—
Adjusted free cash flow	$28.3 million	74% of adjusted EBITDA
Cash and cash equivalents	$453 million	Quarter-end balance

Business and Operating Performance

Investment advisory was the main growth engine. Average advisory balances increased 35% year over year to $52.9 billion, driving a 31% rise in advisory revenue. The annualized advisory fee rate declined by one basis point to 22 basis points, mainly because of a one-time incentive tied to the Custodial Account launch.

Cash management remained under pressure. Average balances declined 1% to $44.9 billion, while the annualized cash management fee rate fell six basis points to 55 basis points. Management attributed the decline to the conversion of APYs to an APR under a lower federal funds rate and the impact of promotional APY boosts. The run-rate fee rate remained 55 basis points at the end of August.

Management highlighted improving cash deposit trends in July and August after targeting the 2023 and 2024 client cohorts with incentives and new products. These cohorts joined during peak interest rates and adopted Wealthfront investment products more slowly than other groups. August net deposits reached $605 million, the strongest monthly total since August 2025, while cash net deposits recorded their best month since March.

Asset-weighted cross-product adoption increased by approximately half a percentage point in August to just under 64%. Management said incentives generated roughly 7,500 additional account openings and were associated with higher average cash balances, greater referral activity and slightly larger investment deposits among participating new clients.

The Wealthfront Brokerage Account is scheduled to launch in October through the company’s broker-dealer. Management expects the account to provide more order types, expand the range of investable securities and support consolidation of self-directed assets held outside Wealthfront. The product will remain focused on long-term, buy-and-hold investing.

Wealthfront launched its Custodial Account in June. The account uses tax gain harvesting designed to realize up to $1,350 of tax-free growth annually without requiring a federal tax return filing. Management characterized the product primarily as a way to deepen family relationships rather than a major near-term asset growth driver.

Wealthfront Home Lending expanded to Texas in May and California in August, following its Colorado rollout. The company plans to enter Washington, Florida, Illinois and Oregon in the coming months. Management said average mortgage rates delivered through the product met its objective of being at least 50 basis points below the national average. New automation includes self-service loan scenarios, restricted stock unit income verification and prefilled application fields.

The company also began limited testing of an AI tool that helps clients determine and set emergency fund levels within the app. Management said broader deployment will depend on building sufficient client trust.

Management Guidance

Management expects approximately $3.0 million to $3.5 million of one-time employer tax expense in the next quarter, related to former employees exercising options before a September deadline.

Home Lending investment is expected to remain a near-term margin headwind. However, management said the company’s automation model and limited physical footprint should support an adjusted EBITDA margin above 40% over the long term. No specific revenue or full-year earnings outlook was provided.

Management indicated that each 25-basis-point rate increase could improve the cash management fee rate by roughly one basis point through the APY-to-APR conversion effect. Better sweep deposit pricing could also help, while wider adoption of client incentives could create offsetting near-term pressure.

Risks and Watch Points

Cash management revenue declined as lower rates and promotional APY boosts compressed the fee rate.
The 2023 and 2024 client cohorts have shown weaker investment product adoption and have also invested through external brokerages, although management reported recent improvement.
Higher mortgage rates are reducing housing affordability and creating an industry volume headwind for Wealthfront Home Lending.
Home Lending startup costs, additional personnel and product development investment are weighing on near-term expenses and margins.
Deposit behavior remains sensitive to interest rates, equity market performance, quarterly tax payments and the relative appeal of cash versus investment products.
Incentives can accelerate account adoption and deepen client relationships but may reduce near-term cash management and advisory fee rates.

Analyst Q&A Highlights

Management said recent cash deposit improvement reflected better retention and cross-product adoption among the 2023 and 2024 cohorts. It cautioned that summer is normally a slower period and that future deposit trends will still depend on broader macroeconomic conditions.

On potential rate increases, management noted that past hiking cycles supported cash deposits. However, it emphasized that equity market performance and relative investor demand for cash and investments could produce a different outcome from the 2022–2023 cycle.

Regarding advisory pricing, management attributed the quarterly fee-rate decline mainly to the Custodial Account incentive. It expects the automated Wealthfront portfolio to remain the largest component of advisory assets, supporting a relatively stable long-term advisory fee rate.

Management said long-short tax-aware investing remains an area of interest, but provided no specific product launch plan. Tax-loss harvesting, direct indexing and other low-cost tax-aware offerings will remain central to the investment product strategy.

On competition, management identified underuse of high-quality financial products as the main opportunity among prospective clients. Client referrals remain a key acquisition channel, while unsolicited recommendations from large language models have also contributed to customer growth.

Full Earnings Call Transcript

Complete Earnings Call Transcript

Management Remarks

Operator

[Operator Instructions] As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Matthew Moon, Vice President, Investor Relations. Please go ahead, sir.

Matthew Moon

Good afternoon, everyone, and thank you for joining us today to discuss Wealthfront's fiscal second quarter 2027 financial results, which, like the quarter, ended July 31, 2026. On the line are David Fortunato, our Chief Executive Officer and President, and Alan Imberman, our Chief Financial Officer and Treasurer. After prepared remarks, we will open the line for Q&A. During the course of today's call, you may make forward-looking statements as defined under applicable securities laws. Forward-looking statements are subject to risks and uncertainties. The company can give no assurance that they will prove to be correct. To better understand the risks and uncertainties that could cause actual results to differ, we refer you to the documents at Wealthfront Files of the Securities and Exchange Commission, including our most recent form.

Our discussion today will include certain non-GAAP financial measures. These non-GAAP financial measures should be considered in addition to, not as a substitute or in isolation from, GAAP measures. Reconciliations of non-GAAP financial measures to comparable GAAP measures can be found in our press release accompanying this call, which is posted to our investor relations website at ir.wealthfront.com. I will now turn the call over to David. Good afternoon, everyone. In our fiscal second quarter 2027, we continue to deliver on our objective of becoming the leading tech-driven platform for digital natives seeking to turn their savings into wealth. Before I get into a review of our last quarter, I want to remind everyone of our unique business model and development philosophy. We believe we make the best practices of personal finance accessible at low fees through automation and intuitive and convenient through user-friendly design.

At scale, this drives high margins, allowing us to share savings with clients, creating trust, which drives add-on deposits, new product adoption, and low-cost word-of-mouth growth, which once again drives high margins. This flywheel enables us to enhance our core cash management and investment advisory product offerings and build new products like Wealthfront Home Lending, which helps our clients save more, earn higher returns on their savings, and borrow at lower rates. In other words, grow their wealth. We continue to believe that the best way to build deep, long-term client relationships is to delight clients by offering them more value than they can find anywhere else and focusing on their long-term financial outcomes. This informs our product development strategy and keeps us focused on our roadmap regardless of short-term market conditions. For example, this past quarter, we expanded availability of Wealthfront Home Lending and further automated key parts of the flow. We added Custodial Accounts to our broad suite of family wealth management offerings and started select client testing of an initial AI solution that helps clients size and set their emergency funds.

We don't attempt to time the market or build products that take advantage of speculative fads. And each year, we continue to increase the value we provide to clients. I'm proud to announce this focus allowed us to surpass $100 billion in total platform assets as of the end of August. As I reflect on this achievement, I could not be more grateful for our clients who have entrusted us to help them achieve their financial goals and proud of our team that have been instrumental in getting us to this point. Digital natives, defined as those born after 1980, have faced significant economic headwinds throughout the years, like the 2008 financial crisis and the COVID-19 pandemic. And they continue to navigate inflation, housing affordability, and a changing labor market. Despite these challenges, we both advised and observed our clients remain resilient and focused on intelligent savings and investing strategies.

An analysis of clients who have been saving and investing with Wealthfront from January 1, 2021 to January 1, 2026 showed impressive growth across their accounts. Of these clients, millennials have on average nearly tripled their wealth held on our platform over that timeframe. And Gen Z clients have on average quintupled their wealth held on our platform over that timeframe. Across the same cohort of clients, the number of millennial clients who have over $1 million on our platform has increased by over 500%. We aspire to be the modern wealth manager for digital natives, replacing financial uncertainty with best practice investing, automated habits, and tax strategies that maximize what clients keep. By continuing to ship products aligned with our clients' interests, we remain confident in our ability to deliver on this aspiration. Turning to the quarter, total platform assets grew 2% quarter-over-quarter and 12% year-over-year to $99 billion at quarter end, driven by investment advisory assets up 5% quarter-over-quarter and up 30% year-over-year to $54.1 billion.

Overall net deposits were $1.1 billion in the quarter, including $1.1 billion from investment advisory, which incorporated the second best quarter of net cross-account transfers from cash to invest in the company's history. This is a continuation of our intentional strategy to drive cross-product flows during transition environments like the one we are in today. This reflects the intentionally hedged business model we constructed that should drive client asset growth through most, if not all, macro environments. Transition environments are periods where prospect and client sentiment shift, often driven by changes in the macro environment and investing sentiment. This transition environment began during the rate cuts towards the end of calendar year 2025 and has persisted due to continued strong market performance. Helping clients adopt a broader range of products is vital to continuing asset growth through any environment, including during transition environments like the one we are in today. Most of our annual client cohorts have shown broad-based investment account adoption, supporting year-to-date net asset growth on the platform, but our 2023 and 2024 annual cohorts have lagged behind. The behavior of the 2023 and 2024 annual client cohorts is not entirely a surprise, as a large majority of these clients hired us during the recent period where rates peaked and the cash account was particularly attractive.

We had a shorter period of time to drive cross-product adoption for these cohorts and have been focused on doing so over the past year. We've been quite successful in driving cross-product adoption. However, these client cohorts have been investing at external brokerages as well. The result has been cash asset flows in a dynamic equilibrium, with these two client cohorts underperforming, but more than offset by the remaining client cohorts performing better and contributing to overall asset growth. We have focused our recent incentives and new product offerings on improving adoption of investing products and specifically focused on the 2023 and 2024 client cohorts. Our cross-product adoption incentives have shifted the behavior of some clients and new account types like our tax-aware Custodial Account have helped broaden client relationships. These efforts have helped improve the 2023 and 2024 annual cohort performance, and the current year client cohort performance has been consistently strong. The result has been improving cash net deposits in July and August, including the best month for cash net deposits since March of this year.

There's more for us to do, and we will be better positioned in the future. I'm happy to share that in October, we will complete the transition of the stock investing account to the broker dealer and rename it the Wealthfront Brokerage Account. This enhancement has been in the work for some time, and we expect the Wealthfront Brokerage Account to benefit us in periods of elevated, self-directed investing sentiment like the one we are in today by providing a familiar experience to beginner investors and increasing asset consolidation from our existing clients. We shipped a variety of other new products and feature enhancements in the quarter as well. We launched the Custodial Account in June, an expansion of our suite of family-oriented wealth management offerings that complement our existing 529, joint, and trust account offerings. Our Custodial Account provides a flexible way for parents to save for their child's future and is one of the only custodial accounts in market designed to automatically lower a child's future tax burden through tax gain harvesting. Tax gain harvesting is designed to take advantage of the favorable federal tax treatment available to children, helping them realize up to $1,350 in tax-free growth each year without requiring a federal tax return filing, increasing their cost basis, thereby reducing the amount of realized gain when the investment is later sold. Due to this strategy, when the funds are eventually withdrawn by the child years later, they have less taxes to pay so they can keep more of their returns.

We continue to see our digital native clients progress into the home buying phases of their lives. In May, we launched general availability of Wealthfront Home Lending in Texas. And in August, we launched general availability in California. We plan to enter Washington, Florida, Illinois, and Oregon in the coming months as we continue our measured rollout. Recall, Wealthfront Home Lending intends to deliver a better digital home mortgage experience with mortgage rates at least 50 basis points below the national average. We're proud to have delivered on this mortgage rate objective of our value proposition on an average basis and have made excellent progress on improving the digital home mortgage experience. We launched a self-service scenarios tool that allows borrowers to explore custom loan configurations and lock in their new rate autonomously online, all without the back and forth with a loan officer. We launched a smarter restricted stock unit income verification process that improves loan officer efficiency and allows borrowers to get an accurate rate quote much more quickly and allows home buyers to get a faster pre-qualification.

We also automated the pre-fill of application intake fields using both Wealthfront and linked account data. These enhancements have led to improved automated decisioning. We have more to improve upon and automate, but they reflect strong progress towards our vision of delivering the first mortgage product designed to be handled entirely in a mobile app. In the long term, we expect to see many more examples of clients executing on self-service loans. As signaled last quarter, we recently began testing our own AI solutions with current client experimentation centered on an LLM tool that's initially focused on helping select clients choose the appropriate amount and then subsequently set or adjust an emergency fund directly in-app. We ultimately envision clients coming to Wealthfront and using AI tools such as this one to answer all of their financial questions. In order for us to achieve that goal, we must ensure that the solution builds trust to reach that critical point of client confidence. We expect to have more to share with you on this in coming quarters as we progress towards this goal. With that, I'll turn it over to Alan to go over the financials.

Thanks, David.

Alan Imberman

Starting with our end of quarter asset and client data, total platform assets grew 12% year-over-year to $99 billion, with investment advisory assets up $54.1 billion, up 30% year-over-year, and cash management assets up $44.9 billion, down 4% year-over-year. We ended the quarter at 1.1 million funded clients, up 14% year-over-year, and 1.97 million funded accounts, up 15% year-over-year, reflecting 1.3 funded accounts per funded client. Moving to the income statement, revenue for the last quarter came in at $91.9 million, up 1% year-over-year. Cash management revenue was $61.8 million, down 10% year-over-year, primarily due to a lower annualized cash management fee rate of 55 basis points, down 6 basis points year-over-year. Average cash management balances measured as the simple average of beginning and end of quarter figures was also down 1% year-over-year to $44.9 billion. The year-over-year decline in the annualized cash management fee rate was driven primarily by the fee rate loss in converting APYs to an APR given the lower Fed funds rate, as well as higher overall impact of APY boosts from client incentives. To help inform your models, the run rate annualized cash management fee rate at the end of August was 55 basis points.

Investment advisory revenue was $28.8 million, up 31% year-over-year, primarily due to average investment advisory balances of $52.9 billion, up 35% year-over-year, while the annualized investment advisory fee rate of 22 basis points was down 1 basis point versus the same period last year due to the impact of one-time client incentives tied to the launch of Custodial Accounts. Asset growth was driven by both strong market and net deposits over the trailing 12-month timeframe. Gross profit was $81.1 million, down 1% year-over-year, reflecting a gross profit margin of 88%, down roughly 1 percentage point year-over-year, due in part to the higher data costs, higher money movement costs, and startup expenses associated with Wealthfront Home Lending. Total GAAP expenses of $75.1 million were up 45% year-over-year, which recall does not incorporate an apples-to-apples comparison of share-based compensation, as share-based compensation prior to the IPO did not incorporate dual trigger RSU expense, given that the second of the two dual triggers conditions was not satisfied until the IPO occurred. Adjusted operating expenses, that is expenses excluding share-based compensation, were $58.7 million, up 17% year-over-year, due primarily to higher adjusted product development expense. Increase in adjusted product development expense was due to higher personnel-related expenses, including from increased headcount associated with the launch of Wealthfront Home Lending. Looking to next quarter, we expect roughly $3 million to $3.5 million in one-time employer tax expense tied to option exercises for former employees ahead of their exercise deadline in September. The September deadline was contractually set for nine months after our IPO, which, recall, occurred back in December 2017 for 2025.

Adjusted EBITDA of $38.1 million was down 15% year-over-year and reflected an adjusted EBITDA margin of 41% down eight percentage points year-over-year, primarily reflecting lower cash management revenue due to a lower cash management fee rate given the previously noted APY to APR conversion and higher client incentives, as well as continued investments, including into the measured rollout of Wealthfront Home Lending. Despite these investments, we continue to demonstrate significant operational and financial discipline, delivering a rule of 40 metric of 42 for the quarter. This is our 16th consecutive quarter exceeding the rule of 40 and underscores a business model designed to successfully and consistently balance top-line growth with the structural efficiencies of our automated platform. GAAP diluted net income was $17.6 million, and GAAP diluted earnings per share was 10 cents per share. Net cash provided by operating activities was $47.3 million, and adjusted free cash flow was $28.3 million in the quarter, with the difference in values driven by the change in temporary client funding receivables related to our initial funding of clients' early direct deposits and instant withdrawals between the two reporting dates. Recall, this adjustment to our free cash flow normalizes for the change in these receivables from period to period, as these end of period balances can fluctuate due to factors such as the day of the week, quarter ends. Importantly, these actions provide clients access to their funds more quickly and in the case of early direct deposit, generates additional days of interest income for our clients.

Adjusted free cash flow conversion ratio, that is, adjusted free cash flow as a percentage of adjusted EBITDA, was 74%. Recall, we pay out 35% of accrued annual bonuses, cash bonuses, to our employees each July with the remainder paid each January. Our trailing 12-month adjusted free cash flow conversion ratio, which normalizes for seasonality, was 88%. During the fiscal second quarter of 2027, we repurchased 3.3 million shares in the open market for approximately $30 million as part of our share repurchase program. We're comfortable deploying our cash for share repurchases because of our robust free cash flow generation, our debt-free capital structure, as well as the multi-decade opportunity to compound wealth with new and existing clients who are in the wealth accumulation phase of their lives. Even with the strong repurchase activity, we ended the quarter with cash and cash equivalents of $453 million, which excludes the receipt of temporary client funding receivables we just mentioned as a part of the Adjusted Free Cash Flow reconciliation. As a reminder, our long-term capital priorities are to invest in organic, product-led growth, including infrastructure, and automation to evaluate opportunities to repurchase shares and to assess M&A with the preference to build versus buy.

Any remaining capital would be added to our surplus reserves in order to enhance resilience and durability. Looking to recent trends, as David mentioned, we surpassed $100 billion in total platform assets for the first time in August, doubling total platform assets in less than three years. We ended August at $100.9 billion in total platform assets, including $55.8 billion in investment advisory assets and $45.1 billion in cash management assets. Total net deposits in August were $605 million, which includes the impact of five full weekends in a month versus the typical four full weekends in a month. That's important because we only recognize withdrawals on weekends to satisfy client spending needs and instant withdrawals, which drives client delight but does impact monthly cash net deposit figures on the margins. Also, as David mentioned, August was the best month for cash net deposits since March of this year, and August was the best month for total net deposits since August of 2025. Asset-weighted cross-product adoption continued increasing up a half a percentage point month-over-month to under 64%, reflecting our continued success in driving cross-product adoption.

Great, thank you. [Operator Instructions] Our next question comes from the line of Ryan Tomasello from KBW. Your question, please.

Ryan Tomasello

With the market pricing in higher odds of a rate cut here over the near term, I was hoping you can talk about how you would expect your user base to respond to a potential potential cut here of 25 bps if that's meaningful enough. Sorry, a hike of 25 bps and if that's meaningful enough you think to drive a material change in the deposit trends on the cash side of the business? And on a related topic, if you can just talk about how you're thinking about promotions and incentives in the back half of the year, particularly to capitalize on a potential re-hike.

Matthew Moon

Yes, thanks for the question. History has told us that rate increases have been beneficial for our cash net deposit trajectory. That said, it's not only the direction, but also larger macro conditions that can influence cash net deposit flows, and the comparative interest in cash versus investing. So, you know, in the last significant rate increase cycle of 2022, 2023, the U.S. equity market performed less well than it has in recent history. And so we'll have to see how that plays out this time. On sort of trends moving forward, like June, September is a quarterly income tax payment month. For some of our clients, that can impact figures on the margins as well. So, you know, I think sort of my summary would be history tells us that rate hikes are good for cash net deposits, but there are some other factors that will be different.

We don't know exactly how that's going to play out, and we've stayed focused on building a hedged business model that can grow with cash, grow with investing, and now grow with mortgage, sort of regardless of where the macro environment goes. And then on the cross-product adoption incentives, we've had roughly 7,500 new account openings attributable to the incentive. The strongest benefit that we've seen is from new to Wealthfront clients who've adopted the incentive and really broadened and deepened their relationship with Wealthfront more quickly than prior cohorts. We think that's a benefit to the clients because it helps them build wealth for both cash and investing and in a more automated way. And it's obviously a benefit to Wealthfront because we get to help them manage more of their money. The subset of clients that have adopted this incentive is quite attractive. The unit economics of the incentive are very good.

We see higher average cash balances, higher propensity to refer new clients to our platform, and slightly larger investment net deposits when compared to similar new clients that have not adopted the cross-product adoption incentives that we've had. So we're pleased with the early results. It's an area that we're going to continue investing in and see if we can continue to drive new client adoption of these incentives to grow relationships more quickly.

Ryan Tomasello

And then looking at the investment advisory fee rate, I realize you disclose the fee rate in the press release, but if I calculate that using a monthly on a monthly average asset basis, it implies about a 2% decrease in the fee rate from last quarter from 21.7 bps to 21.3. That's an acceleration from the rate of decline that we've been seeing in recent quarters. So can you just talk about the drivers there, I assume from incentives and maybe adoption of lower fee rate products? And just overall how you're thinking about the trajectory of the investment advisory fee rate over time as option of other products in that bucket widens.

Alan Imberman

Alan Imberman

Sure. I mean, I still think that in the long term, you know, we can be over 40%. I think what, you know, is going to happen in the near term is there will be a headwind from home lending. However, the kind of higher rates has given us more time to invest, and as David mentioned, become more efficient, both in terms of, you know, building in-house products that make our people more efficient in designing out vendors. But it is something that's going to take a lot of scale in order to really start seeing the incremental margin improvements. But, you know, with a business like ours that is from a headcount footprint, extremely small from a physical footprint, almost non-existent over the long term with our ability to develop, automate, and all those things, we're going to have a very high EBITDA margin. But there's near-term headwinds as we invest. And we think that that is a good trade because it just opens up a very large total addressable market.

It helps our clients in different parts of their lives and provides a really good hedge for the business to be able to grow really in most, if not all, environments.

Operator

Understood. Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to David for any further remarks.

Matthew Moon

Thanks. I want to thank everyone for joining the call and for your continued interest in Wealthfront. I look forward to staying in touch and updating you on our progress in the months ahead. Thanks all. Bye.

Operator

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect.

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Navan (NAVN) Fiscal Q2 2027 Earnings Call: Revenue Up 35%, Guidance Raised

Wed, 09 Sep 2026 23:41:01 +0000

Key Takeaways

Fiscal Q2 2027 revenue rose 35% year over year to $233 million, while gross booking value (GBV) increased 45% to more than $3 billion.
Non-GAAP gross margin reached 75%, and non-GAAP operating margin expanded to 7% from 5% a year earlier. Reported free cash flow improved to $28 million from a $33 million burn a year ago.
Payments volume grew 34% to $1.3 billion, while subscription revenue increased 39% to $21 million. Product-led growth revenue more than doubled year over year.
Navan signed $4 billion of new sales-led growth GBV during the last 12 months, up 60% from the comparable period. RFP volume tripled in the first half from a year earlier.
Ava handled approximately 60% of customer interactions in Q2. Navan-owned models accounted for about 50% of Ava’s model calls, up from 30% in Q1.
Management raised fiscal 2027 revenue guidance to $927 million–$933 million and non-GAAP operating income guidance to $82 million–$86 million.

Core Financial Data

Metric	Fiscal Q2 2027 result	Change or context
Revenue	$233 million	Up 35% year over year
Gross booking value	More than $3 billion	Up 45% year over year
Payments volume	$1.3 billion	Up 34% year over year, versus 29% growth last quarter
Subscription revenue	$21 million	Up 39% year over year
Non-GAAP gross margin	75%	Up approximately 200 basis points year over year
Non-GAAP operating margin	7%	Up from 5% a year ago
Free cash flow	$28 million	Versus a $33 million burn a year ago
Cash and short-term investments	$820 million	Quarter-end balance
Debt	Approximately $125 million	Quarter-end balance
New signed SLG GBV	$4 billion	Last 12 months; up 60% from Q2 last year

Business and Operating Performance

Growth was supported by higher booking demand, expansion among existing customers, ramping deployments, faster contributions from new launches and a higher premium-cabin mix. Navan now serves 50 S&P 500 companies, up from 45 in the prior quarter.

Management said sales-led growth and product-led growth both continued to scale. Enterprise RFP activity tripled in the first half compared with the same period last year. The company also reported rising win rates, average pricing and sales-representative productivity.

Payments and expense growth benefited from new customer adoption, upsells and greater usage among existing customers. Management said the company’s restructured capital position and added warehouse capacity allowed its sales organization to increase its focus on these products.

AI remained central to Navan’s operating model. Ava resolved approximately 60% of customer interactions, including complex travel changes and refunds. Management attributed part of the company’s gross-margin leverage to this resolution rate and the growing use of Navan-owned models.

Navan Edge was described by management as the fastest-growing product the company has launched. The company said usage, customer satisfaction and repeat activity were trending positively, although management expects a more visible financial impact next year.

The BoomPop acquisition expands Navan into meetings and events, which management characterized as roughly 30% of business travel volume. BoomPop uses conversational AI to source venues and related services. Navan expects the combination to support cross-selling into its existing customer base.

Management Guidance

Period	Revenue guidance	Non-GAAP operating income guidance	Implied growth or margin
Fiscal Q3 2027	$253 million–$255 million	$35.5 million–$36.5 million	30% revenue growth at midpoint; 14% operating margin
Fiscal 2027	$927 million–$933 million	$82 million–$86 million	32% revenue growth at midpoint; 9% operating margin

Management said the raised full-year outlook reflects sustained booking momentum and healthy business travel demand. The forecast assumes travel-price inflation remains broadly consistent with levels seen throughout fiscal Q2.

SmartTrip is expected to have an immaterial fiscal 2027 impact on both revenue and profit. BoomPop is expected to contribute a very low-single-digit amount to fiscal 2027 revenue and have a mid-single-digit impact on non-GAAP operating income as integration proceeds. Management expects BoomPop to become accretive in fiscal 2028.

Risks and Areas to Watch

Management said customer ramp timing varies, so the $4 billion of newly signed SLG GBV does not translate into a specific near-term GBV growth rate.
Enterprise RFPs can take six to nine months to reach a signed contract, followed by roughly two months of implementation and an average five-month customer ramp.
Travel-price inflation is difficult to predict. Management’s guidance assumes steady inflation for the remainder of the fiscal year.
Higher sales success increases commission expense, which can limit the immediate operating-income flow-through from revenue outperformance.
BoomPop will create near-term integration costs and is not expected to become accretive until fiscal 2028.

Analyst Q&A Highlights

Enterprise pipeline and conversion: Management said higher RFP volume is providing more sales opportunities, while win rates, average pricing and representative productivity are improving. Larger enterprise sales cycles remain longer than those for smaller customers.

Payments and expense: Growth accelerated as Navan increased sales capacity for its payments and expense products. New customer wins, upsells and deeper adoption within the installed base all contributed.

Meetings and events: Management said BoomPop replaces fragmented, manual event-planning processes with an online conversational workflow. Supplier relationships and negotiated rates support the reported customer savings opportunity.

Direct supplier connections: The Hilton direct connection is intended to improve inventory, pricing accuracy, ancillary merchandising and servicing. Management emphasized customer experience and richer data rather than higher yield as the primary objective.

Enterprise economics: Navan said enterprise and smaller customers generate broadly similar gross margins, although the mix differs. Enterprise customers bring larger volumes, stronger retention characteristics and more opportunities to attach payments, expense, and meetings and events products.

Sales investment: Management expects sales and marketing investment to continue growing at roughly the current sequential pace, with quarterly variability driven partly by commissions.

Full Earnings Call Transcript

Complete Earnings Call Transcript

Management Remarks

Operator

Good day, and thank you for standing by. Welcome to Navan Second Quarter 2027 Fiscal Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to turn the call over to your speaker for today, [indiscernible], VP of Investor Relations. Please go ahead.

Unknown Executive

Thanks, Lisa. Good afternoon, everyone, and welcome to Navan's Second Quarter Fiscal 2027 Earnings Conference Call. With me on the call today are Ariel Cohen, our Chief Executive Officer and Co-Founder; Aurelien Nolf, our CFO; and Michael Sindicich, our President. As a reminder, we published detailed prepared remarks on our IR website.

During the course of today's call, we may make forward-looking statements with the meaning of federal securities laws. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially, including the risks and uncertainties described in our earnings press release, our annual report on our Form 10-K with the SEC on April 1, 2026, and our other filings within the SEC.

In addition, on today's call, we refer to non-GAAP gross margin, non-GAAP operating margin, non-GAAP income and loss from operations free cash flow, which are non-GAAP financial measures that provide useful information for investors. Reconciliations of these non-GAAP financial measures to their [indiscernible] funding GAAP financial measures to the extent reason available can be found on our earnings press release.

And with that, it's my pleasure to turn the call over to Navan's CEO and Co-Founder, Ariel Cohen.

Ariel Cohen

Thank you, Erin, and thank you, everyone, for joining us. I hope you had the chance to review our prepared remarks.

In this quarter, you can have only 1 conclusion about us. We are winning. You can see it with the following: the current usage of the platform and its growth our new sales and growth so far our end-to-end AI platform from business travel, payments and expands, VIP travel and now meeting and events in our AI platform leadership. We are simply executing across the board while gaining momentum.

Let's talk about the current usage of the platform. This quarter, total GBV, this is travel bookings on the platform grew by 45% year-over-year to more than $3 billion. We exceeded our expectations for both revenue and non-GAAP operating income and we are raising our full year FY '25 and outlook. Again, customer satisfaction remained high with CSAT of 96 and NPAs to 44. Our platform is gaining usage across the board on every use case in every geo.

Let's talk about sales and new customers and us taking share. So we are seeing strong sales execution across SLG. SLG, it's our sales-led growth, which is basically enterprise sales. And PLG, which is our product-led Growth, which is our sales cycle. Our enterprise sales motion delivered another strong quarter with SLG having their strongest third quarter ever. New signed GBV for SLG was $4 billion in the last 12 months, and that was up 60% compared to Q2 last year. Product-led grow revenue more than doubled year-over-year again and comes as an addition to our new sales in SLG. Payment volumes reached $1.3 billion and grew 34% and subscription revenue was $21 million, with a growth of 39%.

To be clear, our growth is not coming from 1 isolated part of the company. The entire system is working together. Sales product, deployments, operations, customer success and our global travel and fintech infrastructure.

At the same time, our own execution is creating more opportunity. The volume of RFPs to Navan has tripled in the first half of the year compared to the first half of last year. We now serve 50 companies in the S&P 500, up from 45 last quarter. We are winning larger and more complex enterprise customers across the globe. The most important thing is that our investment in our sales and marketing is becoming more and more efficient with the help of AI in this huge market.

AI obviously, is an important part of our strategy, so let me cover that. As I've explained in our last call, before we even get to AI, it is important to understand the foundation we have built. Navan is connected to virtually every airline, hotel, rail provider and ground transportation solution that our global customer needs. Business travel and fintech connectivity are extremely complex and we have spent the last 11 years, bringing that complexity together on a single real-time global platform. This is not just about booking a trip, it's about managing the entire journey, finding direct inventory, booking it, paying for it through a physical or a virtual Navan card, supporting the traveler, changing the itinerary when needed and ensuring the proper credit refund reconciliation are handled automatically.

To do that at a global scale, you need supplier relationship and negotiated rates, banking partnerships and credit lines, local entities and licenses, compliance with local lowering taxes payments infrastructure and operational expertise in markets around the world. We have built all of this into an advanced real-time infrastructure. That foundation is extremely difficult to replicate, and it is what we believe allows us to turn our AI platform to a scalable solution, supporting big enterprises across the globe.

When I'm not treating AI is the feature, they are on to traditional travel products. We are rebuilding the travel and expense experience around intelligence, orchestration and action. Navan Cognition is the intelligence layer that orchestrate specialized AI agents, human experts, data, live inventory, policy, payments and fulfillment. The important distinction is that Navan does not just provide an answer. It can understand intent, take action, complete the transaction manage the trip, reconcile the expense and bring in a human expert with a full content when judgment is required.

Ava is our AI customer support agent, who is already demonstrating the value of this architecture. In Q2, Ava ended approximately 60% of customer interaction and our customers love it. To be clear, Ava is not doing simple things like resetting your password. She's rebooking your trip when you are stranded in an airport, changing your hotel when you are not happy, taking care of your refunds and many more complex bills as travel support task. The perfect orchestration between human and AI agents improve the traveler and our corporate customers' experience by supporting them more accurately and faster.

Since servicing business travel and payments requires massive travel agency and operations support, it's very hard to scale fast. By utilizing our AI platform, we are able to support Navan usage growth without jeopardizing the quality of our service. This is 1 of the reasons that we are so confident to raise our guidance for the second time this year to 32% year-over-year. We are also taking increasing control of our technology stack. Approximately 50% of our Ava AI model called Navan owned models, up from 30% in Q1. These models are purpose-built for travel and expand and trend on our own data. Over time, we believe that they should give us greater accuracy, faster response time and lower cost. So AI is not just a probably product investment. We believe it is also an opportunity for a structural gross margin expansion and greater operating leverage.

By bringing Navan capabilities directly where travel intent begins, Navan MCP extends our Navan Anyway strategy. It provides conversational access to data across travel expense, booking and policy in ChatGPT, Claude, Cursor, and separately, we are adding agentic capabilities in key collaboration tools like Gemini and Slack.

Navan Edge is our flagship AI product. Edge is a full travel assistant who deeply understand you like a real person. It's not only plans route, but also books everything from flights, hotels, restaurants and events and make the changes we needed simply it's the best travel agent in the world.

To summarize our AI platform, travel and fintech infrastructure are the key, Ava, Navan Anywhere and Edge are creating the application level value and using our own model give us a unique value proposition based on our own data. These 3 components allow us to grow our revenue faster with better economics while creating massive value for our customers.

The last thing that I wanted to talk about is M&A and the expansion of our platform. As we have explained in the past, business travel has endless needs, and our goal is to bring every need into our AI platform. Travel is still an entry point, but is increasingly connected to payments, expense, meeting and events, VIP travel and bleisure. Each of these additional products allows us to manage more of the customer spend, replace more fragmented workflows and become more strategic inside the enterprise.

That is flywheel we are building better inventory and connectivity, drive better experiences, better experience to drive adoption and broader adoption creates more opportunities across the platform. This is why we build new products and make acquisitions, and why I'm so excited about our acquisition of BoomPop. This expands our capabilities in meeting and events, an enormous category that remains largely unmanaged and messy. Together with BoomPop, we expect these opportunities to make Navan more valuable to our existing customers and expand the universe of customers we can serve.

BoomPop is already a partner. Our joint AI platforms allows us to plan events using conversational AI in an efficient way that was never seen before. I'm super excited to welcome the BoomPop team to the Navan family.

So stepping back, this quarter gives us an evidence across every layer of [indiscernible]. We are growing in a resilient market. We are winning larger customers and taking share. SLG, PLG are scaling. Customers love the product, AI is improving the experience, increasing efficiency and creating a margin advantage and we are raising our full year outlook because our execution is strong. Our visibility is improving and the opportunity ahead is large.

I want to close this by thanking the Navan team, our customers and investors. The team is firing on all cylinders, and we are having a great time while winning. We are still in the early innings of a large opportunity, and we are building the best travel agency on the planet for the Agentic era and we are only just getting started.

And with that, I'll turn it over to Aurelien.

Aurelien Nolf

Many thanks, Ariel. It's great to be here, and thanks all for joining us today.

What continues to impress me is how consistently the team is executing across the business and Q2 was another strong example of that. I'll just cover the broad momentum. So let me focus on the financial takeaways, which is growth and operating leverage are advancing together.

Revenue was $233 million, up 35% year-over-year, and GBV reached just over $3 billion, up 45% year-over-year. Once again, we exceeded our expectations for both revenue and non-GAAP operating income. This outperformance was driven primarily by strong volume demand and bookings on the platform, with healthy expansion from existing customers, continued growth from ramping customers and faster contribution from new launches. We also benefited from a higher premium cabin mix.

Our visibility into future growth continues to improve. Over the last 12 months, we signed $4 billion of new GBV in our SLG business, a leading indicator of future revenue growth, while ramp-up timing varies by customer, meaning it does not translate with specific growth rate for GBV in any specific period of time. We believe this metric reinforces our expanding footprint in the sector driven by our accelerating go-to-market momentum.

We are also seeing continued leverage in the platform. Non-GAAP gross margin was 75% and non-GAAP operating margin was 7%, up from 5% a year ago.

Revenue continued to grow faster than our cost base even as we invested in AI infrastructure and product innovation. The primary driver of that is Ava higher resolution rate, which is further supported by the increasing use of our own models that are helping us scale more efficiently, and we expect further leverage over time.

Free cash flow was $28 million on a trailing 1-month basis compared with a burn of $33 million a year ago. We ended the quarter with $820 million in cash and short-term investments and approximately $125 million of debt. That gives us substantial flexibility to invest in the business and pursue strategic opportunities, but we will continue to deploy capital with discipline.

Now turning to the outlook. For Q3, we expect revenue of $253 million to $255 million, representing 30% growth at the midpoint and non-GAAP operating income of $35.5 million to $36.5 million, representing a 14% margin.

Now for the full year, and considering the sustained momentum in the business and healthy demand for business travel, we are again raising revenue guidance now to $927 million to $933 million or 32% growth at the midpoint. We are also raising non-GAAP operating income guidance to $82 million to $86 million or a 9% margin.

So now stepping back, we believe Q2 reinforces this financial story, strong and broad-based growth, continued operating leverage and disciplined investments. We are entering the second half with a very strong momentum, a very good visibility and a very strong balance sheet. We will remain focused on converting that opportunity into durable growth and cash generation over time.

I'm very, very thankful for all the great and hard work happening across the company. And as Ariel mentioned, we are having a great time here furthering our mission of building the best travel agency on the planet.

And with that, operator, we are ready for questions.

Operator

[Operator Instructions] The first question of the day will be coming from the line of Chris Quintero of Morgan Stanley.

Question-and-Answer Session

Christopher Quintero

Congrats on a great quarter here. Maybe first, you all have been seeing a lot of momentum with that RFP activity up 200% year-over-year for the past few months and quarters. So curious on the win rate side, how that's been progressing and how that's translating in terms of timing to revenue and closing those deals?

Michael Sindicich

Yes. Great question. This is Michael Sindicich here. Good to hear from you again. So I think, in general, we're -- first of all, we're absolutely pumped and I'm so proud of the go-to-market team and everyone at Navan, who's building the products and services that we're delivering.

To your point, there's a lot of tailwinds that we're seeing. It's RFP volume increasing it's industry stuff. It's the products that we deliver that drive 15% savings on average, and you can book within 7 minutes, and everyone is super hyper focused on employee efficiency, especially from the people that are generating revenues for their company, which happened to be a lot of travelers.

So I think with all of these tailwinds, all of the increases in the RFPs, which just gives us more at bats, I think it's really just simply like signaling to us that we're watching disruption happen in front of our eyes. We get a lot more at bats and we get a lot more opportunities, to your point, and what we've talked about in the past is we actually see win rates increasing. We see ASPs or average pricing is also increasing, and we see the productivity per rep also increasing.

So with those 3 things happening, that then translates to faster growth, which we show with bookings and revenue volume. And for the first time, we're super happy to report on the new sales, which was $4 billion of travel volume coming from the SLG team. And so what that means is we then sell a deal. And then we've talked about this before, where it takes about 2 months on average to implement the customer. So what happens then is we connect to the HR system, your SSO, the expense solution, payments and then we set up the policy and we launched to the company. once we launch the company, then it's about a 5-month on average ramp until the account gets to full ramp and full adoption. And that could mean deploying country by country, it could be big bang launches, but on average, it's about a 2-month implementation and a 5-month ramp-up of the customer. And so that kind of gives you an hint an idea of kind of what it takes to close the deal all the way to ramp. And if you think about it, the companies that are doing RFPs are generally enterprise size companies, the larger and those deal cycles can be a little bit longer as well.

So we get RFP, it might be 6 to 9 months before we have a signed contract and then go and begin the implementation.

Christopher Quintero

Got it. Very helpful, Michael. And then maybe as a follow-up. Really great to see the subscription and payments revenue acceleration here. So maybe could you unpack some of the key drivers there? I know you all have been focused on getting your sales team out and selling more of the Payments and Expense Management solution, but just curious kind of some of the details there?

Michael Sindicich

Yes, totally. It's consistent again with what we talked about a couple of quarters ago. But we were in an environment where we are relatively constrained. And so what that meant is we weren't as focused on selling the payments volume, which often actually comes with the expense ACV product as well. And so what we've done throughout the IPO is we restructured our capital structure. We have brought on warehouses. We have the capacity. And now the sales team is going out there and really selling our payments and expense product, which you can see just how fast that acceleration has occurred just in a few quarters. And we're really excited to get these products out there because customers absolutely love it. And ultimately, what it does is it drives automated expense management and the finance teams don't have to spend a lot of time reconciling their travel bookings. But I don't know, Aurelien, if you have anything to add?

Aurelien Nolf

Yes, I'm super excited to see the acceleration here, right, in terms of -- because the growth of the payment volume is coming across the board. So we have more new customers signing up for payment and expense. We are seeing more upsells. And then we are seeing the existing base adopting our solution even more. And so that's why you're seeing this growth in terms of payment volume and acceleration to 34% versus 29% last quarter. And we're very excited about these products, as Michael mentioned.

Operator

Our next question is coming from the line of Patrick Walravens of Citizens.

Patrick Walravens

Great. Congratulations guys on all the momentum. So Ariel, why do you like the leading off-site space? What is your competition there? Who you're going to disrupt? And how will -- I mean everyone on the call, we all go to so many conferences, and we all host so many conferences. How is our experience going to be different once you get BoomPop integrated?

Ariel Cohen

Yes, it's a good question. Thank you, Pat. So here's the thing. I always thought about Navan as we first land the customer and a business traveler, right? So we tell them there is a new way to think about stuff. It is way more automated, AI is part of it. It's easy to book. In the Navan platform, it takes 7 minutes to book, when you want to change something is super fast. So really, really surrounding you, the traveler around this goodness. But we also know that business travel has many more needs. We've talked about payments and expense. In the past, we talked about VIP, how can we take the VIP experience and bringing it and making an AI experience. Meeting and event is a big part. It's actually 30% of the TAM of this market. It's a big time of the need of the company, of the need of the traveler. And when we looked into this years ago when we came to the market, we saw that it is so antiquated. You are basically having an RFP pair event. You're sending an EA to source some hotels and restaurants and other things. It's really, really old school. It takes a lot of time. It's extremely not transparent. You are signing with somebody a deal. They go and kind of negotiate with 3 hotels for you, and then they tell you, this is the hotel that you're going to use. It takes a lot of time, antiquated, the opposite of what Navan is all about. So we thought if we can bring that experience to become online, to become conversation, hey, I want to have an event for my sales team. I'm thinking about Vegas or in New York. And this is my budget, and this is what I need, and I'm talking with you or with the platform. And then the platform is actually automatically going and talking with the various providers. And we are creating this match, it will make the experience completely different. People will like it. And then we, as Navan, we're going to create more value to our customers. We are basically becoming more and more their one-stop shop for every need around business travel. So that's why we are excited about it. And BoomPop, specifically, we know these guys for quite some time. They are the guys. They really, really innovated in this space. They prove that you can take something that is extremely manual and make it AI which, by the way, 2 years ago, when I first met them, I actually didn't believe them. And I went very, very deep and understand that it's really AI and not some story as a lot of people are telling, and it's just amazing. We partner with them. We are seeing happy customers together, and we decided to make them part of Navan.

Got it. And then my follow-up, can you dig into between SmartTrip and BoomPop, those 2 acquisitions, the impact that had to your FY '27 guidance update. I guess some online resources are suggesting that BoomPop could be north of a $100 million revenue run rate, which could be pretty significant in terms of that contribution. So any kind of incremental color in terms of the impact of the guidance update would be helpful.

Aurelien Nolf

Yes. So absolutely not -- those level of revenue impact. So for fiscal '27, SmartTrip is top and bottom line here very material. So if it's in your model, you're doing it wrong. So it's small, very strategic, and we're very excited about it because of the access. This is giving us to a lot of local inventory, I had a licenses and a great team but immaterial impact to our financial statements in the short term.

And then from a BoomPop perspective, low single digit -- very low single-digit impact to revenue in fiscal '27, so far away from the number you just quoted and a mid-single-digit impact to the non-GAAP operating income as we are integrating the team. We expect that business to become accretive in fiscal '28, though. But fiscal '27, the summary is immaterial impact to top and bottom line.

Operator

The next question is coming from the line of Blair Abernethy of Rosenblatt Securities.

Blair Abernethy

Great quarter, guys. Just wanted to -- 2 questions. I guess, one, any update on the transitions going on with the Reed & Mackay customer base onto your platform to sort of how that's progressed this quarter? And then secondly, just from -- in terms of new customer adoption of the Navan MCP and Navan Edge. Maybe just any other color around what you're seeing there in terms of the profile of customers that are utilizing these new capabilities?

Ariel Cohen

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AeroVironment (AVAV) Q1 FY2027 Earnings Call: Record Backlog and Guidance Reaffirmed

Wed, 09 Sep 2026 23:40:51 +0000

Key Takeaways

AeroVironment reported record first-quarter fiscal 2027 revenue of $480 million, led by $346 million from Autonomous Systems.
Bookings reached $683 million, producing a quarterly book-to-bill ratio of 1.4x. Funded backlog rose 23% sequentially and 37% year over year to a record $1.5 billion.
Adjusted EBITDA was $53 million, or 11% of revenue. Adjusted diluted EPS increased 84% year over year to $0.59.
Management reaffirmed fiscal 2027 revenue guidance of $2.125 billion to $2.225 billion and adjusted EBITDA guidance of $305 million to $325 million.
Counter-UAS programs drove major contract activity, including the nearly $465 million LOCUST E-HEL award and Titan’s $500 million sole-source IDIQ contract.
Free cash flow was negative $36 million as AeroVironment increased capital spending and inventory to expand production capacity and secure long-lead components.

Core Financial Results

Metric	Q1 FY2027 result	Change or context
Revenue	$480 million	Record first-quarter revenue
Bookings	$683 million	Quarterly book-to-bill of 1.4x
Funded backlog	$1.5 billion	Up 23% sequentially and 37% year over year
Total funded and unfunded backlog	Approximately $2.8 billion	Unfunded backlog was $1.4 billion
Adjusted gross margin	30%	Up from 29% in Q1 FY2026
Adjusted EBITDA	$53 million	11% margin
Adjusted diluted EPS	$0.59	Up 84% from $0.32
Operating cash flow	$13 million	Positive despite working-capital investment
Free cash flow	Negative $36 million	Reflects higher facility investment
Cash and investments	$607 million	Down $38 million sequentially
Debt	$747.5 million	Zero-coupon convertible notes; net leverage of 1.6x adjusted EBITDA

Adjusted product gross margin increased to 40% from 36%. Adjusted service gross margin declined to 8% from 13%, mainly because lower Cyber & Mission Solutions revenue reduced fixed-cost absorption.

Adjusted SG&A increased to $85 million from $65 million. The increase reflected infrastructure and business-development investment, higher legal expenses and a nonrecurring $4.2 million bad-debt reserve. R&D expense was $24 million, or 5% of revenue, compared with $33 million, or 7%, a year earlier.

Business and Operating Performance

Autonomous Systems generated $346 million, representing 72% of company revenue and a 21% year-over-year increase. Within the segment, Precision Strike and Defense Systems revenue rose 8% to $197 million, supported by loitering munitions, one-way attack systems and counter-UAS RF products.

Uncrewed Aircraft Systems revenue increased 71% to $120 million. P550, JUMP 20-X and Puma sales drove the growth across domestic and international customers. Management expects almost all of the $117 million P550 U.S. Army award to be delivered during fiscal 2027 and views the Long-Range Reconnaissance program as an approximately $1 billion opportunity over several years.

Space, Cyber and Directed Energy generated approximately $134 million, down 21% year over year. The decline reflected the SCAR contract termination and other discontinued government programs. The segment posted an adjusted EBITDA loss of $9 million because lower volume reduced fixed-cost absorption.

Counter-UAS was the main source of new program momentum. AeroVironment received a nearly $465 million U.S. Army production contract for the LOCUST directed-energy system and announced its first international LOCUST direct commercial sale. Titan MS also secured a $500 million sole-source IDIQ contract, including an initial $80 million award supporting the Golden Dome initiative.

Other awards included a $30 million Puma contract for Germany, a $51 million U.S. Army Switchblade 600 contract and a $43 million PANTHER phased-array antenna integration contract for SkyRange platforms.

AeroVironment is expanding facilities in Albuquerque for LOCUST, Huntsville for Freedom Eagle-1, Salt Lake City for loitering munitions and Southern California for engineering and production. The company announced a $100 million long-term investment in its Southern California operations, while the Salt Lake City campus remains scheduled to open in spring 2027.

Management Guidance

Management reaffirmed the following fiscal 2027 outlook:

Guidance item	FY2027 outlook
Revenue	$2.125 billion-$2.225 billion
Adjusted EBITDA	$305 million-$325 million
Adjusted diluted EPS	$3.02-$3.34
R&D	7%-9% of revenue
Adjusted SG&A	14%-16% of revenue
Capital expenditure	12%-14% of revenue

Revenue is expected to follow an approximate 45%-55% first-half/second-half split. Adjusted EBITDA is expected to be weighted roughly one-third to the first half and two-thirds to the second half, reflecting higher volume and a more favorable sales mix later in the year. Adjusted EPS is expected to follow an approximately 30%-70% split.

Management said backlog provided 86% revenue visibility to the midpoint of full-year guidance. Titan and LOCUST awards are already incorporated into the outlook. Free cash flow is still expected to be negative for fiscal 2027 because of elevated capital spending, before capital investment returns toward more normalized levels in the following year.

Risks and Items to Watch

The timing of congressional approval for the U.S. government’s fiscal 2027 budget remains the primary near-term uncertainty identified by management. The company’s outlook assumes a short-term continuing resolution followed by an approved defense budget around December. Management does not currently view the timing issue as a significant risk to guidance but said a longer delay would increase uncertainty.

LOCUST production also depends on scaling a relatively young supply chain and securing long-lead components. AeroVironment is adding suppliers and expanding its Albuquerque capacity to support demand.

The full-year outlook is weighted toward the second half, increasing execution dependence on higher production volumes and improved sales mix in the third and fourth quarters. In the second quarter, management expects a less favorable mix and higher internal R&D spending to pressure adjusted EBITDA relative to the first quarter.

Cyber & Mission Solutions remains a drag on service margins because discontinued programs have reduced revenue available to absorb fixed costs. Management expects improvement as new awards increase volume but does not expect this business to match the growth rate of the company’s product franchises.

Analyst Q&A Highlights

LOCUST profitability: Management expects margins to improve in the second half and beyond as production volume rises and firm-fixed-price contracts become a larger part of the mix. CEO Wahid Nawabi said LOCUST could become a franchise generating more than $500 million annually in roughly a year, although scaling will require additional capacity and supplier development.
International directed-energy demand: AeroVironment sees potential demand across the Middle East, Asia-Pacific and Eastern Europe. Management said U.S. Army selection and FAA endorsement could support broader adoption by international customers.
Switchblade contract capacity: Approximately a couple hundred million dollars remained under the current $990 million U.S. Army Switchblade IDIQ ceiling at quarter-end. Management also said close to 20 allied countries have been approved for Switchblade sales through FMS or direct commercial channels.
Freedom Eagle-1 schedule: AeroVironment expects to deliver approximately 60 to 80 systems over the next 12 to 18 months during testing and certification. Initial-rate and full-rate production would follow, and management views the missile as a potential $1 billion long-term franchise.
Supply-chain positioning: Management said more than 98% of AeroVironment’s supply base is domestic, with the balance concentrated among close U.S. allies. The company therefore does not expect recently announced tariffs on drone components to have a negative effect.
Localized international production: AeroVironment is developing local partnerships and operations in Greece, the U.K., Germany, Turkey and Taiwan. Management expects further localization initiatives in Europe, the Middle East and Asia-Pacific where procurement requires domestic content or final assembly.

Full Earnings Call Transcript

Complete Earnings Call Transcript

Management Remarks

Operator

Good day, and thank you for standing by. Welcome to the AeroVironment First Quarter Fiscal Year 2027 Earnings Call. [Operator Instructions] Please be advised that today's call is being recorded.

I would now like to hand it over to our first speaker, Denise Pacioni, Head of Investor Relations. Please go ahead.

Denise Pacioni

Thank you, and good afternoon, ladies and gentlemen. Welcome to AV's first quarter fiscal year 2027 earnings call. My name is Denise Pacioni, Head of Investor Relations for AV.

Before we begin, please note that certain information presented on this call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve many risks and uncertainties that could cause actual results to differ materially from our expectations. Further information on these risks and uncertainties is contained in the company's 10-K and other filings with the SEC, in particular, in the risk factors and forward-looking statements portions of such filings. Copies are available from the SEC or on the AeroVironment website, www.avinc.com or from our Investor Relations team. This afternoon, we also filed a slide presentation with our earnings release and posted the presentation to the Investors section of our website under Events & Presentations.

The content of this conference call contains time-sensitive information that is accurate only as of today, September 9, 2026. The company undertakes no obligation to update any forward-looking statements whether as a result of new information, future events or otherwise.

Joining me today from AV are Chairman, President and Chief Executive Officer; Mr. Wahid Nawabi; and Executive Vice President and Chief Financial Officer, Mr. Sean Woodward. We will now begin with remarks from Wahid Nawabi. Wahid?

Wahid Nawabi

Thank you, Denise. Welcome, everyone, to our first quarter fiscal year 2027 earnings conference call. I will begin today's call by summarizing our quarterly performance, followed by Sean, who will review our financial results in greater detail. After this, Sean, Denise and I will take your questions.

I'm pleased to report excellent first quarter results across several key financial performance metrics that meet or exceeded our expectations. AV reported first quarter revenues of $480 million with record-setting funded backlog of $1.5 billion as well as adjusted EBITDA of nearly $46 million and bookings of $683 million. These results reflect our focus on capturing key growth opportunities and our ability to execute with excellence. Building on our success from fiscal year 2026, we believe our first quarter results have positioned us well to deliver an even greater and stronger fiscal year 2027.

Before discussing the details of our strong results, let me first highlight some key achievements from the first quarter. First, we won several key contracts on franchise programs during the quarter that contributed to $683 million in bookings. These wins add to a strong bookings pipeline for both this fiscal year and beyond. Second, our funded backlog grew to a record $1.5 billion, which is 37% higher than the same period last year. Third, we achieved record first quarter revenue of $480 million. And fourth, we continue to advance our manufacturing capacity expansion plans across several of our platforms and products to support our strong growth over the next several years. With a strong quarter behind us and positive momentum carrying us into the second quarter, we are reaffirming our fiscal year 2027 revenue guidance of between $2.125 billion and $2.225 billion. And adjusted EBITDA guidance for fiscal year 2027 of between $305 million and $325 million. Both of our business segments are progressing well toward their fiscal year 2027 growth goals, supported by key domestic and international program wins and increased backlog and revenue contributions.

During the first quarter, our Autonomous Systems segment contributed $346 million or 72% of the total company revenue. While our Space, Cyber and Directed Energy segment contributed $134.5 million in revenue or 28% of the total company revenue, consistent with our plans for the quarter. Both segments contributed to the 25% increase in funded backlog from the prior quarter due to very strong order flow and several sole-source wins. Our total funded backlog now stands at $1.5 billion. Strong contract wins across multiple programs in both segments, particularly in counter-UAS, positions us for a record fiscal year 2027 and supports our progress towards long-term growth goals.

I would like to now walk you through some significant achievements since our last earnings call in each of our four main product areas, which are multi-mission ISR, precision strike counter-UAS and space and advanced technologies. Starting first with our multi-mission ISR product area. As we had mentioned on our last call. AB's P550 was selected for the U.S. Army's long-range reconnaissance program at the beginning of the first quarter with an award of $117 million. Successful integration into the U.S. Army's Next-Generation Command and Control System, or NGC2 and strong performance during recent field tests positioned the P550 as another key franchise program expected to drive future growth. We anticipate that LRR program to be a $1 billion program over the next few years.

Also during the quarter, AB was awarded a $30 million contract to deliver Puma AE and Puma LE systems for Germany's LARUS airborne reconnaissance program. This award represents one of the most significant European Puma procurement to date. In addition to these wins from our small UAS product line, our JUMP 20 and JUMP 20-X continue to make headways NAV's Group III or medium UAS offering. For example, our JUMP 20 recently received an NQ31A military designation from the Italian Ministry of Defense, formally recognizing AV JUMP 20 as an official military capability. This is a critical next step in the procurement process, enabling the Italian Army to accept deliveries of JUMP 20 and recognizing it as an element of its formal military inventory. With this recent announcement, JUMP 20 and JUMP 20-X have now won several international programs of record, just over the last 12 months alone.

Turning now to Precision Strike. We continue to see progress and momentum across several of our platforms within Precision Strike. Our comprehensive family of one-way attack, loitering munitions and launched effect products has the ability to meet our customers' immediate needs, while remaining adaptable to future requirements. Our recent Switchblade 400 award under the U.S. Army's low altitude stocking and strike ordinance or LASSO program is an example of EV's ability to quickly adapt our proven capabilities to meet new customer program requirements. Leveraging capabilities from both the Switchblade 300 and 600, AV Switchblade 400 is now a key solution set within the U.S. Army's LASSO program. Also during the quarter, AV received a $51 million U.S. Army contract for Switchblade 600, in support of a lethal unmanned systems, IVIQ.

Taken together, these two awards position AV as a long-term partner to the U.S. Army. With 20-plus brigade combat teams and 180-plus soldiers trained, these awards also reflect the U.S. Army's confidence in our solutions and our ability to deliver mission-critical capabilities at speed. Looking ahead, we are also seeing strong demand signals for our one-way attack solution, Red Dragon, and increased international demand in loitering munitions.

Turning now to our counter UAS portfolio. We're extremely excited about the progress we've made this past quarter with our multilayered counter UAS defensive systems. Both Titan and LOCUST systems received several awards this past quarter, which are strategic to the long-term growth of these franchise products. Just recently, we announced two significant wins for our market-leading counter UAS directed energy platform called LOCUST. As you recall, AV was awarded a landmark contract valued at nearly $465 million for the U.S. Army's enduring high-energy laser or E-HEL program in late August.

This award represents the first ever production contract for direct energy systems and U.S. military history. This is a defining moment, not only for our company but also for our customers, our country and the advancements of laser weapons technology as a critical tool in modern war pair. Following this announcement, we also announced our first international order for our LOCUST-directed energy counter UAS laser weapon system as a direct commercial sale. This order underscores the growing global demand for scaled high-energy laser weapon systems. As global threats continue to evolve and as asymmetric economics persist on the modern battlefield, directed energy has emerged as an increasingly important cost-effective solution for countering high-volume, low-cost drone attacks. Under $10 per shot, LOCUST redefines the cost balance between offensive and deepness of systems and provides the war fighter with an essentially unlimited magazine. We see these landmark awards as demonstrating the growing demand for LOCUST both in the United States and internationally and positions AV as a leader with the rapidly expanding directed energy market.

Building our momentum from these awards, we anticipate a growing pipeline of opportunities for our locust laser weapon systems, both domestically and abroad and look forward to sharing additional award progress with you in the coming quarters. In addition to these historic achievements with Direct Energy, Counter UAS, we also announced earlier in the quarter a major contract win for our RF detect into feed platform called Titan. Our Titan MS was awarded a sole-source $500 million IDIQ in support of joint Inter-Agency Task Force 401, domestic Shield program, which included an initial $80 million contract in support of the United States Golden Dome initiative.

Our Titan series of RF Jammers continue to be a market-leading solution in the world and a strong growth driver for the company, and we anticipate the use cases for its capabilities to continue to expand beyond traditional military applications. In addition to these two counter UAS program wins, we also announced the expansion of our Huntsville, Alabama facility in anticipation of additional demand for our Freedom Eagle-1 or FE-1 Kinetic INTERCEPT solution. Since winning the U.S. Army's long-range Kinetic INTERCEPT or LRKI program last year, our customer requested an accelerated production schedule, and we received additional congressional funding to support this acceleration of production and delivery of products on this program.

Our investments in capacity expansion will allow us to rapidly scale FE-1 manufacturing in order to meet the U.S. Army's urgent operational needs. This program is critical and selling critical operational requirements needed by our customers to combat low-cost drone threats.

Now let's look at the progress we made in our Space and Advanced Technologies Group. AV recently won a $43 million contract to integrate PANTHER, phased-array antenna on Sky Range platforms for hypersonic telemetry. This contract will enhance the nation's weapons testing capabilities and will help enable more frequent testing cycles and faster weapons development time lines, especially related to hypersonic equipment. These combined achievements across all four of our product categories during the first quarter demonstrate the breadth and capabilities of our products and solutions across the defense sector. With several of our products at an inflection point for multiyear sustained growth, we are focused on enhancing operational readiness. As we communicated at our Investor Day this past July, leading the sector in innovation has been and will continue to be a key priority for AV. The progress we made this past quarter demonstrates how that commitment is translating into meaningful customer wins and key franchise program awards across our diversified portfolio. As we build on this momentum, we're sharply focused on executing with excellence, increasing capacity, scaling production and delivering high-quality battle-proven solutions to our customers.

The investments we are making in fiscal year 2027 are designed to support future growth by positioning us to capture additional awards, expanding capacity across key sites scaling manufacturing with speed and efficiency and enhancing the resiliency of our supply chain. We are nearly 1/3 of the way into this fiscal year, and we're making significant progress towards achieving these goals. In fact, just after the close of our first quarter, we announced a $100 million long-term investment at our Southern California facilities to build a new state-of-the-art innovation center in campus. This new facility will consolidate operations and provide additional production capacity. In addition to this investment, we're also progressing on our Salt Lake City facility, where we plan to increase loading munitions manufacturing capability. This facility is expected to provide AV with the ability to meet increased demand across our Switchblade product lines well into the future, while also providing additional manufacturing capacity to support other products across our portfolio. This new state-of-the-art campus is on track for a spring of 2027 opening.

Earlier in the quarter, we also announced expansion efforts for our Albuquerque New Mexico facility where production is starting for our newly awarded locus contracts, along with additional future global demand. This facility is planned to be one of the world's largest and highest volume full rate manufacturing space for laser weapon systems used for defense applications. And as we mentioned earlier, we're also building our Huntsville, Alabama location for our Kinetic Intercept counter UAS solution, Freedom Eagle-1. These internally funded capacity expansion projects are specifically designed to keep pace with rising demand in both the near and long term. We expect that continued investment in our leading platforms will yield meaningful returns and drive long-term value creation.

Before turning the call over to Sean, let me summarize with the following comments. This past quarter was a great start to our fiscal year 2027. We delivered record first quarter revenues and funded backlog and won several landmark awards on franchise programs domestically and internationally and expanded production capacity across multiple U.S. facilities. Demand across our portfolio remains robust, and we were focused on executing with discipline as we invest in our business scaling manufacturing and stripping our supply chain to deliver for our customers at the speed their missions require.

With that, I would like to now turn the call over to Sean Woodward, for a review of our first quarter fiscal year 2027 financials. Sean?

Sean Woodward

Thank you, Wahid. I will now walk you through our first quarter performance and fiscal year '27 outlook, referring frequently to our press release and earnings presentation available on our website.

I am pleased to report a very strong start to fiscal 2027 with first quarter results meeting or exceeding several of our key financial targets. We exceeded our financial targets for the first quarter on revenue, adjusted EBITDA and non-GAAP EPS, while also achieving positive operating cash flow. We secured solid bookings of $683 million and ended the quarter with record funded backlog of $1.5 billion, up 23% from the prior quarter and higher by 37% from the same period last year. Relatively consistent unfunded backlog at $1.4 billion brought total funded and unfunded backlog at the end of the first quarter to approximately $2.8 billion. At the same time, we made significant progress on our capacity expansion initiatives that we expect will allow the company to quickly scale to meet expected increased global demand.

During the quarter, we announced several key capacity expansion efforts directly tied to growth on key franchise programs. First, we purchased and are looking to expand our existing facility in Huntsville, Alabama, to support near-term growth needed for our counter UAS kinetic INTERCEPT solution, Freedom Eagle-1. In addition, we recently announced a $100 million investment in our Southern California campus where we plan to improve execution on engineering, design and development alongside our production operations across multiple platforms. This investment will consolidate multiple existing lease facilities, resulting in an expected lower annual operating expenses. We are continuing to make progress on building out production in Albuquerque and New Mexico for our rapidly growing low discounter UAS solutions.

Besides these three capacity expansion investments, we are getting significantly closer to opening our new state-of-the-art manufacturing facility in Salt Lake City, Utah. This 120 square foot facility will allow for rapid scaling of our loitering munition products and provide additional space for other products that are facing increased demand. As discussed in detail at our July Investor Day, these investments directly support the strong demand we're seeing across our product portfolio. We look forward to sharing further progress on these facility expansions in the coming quarters.

Turning now to first quarter results. We secured bookings totaling $683 million in new authorized contract value. Our book-to-bill ratio for quarter 1 was 1.4x and reflecting strong demand from large program awards. Our trailing 12-month bookings exceeded $3 billion, representing a book-to-bill ratio of 1.5x. Total funded and unfunded backlog at the end of the first quarter was just over $2.8 billion.

Slide 6 of the earnings presentation shows the first quarter revenue by operating group, for each of our two segments compared to first quarter fiscal year '26 revenue. The Autonomous Systems, or AXS segment recognized $346 million in revenue in the quarter, which represented a 21% increase over first quarter of fiscal year '26 revenues. The Precision Strike and Defense Systems operating group generated $197 million in revenue in the first quarter, which represented an 8% increase over first quarter of fiscal year '26 revenues, driven by our loitering munition family, along with our one-way attack system and counter-UAS RF technique products.

The Uncrewed Aircraft Systems operating group generated $120 million in revenue in the first quarter, higher by 71% from the same period last year, led by strong domestic and international sales in P550, JUMP 20-X and Puma. The Space Cyber and Directed Energy segment generated $134 million in the quarter 1 revenue, down 21% year-over-year and in line with our expectations, reflecting the first quarter revenue loss from the scar contract termination, which occurred in March of this calendar year and other discontinued government programs.

Within the segment, the space and directed energy operating group sales declined 28% year-over-year due to discontinued carbon. For reference, scar-related revenue was $32 million during first quarter '26. The Cyber & Mission Solutions revenue declined 16% year-over-year, primarily due to discontinued government programs.

Moving on to gross margins. Slide 12 shows the adjusted product and service gross margin reconciliation to GAAP gross margin. First quarter overall adjusted gross margins of 30% were higher than first quarter '26 results of 29%. Quarter 1 adjusted product gross margin was solid at 40% compared to 36% for the first quarter '26. Quarter 1 adjusted service gross margin was 8%, which was lower than the 13% for the first quarter of fiscal year '26. The reason for the decline in quarter 1 service margin was related to our Cyber Mission Solutions business. Specifically, we experienced approximately $5 million in revenue impact from discontinued programs combined with other [indiscernible] and award delays, which made it more challenging to absorb fixed costs.

Moving on to operating expenses. Adjusted SG&A, which excludes intangible amortization and deal and integration costs, was $85 million compared to $65 million in the prior year. The increase was in line with our expectations, driven largely by key investments in infrastructure, along with expanded business development resources to assist in capturing growing global demand. Additionally, we incurred increased legal expenses and an unexpected nonrecurring bad debt reserve of $4.2 million in the quarter. As a percentage of revenue, adjusted SG&A in the quarter was 18%, compared with 14% in quarter 1 of fiscal '26. Full year fiscal '27 adjusted SG&A is projected to be between 14% and 16% of revenue. Quarter 1 R&D expense was $24 million or 5% of revenue compared to $33 million or 7% during the same quarter in the prior year. Full year fiscal '27 R&D is projected to be between 7% and 9% of revenue, in line with prior guidance. In terms of adjusted EBITDA.

Slide 13 of our earnings presentation shows the reconciliation of GAAP net income to adjusted EBITDA. Quarter 1 adjusted EBITDA reached $53 million or 11% of revenue. ASS segment adjusted EBITDA was $62 million for the first quarter of fiscal year '27 with an 18% adjusted EBITDA margin, reflecting strong revenue and gross margin contributions. This was partially offset by SCDE segment adjusted EBITDA, which was negative $9 million, which was expected following lower year-over-year revenue and resulting under absorption of fixed costs in both the Space and Direct Energy and Cyber & Mission Solutions businesses.

Now turning to non-GAAP earnings per share. Slide 11 shows the reconciliation of GAAP and adjusted or non-GAAP diluted EPS. Adjusted EPS reached $0.59 in quarter 1, up from $0.32 in the prior year quarter or an 84% year-over-year increase.

Moving to the balance sheet. At the close of the first quarter, our total cash investments amounted to $607 million, a $38 million decrease from the prior quarter. AMB Total debt composed only of 0 coupon convertible notes of $747.5 million and a net leverage ratio of 1.6x adjusted EBITDA. The company generated $13 million of positive operating cash flow in the first quarter despite making strategic working capital investments, primarily from higher unbilled receivables and inventory. The increase in inventory is intentional, supported by a record funded backlog and to ensure key critical components with long lead times are secured. As expected, free cash flow was negative $36 million in quarter 1, reflecting higher capital investments to support the expansion of our production facilities. We are still targeting fiscal year '27 to be negative from a free cash flow perspective, driven by the increased capital expenditures.

Now turning to backlog. Funding backlog totaled $1.5 billion at quarter end, which is 37% higher than the first quarter of fiscal year '26. Funding backlog composition by segment is $1.1 billion or 75% attributable to the AXS segment and $358 million or 25% to the [ FEEE ] segment. Unfunded backlog at the end of the first quarter was $1.4 billion, was $1.2 billion or 89% attributable to the SCDE segment and $157 million or 11% to the AFS segment. It's important to note that our unfunded backlog figures exclude ceiling values from sole-source IDIQ contracts. The remaining balance on the $990 million U.S. Army Switchblade contract, the remaining balance on the $874 million UAS and Counter U.S. SMS contracts and the remaining balance on the $500 million GIA-401 counter USRF contract, among others, represents significant additional contract capacity beyond our reported unfunded backlog figures.

Turning now to fiscal year '27 guidance. On Slide 7 of the earnings presentation, you will see we are reiterating our fiscal year 2027 guidance. Based on our strong Q1 performance, record funded backlog position and capacity investments underway, we remain confident in our full year outlook. As Wahid mentioned in his remarks, we continue to expect fiscal year '27 revenue to be between $2.25 billion and $2.225 billion, representing 10% growth at the midpoint of our fiscal year '26 results. We continue to expect adjusted EBITDA to be between $305 million and $325 million, and non-GAAP adjusted EPS between $3.02 and $3.34. Near term, non-GAAP adjusted pace remains relatively flat year-over-year due to higher anticipated depreciation and cloud amortization expenses for the significant capital deployed in fiscal year '26 and expected in fiscal year '27.

A few details on the revenue cadence, adjusted EBITDA profile and non-GAAP EPS distribution. We continue to expect revenue to be stronger in the second half of fiscal year '27. We're planning on an approximate 45-55 revenue split between the first half and second half. Following this revenue cadence, we expect adjusted EBITDA to be roughly 1/3 in the first half and 2/3 in the second half of the year. This is similar to the fiscal year '26 results from a distribution perspective and reflects improved sales mix and higher sales volume in the back half of the year. Non-GAAP EPS is anticipated to be roughly 30-70 split between the first half and second half. This reflects the adjusted EBITDA profile and the impact from depreciation expense and stock-based compensation timing. We continue to expect to invest between 7% and 9% of revenue in R&D and 12% to 14% of revenue and CapEx, primarily focused on production capacity expansion across all our product lines, supported by our total backlog.

Adjusted SG&A expenses are projected at 14% to 16% of revenue. In closing, we are very encouraged by our first quarter performance and the strong foundation it provides for fiscal 2027. We delivered a result above several of our key financial targets, generated solid bookings and continued to make disciplined investments in the production capacity and innovation needed to support growing demand across our portfolio. With total backlog of approximately $2.8 billion and revenue visibility to the midpoint of our full year guidance at 86%, we believe the business is well positioned for the balance of the year. Importantly, our recent counter yuans award including Titan and LOCUST are already incorporated into our fiscal 2027 outlook. As we continue to scale the business, we remain focused on execution, capacity expansion and long-term value creation in markets where we see sustained demand and favorable multiyear growth tailwind.

Now I'd like to turn things back to Wahid.

Wahid Nawabi

Thanks, Sean. As Sean stated earlier, we are reaffirming our fiscal year 2027 guidance. While we remain optimistic and encouraged by the urgency plays for our solutions and the Department of War budget. There remains some uncertainty around the timing of final budget approval by U.S. Congress. Our view is unchanged from last quarter, and we do not expect this to be a significant risk to our outlook at this time. Whether it is something we will continue to monitor closely.

In closing, we're very pleased with the progress we made during this past quarter. We won several significant awards, which increased our revenue visibility for fiscal year 2027 and provide a strong foundation for growth in the future. We remain focused on execution as we work to meet the growing demand in our markets with strong momentum across our portfolio and significant opportunities ahead, we believe the long-term potential for growth and value creation at EV has never been better and stronger. I would like to thank our employees shareholders and customers for their continued commitment to AV and our mission.

And with that, Sean, Denis and I will now take your questions.

Operator

[Operator Instructions] Your first question comes from the line of Andre Madrid from BTIG.

Thank you once again for joining today's conference call and for your interest in AV. As a reminder, an archived version of this call, SEC filings and relevant news can be found under the Investors section of our website. We hope you enjoy the rest of your evening, and we look forward to speaking with you again following next quarter's results. Goodbye.

Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.

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CooperCompanies (COO) Fiscal Q3 2026 Earnings Call: Record Cash Flow, Vision Destocking

Wed, 09 Sep 2026 23:40:41 +0000

Key Takeaways

CooperCompanies reported fiscal Q3 2026 revenue of $1.066 billion, up approximately 1% on both a reported and organic basis. Non-GAAP EPS increased 4% to $1.15.
Free cash flow reached a quarterly record of $273 million. Year-to-date free cash flow rose 86% to $528 million, supporting $339 million of share repurchases during the quarter.
CooperVision revenue was essentially flat at $717 million as proactive U.S. channel inventory reductions offset healthy underlying demand. Management said Americas revenue would have grown approximately 5% without the inventory actions.
CooperSurgical revenue increased 3% organically to $349 million. Fertility grew 5% to $141 million, supported by genomics, new clinic wins and expansion within existing accounts.
The Board concluded its strategic review and decided to retain CooperSurgical, determining that the offers received did not adequately reflect the business’s intrinsic value and long-term potential.
For fiscal Q4 2026, management expects consolidated revenue of $1.057 billion to $1.080 billion, organic growth of 0% to 2%, and non-GAAP EPS of $1.05 to $1.09.

Core Financial Data

Metric	Fiscal Q3 2026	Change / Commentary
Consolidated revenue	$1.066 billion	Up approximately 1% reported and organic
Gross margin	66.7%	Down 60 basis points due largely to higher costs and FX headwinds
Operating margin	26.3%	Up 30 basis points on productivity improvements
Non-GAAP EPS	$1.15	Up 4%; included approximately $0.03 from tariff refunds
Interest expense	$21.5 million	Non-GAAP basis
Non-GAAP effective tax rate	15.3%	Fiscal Q3 rate
Free cash flow	$273 million	Highest quarterly level in company history
Year-to-date free cash flow	$528 million	Up 86% year over year
Quarterly share repurchases	$339 million	Year-to-date repurchases reached $445 million
CooperVision revenue	$717 million	Essentially flat year over year
CooperSurgical revenue	$349 million	Up 3% organically

The company recognized an approximately $307 million discrete tax benefit following the favorable completion of HMRC’s examination of its fiscal 2021 transfer of intellectual property and related assets to the U.K. Management expects the resolution to extend meaningful non-GAAP tax benefits for at least another 10 years.

The Board also increased the share repurchase authorization by $1 billion, leaving approximately $1.5 billion of capacity. CooperCompanies maintained leverage below 2x.

Business and Operating Performance

CooperVision

CooperVision’s fiscal Q3 performance was constrained by U.S. channel inventory reductions rather than weaker end demand. Management said U.S. consumption continued to grow at a mid-single-digit rate during the quarter and in the first month of fiscal Q4.

The company completed roughly half of its planned inventory reduction in fiscal Q3 and expects to address most of the remainder in fiscal Q4. The elevated inventory reflected several factors, including purchases ahead of price increases, customer consolidation, IT upgrades and initial stocking related to new private-label contracts.

MyDay remained a key growth driver. The franchise recorded double-digit growth in EMEA and double-digit consumption growth in the Americas. MyDay toric, MyDay multifocal and MyDay Energys each delivered double-digit growth. CooperCompanies is also preparing to launch MyDay toric multifocal.

MiSight generated 20% organic growth. EMEA and the Americas led performance, while China weighed on Asia Pacific results. Management expects low-teens MiSight growth in fiscal Q4 and approximately 20% growth for the full fiscal year.

Biofinity was flat as strength in EMEA and made-to-order products was offset by U.S. inventory actions. Clariti grew in EMEA but was softer in the Americas and Asia Pacific.

To improve commercial execution, CooperVision is expanding sales coverage, marketing programs and AI-driven targeting and analytics. The planned U.S. sales force expansion will add coverage for approximately 5,000 additional locations. Management expects newly recruited representatives to be deployed around early to mid-fiscal Q2 2027, with a more meaningful revenue contribution in the second half of the year.

CooperSurgical

CooperSurgical generated $349 million of revenue, up 3% organically. Fertility revenue rose 5% to $141 million, driven by broad-based product and service demand, genomics, new clinic wins and greater adoption of the Witness laboratory management platform. Softer capital equipment sales partially offset these gains.

Office and surgical revenue totaled $208 million, up 2%. Medical Devices grew 4%, supported by surgical OB/GYN and specialty device portfolios, while PARAGARD revenue was flat.

Management said fertility treatment cycles were growing and clinics were beginning to invest more in capital equipment. The company is increasing fertility R&D investment, including genomics products and accelerated launches.

Strategic Review

The Board unanimously decided to retain CooperSurgical after evaluating alternatives, including a potential sale. Management attributed the valuation gap to temporary factors, including developments involving a competitor in the nonhormonal IUD market and the fertility litigation settlement.

The company said the litigation matter is fully settled. It remains open to strategic alternatives that appropriately recognize the value of its operations, but its immediate capital allocation priorities include profitable organic growth and share repurchases.

Management Guidance

Fiscal Q4 2026 Metric	Guidance
Consolidated revenue	$1.057 billion-$1.080 billion
Consolidated organic growth	0%-2%
CooperVision revenue	$692 million-$706 million
CooperVision organic growth	Down 2% to flat
CooperSurgical revenue	$364 million-$374 million
CooperSurgical organic growth	4%-6%
Interest expense	Approximately $25 million
Non-GAAP effective tax rate	Approximately 16%
Non-GAAP EPS	$1.05-$1.09
Free cash flow	Approximately $170 million, excluding roughly $272 million of litigation-related payments

Management expects fiscal Q4 to remain broadly similar to fiscal Q3. Greater CooperVision commercial investment, additional FX pressure and lower tariff refunds are expected to weigh on gross and operating margins.

For fiscal 2027, the company did not provide revenue or earnings guidance. It expects the scheduled increase in U.S. taxation of foreign earnings under GILTI to raise its non-GAAP effective tax rate from approximately 15.5% in fiscal 2026 to approximately 17.5% in fiscal 2027, all else being equal.

Risks and Areas to Watch

U.S. channel inventory reductions will continue to pressure CooperVision in fiscal Q4. Management expects most of the action to be completed before fiscal 2027, but does not anticipate a subsequent inventory restocking benefit.
Commercial execution has lagged contract wins and portfolio expansion. Management identified insufficient sales coverage and marketing support as the main constraints.
Legacy hydrogel portfolio rationalization remains a near-term headwind in the Americas and Asia Pacific, although management expects the work to be largely completed in fiscal Q4.
China remains challenging, particularly for MiSight. Management cited Ortho-K pricing pressure, competing products and a fragmented myopia-management market.
CooperVision currently has limited exposure to the fast-growing super-premium daily lens category, where competitors generate higher revenue per patient.
A competing nonhormonal IUD has received approval and begun training ahead of a future launch. Management deferred additional PARAGARD commentary until the December earnings call.
FX headwinds, lower tariff refunds and commercial investment are expected to pressure fiscal Q4 margins.

Analyst Q&A Highlights

Management said the full reduction in second-half CooperVision growth expectations was attributable to channel destocking. U.S. consumption remained in the mid-single digits, and the Americas would have posted approximately 5% fiscal Q3 growth without the inventory actions.

The company expects fiscal Q4 inventory reductions to be similar in magnitude to fiscal Q3. Management said the issue is concentrated among a relatively small number of U.S. distributors and e-commerce customers, making channel levels easier to quantify. EMEA is less exposed because its market has a greater subscription and direct-to-consumer component.

Asked about fiscal 2027, management said it is reasonable to expect CooperVision to grow within the contact lens market’s 4%-6% range, but stopped short of issuing formal guidance. It expects a healthier channel and the completion of legacy product rationalization to improve the starting position for fiscal 2027.

Management identified execution, rather than manufacturing capacity, logistics, product availability or contract wins, as CooperVision’s primary issue. The company is expanding its sales force and accelerating selected R&D programs previously planned for around 2030 by several years.

On capital allocation, management said CooperVision organic growth is the company’s top investment priority, followed by fertility. Share repurchases will remain an important use of free cash flow.

Full Earnings Call Transcript

Complete Earnings Call Transcript

Management Remarks

Operator

Thank you for standing by. My name is Tina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q3 2026 Cooper Companies Earnings Conference Call. [Operator Instructions]

It is now my pleasure to turn the call over to Kim Duncan, Vice President of Investor Relations and Risk Management. Please go ahead.

Kim Duncan

Good afternoon, and welcome to Cooper Companies Third Quarter 2026 Earnings Conference Call. During today's call, we will discuss the results and guidance, the conclusion of the strategic review and current corporate developments. We will then use the remaining time for questions. Our presenters on today's call are Al White, President and Chief Executive Officer; and Brian Andrews, Chief Financial Officer.

Before we begin, I'd like to remind you that this conference call will contain forward-looking statements including statements relating to revenue, EPS, cash flow, interest, FX and tax rates, tariffs and other financial guidance and expectations, also strategic and operational initiatives, market conditions and trends and product launches and demand. Forward-looking statements depend on assumptions, data or methods that may be incorrect or imprecise and are subject to risks and uncertainties. Events that could cause our actual results and future actions of the company to differ materially from those described in forward-looking statements are set forth under the caption forward-looking statements in today's earnings release and are described in our SEC filings, including Cooper's Form 10-K and Form 10-Q filings, all of which are available on our website at coopercos.com.

Also as a reminder, the non-GAAP financial information we will provide on this call is provided as a supplement to our GAAP information. We encourage you to consider our results under GAAP as well as non-GAAP and refer to the reconciliations provided in our earnings release which is available on the Investor Relations section of our website under quarterly materials. Should you have any additional questions following the call, please e-mail ir@cooperco.com.

And now I'll turn the call over to Al for his opening remarks.

Albert White

Thank you, Kim, and welcome, everyone, to our Q3 Earnings Call. This quarter included a number of notable developments, including earnings exceeding expectations, record free cash flow, solid fertility growth at CooperSurgical and the favorable completion of a significant tax matter. At CooperVision, however, we proactively reduced U.S. channel inventory that weighed on our results and will continue to impact Q4. Importantly, our underlying demand in the U.S. remained healthy throughout the quarter with consumption increasing at a mid-single-digit rate and we're now positioned to enter fiscal 2027 with a healthier channel and stronger foundation. We're also taking additional steps to strengthen CooperVision revenue performance, and I'll speak to these in a moment.

But first, I want to address the completion of the strategic review, which we announced in a separate press release today. Following a comprehensive evaluation of alternatives, the Board has concluded the strategic review. As part of the process, we conducted a thorough assessment of CooperSurgical, including a potential sale of the business, where we received significant interest and engaged with numerous parties. Ultimately, however, the Board unanimously determined that shareholders are better served by continued ownership than by pursuing a transaction at this time. The Board and our advisers believe several temporary factors influence valuations late in the process, including developments related to a competitive entrant in the nonhormonal IUD market and the impact of our fertility litigation settlement.

These factors contributed to what we believe was a temporary disconnect between CooperSurgical's intrinsic value and the offers received resulting in proposals that did not adequately reflect the full value and long-term potential of the business.

While the formal strategic review has concluded, our commitment to enhancing shareholder value has not changed. We gained valuable insights through the process and will intensify our focus on profitable organic growth and disciplined capital allocation, including share repurchases. The Board and management will also continue to evaluate opportunities to maximize long-term shareholder value and remain open to strategic alternatives that appropriately recognize the value of our operations.

Turning to the quarter. CooperVision reported revenue of $717 million, essentially flat year-over-year. EMEA and Asia Pac performed largely in line with our expectations while the results in the Americas reflected CooperVision's U.S. channel inventory reductions. Moving forward, we see opportunities to strengthen our growth globally through improved execution of our contract wins and product launches. And to support this effort, we're investing in expanded sales coverage, increased customer marketing programs and enhanced commercial execution capabilities, including AI-driven targeting and analytics tools. These initiatives are already gaining traction in Asia Pac, where our new commercial leadership team is fully in place and in the U.S. where we're actively expanding our sales force organization. These efforts are driving stronger customer engagement, including within our private label business, where new account wins and SKU introductions are expanding our customer footprint and deepening penetration within existing accounts.

We're also continuing to invest in our distribution infrastructure, including a new packaging facility in Puerto Rico that will expand direct-to-consumer and direct to customer fulfillment capabilities, enhancing service levels and supporting long-term growth. All these actions are well underway and position us to drive greater revenue growth in fiscal 2027 and beyond.

Turning to products. Our flagship MyDay franchise continues to perform well, highlighted by double-digit growth in EMEA and double-digit consumption growth in the Americas. This performance was driven by strong customer partnerships, ongoing expansion in high-value categories such as torics and multifocals, growing adoption of our premium MyDay Energys offering and the successful launch of MyDay MiSight.

MyDay toric delivered another quarter of double-digit growth, supported by the industry's broadest daily parameter range and the same market-leading toric design is Biofinity. MyDay toric maintains a meaningful competitive advantage, offering approximately 30% more prescription options than any other daily toric lens. MyDay multifocal also delivered another quarter of double-digit growth, supported by its advanced optical design and easy-to-fit platform. With favorable demographic trends and significant room for category expansion, we continue to view multifocals as one of the most attractive growth opportunities in contact lenses. And to build on this, we are preparing to launch MyDay toric multifocal, extending our leadership in optics, parameter range and clinical performance.

Finally, MyDay Energys delivered another quarter of double-digit growth, reflecting increasing recognition among eye care professionals and wearers of its differentiated combination of premium optic advanced material technology. For clariti, performance varied by region, with growth in EMEA, offset by softer performance in our other 2 regions. However, our next-generation clariti multifocal continues to gain momentum, supported by the same proven fitting design as Biofinity and MyDay. And we also recently completed the clariti family launch in Japan and initial [indiscernible] response has been encouraging.

Turning to Biofinity, strength in EMEA and within our market-leading made-to-order portfolio, including toric multifocals and extended ranges, was offset by the inventory moves in the U.S., resulting in a flat quarter. Regarding myopia management, MiSight delivered another strong quarter with 20% organic growth. EMEA and the Americas led performance while softness in China weighed on Asia Pac. Although this was partially offset by growing momentum in Japan following our MiSight launch earlier this year.

In EMEA, growth was supported by the ongoing launch of MyDay MiSight with back-to-school campaigns highlighting the benefits of a silicone hydrogel offering. Canada also launched MyDay MiSight in August and customer feedback has been excellent. Importantly, in these markets that have MyDay MiSight, the MyDay platform now supports patients across every stage of life, from [ IOB ] management and children through spherical, toric, multifocal and premium lifestyle offerings in adulthood.

Looking ahead, we expect MiSight growth to be in the low teens in Q4 against a difficult prior year comparison resulting in roughly 20% growth for this full year and setting the stage for a promising 2027, supported by continued momentum in existing markets and the upcoming launch of MyDay MiSight toric.

Lastly, on Vision, we're accelerating programs tied to new product development, and that ties nicely in with the opening of our Global Vision Center in the U.K. later this month. This state-of-the-art facility brings together R&D, our next-gen technical manufacturing teams and our commercial teams a single integrated environment. The investment will accelerate innovation, enhance collaboration and enable greater speed to market as we capitalize on one standardized manufacturing platform for all future product development.

Turning to CooperSurgical, revenue was $349 million, up 3% organically. Within this, fertility delivered another solid quarter, growing 5% to $141 million. By product category, fertility growth was driven by broad-based strength across our leading global portfolio of products and services, partially offset by softer capital equipment sales following a very strong prior quarter. Genomics was a notable contributor driven by robust global demand, along with continued adoption of witness our automated laboratory management platform. Performance was further supported by new clinic wins, expansion within existing accounts and increasing uptake of recently launched products and services, all resulting in continued global market share gains.

Geographically, growth was led by the Americas, where we continue to gain share, while EMEA and Asia Pac remain mixed as strength across several markets was offset by macro headwinds in the Middle East and China. Stepping back, the long-term fundamentals of the global fertility market remain compelling. Delayed family formation, expanding access to care, increasing treatment utilization and continued investments by fertility clinics supports durable long-term growth. Government support for family building also remains favorable.

Earlier this year, Denmark expanded publicly funded fertility coverage from 3 cycles to 6. Japan's reimbursement framework continues to improve access and affordability for assisted reproductive technologies. In the Middle East, investments in reproductive health care infrastructure continue to support growth in the UAE fertility market. And in California, large group health plans are now required to provide coverage for IVF and certain infertility treatments representing another meaningful step towards expanding patient access.

To conclude on Fertility, we expect continued strength, including a solid fourth quarter, supported by healthy market trends and growing momentum across our innovation pipeline particularly in genomics.

Turning to office and surgical, revenue was $208 million, up 2%. Medical Devices grew 4%, driven by continued strength in our surgical OB/GYN and specialty device portfolios while PARAGARD revenue was flat. Finally, CooperSurgical delivered another quarter of strong operating leverage, reflecting the improved profitability and cash generation of our streamlined business model.

Now before turning the call over to Brian, let me leave you with a few key takeaways. At CooperVision, underlying demand remains healthy, and our long-term growth drivers remain firmly in place including continued momentum in MyDay, strong demand for our toric and multifocal lenses and the ongoing success of MiSight. At CooperSurgical, we remain excited about the fertility market and the opportunities ahead, supported by our strong R&D pipeline. Finally, while the strategic review process was extremely challenging for our teams, it provided valuable insights, and we believe we are well positioned to execute our plans and deliver strong performance in 2027 and beyond.

With that, I'll turn the call over to Brian.

Brian Andrews

Thank you, Al, and good afternoon, everyone. Most of my commentary will be on a non-GAAP basis, so please refer to today's earnings release for a reconciliation of GAAP to non-GAAP results.

For the third fiscal quarter, consolidated revenue was $1.066 billion, increasing approximately 1% on both a reported and organic basis. Gross margin was 66.7%, down 60 basis points year-over-year. This was largely in line with our expectations, reflecting higher costs and foreign exchange headwinds. Operating margins increased 30 basis points year-over-year to 26.3%, driven by ongoing productivity improvements. Interest expense was $21.5 million our non-GAAP effective tax rate was 15.3%.

Before moving to earnings, I want to spend a moment on taxes. During the quarter, we recognized a sizable discrete tax benefit of approximately $307 million. Following the favorable completion of [ HMRC's ] examination, of our fiscal 2021 transfer of intellectual property and related assets to the U.K. Importantly, the closure of the examination provides clarity and certainty around a matter that has been under review for several years and is now expected to extend meaningful non-GAAP tax benefits for at least an additional 10 years.

Turning to earnings. Non-GAAP EPS increased 4% to $1.15, including approximately $0.03 from tariff refunds based on approximately 193 million diluted shares outstanding. This marks our 11th consecutive quarter exceeding consensus earnings expectations, reflecting disciplined execution, strong operational management, and the benefits of the reorganization completed in the fourth quarter of last year.

Turning to cash flow. We generated free cash flow of $273 million. The highest quarterly free cash flow in Cooper's history. This was driven by strong operating performance, improving working capital trends and declining CapEx all of which has contributed to year-to-date free cash flow of $528 million, up 86% from last year. This performance reinforces our confidence in achieving our goal of generating $2.2 billion of cumulative free cash flow in fiscal '26 to 2028. Supported by this strong cash generation, we repurchased $339 million of shares during the quarter, bringing fiscal year-to-date repurchases to $445 million while maintaining leverage below 2x. Given our confidence in the business and commitment to capital returns, the Board approved a $1 billion increase to our share repurchase authorization, bringing the remaining capacity to approximately $1.5 billion for future repurchases.

Turning to guidance. For Q4, we expect consolidated revenue of $1.057 billion to $1.080 billion representing organic growth of 0% to 2%. We expect CooperVision revenue of $692 million to $706 million, down 2% to flat organically. Within this, we expect regional performance trends to be broadly consistent with Q3, with the Americas reflecting the impact of channel inventory actions, EMEA delivering another solid quarter and Asia Pac continuing to face near-term challenges. We expect CooperSurgical revenue of $364 million to $374 million, representing organic growth of 4% to 6%. We expect interest expense of roughly $25 million, reflecting incremental borrowing associated with share repurchases and litigation-related payments. We expect the Q4 non-GAAP effective tax rate to be roughly 16%, resulting in non-GAAP EPS of $1.05 to $1.09. We expect around $170 million free cash flow, excluding litigation-related payments of roughly $272 million. Our foreign exchange assumptions are largely unchanged from last quarter.

In summary, we expect Q4 to be broadly similar to Q3 with the primary differences being greater commercial investments in CooperVision, additional FX headwinds and lower tariff refunds which will pressure gross and operating margins.

Looking ahead to fiscal 2027, it's too early to provide guidance other than to note that our scheduled [ GILTI ] increase of roughly 2% in the U.S. taxation of foreign earnings will impact our non-GAAP effective tax rate. All else being equal, we expect this increase -- we expect this to increase our tax rate from roughly [ 15.5% ] this year to roughly [ 17.5% ] in fiscal 2027.

To conclude, despite actions we took within CooperVision that weighed on performance, we delivered another quarter of earnings above expectations and record free cash flow. We also achieved a favorable resolution of [ HMRC's ] examination of our 2021 U.K. tax planning initiative and returned significant capital to shareholders. At the same time, we are intensifying our efforts to drive organic growth through new commercial investments and a more streamlined operating model. Together, these initiatives position us to accelerate growth, expand profitability and increase cash generation in the years ahead. Supported by our strong balance sheet and disciplined capital allocation framework, we remain confident in our ability to create meaningful long-term value for our shareholders.

With that, I will turn the call over to the operator for questions.

Operator

[Operator Instructions] Our first question comes from the line of Jon Block.

Question-and-Answer Session

Jonathan Block

Thanks, guys. So Al, previously, the fiscal 2H '26 CVI growth was expected to be up roughly 4%, now fiscal 2H is expected to be flattish. And you made some comments around consumption. I just want to be clear, is the entirety of that revision inventory related, as you did call out consumption of mid-single-digit growth specific to the quarter. I'm just wondering if that consumption assumption was -- also applies to fiscal 4Q. So maybe you can just tease out the plus [ 4 to 0 ] in fiscal 2H, how much of that is destock versus underlying fundamentals?

Albert White

Yes, Jon, it's all destock. So the consumption in the U.S. market here has been running pretty steady all year in the mid-single digits. It was -- it did in Q3, and it did in the first month of this quarter. So I would expect consumption to remain as is. Meaning the entire reason for the reduction in the revenue guidance for CooperVision was tied to just channel inventory. That's it.

Jonathan Block

So thanks for the clarity there. I guess just an obvious follow-up, which would be, if you're exiting this year at flat off of pretty modest comps, just any high-level thoughts on 2027 with CVI. In other words, do we think it can go back to mid-single digits as it would revert back to consumption? Or should we think, hey, you're going to be below market this year, do we think below market next year really until some new products start to come out of the innovation hub.

Albert White

Yes. A couple of things on that. I mean, some of the moves that we're making that you see here in the U.S. with respect to the channel inventory are one that's impacting us. Another one that's impacting us has been for a little bit and will to end this year. is some of the portfolio rationalization we're doing with our legacy hydrogels. Our legacy hydrogels were down double digit across the board as we continue to kind of move away from those products. That work we're going to get completed here in our fiscal Q4, and that will put us in a significantly better footing back to kind of CooperVision of old or normal CooperVision, if you will, as we get into 2027.

Operator

Your next question is from the line of Jeff Johnson.

Jeffrey Johnson

Let me just stick on maybe that same line of question Jon was just asking and then I've got one other follow-up as well. But on the destock itself, Al, you may have just answered the question on some of the legacy hydrogel stuff. But what is actually driving that destock? And how do we think about the risk that, that bleeds over into the early part of '27. Have you ring-fenced that fairly confidently that this is a fiscal Q4 should be the last of it? Or how do we think about like the early '27 potential impact? And then one follow-up.

Albert White

Yes. We have ring-fenced that, so to speak. We have gone through that deep deeply and dug into all the details and where the channel inventory is and what's happening. A lot of it was tied to Biofinity but there was other -- there was stuff with dailies, and there was definitely, definitely inventory that was tied to some legacy hydrogels and some of those kind of products. But we're going to get that behind us here in Q4, at least the vast majority of it. Same with the rationalization in the moves in Asia Pac, so that we get back in good footing and get back to normal, if you will, in 2027.

Jeffrey Johnson

Okay. I guess I'll just push you a little bit on that. Just hearing your answer there, the different lines that destock, but why are they destocking? Has end markets slowed? Did you guys have too much inventory in the channel from past efforts to kind of prop up numbers? Is it competitive new product launches that are just requiring less CooperVision inventory? Just anything there?

Yes. So the difference is EMEA is a much greater subscription-based market we're actually seeing the U.S. move in that direction. That's one of the things I was talking about with the new Puerto Rico facility is that you're seeing more direct-to-consumer shipping activity. You see that in EMEA right now. That kind of prevents you from having like these inventory, these big inventory swings and so forth. So we just don't really see that EMEA, I mean you can get it with customers and so forth, of course, right? But but we just don't have that happening in EMEA. So I'm not worried about it in that region.

When you look at the U.S., it's centered on a relatively small number of players, if you will, between distributors and some online e-commerce. So it's pretty easy to straightforward tackle it, and that's what we did. And it's pretty easy to get an understanding about how much channel inventory is out there. What levels people need to hold in order to maintain customer service requirements and so forth. And you can look at that delta, and that's how you ring-fence it, so to speak, to be able to say, "Hey, I can do this, and I can quantify it within a couple of quarter period."

Jason Bednar

All right. All right. That's helpful. And then, Al or Brian, I think you both discussed today investments in CPI sales, marketing and R&D. Usually, that type of approach that's needed to accelerate growth comes at the expense of margins even if temporarily, but it doesn't seem like that's what you're suggesting today. So can you talk a bit more about the investment buckets and then your confidence level in posting margin improvement next year in the face of this spending knowing that we've already gone through some cost efforts coming into this fiscal year.

Brian Andrews

Joanne Wuensch

I'm going to try it from a different angle. If the third quarter and the fourth quarter are negatively being impacted by the channel inventory, and the contact lens market is growing 4% to 6%. Is it reasonable to assume that next year, you can grow within the range of the market?

Albert White

Yes. That is reasonable. I would say a couple of things, Joanne. And I give just a little color on that because your question is very fair. Like we don't have a manufacturing issue. Our team is strong. We're producing product. We don't have a distribution or logistics issue. We don't have a problem winning contracts. We won a number of contracts where we struggled is execution at the end of that, is actually executing and delivering revenues. So it's kind of like we're moving through this entire process, which is one of the things that's kept me optimistic. But then we're not converting at the very last stage of that. That actual commercial execution is where the struggling has happened.

So the sales force execution, this additional marketing the intensity around that kind of stuff and targeting and so forth is the key to success for us, right? It's not product, it's not getting customer products. It's not winning contracts. It's executing at the end on the sales. We don't have enough salespeople out there. Like [ Insights ] 2020, we should have moved faster around this. Like we don't have enough salespeople on the street. We have quite a bit less than our competitors have out there right now. So this is a matter of doing that last stage of investing. And we're on top of that. We're moving as fast as we can right now on that.

I'm not expecting this channel inventory to bounce back. We're taking it out, and we're going to manage it more aggressively to ensure stability there but I do expect better execution. We have a long history of strong execution. So I'm confident in the team and that we'll deliver that.

Operator

Your next question is from the line of Steve Lichtman.

Steven Lichtman

I just want to switch gears to CSI and on the decision to keep the business, you pointed to the valuation disconnect. But as you look at the 2 businesses together, coming off of this process. What was management and the Board's ultimate assessment of why the 2 together are stronger than a part? Because obviously, the lack of obvious synergies has been one of the questions from investors.

Albert White

Yes. Well, I would say that it's really the P&L. It's at the end of the day because if you take a look at the shared services concept that we deployed, remember, we did the restructuring in Q4 of last year and you've seen the savings. I mean, I know there's frustration over revenues. I have frustration over revenues, but I think this was something like our 11th straight quarter of beating earnings expectations. And some of those quarters, we beat an earnings expectations by 5%, 10%. I mean we beat earnings this quarter with CooperVision coming in way under what revenue expectations were.

Sure. On the fertility side of things, we are seeing a growth in cycles, and that's a positive. The other thing we're seeing is we're hurdling through that year period where we have some consolidation and you're starting to see fertility clinics investing more. There's more capital equipment opportunities out there. Our genomics team is absolutely killing it. They're doing a great job, taking a whole bunch of market share. We have somewhat of a new fertility team that started probably 6, 12 months ago that is really doing that. Our new leader, she's just fantastic, and she's doing a great job in killing it. So I'm super optimistic about the fertility market. Anybody who thinks that that's not a good market or that, that litigation settlement is going to disrupt our momentum and progress is just wrong. I just don't see that in the market.

When you look at the PARAGARD competition, we've talked about that in the past. We are the only -- PARAGARD is the only non-hormonal IUD in the market right now. There is a competitive product that received approval that was bought that it closed during this past quarter for us. They started their training and that product will get launched at some point in the future, and there's concern about that. And at this point in time, I'm going to hold off giving any guidance or commentary above and beyond what we've already given, but we'll certainly have a lot more color to be able to give on the December call.

Operator

Your next question comes from the line of Navann Ty.

Navann Ty Dietschi

Just CSI post strategic review. You mentioned some insights from that review. So can you maybe discuss that into more detail and the levers that you mentioned, including investment that you started in the quarter to drive fertility growth. If you could give more details.

Brian Andrews

Navann, it was a little difficult to hear. I think you were asking for the impact of -- or the -- do you say the impact from the strategic review tied to CSI? Can you repeat your question?

Navann Ty Dietschi

Yes. I think Al mentioned that you gained some insight from the strategic review and also mentioned some investment that you started in the quarter to drive fertility growth. If you could discuss that into more detail.

Albert White

Sure. So the insights is an important one because one of the things that the strategic review did was to really drill down into the profitability of our portfolio, all aspects of our portfolio, frankly, and take a look at profitability by product and take a look at profitability by geography and relationship. One of the areas where we've seen significant improvement is the profitability of CooperSurgical. And what it did is it kind of highlighted other areas where there's some opportunity for us to do a better job in terms of driving ongoing profitability improvement. So we're going to learn from that, like we learned a lot from the strategic review. It uncovered some different things, and it's going to make us a better company. It is making us a better company today.

I mean, right now, we are doing investments within fertility. We've added some investment activity, including within our R&D. We have great new Head of R&D, who is running that organization and pulling forward some launches. We've got some exciting stuff going in genomics there with some new launches and some expanded products that we have. I would say we're continuing -- that's where we're putting dollars. We're putting #1, first and foremost, is CooperVision organic growth; and number two, though, after that is fertility, where we are continuing to invest. And we believe that those investments are going to drive good fertility growth. And we also believe that some of the stuff that we've been covered and the insights is going to give us opportunity to continue to drive leverage in that business.

Navann Ty Dietschi

And you also mentioned the -- in the press release the valuation impact of the fertility settlement. Is that fully settled? Or is there anything else we should know about?

Albert White

That is fully settled. So there's nothing new on that. There was concern that, that settlement. You'll remember, that was from an issue we had in 2023. There was a concern that, that settlement would negatively impact our ongoing sales, not our operations. We haven't had any issues since then associated with the media and so forth. So I just don't believe that's accurate, and we haven't seen that. We didn't see it in Q2. We didn't see it in Q3. We're certainly not seeing it as we get rolling here in Q4. But but I appreciate whether that was a true concern on negotiating tactics, hard to tell.

Operator

Your next question is from the line of Anthony Petrone.

Bradley Bowers

You have Brad Bowers on for Anthony. Just maybe I wanted to ask one about the overall strategy or dynamics underlying the CVI business. Obviously, slowdown in growth is not unique to Cooper, but still growing below growth we got in the destocking dynamics, but obviously, you had also taken some share in some of the wider SKU ranges and obviously, some of the new products with MyDay, it sounds like the Americas growth is strong, but you even admit you wish you were growing better. So I wanted to hear about some of the more competitive dynamics and the confidence that those remain in your favor.

Albert White

I would say that those remain in our favor. So nothing has changed with respect to that. I will say that the area where losing share is the wrong word, but where we don't operate is kind of in the super premium segment. There is a part of the market, especially on the daily side that we refer to as super premium. It's really high-priced products and that's just not an area that we compete in right now, and that's shown a lot of growth, and it has very high revenue per patient.

So where we continue to do well, we continue to win patients. Our revenue per patient is not close to where some of our competitors are. And a lot of the market continues to get driven by that really premium segment. Now we are launching -- we've launched MyDay MiSight into that more premium segment. That's what's being launched into Europe. So I think there's some potential for us to gain some ground there. But that would be -- if I had to highlight 2 things, that would be one of them is not having products in the super premium space. And then the other one would be the desire to rationalize some of our legacy hydrogel products. Again, we're definitely seeing a negative impact from that.

Bradley Bowers

That makes sense. But obviously, punching above your weight given the underinvestment in -- not underinvestment, but smaller sales force than competition. Obviously, that is a tailwind, but just wanted to hear -- maybe remind us how productivity kind of ramps there. Obviously, the base is now lower, so it does kind of imply getting back towards that high -- mid- to even high single digits to your point, getting above consumption? And then also just impact, obviously apparent maybe the opportunity that, that would be obscured if there is strong growth in the U.S. by some of the OUS impacts? Just maybe help us figure that out as well.

Albert White

Sure. Just one quick point. As Brian just said that I met MyDay Energys, I think I said MyDay MiSight, but MyDay Energys is the premium product. With the sales force, I would say, if I had to put some parameters around that, we're recruiting now. We'll get people trained and have them out on the street executing. I would say probably in early mid-fiscal Q2.

So from that perspective, right, they need to visit offices and start doing their jobs and so forth and pulling revenues in. So that's probably a positive impact more in the Q3, Q4 time frame. Now I do think early in the year, we'll continue to have consumption be solid. So we'll still put up good results, but I believe we'll accelerate a little bit off that as we get the benefit from those employees. Frankly, same thing when I look at some of the other markets around the world.

Operator

Your next question is from the line of Brett Fishbin.

Brett Fishbin

I have to say a lot of mine have been asked. So maybe just a follow-up on kind of the last point. I was going to ask about your thoughts on underlying market share dynamics, just given the full year CVI growth guide for the Americas. It sounds like a lot of it has to do with salesforce and you're looking at some incremental investment activity. So maybe just the first part, is there anything else that stands out that you think might be driving, call it, full year growth in the Americas below market outside of that?

And then the second follow-up question is just how you're feeling about the product portfolio. I think your point about super premium lenses is really interesting. So just curious like how you feel about current offerings and maybe how active the R&D pipeline might be in regards to some new ideas or even new brands?

Albert White

Sure. I would say on the selling side, I would go back to sales execution. Like we've won some great private label contracts here in the U.S. with a few of the buying groups. We've won some really nice contracts in Asia Pac. Historically, when we win those contracts, we would see the sale of execution turn those into revenue growth. And that's what we've expected more of that, right? You've seen that in some of the guidance. You've seen it in some of my commentary. That's where that has not come to fruition yet. And where -- when we looked at it and peeled back the onion and said, well, why, what is the difference? What's happening? We have a full portfolio out there right now. I feel good about the portfolio. It's arguably the most robust that we've ever had, and we didn't build out the sales force and a lot of the marketing support commensurate with the size of the portfolio that we have right now. So we need to do this activity so we can capitalize on these contract wins that we have.

Thank you, operator, and thank you, everyone, for taking the time. I know we had a lot to discuss today, and I'm sure we'll have a lot of follow-up calls with details. So I appreciate everyone's interest and look forward to catching up and providing an update on our next earnings call in December. Thank you.

Operator

Thank you again for joining us today. This does conclude today's conference call. You may now disconnect.

Find out more

Gloo (GLOO) Fiscal Q2 2026 Earnings Call: Revenue Up 188%, Outlook Raised

Wed, 09 Sep 2026 23:40:35 +0000

Key Takeaways

Fiscal Q2 2026 revenue rose 188% year over year and 12% sequentially to $46.6 million, driven by Gloo 360, Workspace and acquired businesses including Masterworks, Westfall Gold and EMD.
Cost of revenue improved to 64.0% of revenue from 74.8% a year earlier. Adjusted EBITDA improved by $3.2 million sequentially to -$8.3 million.
Gloo raised its full-year fiscal 2026 revenue outlook by $5 million to $200 million, including Cedarstone. Management continues to target adjusted EBITDA profitability in Q4.
The company expects fiscal Q3 revenue of $55 million and adjusted EBITDA of -$3.5 million, supported by seasonally stronger advertising and fundraising activity at Masterworks and Westfall Gold.
Gloo now has more than 30 customers with annual contract value above $1 million, including its first customer exceeding $10 million. Its university portfolio has expanded to more than 40 institutions.
Management identified applied AI, agentic workflows, cross-selling and acquisitions as the main growth levers. The company completed five acquisitions after becoming public and expects M&A to remain part of its strategy in 2027.

Key Financial Data

Metric	Fiscal Q2 2026	Change / Commentary
Revenue	$46.6 million	Up 188% year over year and 12% sequentially
Platform solutions revenue	$22.9 million	Up 209% from $7.4 million; driven by Masterworks, Westfall Gold and EMD
Platform revenue	$23.69 million	Up 170% from $8.7 million; driven by Gloo 360, Masterworks and Workspace
Cost of revenue	64.0% of revenue	Improved by 10.8 percentage points from 74.8%
Adjusted EBITDA	-$8.3 million	Improved by $3.2 million sequentially
Restructuring charge	$4.4 million	Primarily severance related to business-line integration
Cash and cash equivalents	$39.3 million	As of July 31, 2026
Follow-on offering proceeds	$23.7 million	Net of underwriting fees, commissions and offering expenses
Senior secured loan	$13.2 million	Maturity extended by one year to April 2028

Business and Operating Performance

Revenue growth came from both the Powering Tech and Powering Reach businesses. Management cited Gloo 360 and Workspace, together with Masterworks, Westfall Gold and EMD, as the main year-over-year drivers.

Gloo’s strategy is increasingly focused on delivering business outcomes rather than only providing software. Management said AI-enabled workflows are being deployed in donor engagement, help-desk automation, project management and marketing. As more work shifts to agents, the company expects model improvements and lower delivery costs to support operating leverage.

Cross-selling is becoming a more formal growth channel. Gloo introduced a sales compensation program covering sellers across its businesses, while acquisitions bring additional products and established customer relationships. Management said most revenue growth currently comes from existing customers.

Cedarstone added more than 250 mid-market customers and capabilities in accounting and donor services. Management sees potential to cross-sell Cedarstone services to Masterworks customers and Masterworks offerings to Cedarstone’s installed base.

Gloo also expanded its presence in universities, social services and youth-serving organizations. The company now serves more than 40 universities, compared with its first university win only several quarters earlier.

In AI development, Gloo launched Glue Code within Gloo AI Studio. The capability pairs purpose-built agents with models selected for specific tasks. Management said Studio serves internal teams, existing customers, capital partners and individual developers, with the annual Gloo AI Hackathon expected to attract hundreds of developers.

Management Guidance

Guidance Metric	Outlook	Management Commentary
Fiscal Q3 2026 revenue	$55 million	Expected to benefit from strong advertising and fundraising seasonality at Masterworks and Westfall Gold
Fiscal Q3 2026 adjusted EBITDA	-$3.5 million	Nearly $5 million better than fiscal Q2
Fiscal Q3 weighted average shares	Approximately 90 million	Company estimate
Full-year fiscal 2026 revenue	$200 million	Raised by $5 million and includes Cedarstone
Fiscal Q4 adjusted EBITDA	Profitable	Management reaffirmed its profitability target

Management expects fiscal Q3 to deliver the strongest sequential growth of the year. Growth is expected to moderate in fiscal Q4 because Christmas and January fall within Gloo’s fiscal year ending January 31.

The company said its full-year outlook implies revenue will more than double year over year while operating expenses remain approximately flat in absolute dollars. Management also expects additional operating-expense leverage over the next several quarters.

Risks and Watch Items

Fiscal Q3 benefits from advertising and fundraising seasonality, while management expects more moderate growth in fiscal Q4.
The growth strategy depends partly on integrating acquisitions, realizing cost synergies and converting acquired customer relationships into cross-selling opportunities.
Gloo recorded a $4.4 million restructuring charge as it integrated business lines. Management continues to balance cost discipline with plans to add sales personnel.
AI model and token costs can move in both directions. Management said more sophisticated reasoning models may cost more, although open-source models and lower token prices can reduce delivery expenses.
The full-year revenue outlook includes Cedarstone, making execution and integration of the acquisition relevant to the forecast.

Analyst Q&A Highlights

Revenue visibility: Management said recurring and reoccurring revenue, a strong pipeline and increasing cross-selling provide solid visibility into fiscal Q3 and Q4. It did not quantify the split between contracted backlog and new sales required.

Customer expansion: Most customers begin with one Gloo offering, but the company presents its broader portfolio during enterprise discussions. Some university customers have adopted multiple offerings from the start. Gloo’s strategy remains “land, expand, and expand,” covering both wallet-share growth and expansion across customer verticals.

M&A strategy: Management described the acquisition pipeline as strong and said M&A should remain part of the 2027 strategy. Gloo expects to remain opportunistic and cash-efficient, with past transactions typically using 20% to 25% cash, seller notes or performance consideration, and potentially about 50% stock.

AI’s financial impact: Management ranked accelerated customer offerings as AI’s largest current financial contribution, followed by lower costs as work shifts to agents and improved product value through automation. Data consolidation is also emerging as an entry point for customer AI projects.

Forward-deployed engineering: Gloo views forward-deployed engineering as an important differentiator because many customers lack internal technical talent. Gloo 360 uses this model to provide CIO- and CTO-level capabilities, while Midwestern and consulting services support implementation and AI-led transformation.

Path to profitability: Management expects revenue and adjusted EBITDA improvement to accelerate in fiscal Q3 before seasonal moderation in Q4. The company maintained its commitment to positive adjusted EBITDA in fiscal Q4.

Full Earnings Call Transcript

Complete Earnings Call Transcript

Management Remarks

Operator

Thank you. Thank you for standing by and welcome to Gloo's fiscal second quarter 2026 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question, you will need to press *11 on your telephone. You will then hear a message advising your hand is raised. To withdraw your question, press *11 again. Please be advised that today's conference is being recorded.

Now it's my pleasure to turn the call to the Chief Marketing and Communications Officer, Oliver Rall.

Oliver Roll

Thank you, operator, and thank you to all of you for joining our fiscal second quarter earnings conference call. We will be discussing Gloo's performance for the second quarter ended July 31st, 2026, as well as providing guidance for our Q3 and full year 2026. Joining me on our CEO and co-founder Scott Beck and CFO Paul Seaman. Our executive board chair and head of technology, Pat Gelsinger will also join the Q&A session. Before we begin, please be reminded that this call will contain forward-looking statements, including statements related to our business, future growth, strategic initiatives, key priorities, and our financial outlook for Q3 and fiscal year 2026. These statements are based on Gloo's current expectations, but are subject risks and uncertainties relating to future events and or the future financial performance of Gloo. Gloo assumes no obligation to update or revise them whether as a result of new developments or otherwise.

Actual results could differ materially from those anticipated in these forward-looking statements. A discussion of some of the risks that could cause actual results differ materially from our forward-looking statements can be found in today's press release and are disclosed under the caption risk factors and elsewhere in our filings with the Securities and Exchange Commission, including our annual report on Form 10-K for the fiscal year ended January 31st, 2026, and in our subsequent quarterly reports on Form 10-Q. Our SEC filings are also available on Gloo's investor relations website at investors.gloo.com and the SEC's website. In addition, during today's call, we'll discuss certain non-GAAP financial measures, including adjusted EBITDA. We use non-GAAP measures in some of our financial discussions as we believe they provide valuable insights on our operational performance and underlying operating results. These non-GAAP financial measures should be considered in addition to, not as a substitute for, or in isolation from our GAAP results. Reconciliations of these non-GAAP metrics to the most directly comparable GAAP metrics, as well as the definitions of each measure, their limitations, and our rationale for using them, are included in today's press release and will be included in our Form 10-Q to be filed for the quarter ended July 31, 2026.

And now I'll turn the call over to Scott.

Scott Beck

Thank you, Oliver, and thank you for joining us today. Year 2 was another solid quarter with revenue increasing 188% year-over-year to $46.6 million. Since becoming a public company, we've been able to improve our financial performance every quarter. We have met or exceeded guidance each time and are raising our full-year revenue guidance once again. Our progress continues to demonstrate that our strategy and our execution is on track. One of the key drivers is our leadership and applied AI for the faith and flourishing ecosystem. This strengthens every layer of our platform, from trusted AI capabilities like Gloo AI Studio to AI-powered solutions like Gloo 360 to helping customers transform their organizations through an agendic workflow. Our approach to applied AI reflects a broader shift in how AI native companies are creating value.

We are increasingly delivering the work and the outcomes our customers need, rather than simply providing a better tool. As AI models improve, that work becomes faster, more efficient to deliver, creating greater value for our customers and expanding operating margins for Gloo. That makes continued advancement in the frontier models a powerful tailwind to our overall strategy and growth. When the models get better, we get better. We are seeing that in our customer momentum. Customers are trusting Gloo with more of their technology and growth needs. They're engaging with more solutions across our platform, as well as adopting capabilities that we've added through acquisitions.

All of this is translating into strong top-line growth while we continue to operate with cost discipline and make meaningful progress toward adjusted EBITDA profitability. Since becoming a public company, we've improved adjusted EBITDA every quarter and continue to approach break even in Q3 and are committed to achieving adjusted EBITDA profitability in Q4. Our full year guidance more than doubles revenue in 2026 year over year while holding operating expenses approximately flat in absolute dollars. To support that growth and profitability trajectory, we completed meaningful cost actions in Q2, building on the actions that we took last year. We are demonstrating that we can integrate new capabilities, meet significantly greater customer demand and grow revenue without building a proportionately larger cost base. Behind these results is a large, growing, fragmented, and underserved market. According to Kentley Insights, faith-based organizations generated over $265 billion in revenue in 2025. That's up 8.2% from $245 billion in revenue in 2015, and in 2024, roughly double the pace of U.S. GDP growth. At the same time, organizations are under increased pressure to modernize technology, operate more efficiently, strengthen donor development, and scale their missions. Our customer needs align directly with our strategy to power technology and to power reach with applied AI. Powering technology helps organizations modernize their systems, data, and workflows so they can spend more time focusing on their mission. Powering reach helps organizations strengthen marketing and engagement, expand awareness, and build the donor relationships that fund their missions so that they can increase their impact in the world. Underpinning both is our leadership and applied AI for the faith and flourishing ecosystem. Organizations are choosing us because they want a trusted partner that can deliver better outcomes with the resources they already have.

That's exactly where Gloo is positioned to add value. The people and organizations that we serve are amazing. They are changing lives for good and transforming communities in thousands of different ways around the country and around the world. These strategic customer relationships matter. We are closing larger, more strategic relationships that expand both the value that we deliver and the markets that we serve. We now have more than 30 customers representing over $1 million each in annual contract value. In Q2, we reached another important milestone with our first customer exceeding $10 million in annual contract value. In addition, with the acquisition of Cedarstone, we've added over 250 new mid-market network capability providers or customers who are well positioned for cross-selling.

We also expanded further into social services and youth serving organizations where our technology engagement donor development capabilities lift the technology burdens and help them scale. There are many people and youth in this country who are really struggling. And these organizations are making an enormous difference in their lives and are better able to serve them in partnership with Gloo. These relationships create significant long-term growth opportunities as customers adopt more of the Gloo platform. Universities continue to emerge as a strong growth vertical, with over 40 universities in our current client portfolio. Universities face many of the same challenges we see across the broader ecosystem. They have complex technology environments and fragmented data.

They have pressure to operate more efficiently. They need to increase enrollment and they need to strengthen their donor development. Those needs align very well with our platform capabilities. We've added and expanded several university relationships during this quarter, and we have a strong pipeline of additional opportunities ahead. We are not only adding customers, we are also deepening the relationships we already have. In this market, trusted relationships are a non-negotiable. Each capital partner we add to our platform brings its own deep, trusted customer relationships into Gloo.

This creates an increasingly powerful ripple effect within our customers and within the segments. This supports our overall strategy that we call land, expand, and expand. This means once we land with a customer, we not only expand with that specific customer, but we also expand across the segment as well. For example, we already have many of our $1 million plus customers adopting solutions from multiple Gloo business units and capital partners. This is an important indicator of the opportunity that lies ahead. AI is another strong tailwind for Gloo. More organizations are turning to us to apply AI in practical ways that advance their mission, grow their revenue, and make their operations more efficient.

We're bringing the power of agentic workflows to organizations in areas like donor engagement, help desk automation, project management, and many more. These are tangible applications of AI that also give customers better insights into their enterprises while reducing repetitive administrative work and allowing them to focus more on their mission aligned outcomes. And importantly, as we increasingly deliver the work itself, we rapidly embrace the AI model improvements to even more efficiently deliver the work. Through our forward deployed engineering model, we work alongside customers to solve specific operational challenges. And then we turn what works into capabilities that can scale across the ecosystem. On September 8th, the company announced Glue Code, a new agentic building capability within the Gloo AI Studio that helps developers get more from their tokens by pairing purpose-built agents with the right models for each task. Developers will have the opportunity to use Glue Code at our annual Gloo AI Hackathon in October, when we expect hundreds of developers to build new applications for the faith and flourishing ecosystem.

Our acquisition strategy is a core part of building a stronger, more durable company. Since becoming a public company, we've completed five additional acquisitions. Westfall Gold, XRI, EMD or Enterprise Marketdesk, our remaining ownership stake in Midwestern Interactive, and Cedarstone. That's with EMD closing in Q2 and Midwestern and Cedarstone, which have closed in Q3. Cedarstone is a good example of the cross-selling opportunities that we discussed earlier, with Masterworks providing a natural channel to bring Cedarstone capabilities to more customers. Each one adds capabilities, expertise, customer relationships, or market access that strengthens the broader Gloo platform. As we integrate them, we create new growth opportunities and reduce duplication as we integrate their operations.

Our acquisition synergies are working. They improve revenue, financials, and expand what we can do for customers while driving synergies across our platform. This is a powerful flywheel that will ultimately drive meaningful profitability for Gloo. So when I look at Q2, I see significant significant momentum. Our market is massive, growing, and technologically underserved. Our largest relationships are getting bigger and broader. New verticals are opening up. Applied AI is moving into meaningful operational workflows. And the capabilities that we have added across Gloo are increasingly working together one platform.

We still have a lot of work ahead of us, but we believe the direction of the business is clear and strong. We're building the leading technology platform, including our capital partners and business units for the faith and flourishing ecosystem. And we're demonstrating that we can grow the platform with increasing rating leverage. We will remain focused on execution through the second half of the year and delivering on our commitment to achieving adjusted EBITDA profitability in Q4. With that, I'll turn it over to Paul to walk through our financial results in more detail.

Paul Seamon

Thank you, Scott. Our momentum continued in the second quarter as we exceeded both revenue and adjusted EBITDA guidance, with strong year-over-year growth from both our Powering Tech and Powering Reach businesses. Q2 revenue was $46.6 million, up 188% from the same period last year and 12% sequentially from Q1. Year-over-year growth was driven by Gloo 360 and Workspace, as well as acquisitions including Masterworks, Westfall, and EMD. As we continue to strengthen our platform with new capabilities, we are seeing strong cross-sell momentum across our products and solutions. Our leadership in applied AI enables us to deliver essential business outcomes to our customers. We are delivering the work rather than just the software tool they have to manage. In fact, our platform solutions are helping customers reduce the number of software tools they have to license and pay for.

This is driving strong revenue growth in platform solutions at $22.9 million in Q2 2026, up 209% from $7.4 million in Q2 of last year. This was driven by Masterworks, Westfall Gold, and EMD. Platform revenue totaled $23.69 million in Q2 2026, an increase of 170% from $8.7 million in Q2 of last year. This was driven by Gloo 360, Masterworks, and Workspace. Cost of revenue in the quarter was 64.0% of total revenue, an improvement of 10.8 percentage points from 74.8% in the prior year period. This significant improvement was driven by increased scale across our businesses, as well as a favorable shift in mix from our acquisitions over the past year. We expect incremental improvement to continue. Adjusted EBITDA improved $3.2 million sequentially to -$8.3 million.

This improvement reflects revenue growth across our businesses, along with cost restructuring actions we completed in the quarter to integrate our acquisitions and streamline our corporate services. Also note that general and administrative expenses in Q2 included an impact from the Cedarstone acquisition, which closed in August. As we previously stated, we do not adjust for these costs in our non-GAAP results. In the quarter, we took a $4.4 million restructuring charge, primarily for severance costs related to the integration of our business lines. While we will always seek opportunities to improve our cost structure, we believe the business is in a strong position to continue our focus on growth. Investing in adding sales people to drive our top line in the coming quarters. In the quarter, we completed a successful follow-on offering raising $23.7 million of additional capital, net of underwriting fees, commissions, and offering expenses.

As of July 31, 2026, we had $39.3 million of cash and cash equivalents. Last week, we extended the term of our senior secured loan of $13.2 million by one year to April 2028, providing us additional flexibility in 2027. I'd like to now turn to our full year 2026, and Q3 outlook. Increasing our full year 2026 revenue outlook by $5 million to $200 million inclusive of the Cedarstone acquisition. We expect revenue to be $55 million in the third quarter and adjusted EBITDA to narrow to -$3.5 million, a nearly $5 million improvement over the second quarter. We expect the third quarter to provide a significant step up in our performance as it is the strongest advertising and fundraising season for Masterworks and Westfall Gold. We continue to expect adjusted EBITDA to reach profitability in Q4 2026 as we maintain cost discipline.

One other item to note, for Q3 we expect a weighted average share count of approximately 90 million shares. With that, I'll turn it back to the operator to take your questions.

Operator

Thank you, and as a reminder, if you do have a question, simply press *11 to get in the queue and wait for your name to be announced. To remove yourself, press *11 again. Please limit your questions to one and one follow-up, please. One moment while we compile the Q&A roster. First question comes from Richard Baldry with Roth Capital. Please proceed.

Question-and-Answer Session

Uh, you know, typically we're 20% to 25% cash, some seller notes or performance, and then maybe 50% stock. So we see that as being continued. As we look into 2027, for sure, we're going to expect that M&A is part of our strategy as it always has been.

Richard Baldry

And we're excited about what we're seeing. Great. Thanks. Congrats on a great quarter. Thanks.

Operator

Our next question comes from Jason Kreyer with Craig Hallum. Please proceed.

Jason Kreyer

Thank you guys. So look, you're up to 30 customers now that are producing over $1 million in revenue. By the way, congrats on the first $10 million customer. You maybe generally talk about the journey that those customers have been on with Gloo. Maybe just where those relationships started and how you've been successful continuing to expand wallet share over time.

Patrick Gelsinger

Yes, and some of the customers, this is Pat, um, some of those customers have been uh, customers of different portions of Gloo for quite a while. Like a number of them would have been Masterworks customers for a number of years, and we've been growing those uh, relationships and now cross-selling for more of the uh, portfolio. Some have been more recent, you know, 360 as an example is uh, only a 1 and 1/2 years old as an offering in the marketplace. So those customers are more recent. Westfall Gold would be another example that we've had long customer relationships with them as well as they've been doing business for 3 decades now. So it really crosses the spectrum of recent to long-term customers. But what you're seeing very systematically is we're able to increase the size of the relationship.

And we're doing that by doing it more with them in 1 product area than being able to cross sell and this quarter we've formalized our sales compensation programs so cross selling across all of our sellers, you know, to further incent and we're seeing good momentum from that cross selling already. So we do believe there's a lot more to do there. And as Scott said in his formal remarks, we call it land, expand, expand. And we're able to then also move into other customers in similar verticals. And for instance, 40 universities now, and I think it was maybe 2 quarters, maybe 3 quarters ago, we talked about our first university win, and now we're having very broad success across that category. So overall, land, expand, expand, and seeing that quite consistently now across the portfolio. And now with 30 plus at $1 million, we're certainly going to be giving periodic updates on the next milestone. You know, for them, we're looking forward, and several of them are approaching $10 million, so we definitely see that there'll be updates there.

So overall, our sales momentum is strong, and we see that we have many synergies to harvest in the future.

Jason Kreyer

I look forward to a continuation of those trends. Um, I'm going to kick it over to Paul just on the numbers. Um, great to see the leverage in the model. As we get closer to Q4, pivoting into EBITDA profitability, talk about any aspirations beyond that. Should we be expecting like some seasonal dips in confidence? Profitability or do you anticipate continuing to drive that positive EBITDA into future quarters? Thanks.

Paul Seamon

Thanks, Jason. To start out, we expect the third quarter to be the strongest sequential growth in terms of quarter to quarter, and that's driven by Westfall Gold and Masterworks. Seasonally, it's very strong for them in advertising and in fundraising. And then as we think about moving into fourth quarter, that has more moderate growth given that we have both Christmas and January falling in our fiscal year, which ends January 31st. And that's the seasonality we'd expect to see going forward with the business mix. So that'll carry over into next year. So there will be some up and downs quarter to quarter with third quarter generally being the strongest sequential growth. Also moving into the year for 2027, as we think about moving beyond adjusted EBITDA, our focus is also getting to pre-cash flow positives in the back half of the year.

So the combination of momentum and revenue, cost efficiency, being careful with the top and bottom line, sets us up for a good 2027.

Operator

Thank you. Our next question comes from Tim Wong with Citizens JMP. Please proceed.

Unknown Speaker

Hi, thanks for taking my questions. I wanted to ask about FDEs. You completed the acquisition of EMD and are acquiring the remaining stake in Midwestern, both of which expands your forward deployed capacity. I'm curious how you think about deployment and implementation as the bottleneck on AI and how much would you say you're winning because you have FDEs?

Patrick Gelsinger

Yes, it clearly is a key element of the uh offering for us. Midwestern is a great complement, because in many cases people just don't have the talent. And we have 1 of the best talent pathways, literally in the industry, much less in the faith and flourishing community. So having talent is a powerful enabler for us and we're finding more and more value. So if anything that business area is finding more attractive this to us, we have now added the international component. Brazil is another area, so we get lower costs, also co-locating with our customers in those locations. And then our 360 offering is entirely based on forward deployed engineering, where we are essentially becoming their CIO and CTO for those organizations, which, you know, them a skilling level they'd never be able to achieve themselves, which further accelerates their ability to drive their AI transformation.

So I'd say for Midwestern and 360 in particular, those are probably the most powerful areas. But then even areas like Servant are high-end consulting options. Is transformational for customers where literally we're like McKinsey for this ecosystem of being able to guide the transformative process, which today it's almost always driven by an AI model of how they can change their business operations in a pretty fundamental way. So those would be some of the examples, but, you know, forward deployed engineering is a key theme across all of those 3.

Unknown Speaker

Great. And as a follow-up, as you look at your M&A pipeline, I wonder if there's a piece of the full solution that isn't there yet. You spoke to an opportunistic approach, but, I'm curious whether that has to do more with the people and the relationships you can bring on board or if there are customers who maybe stop at 1 offering and don't go to 2 or have 2 offerings and don't go to 3, if there are reasons or gaps in your product solution that you think you could fill. Thank you.

Scott Beck

Yes, as we're looking at M&A pipeline, we're evaluating all those different components. We're looking at a number of different things. You know, 1 are capabilities. Are these incremental capabilities that we don't currently have that would be good capabilities to add? Definitely, number 1. Number 2, we're also looking at like... the customer base? You know, where are we at from a customer base standpoint? And is that a customer base that's important, you know, to be able to draft in? You know, you'll also find that certain of these organizations have, you know, more expertise, let's say in 1 area of um 1 of the denominational areas versus another. You may find somebody that's stronger in the Catholic market or stronger in more of a Southern Baptist market. So we're looking at it really from a number of different perspectives, capabilities, customer base, and then also what are the areas where they've they've found favor and how do those fit together and create greater synergies and further advance the flywheel that we find with M&A.

Patrick Gelsinger

Yes, maybe if I just add to that, the 2 examples that we touched on, I think really clarify your comments nicely, Scott. You know, EMD, we saw Workday and many of our customers. So we saw a Workday capability. And EMD was a perfect fit for Cedarstone. As we looked at that, we saw a huge synergy potential, particularly, you know, with our marketing offerings. So those 2 were driven by different reasons, but ones that, again, fit exactly what we said. We're enhancing our platform offerings and we're driving more synergy in the marketplace.

Operator

Thanks so much. Thank you. Ladies and gentlemen, this will conclude our Q&A session. I will pass it back to the CEO, Scott Beck, for closing remarks.

Scott Beck

Thank you, Operator. And thanks everybody for joining in today's call. I just want to make a few final comments before we close. First, super pleased with the progress that we're making. Just across the board, the maturity of the organization, the organizations that we're being able to acquire, just super pleased with the progress that we're making with that progress. And just a reminder, this is such a large fragmented market. Now, as I said earlier, it remains significantly underserved by technology. You know, our existing customers are growing and our verticals are continuing to expand.

The universities are a great example, you know. Now we're up to 40 that we're serving there. A lot of the expansion is being accelerated by these great capital partners that we've got out there. We couldn't be more proud of the capital partners in the organizations. We named quite a few today, but there's 15 more that are just doing a great job. They bring great expectations and trusted relationships. So from a business standpoint, the opportunity in front of us is really significant.

But there's another bottom line that matters to us as well. And that's the missional impact that these organizations that we work with are serving and helping every day. These organizations that we serve their changing lives every day. And it's really an honor to serve them. I can't say enough about the work that they do. In fact, if you look at it, faith aligned organizations are estimated to provide about 40% of the vital human services across large U.S. cities. A few examples the organizations that we serve.

The rescue missions that we serve had served over 10 million meals last year alone. These rescue missions, we serve some of the largest rescue missions in the United States. In addition, those same rescue missions are helping people escape from human trafficking. These are real stories of life change based on the organizations that we serve. The campus ministries that we serve are active on thousands of campuses throughout the United States, and they're reaching hundreds of thousands of students each year, being able to help them. The churches that we're serving are active in their communities as well. You know, it's not well known, but there's over 100,000 churches in the United States that have embedded recovery programs helping people find freedom from addiction.

And that's addictions all across the board. And that's why I'm so excited about what's happening here is both of the bottom lines. We have an opportunity to build a powerful, durable economic enterprise that creates great long-term value for our shareholders. And at the same time, we get to strengthen organizations that are transforming lives and making changes in communities every day. That's ultimately what Gloo is about, is building a strong economic enterprise that helps people flourish and helps these organizations thrive so that they can do more of what they're uniquely called to do. Thanks for taking time to join us today. May God bless you. May God bless the people that we serve and the organizations that we serve and also the work ahead of us.

Thank you for joining us today, and thank you, operator.

Operator

Thank you and this will conclude our conference. You may now disconnect.

This live transcript is auto-generated without human intervention or review.

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AEO Q2 2026 Earnings Call: Aerie Growth Drives Results and Outlook

Wed, 09 Sep 2026 23:40:33 +0000

Key Takeaways

AEO Inc. reported second-quarter 2026 revenue of $1.4 billion, up 8% year over year, with comparable sales growth of 6%.
Aerie and OFFLINE remained the main growth drivers. Revenue increased 25% to $536 million, while comparable sales rose 19% across apparel, intimates and activewear.
American Eagle revenue increased 1%, but comparable sales declined 1%. Men’s delivered its fourth consecutive quarter of positive comps, while women’s denim improved sequentially.
Operating income reached $211 million, including a $161 million net benefit from tariff refunds. Gross margin expanded 980 basis points to 48.7%, also benefiting from the refunds.
Management expects third-quarter comparable sales to rise in the mid- to high-single digits, with Aerie and OFFLINE up in the high teens to 20% range and American Eagle approximately flat.
Full-year operating income is projected at $540 million to $550 million, based on mid-single-digit consolidated comparable sales growth.

Key Financial Results

Metric	Q2 2026 result	Year-over-year change / details
Consolidated revenue	$1.4 billion	Up 8%
Comparable sales	—	Up 6%
Gross profit	$672 million	Up 34%
Gross margin	48.7%	Up 980 basis points
Tariff refund benefit in gross profit	$179 million	Added 1,300 basis points to gross margin
Merchandise margin	—	Down 330 basis points
SG&A rate	29.6%	Up 290 basis points; dollars increased 19%
Operating income	$211 million	Versus $103 million; included a $161 million net tariff refund benefit
EPS	$0.79	—
Inventory cost	—	Up 14%; units up 9%
Capital expenditure	$66 million	—
Cash returned through dividends	$21 million	—
Cash and investments	$148 million	Quarter-end
Total liquidity	$783 million	Including the revolver

Business and Operating Performance

Aerie and OFFLINE

Aerie and OFFLINE generated broad-based growth across stores, digital channels and product categories. Total revenue rose 25% to $536 million, and comparable sales increased 19%.

Demand was strong in core apparel, intimates and activewear. Management highlighted momentum in T-shirts, tanks, fleece, bottoms, OFFLINE’s Cloud Fleece franchise, sports bras and active bottoms. The Float bra collection added a lightweight option alongside Aerie’s structured bra products.

Aerie’s customer base continued to expand. The company nearly doubled the size of its advocate program during the quarter, while customer spending increased by double digits. Management said Aerie’s brand awareness was approximately 59%, compared with roughly 76% for American Eagle, leaving additional room to reach new customers.

American Eagle

American Eagle revenue grew 1%, while comparable sales declined 1%, an improvement from the first quarter. Men’s posted a fourth consecutive quarter of positive comparable sales, led by strength across bottoms categories.

Women’s fashion bottoms, including cargo styles, performed positively. New denim fits such as wide-leg straight and low-rise styles gained acceptance, but the company is still rebalancing older fits and clearing selected seasonal merchandise. Shorts were identified as the largest area of seasonal inventory pressure.

AEO is shifting American Eagle marketing spending from brand-awareness campaigns toward digital and performance marketing intended to support conversion. Management is also focused on store traffic and conversion as key indicators of the brand’s recovery.

Management Guidance

Period	Management outlook
Q3 comparable sales	Mid- to high-single-digit growth
Q3 Aerie and OFFLINE comps	High teens to approximately 20% growth
Q3 American Eagle comps	Approximately flat
Q3 gross margin	Similar to last year
Q3 operating income	$110 million to $115 million
Q3 SG&A	Up in the high-single digits
Full-year comparable sales	Mid-single-digit growth
Full-year operating income	$540 million to $550 million
Full-year gross margin	Up year over year

Management said quarter-to-date trends were consistent with the third-quarter brand guidance. It expects Aerie to sustain strong merchandise margins, while American Eagle’s margin performance should improve from the first half but continue to include markdown allowances for inventory rebalancing.

For the fourth quarter, management expects modest gross-margin improvement under its current assumptions. The outlook incorporates the Section 301 tariff rates implemented in late June.

Risks and Watchpoints

American Eagle continues to face markdown pressure from seasonal inventory and selected fashion products.
Management reduced its back-half assumptions for American Eagle from low-single-digit comparable sales growth to approximately flat performance.
Inventory costs increased 14%, compared with a 9% increase in units, partly reflecting incremental tariffs.
The company included allowances for possible freight and fuel surcharges, noting uncertainty associated with oil prices.
Fourth-quarter tariff costs could change if tariff rates increase beyond the company’s current 12.5% assumption.
Aerie’s faster growth creates a sales-mix effect that can limit consolidated income gains relative to comparable-sales growth.

Analyst Q&A Highlights

American Eagle denim: Management said women’s denim improved sequentially after the assortment shifted toward low-rise and other fashion fits. Older fits and seasonal inventory still need to be cleared.
Aerie momentum: Quarter-to-date performance remained in the high teens to 20% comparable-sales range. Management cited strength across apparel, intimates, activewear, stores and digital channels.
Channel trends: Aerie was positive across both stores and online. At American Eagle, digital remained stronger, while stores improved from the second quarter but continued to trail the brand average.
Margin outlook: Aerie maintained strong merchandise-margin performance. American Eagle’s third-quarter assumptions include markdown coverage, while buying and occupancy costs are expected to perform similarly to the second quarter.
Path to renewed American Eagle growth: Management identified product strategy, store traffic, conversion and performance marketing as the main operational priorities. Inventory will be planned prudently to preserve the ability to respond to emerging trends.
Aerie intimates opportunity: Management plans further bra innovation and sees potential in coordinated sets and matching apparel, which can support more complete customer outfitting.

Full Earnings Call Transcript

Complete Earnings Call Transcript

Management Remarks

Operator

Good afternoon everyone. Welcome to the AEO Inc. Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Alexis Tragos, Vice President of Corporate Communications. Please go ahead.

Alexis Tragos

Good afternoon, everyone. Joining me today for our prepared remarks are Jay Schottenstein, Executive Chairman and Chief Executive Officer; Jen Foyle, President, Executive Creative Director for American Eagle and Aerie; Ravi Thanawala, Chief Financial Officer; and Mike Mathias, Strategic Adviser.

Before we begin today's call, I need to remind you that we will make certain forward-looking statements. These statements are based upon information that represents the company's current expectations or beliefs. The results actually realized may differ materially based on risk factors included in our SEC filings. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. You can find our second quarter investor presentation on our corporate website at www.aeo-inc.com in the Investor Relations section.

Now I'll turn the call over to Jay.

Jay Schottenstein

Thanks, Alexis, and good afternoon, everyone. The second quarter represented another important step forward for AEO. We built on the strength of our portfolio, making progress at American Eagle while Aerie continues to deliver outstanding performance. The second quarter came in at the high end of our expectations, with revenue of $1.4 billion and comparable sales growth of 6%. Operating income of $211 million included a net tariff refund benefit of approximately $161 million.

We remain focused on driving stronger profitability across the business and these results underscore the strength and relevance of our brands and the progress against our priorities. At Aerie, which includes off-line, momentum continued. Aerie delivered revenue of 25% total growth and comparable sales grew 19%, reflecting the broad-based demand across categories and channels. We remain confident in the long-term opportunity for Aerie and our ability to reach new customers.

Turning to American Eagle. Total revenue grew 1% with comps declining 1%. The an improvement from the first quarter. AE men's posted its fourth consecutive quarter of positive comps, signaling continued traction and relevance. We are moving in the right direction, yet there remains work to do. Our progress is fueled by our people. I'd like to extend my gratitude to our associates for their relentless dedication and commitment to our brands and customers.

Before I turn it over to Ravi, I want to take a moment to thank Mike for his many years of service to AEO. Mike has been and will continue to be a trusted partner to me and I'm greater leadership his commitment in the many contributions he has made to our business over the years. I'm also very pleased to welcome Ravi to the team. He brings comprehensive financial and operating expertise a fresh perspective and a deep understanding of what drives long-term shareholder value. As we look at the opportunities ahead, I'm excited about the breadth of our experience and judgment he brings to the team as we work together to make AE a stronger, more productive business over time.

Now I'll turn the call over to Ravi.

Ravi Thanawala

Thank you, Jay. I'm excited to step into the CFO role. I've been at AEO for just a few weeks, so I'm spending a great deal of time listening, learning and getting to know the business and team. What I try to mean to AEO was the strength of the brands, the connection to its customers and the opportunity I see to create meaningful long-term value for shareholders. I'll be focused on driving durable value creation by connecting brand growth with disciplined execution, stronger profitability and the thoughtful allocation of resources. Those are the areas where I'm spending time on with Jay and the leadership team as I get deeper into the business.

It's still early, and I want to be thoughtful about drawing conclusions. However, I'm excited by the opportunity I see at AEO and look forward to sharing more about my perspective and priorities over time. I also wanted to thank Mike and the entire finance team for the support they have given me to redistribution. Mike has been extremely generous with his time and his knowledge of AEO, and I'm grateful to have the benefit of his experience and perspective. Given how recently I joined the company, Mike will be taking you through the details of the second quarter results and the outlook. I have spent considerable time with Mike and team reviewing the outlook and the assumptions supporting it. I'm comfortable with the company's expectations for the balance of the year.

Now I'd like to turn the call over to Jen.

Jennifer Foyle

Thank you, Ravi, and good afternoon, everyone. Before I get into the brand details, I want to share my appreciation to our entire organization. Their passion for our brands, our products and our customers shows every day, and I'm proud of the work they are doing. Aerie and OFFLINE delivered another outstanding quarter with broad strength across the business and tremendous response from our customers. At American Eagle, we made progress during the first quarter with continued strength in men's. There's still work to do, and I'm encouraged by the opportunity ahead.

Turning first to Aerie and OFFLINE. We delivered another exceptional quarter Comparable sales increased 19% and total revenue grew 25% to $536 million. What I'm most excited about is the breadth and quality of that growth. We saw strength across channels and categories with growth in core apparel, intimates and activewear. There was a consistent demand in aerie, apparel in teas, tanks, fleece and bottoms. Head-to-toe outfitting curated monthly drops, sleep to street and wear now fabrications resonated with our customers, mix and match, summer brights, strikes and a little leopard all words.

We are also pleased with continued growth in OFFLINE's cloud lease franchise, sports roads and incredibly strong results across bottoms. I love seeing this breadth because it tells us the customers responding to the complete lifestyle offering, not just one category or one trend. Our core intimates business also remained strong throughout the quarter. we continue to win with what Aerie has stood for from the beginning, Real Comfort. Customers responded to our focus on fabrication and the 20 years of Happy Body's anniversary campaign. In July, we also introduced our new float bra collection designed for waitless feel, Float complements our structured bra franchise and gives customers a new way to experience Aerie's signature comfort.

Our customer base continues to grow. We are expanding the Aerie community and deepening their engagement with us. Our Aerie real makers continue to be an important part of that connection. Across the quarter, we nearly doubled the size of the ADVOCATE program and found fresh new ways to bring new customers to the brand and engage them. As we move into the third quarter, we are doing something I love to see we are comping the comp. We are sustaining growth against increasingly strong comparisons and seeing strength across categories while continuing to expand our customer base.

So now turning to American Eagle. We are seeing steady traction as we actively work to refine our strategies. We delivered sequential improvement from the first quarter, yet there is opportunity to build on our progress and further accelerate our performance. Men's continues to deliver as we posted our fourth consecutive quarter of positive comps. Growth was driven by strength across all bottoms categories with tops continuing to meet our expectations. This demonstrates that our focus and strategies to restore top line growth in the AE men's business is paying off.

In women's, customers responded well to our focus on outfitting particularly pairing tiny tops with oversized bottoms. We leaned into the cargo trend and fashion bottoms performed positively. In women's denim, new fashion fits, including wide leg straight and low rise gained strong acceptance. And moving forward, we recognize where there is still opportunity to restore consistent growth across categories. AE's brand awareness and cultural significance remains strong. and the active customer file continues to grow.

Our marketing strategies are built on multiple touch points, tapping into differing interests, rituals and experiences. We have strategically invested in our presence at the mall as a place to shop, gather and connect on campus with our sorority partners to own a stake in Rush talk and in sports on the biggest stage of the year with global brand ambassador, Lamine Yamal. We spent the last 4 quarters investing in brand awareness to drive purchase consideration and now we are shifting our marketing dollars into conversion driving tactics. Ultimately, this is about showing up for our customers during their biggest moments, building their wardrobes while building our community.

And looking ahead to the second half of this year, our strategic priorities across AEO are clear: deliver best-in-class products, maintain our investment in marketing tactics that drive conversion remain focused on our inventory management and improved margin health. We are also making strategic investments in product and marketing as we build towards AEO's 50th anniversary in 2027. We entered the third quarter with momentum in Aerie and OFFLINE, a game plan to make clear improvements in American Eagle and a highly engaged customer community across all brands. And I'm excited about what the brands can accomplish together.

Aerie's consistent growth, the opportunity we see in off-line and American Eagle deep customer relationships give us multiple ways to serve our customers across more categories, occasions and moments in their lives. Each brand has its own identity and distinct opportunities. Together, they give AEO springboard to grow. We have talented teams across our stores, distribution centers and corporate offices bringing these brands to life every day, and I have tremendous confidence in what we can achieve together. Thank you, all of our associates for all of your hard work.

With that, I'll turn the call over to Mike.

Mike Mathias

Thanks, Jen, and good afternoon, everyone. Driven by strong momentum across Aerie, our second quarter revenue and operating income hit the top end of our guidance. As you heard from Jay and Jen, we're zeroed in on opportunities for the AE brand. and are continuing to fuel Aerie's exceptional growth. I'm going to take you through the financial results, including the impact of the tariff refunds recognized in the quarter and then discuss our outlook for the balance of the year. Our reported results include the impact of tariff refunds.

Second quarter consolidated revenue of $1.4 billion increased 8% to last year with comparable sales growing 6%. Aerie's strong business continued with total sales growing by 25% and comparable sales up 19% with growth across [indiscernible]. A total sales increased 1%, with comparable sales declining 1%. Gross profit dollars of $672 million rose 34% from last year and gross margin of 48.7% increased 980 basis points. Included in gross profit this year is a net benefit of $179 million related to tariff refunds, which drove 1,300 basis points of the gross margin expansion. Merchandise margin deleveraged 330 basis points with improvement in Aerie, offset by markdowns in AE, as we previously guided to for the second quarter.

SG&A dollars increased 19% and 290 basis points to a rate of 29.6%, inclusive of $18 million of incentive expense attributable to tariff refunds. The remaining increase is primarily a result of planned investments in advertising. Depreciation decreased slightly year-over-year at $52 million compared to $55 million last year. We recorded a second quarter operating profit of $211 million compared to $103 million last year. Included in operating profit this year is a net benefit of $161 million related to tariff refunds.

Interest expense increased primarily due to the sale of tariff claims as discussed last quarter. Other income increased due to unrealized gain on equity method investments. The second quarter tax rate was approximately 25% and EPS was $0.79. Consolidated inventory cost was up 14% with units up 9%. The increase in costs includes the impact of incremental tariffs this year. Unit inventory plans will continue to be rebalanced between brands and categories for the remainder of the year.

In the second quarter, as Jay noted, we continue to make long-term investments in our business while returning cash to shareholders. Second quarter CapEx totaled $66 million, and the company returned $21 million to shareholders during the quarter via the quarterly dividend. We ended the quarter with approximately $148 million in cash and investments, and $783 million of total liquidity, including our revolver.

Before turning to our outlook, I want to note that Ravi has been engaged with the team reviewing our plans and expectations for the balance of the year. The outlook I'll discuss today reflects the company's current expectations. For the third quarter, we expect comparable sales growth in the mid- to high single digits with Aerie and OFFLINE continuing in the high teens to 20% range and American Eagle approximately flat.

Gross margin is expected to be similar to last year with full year gross margin up year-over-year. Operating income for the third quarter is expected to be in the range of $110 million to $115 million with SG&A expense up in the high single digits. The tariff rate assumption for the rest of the year reflects the Section 301 tariffs implemented in late June. For the full year, we expect operating income in the range of $540 million to $550 million based on consolidated comparable sales growth in the mid-single digits.

In closing, we're committed to building on the momentum in area offline, accelerating improvement at America Eagle and unlocking greater profitability across the business. With that, we'll open it up to questions.

Operator

[Operator Instructions] The first question is from Jay Sole with UBS.

Question-and-Answer Session

Jay Sole

Great. Jen, I want to ask you about the women's denim business at American Eagle. Can you just maybe dive into that a little bit more, tell us about how that business developed over the quarter? What you see happening in Q3 just from a sales standpoint and kind of what's driving that and the opportunity for continued progress from here? And then also maybe -- and second part to that question is you talked a little bit about third quarter. I think you said you've seen trends continue. If you can sort of clarify that a little bit. I mean, where do you see Aerie so far in Q3? And how is that factored into your guidance? Same question for both brands.

Jennifer Foyle

Look, we're seeing sequential improvement in denim. Sorry, I have a little bit of a cold. So just -- but we are seeing sequential improvement. As I mentioned in my last earnings call, we definitely need to pivot. We needed to pivot and we pivoted quite nicely into the fit that we're working 100%. Really, it was low rise that we really want to get into that business. And as you saw that, that was our marketing launch for back-to-school. So really excited about how we reposition denim.

What we are needing to work through right now is just some of the older fits and really just rebalancing our inventory. It's as simple as that. And our numbers reflect the guide in AE. As we look to Aerie, I mean we continue to launch new ideas in Aerie. All categories are working. All categories are firing. We can't ask for more. I mean these numbers -- we're proving, I love what I said, right? We're proving we can comp the comp. And I think the team is really geared up for holiday. We're seeing a nice continuation of the sales comp again reflected in the guide.

And with all our new launches, we relaunched our booty campaign, our Andes campaign, intimates is gaining share. Our float bra launch, we're going to really work on bra innovation. That's a new playbook for us or we're going to reinvigorate it because we're excited about some new ideas in broad. I think we're really going to compete on that end with really launching ideas that I think our customers are going to really embrace. So some new ideas that are coming your way and that will build into next year.

And then, of course, apparel. Apparel has been really on fire. The numbers are incredible and they like completing the output, right? We're building them from inside out, and that's what we do in Aerie, and off-line certainly has seen incredible growth as well.

Operator

The next question is from Matthew Boss with JPMorgan.

Amanda Douglas

It's Amanda Douglas on for Matt. And could you speak to the difference in merchandise margin performance within the quarter with improvement at Aerie offset by the American Eagle brand? And what are you specifically seeing on markdowns by brand entering back to school?

Jennifer Foyle

Sure. We've seen a little pressure, as Mike mentioned, on seasonal ideas in AE. So we continue to see a little of that pressure as we go into Q3. So we're working through that, again, rightsizing our inventory. And Aerie has been doing an outstanding job leveraging this customer base. That's growing our brand awareness. That's another thing that I didn't mention in my last answer, the brand awareness in Aerie. We're feeling at 59%, albeit it's growing. There's still a lot of opportunity for runway and Aerie. But pivoting back like as we think about the promotional cadence, Aerie has done a really nice job balancing out their promotions, leveraging the newness, they've been doing new drops, and we've been easily able to reconstruct the promotion activity between brands so that we're balancing this out.

Operator

Next question is from Kelly Crago with BMO Capital Markets.

Kelly Crago

So just wanted to dig in a little bit further on the third quarter comp guide up mid to high. If you could just break out expectations by brand? And any color again more explicitly about what you're seeing quarter-to-date at the 2 bars. I think then you're speaking to some maybe higher promos at Eagle than you were anticipating and how that might impact the margins in the third quarter?

Jay Schottenstein

Kelly, I can take that Jen mentioned in our prior answer that comp guidance by brand is in line with where we are quarter-to-date. So AE relatively flat. So some sequential improvement from what we just reported for area in the high teens to 20%, again, similar to what we just reported in Q2. So the trend continues there. And also, as Jen said, I mean, comping the comp and actually maintaining comp trend against tougher compares, which is what the team has been going after. So we have a good proof point here quarter-to-date in are on that front.

And then, yes, the merch margin performance in Q2 and some of the markdowns in AE that we guided to back in May. -- alongside our $45 million to $50 million guidance. Those did come through kind of in line with expectations and resulting in us hitting that high end of our operating guide. And then for Q3, we do have -- as Jen said, we're still looking to rebalance some inventory. We have some markdowns in the Q3 merch margin guide for some potential markdowns as we go through that work, and that's covered in our gross margin guide of relatively flat for the third quarter, and Aerie is continuing its nice performance there on the merch margin line. So again, a little bit of a mixed brand outfit where Aerie is maintaining strength in margin definitely getting back to some strength, but we do have a little bit of markdown coverage for some of this inventory work that still needs to be done.

Kelly Crago

Got it. And then just -- just my understanding with the tariff refund, I noticed you said something about -- I mean, that you're accruing some higher incentive comps here. Can you just kind of walk through how that plays out in the high single-digit SG&A guide, I think is for 3Q apologies if I'm missing some of the details here, is that like related to the higher intensive comp marketing, anything else there? And then how does this sort of play in the fourth quarter as well? And that's all I got.

Jay Schottenstein

Sure. Yes, we did book in the second quarter against tariff refunds, some incentive comp commensurate with as the refund in line with our full year income targets tied to those incentive plans the accrual for the back half, third and fourth quarter, I think I've guided to it now back in March and then again in May that that's more -- that elevated accrual is up against more because it's up against a lower than historical result last year. So this paper on in terms of that accrual is kind of more average or more historical the impact of -- there's no impact in the third and fourth quarter to anything tied to refunds. So that was isolated against the refund benefit that we saw in the second quarter. Any kind of incremental number.

So the back half SG&A, we guided third quarter up high single. That includes, again, the impact of that more historical or average incentive accrual versus the lower accrual in history last year. And with the rest of the line advertising, relatively in line as a rate of sale in the third quarter, some leverage in the fourth quarter. As we pass through -- look at SG&A on a go forward on a 12-month basis, advertising, we're lapping this elevated spend as of this quarter, as we look forward on a go-forward basis, advertising will be a leverage line item into 2027. And as we normally get past the next couple of quarters, with a bit of an apples and oranges incentive accrual impact, that will also be a leverage line item as we go into 2027.

Yes. In both brands, we're very excited about. Obviously, the brand held for both brands has been extremely positive. So let's start with that. So what we're working on the American Eagle side is really converting those customers and entertaining them. and we're very focused on getting them to stores. This is when we really gear up. I do think long legs are going to build into the -- into Q3 and into Q4. So with AE, that should be hopefully positive and some optimism there. Again, still 8 weeks ago in this quarter, but we're not into full long length yet either. So I think we have some opportunity there.

The key items that the teams have worked through, the new ideas, all of our fund it is that we do during the holiday season in both brands, I think, really going to excite the customer there. Color, optimism, fun, Aerie is going to continue to do its drops as well as AE. All the newness tracks nitrate have been working. It's new ways to reengage our customers and get them into the stores. And I think we have a lot brewing for the holiday season.

Jungwon Kim

Just one more follow-up, Jen, on the Aerie side. Any color on how intimates perform and how you feel about those sort there?

Jennifer Foyle

Very nicely. We're exciting what we're seeing in intimates. There was some market share gain. And we're really focused on newness and broad as we move forward. Sports broads have been working other bras. We really want to gain credit for all the innovation we do in our core bras. And I think there'll be a lot of work and some new innovation that you'll see on the go forward. Keeping in mind, as we had to keep you into Q4, we definitely dive into other categories as well. It's a gift-giving season, and I think Aerie does it best. .

Operator

Next question is from Adrienne Yih with Barclays.

Angus Kelleher-Ferguson

Find out more

Limoneira (LMNR) Fiscal Q3 2026 Earnings Call: EBITDA Rises, Avocado Guidance Raised

Wed, 09 Sep 2026 21:40:52 +0000

Key Takeaways

Fiscal Q3 2026 net revenue declined to $43.8 million from $47.8 million, primarily due to the transition of citrus brokerage operations to Sunkist.
Adjusted EBITDA increased to $3.9 million from $3.0 million. SG&A expenses fell by $1.0 million to $4.0 million as Limoneira advanced toward its targeted $10 million in annual savings.
Fresh lemon sales rose to $27.3 million as average pricing increased to $19.88 per carton, although volume declined to 1.373 million cartons.
Limoneira raised fiscal 2026 avocado volume guidance to 7.0–7.25 million pounds, from 5.5–6.5 million pounds, after selling approximately 7.0 million pounds in the third quarter.
Management lowered fresh lemon volume guidance to 4.0–4.25 million cartons, citing excess Argentine imports that pressured both sales volume and pricing.
The company expects fiscal 2027 avocado production to exceed 10 million pounds, at least 30% above fiscal 2026, supported by acreage planted in 2023 and 2024.

Key Financial Data

Metric	Fiscal Q3 2026	Fiscal Q3 2025	Change or context
Net revenue	$43.8 million	$47.8 million	Down $4.0 million
Agribusiness revenue	$42.2 million	$45.9 million	Lower citrus brokerage revenue
Fresh lemon sales	$27.3 million	$23.8 million	Higher average pricing
Fresh lemon volume	1.373 million cartons	1.397 million cartons	Lower volume
Average lemon price	$19.88 per carton	$17.02 per carton	Net of Sunkist marketing fees in Q3 2026
Avocado volume	7.0 million pounds	5.7 million pounds	Higher production volume
Average avocado price	$1.15 per pound	$1.50 per pound	Lower year over year
SG&A expenses	$4.0 million	$5.0 million	Lower salaries, benefits and selling expenses
Operating loss	$3.0 million	$0.6 million	Included Windfall Farms asset impairment
Net loss attributable to common stock	$3.0 million	$1.0 million	Diluted EPS of $(0.17) versus $(0.06)
Adjusted diluted EPS	$0.02	$(0.02)	Adjusted net income versus adjusted loss
Adjusted EBITDA	$3.9 million	$3.0 million	Increased $0.9 million

As of July 31, 2026, long-term debt excluding the current portion was $100.7 million, compared with $72.5 million at fiscal year-end 2025. Cash and equivalents were $2.2 million, versus $1.5 million.

Business and Operating Performance

The Sunkist transition eliminated orange and specialty citrus revenue and reduced brokered lemon sales. These effects were partly offset by higher fresh lemon pricing and carton sales. Limoneira recorded no orange revenue in the quarter, compared with $1.7 million a year earlier, while brokered lemon and other lemon sales fell from $3.8 million to an immaterial amount.

Avocado volume increased sharply, including fruit intentionally held back from the second quarter. The benefit was partially offset by the decline in average pricing to $1.15 per pound from $1.50.

Limoneira expects 400 acres planted in 2023 and 2024 to begin contributing in fiscal 2027. Another 400 non-bearing acres are expected to start producing over the next two to four years.

The company entered a 50-50 organic recycling joint venture with Agromin. Management said the planned facility could process up to 290,000 tons of organic waste annually and is expected to begin operating in the second half of fiscal 2027.

Limoneira also agreed to sell Windfall Farms for $15 million in cash, with closing expected on September 14, 2026, subject to customary conditions. The proceeds are intended for debt reduction and continued avocado acreage expansion. Limoneira will continue farming the property for $200,000 annually plus reimbursement of property expenses.

Management Guidance

Fiscal 2026 fresh lemon volume: 4.0–4.25 million cartons.
Fiscal 2026 avocado volume: 7.0–7.25 million pounds, raised from 5.5–6.5 million pounds.
Fiscal 2027 avocado volume: more than 10 million pounds and at least 30% growth from fiscal 2026.
Fiscal Q4 2026: management expects positive adjusted EBITDA and a water-rights monetization event.
Fiscal 2027: management expects meaningfully stronger EBITDA, supported by avocado growth, the full benefit of cost savings, Sunkist packing optimization and an anticipated $4 million of additional operating improvements.

The company has identified more than $200 million of real estate development assets, non-strategic land and water rights for potential monetization. Management also expects approximately $180 million of total proceeds from Harvest at Limoneira, Limoneira Lewis Community Builders II and East Area II over seven fiscal years. Of that amount, $25 million was received in fiscal 2024 and fiscal 2025, leaving an expected $155 million over the next five fiscal years.

Risks and Watchpoints

Unexpected Argentine lemon imports oversupplied the U.S. market after South African supply pressured Western European prices. Management said this reduced Limoneira’s lemon volume and pricing. Prices have begun to firm, but the company remains cautious about pushing additional supply into the fiscal fourth quarter.

Fiscal 2027 avocado output remains dependent on fruit growth, retention and weather conditions. Management specifically cited wind and other weather-related events as risks. Heavy California rainfall could support aquifers and tree health, but concentrated rainfall could cause flooding.

Long-term debt increased materially from fiscal year-end 2025. Planned debt reduction partly depends on the completion of asset sales and monetization transactions.

Analyst Q&A Highlights

Management attributed the lemon shortfall primarily to Argentine fruit diverted into the U.S. after Western Europe became oversupplied with South African lemons. The company expects pressure to ease as imported supply declines, although the effects have not fully cleared.

On water monetization, management said the process remains on track. Limoneira has removed lemon production in Arizona and is identifying lower-water-use replacement crops, which could free Colorado River water rights for long-term conservation programs serving municipal users.

Regarding fiscal 2027 avocado production, management said a large crop is already visible on trees, supporting confidence in the more-than-10-million-pound target. However, the company cautioned that production is not guaranteed because the fruit must remain on the trees and withstand weather before harvest.

Full Earnings Call Transcript

Complete Earnings Call Transcript

Management Remarks

Operator

Thank you. Good afternoon, everyone, and thank you for joining us for Limoneira's Third Quarter Fiscal Year 2026 Conference Call. On the call today are Harold Edwards, President and Chief Executive Officer, and Greg Hamm, Chief Financial Officer. By now, everyone should have access to the third quarter fiscal year 2026 earnings release, which went out today at approximately 4 p.m. Eastern time. If you've not had a chance to view the release, it's available on the investor relations portion of the company's website at Limoneira.com. This call is being webcast and a replay will be available on Limoneira's website as well. Before we begin, we'd like to remind everyone that prepared remarks contain forward-looking statements and management may make additional forward-looking statements in response to your questions. Such statements involve a number of known and unknown risks and uncertainties, many of which are outside the company's control and could cause its future results, performance, or achievements to differ significantly from results, performance, or achievements expressed or implied by such forward-looking statements.

Important factors that could cause or contribute to such differences include risk detailed in the company's Form 10-Qs and 10-Ks filed with the SEC and those mentioned in the earnings release. Except as required by law, we undertake no obligation to update any forward-looking or other statements herein, whether a result of new information, future events, or otherwise. Please note that during today's call, we'll be discussing non-GAAP financial measures, including results on an adjusted basis. We believe these adjusted financial measures can facilitate a more complete analysis and greater understanding of Limoneira's ongoing results of operations, particularly when comparing underlying results from period to period. We have provided as much detail as possible on any items that are discussed on an adjusted basis. Also, in the company's earnings release and in today's prepared remarks, we include adjusted EBITDA and adjusted diluted EPS, which are non-GAAP financial measures. A reconciliation of adjusted EBITDA and adjusted diluted EPS to the most directly comparable GAAP financial measures are included in the company's press release, which has been posted to our website.

And with that, it is my pleasure to turn the call over to the company's president and CEO, Mr. Harold Edwards.

Harold Edwards

Thanks, John, and good afternoon, everyone. During the third quarter, we continued to make progress on our value creation strategy of growing long-term agricultural income, which includes streamlining operations, expanding avocado production, optimizing lemon packing with recently announced Sunkist partnership, and expanding our organic recycling facility. In addition, we have identified real estate development and non-strategic land assets and water rights of over $200 million. The third quarter results came in below our expectations due to lighter than anticipated lemon sales volume. However, adjusted EBITDA exceeded prior year third quarter results. The quarter benefited from higher total agribusiness operating income driven by stronger than expected avocado volume and progress toward our targeted $10 million in annual selling, general and administrative expense savings. We now expect to achieve the lower end of our lemon volume guidance as a result of higher lemon imports hitting the U.S. market.

However, we are again raising our avocado volume guidance for fiscal year 2026. Looking ahead, we expect to produce more than 10 million pounds of avocados in fiscal year 2027, an increase of approximately 30 percent over fiscal year 2026. This growth is driven by the 400 acres of avocados we planted in 2023 and 2024, which are expected to set a crop this year and contribute to volume in fiscal year 2027. We also have an additional 400 non-bearing acres that are expected to begin bearing in the next two to four years. As a reminder, California avocados command premium pricing due to the superior quality, and our strategic location provides logistical advantages to the highest per capita consumption markets in the U.S. Turning to the monetization of non-strategic assets, we expect the sale of Windfall Farms for $15 million to close on September 14, 2026, which is the most recent step in our ongoing strategy to monetize non-strategic assets, strengthen our balance sheet, reduce debt, and redeploy capital into higher return opportunities across our core agribusiness and real estate platforms. As we enter the fiscal fourth quarter, we expect another quarter of positive adjusted EBITDA and additional asset monetization events.

Regarding our water rights monetization, we've taken decisive steps in Arizona, ceasing citrus farming operations on 600 acres of lemons to focus on water monetization by farming low-water use crops, which we anticipate will make this asset significantly more profitable. We expect a monetization event from our Class III Colorado River water rights in 2026. Additionally, our Santa Paula Basin conserved pumping rights represent high-value, non-operational resources that we can convert to cash while maintaining our agricultural operations. Looking into fiscal year 2027, we are well positioned to achieve meaningfully stronger EBITDA. This includes the benefit from our recently signed 50-50 organic recycling joint venture with Agromin to create a potential high return facility with the capacity to process up to 290,000 tons of organic waste annually. This is expected to generate significant shared earnings when the facility becomes operational in the second half of fiscal year 2027. With a dramatic increase in our avocado volume from the additional acreage that was planted in 2023 and 2024, realizing the full benefit from our current cost savings initiatives, optimizing lemon packing with our transition to Sunkist, and an additional $4 million in anticipated operating improvement due to Windfall Farms management, improved lemon storage margins, and improved lemon logistics. Turning to our real estate development project, Harvest at Limoneira, we continue to expect future proceeds from Harvest, Limoneira Lewis Community Builders II and East Area II to total $155 million over the next five fiscal years.

Home sales for phase two continued to be robust with two to seven homes per week being sold. Phase three of the project consists of approximately 500 home lots, and we believe we will go to market with this phase in fiscal year 2027. In addition, we have 300 apartments approved and expect to break ground on this portion of the project in the second half of fiscal year 2027. Part of our real estate development is a 25-acre East Area II medical pavilion project that we believe could begin to be monetized in fiscal year 2026. Additionally, we have Leoncito Del Mar, our 221-acre agricultural infill property, which represents a strategic asset with potential for residential development and significant long-term value creation. In summary, as we enter the fourth quarter of fiscal year 2026, we believe we are very well positioned to achieve positive adjusted EBITDA and monetize one of our water assets in the quarter and continue building the foundation for sustained profitability. We've transformed our cost structure, focused our revenue streams, optimized our asset base, and positioned ourselves for sustainable EBITDA growth.

I believe the items just discussed have us very well positioned to unlock the tremendous asset value at Limoneira. Now let me turn the call over to Greg for the financial details, and then we'll take your questions. Thank you.

Greg Hamm

Thank you, Harold, and good afternoon, everyone. I'm pleased to be speaking with you today to discuss our third quarter fiscal year 2026 financial results. As we discussed last quarter, the third and fourth quarters were expected to be our seasonally stronger periods under the Sunkist Agreement, and our third quarter results are tracking in line with that expectation. Total net revenue for the third quarter of fiscal year 2026 were $43.8 million compared to $47.8 million in the third quarter of fiscal year 2025. Agribusiness revenues totaled $42.2 million compared to $45.9 million in the prior year third quarter. Other operations revenue was $1.6 million compared to $1.5 million in the prior year third quarter. The year-over-year decrease was primarily due to the transition of our citrus brokerage operations to Sunkist, which eliminated orange and specialty citrus revenues and decreased brokered lemon and other lemon sales, partially offset by increased fresh lemon and carton sales driven by higher pricing.

Additionally, avocado revenues decreased due to lower prices, partially offset by higher volume of avocados sold compared to the prior year third quarter. Fresh lemon carton sales were $27.3 million in the third quarter of fiscal year 2026, compared to $23.8 million in the same period last year. We sold approximately 1,373,000 cartons of fresh lemons at an average price of $19.88 per carton during the third quarter of fiscal year 2026, compared to 1,397,000 cartons at $17.02 per carton in the prior year third quarter. Fresh lemon carton sales and per carton prices for the third quarter of fiscal year 2026 are net of the Sunkist marketing fee. Brokered lemons and other lemon sales were immaterial in the third quarter of fiscal year 2026, compared to $3.8 million in the third quarter of fiscal year 2025. Turning to avocados, through the first nine months of fiscal year 2026, we sold approximately 7.3 million pounds of avocados, exceeding the high end of our previous full-year guidance range of 5.5 million to 6.5 million pounds. In the third quarter of fiscal year 2026, we sold approximately 7 million pounds at an average price of $1.15 per pound compared to 5.7 million pounds at $1.50 per pound in the prior year period.

The increase in volume includes some of the harvest we intentionally delayed from the second quarter to maximize pricing and reflects the alternating high and low production years that are typical of the California avocado crop, partially offset by lower average pricing this quarter compared to the prior year. There was no orange revenue in the third quarter of fiscal year 2026 compared to $1.7 million in the same period last year, and no specialty citrus and wine grape revenue compared to $600,000 in the third quarter of fiscal year 2025, both due to the transition of our citrus brokerage operations to Sunkist. Total costs and expenses in the third quarter of fiscal year 2026 were $46.8 million compared to $48.1 million in the third quarter of last fiscal year, primarily driven by a decrease in agribusiness costs and lower selling, general and administrative expenses partially offset by impairment of assets related to Windfall Farms. Selling, general and administrative expenses were $4 million compared to $5 million in the third quarter of fiscal year 2025, primarily reflecting lower salaries, benefits, and other selling expenses related to the Sunkist transition. Operating loss for the third quarter of fiscal year 2026 was $3 million, compared to an operating loss of $600,000 in the prior year period. This reflects the revenue and cost factors just described. Net loss applicable to common stock after preferred dividends was $3 million, or 17 cents per diluted share, in the third quarter of fiscal year 2026, compared to a net loss applicable to common stock of $1 million, or 6 cents per diluted share, in the third quarter of fiscal year 2025.

Now, let me turn to adjusted results. Adjusted net income for diluted EPS in the third quarter of fiscal year 2026 was $400,000, or two cents per diluted share, compared to an adjusted net loss of $400,000, or two cents per diluted share in the prior year period. A full reconciliation is provided in our earnings release. Non-GAAP adjusted EBITDA was $3.9 million in the third quarter of fiscal year 2026, compared to $3 million in the same period last year. Reconciliation to net loss attributable to Limoneira Company is provided in our earnings release. Turning to our balance sheet, long-term debt less current portion as of July 31st, 2026 was $100.7 million compared to $72.5 million at the end of fiscal year 2025. Cash and cash equivalents were $2.2 million as of July 31st, 2026 compared to $1.5 million at the end of fiscal year 2025.

During the first nine months of fiscal year 2026, we received aggregate insurance proceeds of $5.4 million related to combined business interruption and casualty loss claims arising from incidents at our packinghouses. On September 2, 2026, we received confirmation from our insurance company then an additional $2 million of insurance proceeds is to be paid for these claims. We anticipate receiving these additional insurance proceeds in the fourth quarter of fiscal year 2026, at which time income will be recognized for the amounts received. I also want to update you on the Windfall Farms transaction. Subsequent to quarter end on August 17, we announced that we entered into a new agreement to sell Windfall Farms for $15 million all cash following a competitive public auction process. We expect this transaction to close on September 14, 2026, subject to customary closing conditions, and we intend to use the proceeds to reduce debt and fund continued avocado acreage expansion, consistent with our capital allocation priorities. There are two additional pieces of the transaction worth highlighting.

First, the buyer has executed a farming agreement under which we will continue to farm the vineyard property and will be paid $200,000 per year in addition to full reimbursement of all expenses on the property. Second, the buyer elected to exclude the 2026 crop from the sale so we will be able to collect the economic benefit of this year's vineyard crop, which we expect to be substantially complete by October 31st. Now I'd like to turn the call back to Harold to discuss our remaining fiscal year 2026 outlook and longer-term growth objectives.

Harold Edwards

pipeline. Thank you, Greg. We expect to achieve the lower end of our fresh lemon volumes due to higher import volume and now believe we will sell 4.0 million to 4.25 million cartons for fiscal year 2026. We have increased our expected avocado volumes to now be in the range of 7 million to 7.25 million pounds compared to the previous range of 5.5 million to 6.5 million pounds for fiscal year 2026. We expect at least 30% increase in volume in fiscal year 2027 compared to fiscal year 2026. We have identified over $200 million in real estate development and non-strategic land assets and water rights that we expect to monetize beginning in the fourth quarter of this year and over the next few years. In addition, we expect to receive total proceeds of approximately $180 million from Harvest, Limoneira Lewis Community Builders II, and East Area II spread out over seven fiscal years, of which $10 million was received in fiscal year 2025 and $15 million was received in fiscal year 2024. We're excited about our overall business for fiscal year 2027 and the tremendous opportunity we have to enhance shareholder value through improved agricultural results and monetization events. Operator, we'll now open the call to questions.

Thank you. We'll now be conducting a question and answer session.

Operator

[Operator Instructions]

Thank you. Our first question is from Puran Sharma with Stephens.

Question-and-Answer Session

Pooran Sharma

Good afternoon and thanks for the question here. Just wanted to understand the lemon volumes and imports you called out. I believe you mentioned higher imports as the reason you're going to the lower end of the guide here. Could you maybe give us a sense as to where you're seeing these imports coming from? Is this mainly a timing issue? Or is it just more industry supply than you're anticipating here in the back half? Yes.

Harold Edwards

Hi, Puran. Thanks for the question. Yes, so as usual, there's a series of connected dots items that happened that caused the challenges in our sales volume in the third quarter. So the first thing that happened was Western Europe got oversupplied with lemons from South Africa. And Western Europe is typically the outlet for Argentina fruit. And so as the price went down in Western Europe, the Argentina fruit diverted to the U.S. and, in essence, oversupplied the market. And so that's really what happened is Sunkist's sales plan fell short because there were just too many lemons in the market at this time. And it hurt us on volume and it actually hurt us on price as well.

And it was just an unexpected oversupply from Argentina. And Argentina was the sole culprit of the oversupply in the lemons. And while that's beginning to be better and relieve itself as that fruit is diminishing in the market, we have intentionally held back on sort of pushing that additional supply forward in the fourth quarter out of an abundance of caution. We are seeing price beginning to firm and strengthen a bit, but there's still challenges with the aftermath of the oversupply caused by the imports of fruit from Argentina.

Pooran Sharma

Okay. Appreciate the color there. Maybe just on water monetization, I think you mentioned you have over $200 million of real estate, strategic land and certain water rights for potential monetization. I believe the Colorado River water monetization event, you're expecting it to occur here in fiscal 2026, which leaves kind of a narrow window. I just wanted to get your thoughts on what needs to happen here to complete a transaction. And has your confidence around the timing and the value of that monetization changed at all since the last quarter?

Harold Edwards

No, it's kind of right on track with the last quarter. So, a series of things needed to happen. The first is we needed to remove our lemons from our 1300 acres that we have of farmland in Yuma, Arizona. We've done that. The next thing is we needed to identify lower water-using crops that could be substituted for the lemons. And so we're close to some exciting announcements of what those crops will be. But by doing that, that then frees up a certain amount of water that won't be required for our agricultural operations, that we can contribute to following programs, long-term following programs that will allow water users, principally from municipalities, specifically probably the Central Arizona Project, so all of the housing Phoenix that goes all the way down to Tucson and throughout Arizona to take advantage of those water rights from the Colorado River. And so we're very confident that we're very close to entering into a long-term agreement to take advantage of these following programs, will provide significant benefit for us and our shareholders as we monetize those water rights in the fourth quarter of this fiscal year.

Great. Thank you very much. Thanks, Puran.

Operator

OCC Fiscal Q3 2026 Earnings Call: Sales Rise 22%, Margin Expands

Wed, 09 Sep 2026 21:40:37 +0000

Key Takeaways

Optical Cable Corporation (OCC) reported fiscal Q3 2026 net sales of $24.3 million, up 22% year over year, driven largely by enterprise, data center and specialty markets.
Gross profit increased 43.9% to $9.1 million. Gross margin expanded to 37.4% from 31.7%, reflecting higher production volumes, manufacturing efficiencies and operating leverage.
Net income reached $1.9 million, or $0.21 per basic and diluted share, compared with $302,000, or $0.04 per share, in fiscal Q3 2025.
Backlog and forward load rose to $13.5 million at July 31, 2026, from $13.3 million at April 30 and $7.3 million at October 31, 2025. Most is expected to ship within two to three quarters.
Management maintained its view that the second half of fiscal 2026 would be strong and reported continued strength in sales and demand during August. The company did not provide fiscal 2027 margin guidance.
Optical fiber shortages remain the main constraint on manufacturing expansion, although management said they should not prevent continued strong top-line growth during the remainder of fiscal 2026.

Key Financial Data

Metric	Fiscal Q3 2026	Fiscal Q3 2025	Change
Net sales	$24.3 million	$19.9 million	+22.0%
Gross profit	$9.1 million	$6.3 million	+43.9%
Gross margin	37.4%	31.7%	+5.7 percentage points
SG&A expenses	$7.0 million	$5.7 million	Increase
SG&A as a percentage of sales	28.7%	28.8%	Broadly stable
Net income	$1.9 million	$302,000	Increase
Basic and diluted EPS	$0.21	$0.04	Increase

Metric	First nine months of fiscal 2026	Prior-year period	Change
Net sales	$62.9 million	$53.2 million	+18.3%
Gross profit	$22.1 million	$16.3 million	+35.5%
Gross margin	35.0%	30.6%	+4.4 percentage points
SG&A expenses	$18.8 million	$16.9 million	Increase
Net income (loss)	$2.5 million	$(1.5) million	Returned to profit
Basic and diluted EPS	$0.28	$(0.19)	Improved

Business and Operating Performance

Growth was supported by stronger demand across OCC’s enterprise, data center and specialty markets, both domestically and internationally. Specialty markets include the military sector. The company also identified opportunities in grid and energy verticals.

Higher production volumes spread fixed manufacturing costs across a larger sales base and improved manufacturing efficiency. Management cautioned that gross margin remains sensitive to quarterly product mix.

OCC is increasing staffing across its facilities, with the largest additions at its fiber optic cable plant in Roanoke and its connectivity and termination facility near Dallas. Capacity expansion under consideration includes both hiring and additional equipment for selected product families and facilities.

The company has begun generating some sales from Lightera products. Lightera is both a strategic collaboration partner and an important supplier to OCC.

Working capital stood at $19.2 million at quarter-end, up from $13.9 million at the end of fiscal 2025. Management said working capital, credit revolver availability and operating cash generation are sufficient for near-term needs.

Management Outlook

Management said fiscal Q3 results supported its prior expectation for a strong second half of fiscal 2026. OCC continued to see strong sales and demand in August, although it was too early to comment on September.

The company said industry demand remained high, with no indication of near-term weakening. However, management could not estimate how long the current demand cycle or elevated backlog would continue. It also noted that fiscal Q1 can be affected by holiday-related seasonality.

OCC did not provide specific fiscal 2027 margin guidance. Management indicated that higher production volumes could continue to support gross-margin performance, while sales compensation and shipping costs generally fluctuate with revenue.

Risks and Points to Watch

Optical fiber shortages caused by high demand, particularly for data center and other applications, remain the primary manufacturing bottleneck.
Certain raw materials are experiencing longer lead times, which may constrain product shipments.
Gross margin can vary with product mix, production volumes and manufacturing efficiency.
Data center sales cycles can be longer because of supplier and product qualification requirements. Potential business under qualification is not included in backlog.
Backlog timing varies by customer, and some orders involve staged deliveries. Management therefore does not treat backlog as a precise quarterly revenue forecast.
SG&A rose because of higher employee costs, contracted sales personnel expenses, sales incentives and shipping costs.

Analyst Q&A Highlights

Asked whether the fiscal Q3 gross-margin improvement reflected one-time factors, management attributed the result to manufacturing operating leverage, operating efficiencies and product mix. OCC said it hopes to maintain higher margins at current production levels but did not offer a formal forecast.

Management also clarified that the modest sequential increase in backlog did not signal demand normalization. Backlog and forward load continued to grow after quarter-end, while most outstanding orders are expected to ship within two to three quarters.

On funding, OCC explained that cash is swept daily to reduce its credit revolver balance, resulting in a generally low reported cash balance. Management said current revolver availability and operating cash generation should cover near-term requirements.

Full Earnings Call Transcript

Complete Earnings Call Transcript

Management Remarks

Operator

Good morning, everyone. My name is Bo, and I will be your conference operator today. At this time, I would like to welcome you to Optical Cable Corporation's Third Quarter of Fiscal Year 2026 Earnings Conference Call. [Operator Instructions] With that, Ms. Felix, you may begin your conference.

Caroline Felix

Good morning, and thank you for joining us for Optical Cable Corporation's Third Quarter of Fiscal Year 2026 Conference Call. By this time, everyone should have a copy of the earnings press release issued earlier today. You can also visit www.occfiber.com for a copy. On the call with us today are Neil Wilkin, President and Chief Executive Officer of OCC; and Tracy Smith, Executive Vice President and Chief Financial Officer.

Before we begin, I'd like to remind everyone that this call may contain forward-looking statements that involve risks and uncertainties. The actual future results of Optical Cable Corporation may differ materially due to a number of factors and risks, including, but not limited to, those factors referenced in the forward-looking statements section of this morning's press release. These cautionary statements apply to the contents of the Internet webcast on www.occfiber.com, as well as today's call.

With that, I'll turn the call over to Neil Wilkin. Neil, please begin.

Neil Wilkin

Thank you, Caroline, and good morning, everyone. I will begin the call today with a few opening remarks. Tracy will then review the third quarter results for the 3-month and 9-month periods ended July 31, 2026, in some additional detail. After Tracy's remarks, we will answer as many of your questions as we can.

As is our normal practice, we will only take questions from analysts -- take live questions from analysts and institutional investors during the Q&A session. However, we also offer other shareholders the opportunity to submit questions in advance of our earnings call. Instructions regarding such submissions are included in our press release announcing the date and time of our call.

I will say that today, we got more questions than we typically would get on a quarter from individual investors. We'll answer as many of those as we can. And then when we get to the Q&A for institutional investors, please limit your questions to things that were not addressed by the questions from the individual shareholders, and we'll be limiting the questions we'll take from institutional investors to 1 question per person. With that, we'll begin.

Following a solid start to the year, we continued to build on OCC's strong growth and momentum during the third quarter of fiscal year 2026, delivering year-over-year increases of net sales, gross profit and net income. Net sales increased 22% to $24.3 million and gross profit increased 43.9% to $9.1 million during the third quarter. Our net sales increase was largely driven by strong demand in OCC's enterprise, data center and specialty markets.

Our strong gross profit results during the third quarter and also fiscal year-to-date continue to demonstrate the benefit of OCC's manufacturing operating leverage. As our production volumes increase, our fixed manufacturing costs are spread over higher sales volumes and manufacturing efficiencies also tend to increase.

As of the end of the third quarter, our sales order backlog and forward load stood at $13.5 million. We are now in the last quarter of our fiscal year, and we are confident in OCC's ability to build on our momentum and capitalize on the opportunities ahead. At the same time, we continue to explore opportunities to further strengthen OCC's capabilities and support long-term growth.

As always, we remain focused on delivering exceptional service to our customers and end users and driving sustainable value creation for our shareholders.

And with that, I'll turn the call over to Tracy, who will review in additional detail our third quarter of fiscal year 2026 financial results.

Tracy Smith

Thank you, Neil. Consolidated net sales for the third quarter of fiscal 2026 increased 22% to $24.3 million compared to $19.9 million for the same period last year. Consolidated net sales for the first 9 months of fiscal 2026 were $62.9 million, an increase of 18.3% compared to net sales of $53.2 million for the same period last year.

During the third quarter and first 9 months of fiscal 2026, we experienced an increase in net sales in our enterprise, data center and specialty markets compared to the same periods last year as we continued to see general market growth opportunities in our industry, both domestically and internationally, with strength specifically in our enterprise, data center and specialty markets.

As Neil mentioned, our sales order backlog and forward load increased to $13.5 million at the end of the third quarter of fiscal 2026 as compared to $13.3 million as of April 30, 2026, $10.4 million as of January 31, 2026, and $7.3 million as of October 31, 2025.

Turning to gross profit. Our gross profit increased 43.9% to $9.1 million in the third quarter of fiscal 2026 compared to $6.3 million in the third quarter of fiscal 2025. Gross profit margin, our gross profit as a percentage of net sales, increased to 37.4% in the third quarter of fiscal 2026, compared to 31.7% in the third quarter of the prior year.

Gross profit increased 35.5% to $22.1 million in the first 9 months of fiscal 2026, compared to $16.3 million in the first 9 months of fiscal 2025. Gross profit margin increased to 35% in the first 9 months of fiscal 2026, compared to 30.6% for the same period last year.

Gross profit margin for the third quarter and first 9 months of fiscal 2026 was positively impacted by higher volumes and the resulting positive impact of our strong operating leverage. Additionally, our gross profit margin percentages are heavily dependent upon product mix on a quarterly basis and may vary based on changes in product mix.

SG&A expenses increased to $7 million in the third quarter of fiscal year 2026 compared to $5.7 million for the same period last year. SG&A expenses as a percentage of net sales were 28.7% in the third quarter of fiscal 2026 compared to 28.8% in the third quarter of fiscal 2025.

SG&A expenses increased to $18.8 million in the first 9 months of fiscal year 2026 compared to $16.9 million for the same period last year. SG&A expenses as a percentage of net sales were 29.9% in the first 9 months of fiscal 2026 compared to 31.8% in the first 9 months of fiscal 2025.

The increase in SG&A expenses during the third quarter and first 9 months of fiscal 2026 compared to the same periods last year was primarily the result of increases in employee costs, contracted sales personnel-related costs and shipping costs. Included in employee costs and contracted sales personnel-related costs are compensation costs and sales incentives.

OCC recorded net income of $1.9 million, or $0.21 per basic and diluted share for the third quarter of fiscal 2026 compared to net income of $302,000, or $0.04 per basic and diluted share for the third quarter of fiscal 2025. OCC recorded net income of $2.5 million, or $0.28 per basic and diluted share for the first 9 months of fiscal 2026 compared to a net loss of $1.5 million, or $0.19 per basic and diluted share for the first 9 months of fiscal 2025.

With that, I'll turn the call back over to you, Neil.

Neil Wilkin

Thank you, Tracy. As I previously mentioned, we received a large number of questions in advance of today's call, some of which came in just before the call. We believe that some of these questions that have been submitted will be of interest to most participants. So we're going to go through those questions first, and then we will address any remaining questions live from analysts or institutional investors.

Sergi Mascaro

So the gross margin was very impressive this quarter, and I'm wondering if this improvement is just related to higher volumes or there are other factors or other one-offs impacting the gross margin?

Neil Wilkin

Well, our gross margin can vary based on manufacturing operating leverage, but also -- and other efficiencies, also product mix. And so we're pleased that we've been able to show an increase in our gross profit margins over the last couple of -- gross profit margin percentage over the last couple of quarters, and we're hoping that we'll continue to maintain higher margins at the production levels we're currently at.

Operator

[Operator Instructions] And Mr. Wilkin, it appears we have no further questions over the phone at this time. Sir, I'd like to turn the conference back to you for any closing comments.

Neil Wilkin

Okay. Well, thank you. I would like to thank everyone for listening to our third quarter of fiscal year 2026 conference call today. As always, we appreciate your time and your investment in Optical Cable Corporation.

Additionally, I would like to note that this Friday marks the 25th anniversary of the terrible attack on the United States on September 11, 2001. We are so grateful for our company's first responders and those that serve and support the U.S. military for protecting us, protecting our freedom and protecting our way of life. Thank you all. Have a good day.

Operator

Thank you very much, Mr. Wilkin, and thank you, Ms. Smith. Again, ladies and gentlemen, this brings us to the end of today's meeting. We do appreciate your time and participation. You may now disconnect.

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CooperCompanies Q3 FY2026 Earnings: Tax Benefit Drives GAAP EPS to $2.24

Wed, 09 Sep 2026 20:32:17 +0000

CooperCompanies (Nasdaq: COO) reported fiscal Q3 2026 revenue of $1.066 billion, up 1% year over year, while GAAP diluted EPS rose to $2.24 from $0.49. The EPS increase was primarily driven by a $307.2 million discrete tax benefit; non-GAAP EPS increased 4% to $1.15, and free cash flow rose 66% to $273.0 million.

Core Earnings Data

Revenue growth remained limited, with reported, constant-currency, and organic growth all at 1%. GAAP margins improved partly because the prior-year quarter included inventory and long-lived asset write-offs associated with a CooperSurgical product-line exit.

The adjusted results showed a more modest underlying improvement. Non-GAAP gross margin declined 60 basis points because of higher manufacturing costs and unfavorable foreign exchange, while non-GAAP operating margin increased 30 basis points through expense management and productivity initiatives.

Metric	Fiscal Q3 2026	Fiscal Q3 2025	Year-Over-Year Change
Revenue	$1,066.2 million	$1,060.3 million	+1%
GAAP gross profit / margin	$711.9 million / 67%	$692.0 million / 65%	Approx. +3%; margin +200 bps
GAAP operating income / margin	$222.0 million / 21%	$175.7 million / 17%	Approx. +26%; margin +400 bps
Non-GAAP operating income / margin	$280.7 million / 26%	$276.4 million / 26%	Approx. +2%; margin +30 bps
GAAP net income	$432.8 million	$98.3 million	Approx. +340%
GAAP diluted EPS	$2.24	$0.49	Up $1.75
Non-GAAP net income	$221.5 million	$220.3 million	Approx. +1%
Non-GAAP diluted EPS	$1.15	$1.10	+4%
Free cash flow	$273.0 million	Not disclosed	+66%

Business and Segment Performance

CooperVision generated no reported or organic growth, as reductions in U.S. channel inventory weighed on results. Its geographic performance was mixed: EMEA grew, while the Americas and Asia Pacific declined. CooperSurgical provided the company’s growth, led by fertility products.

Business or Category	Fiscal Q3 2026 Revenue	Reported Growth	Organic Growth
CooperVision	$717.0 million	0%	0%
Toric and multifocal lenses	$363.8 million	+1%	+2%
Sphere and other lenses	$353.2 million	-2%	-1%
CooperVision Americas	$281.6 million	-2%	-2%
CooperVision EMEA	$309.4 million	+6%	+5%
CooperVision Asia Pacific	$126.0 million	-10%	-5%
CooperSurgical	$349.2 million	+2%	+3%
Office and surgical	$208.0 million	+2%	+2%
Fertility	$141.2 million	+3%	+5%

The 5% organic growth in fertility was the strongest category result. Within CooperVision, growth in toric and multifocal products was offset by a decline in sphere and other lenses. EMEA’s expansion was also insufficient to offset weaker results in the Americas and Asia Pacific.

Profitability, Cash Flow, and the Balance Sheet

Selling, general, and administrative expense fell to $401.3 million from $421.7 million. Research and development expense declined to $41.6 million from $44.6 million, while amortization expense decreased to $47.0 million from $50.0 million. These reductions helped adjusted operating margin increase despite gross-margin pressure.

Interest expense declined to $21.5 million from $25.4 million because of lower interest rates and lower average debt. Cash provided by operations was $341.7 million, and capital expenditures were $68.7 million, producing $273.0 million of free cash flow.

CooperCompanies repurchased approximately 4.9 million shares for $339.1 million during the quarter at an average price of $69.16. That amount exceeded quarterly free cash flow. Following an increase in the repurchase authorization from $2 billion to $3 billion, approximately $1.5 billion remained available.

At July 31, cash and cash equivalents were $154.7 million, compared with $110.6 million at the October 2025 fiscal year-end. Inventory increased to $911.5 million from $846.0 million over the same period. Short- and long-term debt totaled approximately $2.54 billion, compared with approximately $2.51 billion at fiscal year-end, with a larger portion classified as short-term debt.

The Tax Benefit, Not Operations, Drove Most of the GAAP Earnings Increase

The difference between GAAP and adjusted earnings is central to interpreting the quarter. CooperCompanies recorded $201.8 million of income before taxes but $432.8 million of net income because its income statement included a $231.0 million net tax benefit rather than a tax expense.

The main factor was a $307.2 million discrete benefit following the favorable completion of a U.K. tax authority examination involving the company’s fiscal 2021 transfer of intellectual property and related assets. This benefit drove GAAP EPS to $2.24, substantially above non-GAAP EPS of $1.15.

Excluding the reconciliation adjustments, non-GAAP net income increased only slightly to $221.5 million from $220.3 million. The adjusted figures therefore provide a clearer view of operating progress, which consisted of modest EPS growth, improved operating efficiency, and pressure on adjusted gross margin.

Financial Guidance

CooperCompanies updated its fiscal 2026 guidance. The release did not include the previous ranges, so the size and direction of the revisions cannot be determined from the provided information. The latest outlook points to continued divergence between CooperVision and CooperSurgical in the fourth quarter.

Metric	Latest Guidance
Fiscal Q4 2026 total revenue	$1.057 billion-$1.080 billion; 0%-2% organic growth
Fiscal Q4 2026 CooperVision revenue	$692 million-$706 million; -2% to 0% organic growth
Fiscal Q4 2026 CooperSurgical revenue	$364 million-$374 million; 4%-6% organic growth
Fiscal Q4 2026 non-GAAP diluted EPS	$1.05-$1.09
Fiscal 2026 total revenue	$4.229 billion-$4.252 billion; 2%-3% organic growth
Fiscal 2026 CooperVision revenue	$2.828 billion-$2.842 billion; 1%-2% organic growth
Fiscal 2026 CooperSurgical revenue	$1.401 billion-$1.410 billion; 4%-5% organic growth
Fiscal 2026 non-GAAP diluted EPS	$4.51-$4.55
Fiscal 2026-2028 free cash flow objective	More than $2.2 billion cumulatively

Management said the U.S. channel inventory reduction at CooperVision will continue to affect the fourth quarter. That expectation is reflected in the segment’s forecast for organic growth between negative 2% and zero, compared with positive 4% to 6% for CooperSurgical.

Risks Investors Need to Watch

Continued CooperVision weakness: U.S. channel inventory reductions weighed on Q3 and are expected to continue affecting Q4. The segment’s Q4 organic growth guidance ranges from a 2% decline to no growth.
Adjusted gross-margin pressure: Higher manufacturing costs and unfavorable foreign exchange reduced non-GAAP gross margin by 60 basis points. Further operating expense savings would be needed to offset continued pressure.
GAAP earnings normalization: The $307.2 million tax benefit was discrete and drove most of the increase in GAAP net income and EPS, making the reported earnings jump less indicative of recurring operating performance.
Litigation exposure: Accrued litigation liabilities increased to $316.5 million at July 31 from $0.7 million at the prior fiscal year-end. The company also recorded $274.4 million of litigation expense and associated legal costs during the first nine months of fiscal 2026.
Capital allocation and debt: Quarterly share repurchases exceeded free cash flow, while total debt remained approximately $2.54 billion and shifted toward short-term classification. Future repurchase activity should be considered alongside cash generation and debt management.

Summary

CooperCompanies’ fiscal Q3 2026 combined minimal revenue growth with better operating cost control and substantially higher free cash flow. GAAP earnings were dominated by a one-time U.K. tax benefit, while adjusted results showed more modest progress and continued gross-margin pressure. The main operating question for the fourth quarter is whether CooperSurgical’s growth can offset ongoing CooperVision channel inventory reductions and weakness in several regions.

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Kewaunee Scientific Q1 FY2027 Earnings: Lower Sales and Corporate Costs Cut EPS

Wed, 09 Sep 2026 20:22:47 +0000

Kewaunee Scientific (NASDAQ: KEQU) reported Q1 FY2027 sales of $66.32 million, down 6.7% year over year, while diluted EPS fell to $0.58 from $1.04. Lower Lab Products Group volumes, higher corporate compensation expense, and a higher effective tax rate outweighed improved International profitability. Backlog ended the quarter on July 31, 2026, at $169.0 million, up sequentially but below the prior-year level.

Core Performance

Gross profit declined broadly in line with sales, allowing gross margin to edge approximately 20 basis points higher to 29.6%. Operating expenses nevertheless rose 2.2% to $16.48 million, causing operating profit, attributable net earnings, and EBITDA to fall faster than revenue.

Metric	Q1 FY2027	Q1 FY2026	YoY Change
Sales	$66.32 million	$71.10 million	-6.7%
Gross profit and margin	$19.64 million; 29.6%	$20.93 million; 29.4%	-6.2%; margin +0.2 pts
Operating profit and margin	$3.16 million; 4.8%	$4.81 million; 6.8%	-34.3%; margin -2.0 pts
Pre-tax earnings	$2.56 million	$3.92 million	-34.7%
Net earnings attributable to Kewaunee	$1.71 million	$3.09 million	-44.8%
Diluted EPS	$0.58	$1.04	-44.2%
EBITDA (non-GAAP)	$4.53 million	$6.32 million	-28.4%

EBITDA margin was approximately 6.8%, compared with 8.9% in the prior-year quarter.

Business and Segment Performance

Lab Products Group, or LPG, remained the largest business and accounted for about 77% of quarterly sales. Challenging life sciences conditions reduced manufacturing volumes, although stronger education demand, cost controls, and operating efficiencies helped support profitability.

International sales also declined, but a favorable mix of higher-margin projects lifted both segment net earnings and EBITDA. This created a clear divergence between the two operating segments.

Segment Metric	Q1 FY2027	Q1 FY2026	YoY Change
LPG sales	$50.87 million	$54.35 million	-6.4%
LPG net earnings	$3.89 million	$4.72 million	-17.6%
LPG EBITDA	$6.59 million	$7.58 million	-13.1%
International sales	$15.45 million	$16.75 million	-7.8%
International net earnings	$0.79 million	$0.64 million	+23.5%
International EBITDA	$1.20 million	$1.06 million	+13.9%

Corporate EBITDA was a loss of $3.26 million, widening from a $2.31 million loss. Kewaunee attributed the change primarily to additional compensation expense from settling certain long-term incentive awards in cash rather than shares. Management does not expect that incremental expense to recur, but the company did not quantify it separately.

Profitability and Balance Sheet

The relatively stable gross margin indicates that product costs adjusted with lower sales, but expenses below gross profit created greater pressure. Interest expense declined to $626,000 from $1.06 million, providing a partial offset to weaker operations.

The effective tax rate increased to approximately 28.0% from 19.4%. Kewaunee said the increase reflected a greater proportion of earnings coming from international operations, helping explain why attributable net earnings declined more sharply than pre-tax earnings.

Cash on hand, including restricted cash, was $10.26 million at quarter-end, down from $11.62 million on April 30, 2026. Working capital was largely stable sequentially at $56.72 million versus $57.05 million.

Long-term debt declined to $39.38 million from $40.85 million. Excluding the sale-leaseback financing obligation, long-term debt fell 8.2% to $13.84 million from $15.09 million, while the debt-to-equity ratio improved to 0.59-to-1 from 0.61-to-1. Short-term debt increased to $6.48 million from $5.90 million.

Backlog and Management Commentary

Backlog increased approximately 1.9% from April 30 to $169.0 million, but it was 17.6% below the $205.0 million reported one year earlier. The sequential improvement offers some support for future activity, while the year-over-year decline and timing of project releases remain important constraints.

President and CEO Thomas D. Hull III said quoting activity remained strong across the company’s markets. However, project award and release timelines remained extended amid geopolitical and economic uncertainty, making the conversion of customer activity into backlog and recognized sales a key variable for subsequent quarters.

Recent Insider Transactions

The supplied insider data show no cash purchases during the most recent six-month period. Two stock awards dated May 1, 2026, and one stock gift dated March 26 were reported at $0 value; no transaction quantities were provided.

The following reported sales were the most recent transactions with disclosed prices and values. These records are presented without inferring insiders’ views about the company’s prospects.

Date	Insider	Role	Transaction	Price per Share	Reported Value
Jan. 7, 2026	Thomas David Hull III	CEO	Sale	$37.50	$81,638
Jan. 6, 2026	Donald T. Gardner III	CFO	Sale	$37.57	$75,140
Dec. 31, 2025	Thomas David Hull III	CEO	Sale	$37.66–$38.00	$24,790
Dec. 29, 2025	Thomas David Hull III	CEO	Sale	$38.01	$33,601
Dec. 22, 2025	Thomas David Hull III	CEO	Sale	$39.00	$39,000
Dec. 17, 2025	Thomas David Hull III	CEO	Sale	$39.00	$39,000
Oct. 9, 2025	Donald T. Gardner III	CFO	Sale	$42.76	$128,280

Risks Investors Need to Watch

Project conversion and backlog: Backlog improved sequentially but remained substantially below the prior-year level. Extended award and release timelines could delay the recognition of sales.
LPG market conditions: Continued life sciences weakness and lower manufacturing volumes could pressure sales and operating leverage, even with education demand and cost controls providing support.
Expense sensitivity: Operating expenses increased despite lower revenue, and the widening corporate loss weighed on consolidated profitability. The incremental compensation expense is expected not to recur, but its amount was not separately disclosed.
International mix and taxation: Higher-margin projects improved International earnings, but the greater international earnings mix also raised the effective tax rate. Changes in project mix could therefore affect both segment margins and consolidated net income.

Summary

Kewaunee Scientific’s Q1 FY2027 results showed lower sales and materially weaker consolidated earnings, despite a stable gross margin and improved International profitability. LPG volume pressure, higher corporate costs, and a higher tax rate were the main earnings headwinds, while lower debt and a sequential backlog increase provided some balance. Future results will depend on the timing of project conversions, life sciences demand, and whether corporate expenses normalize as management expects.

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AeroVironment Fiscal Q1 2027 Earnings: Revenue Rises as GAAP Loss Narrows

Wed, 09 Sep 2026 20:22:17 +0000

AeroVironment (NASDAQ: AVAV) reported fiscal Q1 2027 revenue of $480.5 million, up 6% from $454.7 million, while its diluted GAAP loss per share narrowed to $0.10 from $1.44. Gross margin improved to 26%, but non-GAAP adjusted EBITDA declined as weaker Space, Cyber and Directed Energy results offset growth in Autonomous Systems.

Core Earnings Data

Revenue increased by $25.8 million, supported by a $15.5 million increase in product sales and a $10.3 million increase in service revenue. Gross profit rose faster than revenue because product margin improved and acquisition-related amortization and other purchase-accounting expenses declined.

GAAP profitability improved substantially, although the comparison benefited from lower non-cash purchase-accounting charges, acquisition expenses and interest costs. On an adjusted basis, EPS increased to $0.59, while adjusted EBITDA decreased by approximately 6% to $53.4 million.

Metric	Fiscal Q1 2027	Fiscal Q1 2026	YoY Change
Revenue	$480.5 million	$454.7 million	+6%
Gross profit and margin	$124.6 million; 26%	$95.1 million; 21%	Profit +31%; margin +5 percentage points
Operating loss	$(10.9) million	$(69.3) million	Loss narrowed by $58.4 million
Net loss	$(5.1) million	$(67.4) million	Loss narrowed by $62.3 million
Diluted GAAP EPS	$(0.10)	$(1.44)	Improved by $1.34
Non-GAAP adjusted EPS	$0.59	$0.32	Approximately +84%
Non-GAAP adjusted EBITDA	$53.4 million	$56.6 million	Approximately -6%
Operating cash flow	$13.5 million	$(123.7) million	Improved by $137.2 million

Business and Segment Performance

Autonomous Systems, or AxS, generated all of the company’s net revenue growth. Its $60.6 million increase more than offset a $34.8 million decline in Space, Cyber and Directed Energy, or SCDE.

Segment	Q1 FY2027 Revenue	Q1 FY2026 Revenue	Revenue Change	Segment Adjusted EBITDA
Autonomous Systems	$346.0 million	$285.3 million	Approximately +21%	$62.3 million vs. $52.8 million
Space, Cyber and Directed Energy	$134.5 million	$169.4 million	Approximately -21%	$(8.9) million vs. $3.8 million

AxS also increased segment adjusted EBITDA by $9.5 million. SCDE moved from positive adjusted EBITDA to an $8.9 million loss, producing a $12.7 million year-over-year deterioration that weighed on consolidated adjusted EBITDA.

Bookings reached approximately $0.7 billion, producing a quarterly book-to-bill ratio of 1.4. Funded backlog was $1.5 billion at August 1, 2026, up from $1.2 billion at April 30 and 37% higher year over year. Funded backlog represents firm orders for which customer funding has already been appropriated.

Profitability, Cash Flow and the Balance Sheet

Gross margin increased from 21% to 26%, primarily because intangible amortization and other purchase-accounting expenses included in gross profit fell to $18.5 million from $37.4 million. Product gross profit increased by $32.6 million, more than offsetting a $3.2 million decline in service gross profit.

Operating expenses also fell. Selling, general and administrative expense decreased by $19.8 million to $111.5 million, including lower intangible amortization and acquisition-related expenses, partly offset by higher employee costs associated with increased headcount. R&D expense declined by $9.2 million to $24.0 million.

Operating cash flow turned positive at $13.5 million. Collections of accounts receivable contributed $128.3 million, but a $100.3 million inventory build and a $68.0 million increase in unbilled receivables and retentions absorbed cash. Capital expenditures rose to $44.0 million from $22.7 million, meaning quarterly operating cash flow did not cover property and equipment investment.

At quarter-end, AeroVironment held $278.4 million in cash, $301.8 million in short-term investments and $94.8 million in long-term investments. Long-term debt was $730.1 million. Inventory increased to $410.8 million from $312.9 million at the end of fiscal 2026, while unbilled receivables and retentions rose to $637.8 million from $570.4 million.

Lower Acquisition Charges Lift GAAP Results, but SCDE Weighs on Adjusted Profitability

AeroVironment’s sharply narrower GAAP loss did not reflect an equivalent improvement in consolidated adjusted EBITDA. Total intangible amortization and related non-cash purchase-accounting expenses fell to $43.4 million from $79.7 million, while acquisition-related expenses included in the adjusted EBITDA reconciliation declined to $2.1 million from $23.7 million.

Financing costs also improved. The company recorded $4.1 million of net interest income, compared with $17.4 million of net interest expense a year earlier, after term and revolving loans associated with the BlueHalo acquisition were settled using proceeds from convertible notes and equity issued in July 2025.

These changes explain much of the improvement in GAAP operating and net results. By contrast, adjusted EBITDA declined by $3.2 million because the SCDE segment’s earnings deterioration outweighed AxS growth.

Fiscal 2027 Guidance

AeroVironment reaffirmed its full-year fiscal 2027 outlook. The unchanged ranges call for higher full-year adjusted EBITDA than the $287 million reported for fiscal 2026, while GAAP and non-GAAP EPS remain separated by substantial forecast acquisition-accounting adjustments.

Metric	Latest FY2027 Guidance	Previous Guidance	Change
Revenue	$2.125 billion–$2.225 billion	$2.125 billion–$2.225 billion	Reaffirmed
GAAP net income	$10 million–$27 million	$10 million–$27 million	Reaffirmed
GAAP diluted EPS	$0.21–$0.53	$0.21–$0.53	Reaffirmed
Non-GAAP adjusted EBITDA	$305 million–$325 million	$305 million–$325 million	Reaffirmed
Non-GAAP adjusted EPS	$3.02–$3.34	$3.02–$3.34	Reaffirmed

The guidance applies to the fiscal year ending April 30, 2027. The non-GAAP EPS outlook excludes acquired intangible amortization, purchase-accounting adjustments, acquisition expenses and specified investment activity.

Management Commentary

Chairman, President and CEO Wahid Nawabi emphasized record first-quarter revenue and funded backlog, as well as demand for the company’s major franchise programs. Management said customers are deploying autonomous capabilities at increasing scale.

The company’s operational priorities are expanding manufacturing capacity across its sites and strengthening its supply chain. Execution in those areas will influence how quickly AeroVironment can convert its funded backlog into delivered products and revenue.

Recent Insider Transactions

Reported insider activity for the preceding six months included 115,040 shares classified as purchases across 23 transactions and 2,599 shares sold across 10 transactions, resulting in net reported purchases of 112,441 shares. Many of the recent entries were stock awards rather than open-market purchases, so the aggregate purchase figure should not be interpreted as direct insider buying without that distinction.

Date	Insider	Role	Transaction	Reported Price	Reported Value
Aug. 17, 2026	Stephen F. Page	Director	Sale	$191.98 per share	$47,995
Aug. 14, 2026	Brian Charles Shackley	Officer	Sale	$201.86 per share	$41,381
July 15, 2026	Stephen F. Page	Director	Sale	$143.00 per share	$35,464
July 15, 2026	Brian Charles Shackley	Officer	Sale	$143.00 per share	$42,900
July 2, 2026	Mary Elizabeth McDaniel Clum	Officer	Stock award	Not specified	$0
July 2, 2026	Sean Thomas Woodward	CFO	Stock award	$0.00–$140.31 per share	$13,610
July 2, 2026	Robert Fendlay Smith	COO	Stock award	Not specified	$0
July 2, 2026	Cindy Kay Lewis	Director	Stock award	Not specified	$0
July 2, 2026	Phillip S. Davidson	Director	Stock award	Not specified	$0
July 2, 2026	Mary Beth Long	Director	Stock award	Not specified	$0

The reported transactions establish the type and size of recent insider activity but do not, by themselves, indicate insiders’ views of the company’s outlook.

Risks Investors Need to Watch

SCDE weakness: The segment’s revenue fell approximately 21%, and adjusted EBITDA moved from a $3.8 million profit to an $8.9 million loss. Continued weakness could offset further AxS growth.
Working-capital demands: Higher inventory and unbilled receivables consumed substantial cash during the quarter. Further expansion could limit cash conversion even if reported revenue grows.
Capacity and supply-chain execution: Management is expanding manufacturing capacity and strengthening suppliers to meet demand. Delays could affect backlog conversion and contract delivery timing.
Government funding and contract timing: AeroVironment depends heavily on funded government programs. Changes in procurement priorities, appropriations or contract timing could affect revenue and backlog realization.
Acquisition-accounting burden: Amortization and purchase-accounting charges declined but remained material at $43.4 million, maintaining a wide gap between GAAP and non-GAAP profitability.

Summary

AeroVironment’s fiscal Q1 2027 combined modest revenue growth with a significantly narrower GAAP loss, helped by lower acquisition-accounting charges, reduced acquisition expenses and improved interest results. AxS delivered higher revenue and segment earnings, but SCDE’s contraction pushed consolidated adjusted EBITDA below the prior-year level. The main issues to monitor are SCDE performance, conversion of the $1.5 billion funded backlog and the cash demands created by inventory, unbilled receivables and capacity expansion.

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Hewlett Packard Enterprise Co Stock (HPE) Closed Up by 5.12% on Sep 9: What Investors Need To Know

Wed, 09 Sep 2026 20:15:49 +0000

Hewlett Packard Enterprise Co (HPE) closed up by 5.12%. The Technology Equipment sector is down by 0.18%. The company outperformed the industry. Top 3 stocks by turnover in the sector: Apple Inc (AAPL) down 0.28%; Micron Technology Inc (MU) up 2.75%; NVIDIA Corp (NVDA) down 0.91%.

What is driving Hewlett Packard Enterprise Co (HPE)’s stock price up today?

Hewlett Packard Enterprise experienced strong upward momentum following the release of its third-quarter financial results, which exceeded Wall Street expectations across key top- and bottom-line metrics. The company demonstrated significant top-line expansion and profitability growth, driven by surging customer adoption of its server and networking solutions. In response to record order velocity and an expanding backlog, management raised its full-year earnings and revenue guidance while providing an optimistic framework for the upcoming fiscal year. Furthermore, the commitment to return a substantial portion of free cash flow to shareholders via dividends and accelerated share repurchases, backed by early achievement of balance sheet deleveraging targets, provided immediate support to equity valuations.

Underpinning this operational strength is robust enterprise demand for artificial intelligence infrastructure and hybrid cloud deployment. HPE recorded exceptional order growth in its networking segment, bolstered by rapid market absorption of high-performance routing and data center networking hardware. The integration of Juniper Networks is progressing ahead of schedule, enabling the combined entity to capture synergies earlier than anticipated and secure large-scale enterprise deployments, including expanded platform deals with major cloud providers. Additionally, management highlighted the structural cost efficiency of private cloud AI infrastructure, reinforcing the long-term durability of its server and storage order backlog despite ongoing component supply chain tight spots.

Institutional sentiment around the stock has strengthened considerably following management commentary at recent industry conferences and subsequent sell-side target revisions. Brokerage analysts across major investment banks revised their target prices upward, emphasizing the company's favorable forward valuation multiples compared to enterprise hardware peers alongside its expanding margin profile. While supply constraints for high-end memory and processing components remain an operational bottleneck to immediate backlog conversion, market participants view HPE's growing order backlog and high-margin networking mix as solid catalysts for sustained multi-year earnings growth.

Technical Analysis of Hewlett Packard Enterprise Co (HPE)

Technically, Hewlett Packard Enterprise Co (HPE) shows a MACD (12,26,9) value of 0.192, indicating a buy signal. The RSI at 62.793 suggests neutral condition and the Williams %R at 0.151 suggests overbought condition. Please monitor closely.

Media Coverage of Hewlett Packard Enterprise Co (HPE)

In terms of media coverage, Hewlett Packard Enterprise Co (HPE) shows a coverage score of 50, indicating a moderate level of media attention. The overall market sentiment index is currently in neutral zone.

Fundamental Analysis of Hewlett Packard Enterprise Co (HPE)

Hewlett Packard Enterprise Co (HPE) is in the Technology Equipment industry. Its latest annual revenue is $34.30B, ranking 7 in the industry. The net profit is $-59.00M, ranking 38 in the industry. Company Profile

Over the past month, multiple analysts have rated the company as Buy, with an average price target of $67.21, a high of $88.00, and a low of $52.00.

More details about Hewlett Packard Enterprise Co (HPE)

Company Specific Risks:

AI Server Mix Shift and Margin Pressure: Management warned that near-term operating margins could face pressure due to a higher product sales mix of lower-margin AI servers relative to traditional enterprise hardware, alongside aggressive pricing competition in the data center market.
Supply Chain Bottlenecks and Revenue Realization Lag: Normalized order growth of 42% significantly outpaced revenue growth of 34%, expanding order backlog to record levels as component shortages in specialized AI networking and switching hardware hamper immediate revenue conversion.
Institutional Analyst Caution on AI Demand Sustainability: Sell-side analysts maintained neutral ratings post-earnings, expressing skepticism over whether the aggressive enterprise and hyperscaler AI infrastructure capex wave will maintain momentum without margin erosion once data center builds normalize.
Regulatory Scrutiny and Global Trade Vulnerabilities: Analysts highlight persistent risks stemming from regulatory legal scrutiny and shifting international trade tariffs, which threaten to increase component procurement costs and compress gross margins on global server shipments.

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Gloo Q2 Fiscal 2026 Earnings: Revenue Rises 188% as Losses Narrow

Wed, 09 Sep 2026 20:15:38 +0000

Gloo (Nasdaq: GLOO) reported fiscal Q2 2026 revenue of $46.6 million, up 188% from $16.2 million a year earlier, while GAAP diluted loss per share narrowed to $0.25 from $6.45. Net loss fell to $21.2 million and adjusted EBITDA improved to negative $8.3 million, although the company remained unprofitable as it expanded enterprise relationships, cross-platform sales and acquired capabilities.

Core Financial Results

For the quarter ended July 31, 2026, revenue growth substantially outpaced the 65% increase in total operating expenses. Revenue minus the stated cost of revenue, which excludes depreciation and amortization, was approximately $16.8 million, compared with $4.1 million a year earlier; the corresponding margin improved to about 36.0% from 25.2%.

GAAP operating margin improved to approximately negative 44.0% from negative 150.7%. The improvement in reported loss per share should be viewed alongside the increase in weighted-average common shares to 84.1 million from 8.2 million.

Metric	Fiscal Q2 2026	Fiscal Q2 2025	Year-Over-Year Change
Revenue	$46.6 million	$16.2 million	+188%
Total operating expenses	$67.1 million	$40.5 million	+65%
Operating loss	$(20.5) million	$(24.4) million	Loss narrowed about 16%
Net loss	$(21.2) million	$(44.1) million	Loss narrowed about 52%
Diluted loss per share	$(0.25)	$(6.45)	Loss narrowed by $6.20 per share
Adjusted EBITDA	$(8.3) million	$(19.0) million	Loss narrowed about 56%

Adjusted EBITDA is a non-GAAP measure. It also improved sequentially by $3.2 million from negative $11.5 million in fiscal Q1 2026, marking the third consecutive quarter of sequential improvement.

Business and Revenue Performance

Both reported revenue streams expanded rapidly and contributed close to half of total revenue. Platform solutions grew faster, but Gloo did not disclose how much of either segment’s increase was organic or acquisition-related.

Revenue Stream	Fiscal Q2 2026	Fiscal Q2 2025	Year-Over-Year Change
Platform revenue	$23.6 million	$8.7 million	Approximately +170%
Platform solutions revenue	$22.9 million	$7.4 million	Approximately +209%
Total revenue	$46.6 million	$16.2 million	+188%

Gloo linked its business momentum to larger enterprise relationships and increased adoption across multiple parts of its platform. The company now has more than 30 customers with at least $1 million in annual contract value and recorded its first customer exceeding $10 million in annual contract value. It also serves more than 40 universities, which management identified as an emerging growth market.

Acquisitions continued to broaden the platform. Gloo completed its purchase of Enterprisemarketdesk during the quarter, while the remaining Midwestern Interactive stake and Cedarstone transactions closed after quarter-end in August 2026. These deals add technology, talent, finance and development-services capabilities, but their individual revenue contributions were not disclosed.

Lower Non-Operating Costs Magnified the Net-Loss Improvement

The reduction in net loss was considerably larger than the improvement in operating loss. Operating loss narrowed by about $3.9 million, whereas net loss narrowed by approximately $22.9 million, primarily because total other expense fell to $1.1 million from $18.9 million.

The prior-year period included an $8.2 million fair-value loss on financial instruments and a $7.5 million loss on debt extinguishment. Interest expense also declined to $0.8 million from $3.3 million. These changes improved GAAP net income without representing the same degree of improvement in underlying operations.

Adjusted EBITDA nevertheless showed operating progress. Its reconciliation for the quarter excluded, among other items, $4.4 million of financing and restructuring costs, $3.0 million of equity-based compensation and $3.7 million of depreciation and amortization.

Cash Flow and Balance Sheet

Cash-flow figures were provided only for the six months ended July 31, rather than for Q2 alone. Six-month net cash used in operating activities improved to $28.0 million from $44.2 million in the prior-year period. Gloo also used $10.4 million for investing activities, including capitalized software costs and acquisitions.

Financing activities provided $20.3 million, supported by $23.7 million in net proceeds from a follow-on stock offering. After operating, investing and financing activity, cash, cash equivalents and restricted cash declined by $18.0 million during the six-month period. Cash and cash equivalents stood at $39.3 million on July 31, down from $57.3 million on January 31.

Current and non-current debt totaled approximately $37.4 million at quarter-end, compared with $35.3 million on January 31. After the quarter, Gloo extended the maturity of its $13.2 million senior secured loan by one year to April 2028, providing additional time before repayment.

Guidance

Gloo introduced fiscal Q3 guidance and raised its fiscal 2026 revenue outlook. The Q3 revenue target would represent approximately 18% sequential growth from Q2, while the adjusted EBITDA outlook implies another $4.8 million of sequential improvement.

Metric	Latest Guidance	Change or Context
Fiscal Q3 2026 revenue	$55 million	Expected to increase 69% year over year
Fiscal Q3 2026 adjusted EBITDA	$(3.5) million	Approaching break-even
Fiscal 2026 revenue	$200 million	Raised; previous amount was not provided

Management continues to expect positive adjusted EBITDA in fiscal Q4 2026. CFO Paul Seamon said operating expenses are expected to remain approximately flat in absolute dollars for the full year, making cost control central to the planned move toward profitability.

Recent Insider Transactions

The supplied insider-transaction data shows that the ten most recent reported transactions were direct sales by Thrivent Financial for Lutherans, identified as a beneficial owner of more than 10% of a security class. The reported values below are presented in U.S. dollars as listed in the source; the transactions should not by themselves be interpreted as a view on Gloo’s outlook.

Date	Insider	Transaction	Reported Value
Sep. 4, 2026	Thrivent Financial for Lutherans	Sale at $3.06–$3.12 per share	$21,600
Aug. 28, 2026	Thrivent Financial for Lutherans	Sale at $3.41 per share	$10,230
Aug. 27, 2026	Thrivent Financial for Lutherans	Sale at $3.25–$3.37 per share	$28,365
Aug. 19, 2026	Thrivent Financial for Lutherans	Sale at $3.23–$3.34 per share	$26,433
Aug. 14, 2026	Thrivent Financial for Lutherans	Sale at $3.42–$3.52 per share	$48,608
Aug. 11, 2026	Thrivent Financial for Lutherans	Sale at $3.52–$3.55 per share	$53,179
Aug. 6, 2026	Thrivent Financial for Lutherans	Sale at $3.39–$3.53 per share	$97,273
Aug. 3, 2026	Thrivent Financial for Lutherans	Sale at $3.14–$3.46 per share	$93,387
Jul. 31, 2026	Thrivent Financial for Lutherans	Sale at $3.14–$3.23 per share	$67,705
Jul. 22, 2026	Thrivent Financial for Lutherans	Sale at $3.36–$3.37 per share	$28,254

Risks Investors Should Watch

Profitability remains unproven: Despite substantial revenue growth, Gloo still reported a $20.5 million operating loss and negative adjusted EBITDA of $8.3 million. Reaching adjusted EBITDA profitability in Q4 depends on continued revenue growth and expense discipline.
Cash consumption is still material: Six-month operating cash use remained $28.0 million, and cash declined by $18.0 million even after proceeds from a follow-on offering helped fund operations and investment.
Acquisition integration and revenue quality: Gloo has announced five strategic acquisitions since its public-market debut. The company did not separate acquired growth from organic growth, making the durability and underlying composition of the 188% revenue increase harder to assess.
Debt and financing obligations: Reported debt increased from January, and the company extended the maturity of its $13.2 million senior secured loan. Continued losses could keep liquidity and financing needs relevant even if adjusted EBITDA improves.

Summary

Gloo’s fiscal Q2 2026 results combined nearly tripled revenue with improving operating leverage and a third consecutive sequential gain in adjusted EBITDA. Net loss narrowed substantially, although much of the year-over-year GAAP improvement came from lower non-operating expenses. The next points to monitor are the integration of recent acquisitions, six-month cash consumption and whether Gloo can convert its enterprise growth into the adjusted EBITDA break-even trajectory outlined for the second half of fiscal 2026.

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International Business Machines Corp Stock (IBM) Closed Up by 3.38% on Sep 9: What Investors Need To Know

Wed, 09 Sep 2026 20:15:23 +0000

International Business Machines Corp (IBM) closed up by 3.38%. The Software & IT Services sector is down by 0.76%. The company outperformed the industry. Top 3 stocks by turnover in the sector: Meta Platforms Inc (META) up 6.55%; Alphabet Inc Class A (GOOGL) down 2.28%; Alphabet Inc Class C (GOOG) down 2.09%.

What is driving International Business Machines Corp (IBM)’s stock price up today?

International Business Machines experienced notable upward price momentum accompanied by intraday volatility, driven by a convergence of positive technological announcements and favorable institutional positioning. Investors showed renewed interest in the technology giant following recent oversold conditions linked to cyclical mainframe revenue timing. Market participants appear to be refocusing on the company's long-term enterprise artificial intelligence and quantum computing potential, viewing recent valuation compressions as an attractive entry opportunity.

A major catalyst bolstering market sentiment was the milestone announcement regarding IBM's quantum computing capabilities. IBM, in partnership with Cleveland Clinic and RIKEN, was named a finalist for the prestigious ACM Gordon Bell Prize after achieving a historic breakthrough in quantum-centric supercomputing to model complex biological molecules. Additionally, IBM Research unveiled its latest open-source Granite AI time-series forecasting model, which demonstrated leading performance on global enterprise benchmarks. These advancements reinforced investor confidence in IBM's ability to commercialize next-generation computing infrastructure and software solutions.

Wall Street analyst commentary also contributed to the stock's positive movement. Institutional reports underscored that IBM's quantum and hybrid cloud initiatives were effectively being valued at minimal baseline expectations by the market, leaving substantial upside potential as commercial adoption accelerates. Strong recurring revenue growth across the enterprise software segment, supported by Red Hat and expanded AI management tools, provided fundamental backing against broader macroeconomic uncertainty.

Intraday volatility throughout the trading session highlights an ongoing tug-of-war between short-term technical traders and long-term institutional buyers. While lingering concerns over the timing of large hardware contract closures previously weighed on sentiment, the emerging clarity around enterprise AI integration and technical support levels triggered steady buying pressure. As institutional inflows stabilize the stock above key short-term moving averages, market focus remains squarely on the execution of IBM's hybrid cloud and AI growth strategy.

Technical Analysis of International Business Machines Corp (IBM)

Technically, International Business Machines Corp (IBM) shows a MACD (12,26,9) value of 1.435, indicating a neutral signal. The RSI at 55.252 suggests neutral condition and the Williams %R at 12.370 suggests overbought condition. Please monitor closely.

Media Coverage of International Business Machines Corp (IBM)

In terms of media coverage, International Business Machines Corp (IBM) shows a coverage score of 45, indicating a moderate level of media attention. The overall market sentiment index is currently in bullish zone.

Fundamental Analysis of International Business Machines Corp (IBM)

International Business Machines Corp (IBM) is in the Software & IT Services industry. Its latest annual revenue is $67.53B, ranking 7 in the industry. The net profit is $10.59B, ranking 11 in the industry. Company Profile

Over the past month, multiple analysts have rated the company as Buy, with an average price target of $242.71, a high of $350.00, and a low of $174.00.

More details about International Business Machines Corp (IBM)

Company Specific Risks:

Mainframe Demand Contraction and IT Budget Shift: IBM Z hardware revenue fell significantly as enterprise customers abruptly redirected capital expenditures away from traditional mainframes and transaction-processing software toward raw AI hardware infrastructure, imperiling core high-margin revenue streams.
Securities Fraud Class Action Investigations: Securities law firms have launched formal investigations into IBM regarding potential misrepresentations about the pace of enterprise deal closures and the true demand outlook for the IBM Z product pipeline.
Institutional Downgrades and Capital Rotation: Analyst revisions, including price target reductions from firms such as UBS and warnings from Evercore ISI, highlight persistent headwinds stemming from IBM's lowered 4%–5% revenue growth guidance and institutional capital reallocation into competing AI ventures.
Disruption to Legacy COBOL Ecosystem: The rapid market introduction of generative AI code-translation tools designed to automate COBOL modernization threatens IBM's high-margin legacy software lock-in and enterprise consulting business model.

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AEO Fiscal Q2 2026 Earnings: Tariff Refunds Drive Most of the Profit Gain

Wed, 09 Sep 2026 20:13:55 +0000

AEO Inc. (NYSE: AEO) reported fiscal Q2 2026 net revenue of $1.38 billion, up 8% year over year, while diluted EPS increased to $0.79 from $0.45. Aerie and OFFLINE led the top-line growth, with combined revenue up 25% and comparable sales up 19%, while American Eagle comparable sales declined 1%. Reported profitability rose sharply, but a $161 million net operating-income benefit from tariff refunds accounted for most of the improvement.

Core Earnings Data

Total comparable sales increased 6% during the 13-week quarter ended August 1, 2026. Gross profit and operating income grew much faster than revenue, although tariff refunds were the primary reason for the margin expansion.

The following figures are in USD millions except EPS and margins.

Metric	Fiscal Q2 2026	Fiscal Q2 2025	YoY Change
Net revenue	$1,380.4	$1,283.7	+8%
Gross profit and margin	$672.1 / 48.7%	$500.0 / 38.9%	+34% / +980 bps
SG&A and rate	$408.4 / 29.6%	$342.2 / 26.7%	+19% / +290 bps
Operating income and margin	$211.4 / 15.3%	$103.1 / 8.0%	Approx. +105% / +730 bps
Net income attributable to AEO	$134.1	$77.6	Approx. +73%
Diluted EPS	$0.79	$0.45	Approx. +76%

Brand and Segment Performance

Aerie was the main growth engine. Its segment revenue increased approximately 25%, supported by 19% comparable-sales growth, while American Eagle revenue was nearly flat and its comparable sales declined 1%.

Segment	Fiscal Q2 2026 Revenue	Fiscal Q2 2025 Revenue	YoY Change	Comparable Sales
American Eagle	$805.9 million	$800.4 million	Approx. +1%	-1%
Aerie	$535.8 million	$429.1 million	Approx. +25%	+19%
Other	$38.7 million	$61.5 million	Approx. -37%	Not disclosed

Management said American Eagle improved sequentially from the first quarter. The men’s business recorded its fourth consecutive quarter of growth, but the company continues to seek greater consistency in women’s merchandise.

Tariff Refunds Drove Reported Margin Expansion While Merchandise Margins Weakened

AEO received $196 million of IEEPA tariff refunds, including interest, during the quarter. After related incentive compensation, gross profit included a $179 million net benefit that contributed 1,300 basis points to gross-margin expansion. Because reported gross margin increased by only 980 basis points, the benefit more than accounted for the entire year-over-year improvement; merchandise margins themselves declined 330 basis points as improvement at Aerie was offset by American Eagle.

The company accrued $35 million of incremental incentive compensation associated with the refunds, including $18 million recorded in SG&A. After these expenses, tariff refunds added $161 million to operating income and 1,170 basis points to operating margin. A simple subtraction—not a company-reported adjusted measure—puts operating margin at roughly 3.6% before the disclosed refund benefit, compared with 8.0% last year.

Below operating income, interest expense increased to $47.1 million from $1.9 million. This included $45 million tied to an agreement entered into in the prior fiscal year to sell certain tariff-refund claims. Other income of $13.8 million included a $12 million gain on equity-method investments.

Inventory and Balance Sheet

Inventory at cost increased 14% to $817.9 million, while inventory units rose 9%. The difference partly reflected incremental tariff costs, and management plans to rebalance units between brands and merchandise categories during the rest of the year. Inventory growth nevertheless exceeded the quarter’s 8% revenue increase.

Cash and cash equivalents stood at $148.0 million, up from $126.8 million a year earlier, while long-term debt declined to $55 million from $203 million. The current ratio edged down to 1.59 from 1.62. AEO spent $66 million on capital expenditures and returned $21 million through its quarterly dividend of $0.125 per share.

Earnings Guidance

AEO updated its fiscal 2026 operating-income guidance to $540 million to $550 million. All guidance includes the impact of IEEPA tariff refunds, an important consideration given their substantial contribution to second-quarter profit.

Metric	Fiscal Q3 2026 Outlook	Fiscal 2026 Outlook
Comparable sales	Up mid-to-high single digits	Up mid-single digits
Gross margin	Flat year over year	Up year over year
SG&A	Up high-single digits	Up low-double digits
Operating income	$110 million-$115 million	$540 million-$550 million
Depreciation and amortization	$55 million	Approximately $215 million
Weighted-average share count	Low 170 millions	Low 170 millions
Capital expenditures	—	$250 million-$260 million

Recent Insider Transactions

Over the latest six-month period supplied, AEO insiders purchased 271,951 shares in 21 transactions and sold 17,337 shares in five transactions, producing net purchases of 254,614 shares. Total insider holdings were 14.98 million shares, with net purchases representing 1.70% of that total; these figures do not by themselves indicate insiders’ views on the company’s prospects.

The latest supplied records containing a disclosed transaction and value are shown below.

Date	Insider	Disclosed Transaction	Reported Value
July 17, 2026	David M. Sable, Director	Direct sale at $17.23 per share	$99,572
July 7, 2026	Noel Joseph Spiegel, Director	Direct sale at $16.78 per share	$48,528
July 7, 2026	Cary D. McMillan, Director	Direct sale at $16.78 per share	$48,513
July 1, 2026	Noel Joseph Spiegel, Director	Direct stock award at $0.00 per share	$0
July 1, 2026	Cary D. McMillan, Director	Direct stock award at $0.00 per share	$0
July 1, 2026	Janice E. Page, Director	Direct stock award at $0.00 per share	$0
July 1, 2026	David M. Sable, Director	Direct stock award at $0.00 per share	$0
April 6, 2026	Noel Joseph Spiegel, Director	Direct sale at $17.32 per share	$50,003
April 6, 2026	Cary D. McMillan, Director	Direct sale at $17.22 per share	$49,729

Risks for Investors to Watch

Dependence on tariff-related benefits: AEO said it has received substantially all refunds covered by its submitted claims. The $161 million quarterly operating benefit therefore makes reported earnings and margin comparisons less representative of underlying merchandise economics.
Underlying margin pressure: Merchandise margins declined 330 basis points despite reported gross-margin expansion, with weakness at American Eagle offsetting improvement at Aerie.
Uneven brand performance: Aerie’s 19% comparable-sales growth contrasted with a 1% decline at American Eagle. Continued inconsistency in American Eagle’s women’s business could limit portfolio-wide growth.
Inventory management: Inventory cost rose 14% and units increased 9%, requiring the company to rebalance products between brands and categories during the remainder of the year.
Expense growth: SG&A increased 19% in the quarter because of refund-related compensation and planned advertising investments. The outlook calls for another high-single-digit increase in Q3 and a low-double-digit increase for the full year.

Summary

AEO’s fiscal second quarter combined solid revenue growth with a clear divergence between brands: Aerie and OFFLINE expanded rapidly, while American Eagle remained nearly flat. Tariff refunds drove most of the reported profit and margin improvement, masking weaker merchandise margins and contributing to higher compensation and interest costs. The main points to monitor are whether American Eagle becomes more consistent, whether inventory is rebalanced effectively, and how profitability develops once tariff-refund benefits no longer dominate the comparison.

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Limoneira Q3 FY2026 Earnings: Lower Revenue, Higher Adjusted EBITDA

Wed, 09 Sep 2026 20:12:55 +0000

Limoneira (Nasdaq: LMNR) reported fiscal Q3 2026 net revenue of $43.8 million, down 7.7% from $47.5 million a year earlier, while diluted loss per share widened to $0.17 from $0.06. For the quarter ended July 31, 2026, non-GAAP adjusted EBITDA rose 30% to $3.9 million as higher agribusiness operating income and lower SG&A expenses partly offset weaker revenue and a Windfall Farms impairment.

Core Earnings Data

Revenue declined primarily because Limoneira transitioned its citrus brokerage operations to Sunkist, reducing brokered lemon, orange, and specialty citrus sales. Higher fresh lemon pricing provided a partial offset, while total costs fell more slowly than revenue because the quarter included a $4.1 million asset impairment.

The company also reported adjusted diluted EPS of $0.02. The following comparison separates the improved non-GAAP EBITDA result from the wider GAAP loss.

Metric	Fiscal Q3 2026	Fiscal Q3 2025	YoY Change
Total net revenue	$43.8 million	$47.5 million	Down about 7.7%
Total costs and expenses	$46.8 million	$48.1 million	Down about 2.8%
SG&A expenses	$4.0 million	$5.0 million	Down about 19.0%
Operating loss	$3.0 million	$0.6 million	Loss widened by about $2.3 million
Net loss applicable to common stock	$3.0 million	$1.0 million	Loss widened by about $2.0 million
Diluted loss per share	$0.17	$0.06	Loss widened by $0.11
Adjusted EBITDA	$3.9 million	$3.0 million	Up about 30.0%

Adjusted EBITDA and adjusted EPS are non-GAAP measures and exclude certain items affecting reported results.

Business and Segment Performance

Agribusiness remained the main source of revenue, but its decline outweighed growth in other operations. Within agribusiness, higher fresh lemon pricing contrasted with the loss of brokerage-related revenue and weaker avocado pricing.

Business Metric	Fiscal Q3 2026	Fiscal Q3 2025	YoY Change
Agribusiness revenue	$42.2 million	$45.9 million	Down about 8.2%
Other operations revenue	$1.6 million	$1.5 million	Up about 7.0%
Fresh lemon carton sales	$27.3 million	$23.8 million	Up about 14.7%
Avocado revenue	$8.0 million	$8.5 million	Down about 5.9%
Brokered and other lemon sales	Immaterial	$3.8 million	Decreased following Sunkist transition

Fresh lemon cartons sold declined about 1.7% to 1.373 million, but the average price increased about 16.8% to $19.88 per carton. These prices and sales were reported net of the Sunkist marketing fee.

Avocado volume moved in the opposite direction from revenue. Pounds sold increased about 24% to 7.013 million, while the average price fell about 23% to $1.15 per pound, resulting in lower avocado revenue. Limoneira recorded no orange, specialty citrus, or wine grape revenue, compared with a combined $2.3 million a year earlier, largely because of the brokerage transition.

Profitability, Cash Flow, and Balance Sheet

SG&A expenses fell by roughly $1.0 million, mainly due to lower salaries, benefits, and selling expenses associated with the Sunkist transition. However, the $4.1 million third-quarter impairment related to Windfall Farms contributed to the wider operating loss. Total Windfall Farms impairment charges reached approximately $13.5 million for the first nine months of fiscal 2026.

Cash flow figures were reported for the nine months ended July 31 rather than for the quarter alone. Net cash used in operating activities increased to $15.9 million from $7.0 million, while investing cash outflow was $9.5 million. Financing activities provided $26.2 million, helping fund those operating and investing outflows.

Long-term debt excluding the current portion rose to $100.7 million from $72.5 million at the end of fiscal 2025. Cash increased to $2.2 million from $1.5 million over the same period.

After the quarter ended, Limoneira agreed to sell Windfall Farms for $15.0 million in cash. The transaction was expected to close on September 14, 2026, subject to customary conditions, with management planning to use the monetization strategy to strengthen the balance sheet, reduce debt, and redeploy capital.

Cost Savings Raised Adjusted EBITDA While an Impairment Widened the GAAP Loss

The quarter produced opposing profitability signals. Adjusted EBITDA increased by $0.9 million even as the GAAP operating loss expanded by approximately $2.3 million. Management attributed the adjusted improvement to higher total agribusiness operating income and progress toward its targeted $10 million in annual SG&A savings, excluding an allowance on foreign receivables.

The GAAP result absorbed the Windfall Farms impairment and the effect of lower revenue. This distinction is important because the operating transition is reducing recurring expenses, but asset monetization has also generated substantial accounting charges. Future proceeds may support debt reduction, though they do not reverse the impairments already recognized.

Fiscal 2026 Guidance

Limoneira raised its avocado volume outlook after selling more than seven million pounds during the third quarter. Lemon volume remains within the prior range, but management now expects results at its lower end because of higher imports and lighter-than-anticipated sales.

Metric	Latest Guidance	Previous Guidance	Change
Fresh lemon volume	Lower end of 4.0 million–4.5 million cartons	4.0 million–4.5 million cartons	Shifted toward the low end
Avocado volume	7.0 million–7.25 million pounds	5.5 million–6.5 million pounds	Raised

For fiscal 2027, the company expects avocado production to exceed 10 million pounds, approximately 30% above its expected fiscal 2026 level. Management said the anticipated increase is primarily tied to 400 acres planted in 2023 and 2024 that are expected to contribute to fiscal 2027 production.

Limoneira also expects positive adjusted EBITDA in fiscal Q4 and a fiscal 2026 water-rights monetization event, though it did not provide expected amounts. Its Harvest at Limoneira projections include a $5 million distribution in fiscal 2026 and $35 million in fiscal 2027 as part of approximately $180 million expected over seven fiscal years.

Risks Investors Need to Watch

Lemon volume and import pressure: Higher imports led management to expect fresh lemon volume at the bottom of its fiscal-year range. Continued volume pressure could limit the benefit of higher carton prices.
Avocado pricing: Third-quarter avocado volume increased substantially, but a lower average selling price caused revenue to decline. Fiscal 2026 revenue will therefore depend on both the raised volume outlook and realized pricing.
Cash use and higher debt: Nine-month operating cash outflow more than doubled year over year, while long-term debt increased to $100.7 million. This raises the importance of completing planned asset monetizations and improving recurring cash generation.
Monetization execution: The Windfall Farms sale remained subject to closing conditions at the time of the release, while the planned water-rights transaction had no disclosed value. The timing and proceeds of these transactions could affect the pace of debt reduction.
Sunkist transition: The shift reduced brokerage revenue and eliminated certain citrus sales from Limoneira’s reported results. Although related cost savings are emerging, the company still needs to demonstrate that the streamlined model can produce sustained profitability.

Summary

Limoneira’s fiscal Q3 2026 results reflected a business in transition: reported revenue and the GAAP loss worsened, but adjusted EBITDA improved as agribusiness income and SG&A savings gained traction. Higher fresh lemon pricing and increased avocado volume were offset by the Sunkist brokerage transition, lighter lemon sales, and lower avocado prices. The main items to monitor are execution against the higher avocado outlook, lemon import pressure, operating cash use, and whether planned land and water monetizations translate into meaningful debt reduction.

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US Stocks Fall for Third Day, Dow Drops 400 Points; Memory Stocks Buck Trend as SK Hynix ADR Surges 7% to Record High

Andy Chen — Wed, 09 Sep 2026 20:12:41 +0000

TradingKey - The U.S. Treasury announced that it would triple the scale of its long-term Treasury buybacks to $6 billion. However, the 10-year Treasury yield surged to a near two-year high, indicating that investors had expected an even larger operation. U.S. stocks fell for a third consecutive day, while memory stocks bucked the trend to move higher.

At the close, the Dow Jones Industrial Average fell 0.77% to 52,380.66; the Nasdaq Composite Index fell 0.64% to 26,253.34; and the S&P 500 Index fell 0.48% to 7,636.36.

Tech Stock Performance

SK Hynix ADR (SKHY) surged 7.05% to $198.63, hitting an all-time high since its listing, with its market capitalization reaching $1.45 trillion.

According to the latest forecast from S&P Global Market Intelligence, driven by strong demand in the AI memory chip market, SK Hynix is expected to announce a new share buyback program in the fourth quarter of this year, with an estimated size between 20 trillion and 40 trillion Korean won (approximately $28 billion). Furthermore, after completing the large-scale buyback, the company will still have the capacity to pay generous dividends, providing another strong catalyst for the South Korean government's "Corporate Value-up" initiative and the momentum in restructuring shareholder returns. Mohammad Hassan, head of APAC equity dividend forecasting at S&P Global Market Intelligence, said in an interview that the lower limit for SK Hynix's new round of buybacks is expected to be 20 trillion won, and "it could potentially hit the upper limit of 40 trillion won again."

Among mega-cap tech stocks, Meta Platforms (META) rose 6.55%. On the downside, SpaceX (SPCX) fell 3.86%, Google (GOOGL) fell 2.28%, Amazon (AMZN) fell 1.78%, Broadcom (AVGO) fell 1.13%, Nvidia (NVDA) fell 0.91%, TSMC (TSM) fell 0.83%, Microsoft (MSFT) fell 0.47%, Apple (AAPL) fell 0.28%, and Tesla (TSLA) fell 0.10%.

[Source: FutuBull]

The Philadelphia Semiconductor Index rose 0.37% to 11,931.32. Among its 30 constituents, 18 advanced and 12 declined.

Among memory stocks, SK Hynix (SKHY) rose 7.05%, Micron Technology (MU) gained 2.75%, SanDisk (SNDK) rose 1.51%, and Western Digital (WDC) gained 1.04%.

Company News

Dell Technologies Reportedly Seeks $4 Billion Bond Sale to Pay Down Debt

Dell Technologies, the global server and PC maker, is seeking to raise about $4 billion through an investment-grade bond offering, Bloomberg reported on Sept. 9. Dell is issuing bonds across four tranches with maturities ranging from 3 to 10 years, media reported, citing people familiar with the matter. Initial price talk on the longest-dated tranche is up to 1.4 percentage points above comparable U.S. Treasuries. Proceeds will be used to refinance outstanding notes maturing in 2026 and for general corporate purposes, the person said.

Apple Unveils First Foldable iPhone Duo, Starting at $1,999

Apple has launched its first foldable smartphone, the iPhone Duo, featuring a 7.6-inch inner screen when unfolded, the largest display ever on an iPhone. When folded, it uses a 5.4-inch cover screen with a display area equivalent to 90% of the iPhone 18 Pro. Both screens support ProMotion, Always-On display, and a peak outdoor brightness of up to 3,000 nits. The new device features a Grade 5 titanium body and a precision hinge composed of over 100 components, supports IP68 dust and water resistance, and integrates Touch ID into the side button. Powered by a 2-nanometer A20 Pro chip and a custom vapor chamber, the iPhone Duo delivers up to a 35% boost in sustained performance compared with the iPhone 17 Pro and supports running two apps simultaneously in split-screen mode. It comes equipped with a 48-megapixel main camera and a 48-megapixel ultra-wide camera, with its foldable design also enabling rear-camera selfies with a real-time preview on the cover screen.

Industry & Macro News

U.S. Treasuries Extend Losses After Buyback Announcement, Market Views $6 Billion Cap as Insufficient

The U.S. Treasury stated that it will purchase at least $4 billion and up to $6 billion in long-term government debt in the first operation of its expanded buyback program, demonstrating Bessent's determination to curb recent increases in borrowing costs. U.S. Treasuries extended earlier losses after the announcement, indicating that the size of the announcement was smaller than some investors had expected. The success of the expanded purchase program remains to be seen.

Trump: U.S.-Iran War Will End Immediately After Midterm Elections

Trump stated that he will not change his strategy toward Iran for the midterm elections and is not currently seeking negotiations with Iran, saying the situation "has gone too far," though talks could still take place in the future. He noted that what the U.S. is seeking to address with Iran is no longer just the nuclear issue, and the negotiating table will also include other topics that were "impossible to put on the table" three months ago, adding that "this war will end immediately after our election." Touching on energy prices, Trump said oil prices will drop significantly after the midterms and will push gasoline prices below $2 a gallon, though achieving this goal may take longer. Regarding oil prices rising back above $100 a barrel, he linked it to preventing Iran from obtaining nuclear weapons and said Iran's current economic and domestic situation is very dire.

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Academy Sports and Outdoors (ASO) Q2 FY2026 Earnings Call: EPS Guidance Raised

Wed, 09 Sep 2026 20:00:51 +0000

Key Takeaways

Q2 fiscal 2026 net sales increased 3% year over year to $1.6 billion, while comparable sales declined 0.4%. E-commerce sales rose 12.8%.
Gross margin expanded approximately 440 basis points to 40.4%, primarily reflecting tariff refunds. Management said this benefit is non-recurring and expects no additional net P&L impact from refunds for the rest of the year.
Diluted EPS increased 17.3% to $2.17, while adjusted EPS rose 19.1% to $2.31. Tariff refunds, net of pricing, labor and marketing investments, added $0.06 to both measures.
Consumer trends remained divided by income. Traffic from households earning under $50,000 fell by a high-single-digit percentage, while traffic from households earning more than $100,000 increased by a high-single-digit percentage.
Academy Sports and Outdoors maintained its fiscal 2026 sales outlook and raised its gross margin and EPS guidance. Management expects full-year sales growth of 3% to 5% and comparable sales ranging from flat to up 2%.
Q3 started with low-single-digit positive comparable sales through Labor Day. Management said shifted tax-free weekends boosted early Q3 results but that comps would still have been positive without the timing benefit.

Core Financial Data

Metric	Q2 fiscal 2026 result	Year-over-year change or context
Net sales	$1.6 billion	Up 3%
Comparable sales	Down 0.4%	New stores in the comp base contributed about 50 basis points
E-commerce sales	—	Up 12.8%
Gross margin	40.4%	Up approximately 440 basis points
SG&A as a percentage of sales	25.5%	Up 20 basis points
Operating income	$246 million	Up 42.9%, including tariff refunds
Diluted EPS	$2.17	Up 17.3%
Adjusted EPS	$2.31	Up 19.1%
Total inventory	—	Up 4.4%; per-store inventory dollars down 2.3% and units down 5.6%
Cash	$298 million	Plus an untapped $1 billion revolver
First-half net sales	$3.1 billion	Up 4.7%
First-half comparable sales	Up 1.1%	Within the full-year guidance range

The 440-basis-point gross margin expansion reflected a 510-basis-point benefit from tariff refunds, partially offset by a 70-basis-point merchandise margin headwind as Academy reinvested proceeds into customer pricing.

During the first half, the company repurchased approximately $181 million of shares, equal to about 5% of outstanding shares, and paid approximately $19 million in dividends. It had $256 million remaining under its repurchase authorization at the end of Q2.

Business and Operating Performance

Sports and Recreation was the strongest division, with sales up 6%. Soccer merchandise grew at a double-digit rate, supported by World Cup demand, while treadmills increased by a high-single-digit percentage.

Outdoor sales rose 4%, led by shooting sports and coolers. The company had suppressors in approximately 85 stores at quarter-end and increased its year-end target to 135 stores from an original plan of roughly 100. Management also plans to launch Redfield private-label hunting rifles in the second half.

Apparel sales were flat. World Cup jerseys and T-shirts, outdoor apparel, and work and Western apparel performed well, partly offset by lower NBA championship merchandise sales. Footwear declined 1%, although management said Academy gained market share in the category.

The company is redirecting footwear investment toward performance running products from Nike, Adidas, Brooks, New Balance and ASICS, alongside lifestyle brands including Birkenstock and Ariat. HOKA is launching online and in 15 stores during the fall.

E-commerce remained a key growth driver, rising 14% in the first half. Academy added Instacart and Uber Eats storefronts, completed its migration to AI-based semantic search, and launched the Academy Retail Media Network. Management expects the retail media business to become a more meaningful contributor beginning next year.

Academy opened three stores in Q2 and remains on track to open 22 to 24 stores this year, including 11 during Q3. Stores opened from 2022 through 2025 that are already in the comparable base generated mid-single-digit comp growth during Q2.

The relaunched MyAcademy Rewards and credit card program also gained traction. Credit card applications increased 15%, approval rates rose by more than 900 basis points, and Academy credit card spending grew approximately 20%. Membership exceeded 15 million, and management expects it to reach 16 million by year-end.

Management Guidance

Fiscal 2026 metric	Updated guidance
Net sales	$6.23 billion to $6.36 billion
Sales growth	3% to 5%
Comparable sales	Flat to up 2%
Gross margin	35.5% to 36.0%
Net income	$390 million to $415 million
Diluted EPS	$6.05 to $6.45
Adjusted EPS	$6.50 to $6.90
Adjusted free cash flow	$300 million to $350 million

Academy affirmed its sales, comparable sales and net income ranges while raising gross margin and EPS guidance. The EPS outlook reflects a lower share count and excludes any effect from future repurchases.

At the midpoint, management expects sales to increase about 4%, comparable sales to rise approximately 1%, gross margin to expand 100 basis points and net income to grow about 7%.

For the second half, management said the midpoint of guidance implies an approximately 1% comparable-sales increase, with no major expected difference between Q3 and Q4. It expects second-half gross margin to be roughly flat year over year, balancing lower shrink and tariff-related benefits against pricing investments and elevated fuel costs.

Risks and Watchpoints

Management expects the consumer environment to remain pressured during the second half, particularly for households earning less than $50,000.
Lower-income customers are shopping closer to need and concentrating purchases around major promotional events, creating greater volatility between peak and off-peak periods.
Management expects the holiday season to be more promotional than last year and has incorporated that assumption into its plans.
Higher gas and freight costs are included in the updated outlook and may pressure second-half margins.
The Q2 tariff-refund benefit is non-recurring. Academy has received substantially all expected refunds and does not anticipate an additional net P&L benefit during the remainder of the year.
Q2 ticket increased 4.5%, supported by higher average unit retail, but transactions declined about 2% and units per transaction decreased.

Analyst Q&A Highlights

Management estimated that Q2 comparable sales would have been approximately flat without tax-free weekends shifting from late July into early August in Oklahoma, Missouri, Virginia and South Carolina. The timing helped early Q3, but management said quarter-to-date comparable sales would still have been positive without the shift.

On customer composition, management said households earning more than $100,000 represent the company’s largest and fastest-growing cohort, approaching 40% of customers. Households earning less than $50,000 remain near 30% but are shrinking as a share of the customer base.

Management attributed Academy’s relative resilience to its diversified assortment across sporting goods, footwear, apparel, outdoor products, grilling, coolers, shooting sports, fishing and camping. This breadth helped offset weakness in footwear and parts of the soft-goods business.

Regarding pricing, management said competitive price gaps remained consistent. However, Academy reversed selected price increases where demand weakened after products crossed key price thresholds, including reducing a BCG Coach’s Polo from $12.99 back to $9.99.

Management also emphasized that newer stores in underserved, mid-sized markets with lower competitive density are producing stronger results. The stores scheduled for the second half are weighted toward these types of markets.

Full Earnings Call Transcript

Complete Earnings Call Transcript

Management Remarks

Operator

[Operator Instructions]

I would now like to turn the conference over to Dan Aldridge, Vice President, Investor Relations for Academy Sports and Outdoors.

Dan Aldridge

Thank you, you may begin. Good morning and thank you for joining the Academy Sports and Outdoors second quarter fiscal 2026 financial results call. Participating on today's call are Steve Lawrence, Chief Executive Officer, and Carl Ford, Chief Financial Officer. As a reminder, today's earnings release and the comments made by management during this call include forward-looking statements. These statements are subject to risks and uncertainties that could cause our actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, the factors identified in today's earnings release and in our most recent Form 10-K and 10-Q filings. The company undertakes no obligation to revise any forward-looking statements. Today's remarks also refer to certain non-GAAP financial measures. Reconciliations to the most comparable GAAP measures are included in today's earnings release, which is available on our website at investors.academy.com. Good morning, we will review our financial results for the second quarter of fiscal 2026, provide an update on our strategic initiatives, and discuss our outlook for the year. Once we conclude prepared remarks, there will be time for questions. With that, I'll turn the call over to Steve.

Steven Lawrence

Good morning and welcome to our second quarter earnings call. As you read in our press release earlier today, we saw continued top line momentum in the business with sales for the quarter coming in at $1.6 billion, which was up 3% in total and translated into a slightly negative comp at down 0.4%. The dot-com business continued to grow double digits at up 12.8%, which improved penetration in this channel by 110 basis points versus last year. During our Q1 call, we mentioned a slowdown at the end of the quarter as we transitioned to Q2, which we attributed to overall inflationary pressures on the consumer, which were no longer being offset by increased tax refunds. The trend persisted into the early part of second quarter, May and June sales running up 2% in total and down 1% on a comp basis. You see this most pronounced in traffic trends from the lower income households making less than $50K annually, which were down high single digits during the quarter, a larger decrease than we saw in Q1, which was down low single digits. Conversely, we continue to see strong traffic trends in the higher income cohort with traffic from households greater than $100K annually tracking up high single digits during Q2, which was an acceleration to what we saw in the first quarter.

We're pleased to end Q2 on a high note, with July being our best month of the quarter, plus 3% in total, which translated into a modest positive comp. We believe July sales in back-to-school categories would have been even stronger. We had four states in our footprint, Oklahoma, Missouri, Virginia, and South Carolina, shift their tax-free weekends from the last week of July into the first week of August. While this disadvantaged the tail end of Q2, it did help us get off to a good start to Q3, the sales through Labor Day running up low single-digit comps. As we've seen in the past, when the customer is under pressure, they shop episodically and aggregate their purchases around the key events on the calendar as a way to expand their spending power. This held true this past quarter with events such as Memorial Day, Father's Day, Fourth of July, and Back to School performing well. These also happen to be the time periods where the promotions traditionally are at their peak. Similar to Q1, we continue to see stronger performance on the hard good side of the business. Sports and Recreation was our best business at up 6% with continued strength in sporting goods.

We've been sporting goods. We're definitely seeing a World Cup effect, soccer gear sales running up double digits for the quarter. We expect this trend will continue throughout the remainder of the year and into next. We're also seeing strength and fitness with treadmills up high single digits during the quarter as customers continue to prioritize health and wellness. Another very notable department is our front end department which is somewhat of a catch-all for us. This business continues to benefit from significant investments in trend right categories such as trading cards and outdoor speakers driven by Turtlebox. Outdoor was our second best performing division at up 4% driven by shooting sports, coolers. Well, not as strong as hard goods. We did have some bright spots on the soft goods side of the business.

While apparel sales were flat, we did see strong performance from categories such as World Cup jerseys and tees, outdoor, and work in Western apparel. Some of the World Cup good news was offset by decline in NBA championship gear as we anniversary the Oklahoma City Thunder winning the title last year. As we look to comp the World Cup next year, we believe the Women's World Cup merchandise, coupled with a strengthening assortment and improved localization in our fan shop assortment, should allow us to offset the gains from this year. Footwear was our softest category for the quarter with sales down 1%, but even running this decline, we did pick up market share during the quarter. While footwear is our smallest division at roughly 20% of our total sales, it is an important business for us. We service a diverse portfolio of customer needs, including cleats and athletic shoes you can wear on the field or court, casual shoes and sneakers, work boots and shoes, along with a meaningful business and seasonal style, such as sandals and flip-flops in spring and boots in fall. The team is focused on moving back to top-line growth in this division by aggressively shifting funding from underperforming styles towards the items and brands that are currently driving the business, such as performance running styles from brands like Nike, Adidas, Brooks & New Balance, as well as trending lifestyle brands such as Birkenstock and Ariat.

Clearly, we've seen a shift in the consumer spending patterns as we progress through the first half of the year, with demand decelerating from Q1 into Q2. Our expectation is the trends we saw take shape in Q2 will persist throughout the remainder of the year. Based on this assumption, we're reacting accordingly. We know that being able to present our customers with compelling value during the key events on their calendar is critical to driving sales in the back half of the year. Some actions are taken on this front. First, we're reinvesting the majority of the proceeds from the tariff refunds we received back into approved pricing for our customers. We've done a thorough review and have adjusted pricing across many of our private brand products to offer customers pre-tariff mobile prices, which has already stimulated demand, driven traffic and delivered value to our customers. A couple examples of this are, in Q2, we promoted our Outdoor Gourmet three-burner gas and charcoal grills for key events at 99.99, taking our largest private brand key item, Magellan Outdoors Laguna Madre shirt back to 19.99 versus 24.99 previously.

And finally, within our BCG apparel brand, we're promoting key programs such as our Coach's Polo at 9.99. Second, we continue to make sure that for the key events on the customer's calendar, we have market-leading deals and value on both national and private brands. We'll continue to rationalize promotions during the lulls in the calendar in order to help fund these more aggressive promotions in the peaks. Third, we'll also continue to utilize clearance as a way to drive traffic in off-peak months by providing deep value on end-of-life product as we close out each season. These strategies proved to be particularly valuable to the under $50K a year household who frequently shop out of season as a way to outfit their family in advance of the next year's needs. Fourth, we're leaning into our newly reinvented and relaunched multi-tier MyAcademy Rewards loyalty program by providing more targeted discounts and offers to our loyalists during key moments on the calendar. We're still in the early innings on this program, but are already seeing increased engagement from this initiative.

And I'll share more on this front a little bit later in the call. Finally, we're doubling down on our commitment to delivering newness and innovation across all of our categories as a way to drive traffic with existing and new customers. This has been a key ingredient in our success over the past couple of years, and we're accelerating our pace on this front. A couple of examples of this are we're excited to announce the launch of HOKA in 15 stores and online for this fall. In HOKA will also receive assorted allocations and improved in-store merchandising for all key performance running programs across brands such as Nike, Brooks, Adidas, New Balance, and ASICS. The team has also done a great job of identifying and incubating new brands and smaller door accounts and then rapidly expanding them into additional doors and categories once we get a good read on them. The case study for this has been BURLEBO, which continues to grow high double digits for us over the past several years. We grew the brand from 25 doors to all doors within two years, and BURLEBO is now one of our top 10 apparel brands. The team used the same model to test Chicken Legs, a TrendRight conversational print running short brand in 25 doors this past spring.

The results were well above our expectations, and we quickly scaled this brand out to roughly 200 doors from back to school. We're also leveraging the continued growth in work in Westernwear by expanding one of our key brands Ariat through shop installations and 200 doors, which is double the amount of doors we announced in Q1. This category has been experiencing strong growth over the past couple years. With the partnership we're building on this front, we expect this growth to continue for the remainder of this year and into next. Newness is not just limited to the soft goods business. A great example is how we're scaling new brands and categories in shooting sports. We've been rolling out suppressors this year.

We now have this new category in roughly 85 doors at the end of Q2 with the goal of pushing out to 135 doors by the end of the year versus our original plan of roughly 100 stores. Ultimately, we expect to see this going to almost all doors in 2027. As a reminder, this business is 100% incremental for us. In addition, we're rolling out private label hunting rifles under the Redfield brand in the back half of the year. Introduction of Redfield into the firearms category will allow us to fill a void in the marketplace with shotguns and scope-hunting rifles that can retail for $100 less than comparable national brand firearms. We believe the refinements we're making to our go-forward strategy will continue to drive both traffic and sales increases by delivering compelling value coupled with a steady diet of new and innovative brands and items. This gives us the confidence to reaffirm our sales guidance for the full year of plus 3% to plus 5%, which would translate into a flat to plus 2% comp for fiscal 2026.

Shifting gears, I'd like to share more on the continued progress we're making against our long-range plan strategies. I will start with our single largest growth initiative, new stores. We remain on track to open up 22 to 24 stores this year. During Q2, we opened up three new stores with locations in Altoona, Pennsylvania, and Morristown and North Knoxville, Tennessee. We plan to open 11 additional stores in Q3. Stores for this year are scheduled to open up in November, giving customers a great option to shop for holiday gifts. At this point, we have 46 stores that were opened up between 2022 and 2025 that are currently in the comp base, and these stores continue to perform well in Q2, topping in the mid-single digits. As we progress through the back half of the year, we'll continue to see fall 2025 stores start to move into the base.

By the end of the year, we'll have 63 stores from prior vintages help fuel our comp sales. Our second major sales initiative is driving outsized growth in our dot com business. We're running up 14% in our dot-com channel through the first half of the year and during Q2, we continue to make solid progress on this front. We rolled out storefronts on both the Instacart and Uber Eats same-day delivery platforms to complement our existing partnership with DoorDash. Research shows there is minimal overlap between users on these platforms. We view this as a positive. We also completed our migration on our site and app from traditional keyword search to AI-based semantic search. Moving forward, this will continue to improve our overall site experience as more and more users adopt conversational prompts over keywords as their everyday choice for how they search across the web with AI. At the tail end of Q2, we launched our Academy Retail Media Network, or ARM for short, and have already onboarded several vendor partners who believe we can provide them with expanded and unduplicated reach in the marketing to the Always Game families who serve across our footprint. We don't expect this to be a huge source of revenue or profitability during the back half of this year. We believe our retail media network should be a solid contributor starting next year.

We also plan to launch our first foray into social commerce during Q3 with a TikTok Shop featuring our Freely brand. As you already know, this is a rapidly growing channel for commerce, and we see this as a key way to attract younger consumers to our brand. The third leg of our long-term growth algorithm is to strengthen our existing base business. One of the key focuses on this front has been the integration of our MyAcademy Rewards program with our credit card program. During the quarter, we completed this relaunch, and we're seeing a very strong reaction from customers right out of the gate. A couple of data points I'd share to support this. Credit card applications were up 15% during the quarter, with approval rates up over 900 basis points for the same time period. Spend on Academy credit cards was also up roughly 20% during the quarter.

This tells us that our new value proposition is resonating with existing customers, while also helping us attract a larger number of affluent customers who also tend to have higher credit ratings. We've also seen the spend outside of the Academy on the co-branded card exceed our expectations. This tells us customers are starting to move their MyAcademy Rewards MasterCard to their top of wallet choice. As a reminder, customers earn 2% back on outside spend that generates rewards that are redeemable at Academy. Simply put, as more and more customers adopt the MyAcademy Rewards MasterCard for their everyday purchases, this behavior will translate into additional traffic and sales for Academy down the road. The end result is we believe we should hit 16 million members for MyAcademy program by the end of the year, and are currently sitting at over 15 million members in the program, which was our original goal for the end of this year. This initiative is also in the early innings, and there's ample opportunity for us to scale this program, both in terms of new customer acquisition and driving expanded usage with existing members.

As a reminder, members that have a private label credit card spend two and a half times the average customer. We expect those with co-branded cards to spend three and a half times the average customer. We expect the impact of this integration and relaunch of our loyalty and credit card program will provide us with powerful new tools to drive sales and profitability moving forward. Another key initiative under this strategy is to build a deeper connection with families and communities we serve. To help with this, we're working across a couple of fronts. First, working with two of our key vendor partners, Nike and the Jordan Brand, to launch the H-Town Classic basketball tournament next month. This is a three-on-three tournament for youths aged 11 to 18 to help celebrate basketball culture in our hometown. The tournament will be played in the parking lot of one of our local stores where we expect to see over 150 teams compete. And we're really excited to see this idea to come to life this fall.

Second, we signed a sponsorship agreement with Hyrox to complement our brick-and-mortar exclusivity to this rapidly growing fitness trend. With this partnership, we will tie activations to races and key markets in our footprint, such as Atlanta, Dallas, Nashville, and Tampa, including the title sponsorship of the race in Houston next spring. As you can tell, we're making solid progress against our long-range plan initiatives, but we still have a lot more opportunity ahead of us each as these growth initiatives strengthen and scale. At this point, we're halfway through the year, and our sales year to date are plus 4.7% to last year of $3.1 billion, which translates into a plus 1.1% on a comp basis. These results put us squarely in the middle of our annual comp sales guidance range of flat to plus 2%. Our expectation is that the consumer backdrop will remain challenged during the back half of the year. At the same time, we continue to build momentum in our long-term strategies, and when you couple that with the adjustments we've been making in our assortment and pricing, we believe we can successfully navigate through the remainder of fiscal 2026 and deliver against our annual guidance.

Now I'd like to turn it over to Carl to give you a deeper dive into the financials for the quarter. Carl?

Unknown Speaker

Thanks, Steve. Net sales for the second quarter were $1.6 billion, an increase of 3%, with comparable sales down 0.4%. E-commerce remained a strength in Q2, with continued investment resulting in 12.8% sales growth. New stores in the comp base continue to provide a consistent tailwind, with comps up mid single digits and they contributed approximately 50 basis points to comp during the quarter. The two-year stack of comp sales for the total company has continued its positive trajectory with sequential improvement five quarters in a row. The two-year stack for Q2 was slightly negative. Additionally, spending on the Academy credit cards was up approximately 20% during the quarter. Gross margin for the quarter was 40.4%, up approximately 440 basis points year over year. The increase was driven by 510 basis points from tariff refunds and were partially offset by a negative 70 basis point impact from merch margin as we reinvested tariff refund proceeds into improved pricing for our customers.

While tariff-related proceeds provided a net benefit of 440 basis points to gross margin in the quarter, the majority was offset as part of our FY '25 tariff sales transaction and also used for strategic investments, examples of which Steve mentioned in his remarks. We have received substantially all tariff refunds during the second quarter and do not expect any additional net P&L impact for the remainder of the year. SG&A was 25.5% of sales, up 20 basis points year-over-year, primarily driven by our investments in strategic growth initiatives for 21 new stores opened since Q2 FY '25, tech investments in e-commerce and customer data, the rollout of 55 new Jordan Brand shops in Q2, and the reinvestment of tariff refunds into incremental store labor and marketing. These investments deleveraged SG&A by 150 basis points. During the quarter, we leveraged base expenses by 130 basis points on a negative 0.4% comp. And year-to-date, we have leveraged SG&A in total by approximately 20 basis points.

Operating income for the quarter was $246 million, up 42.9% inclusive of tariff refunds year over year. Other expenses include $61.8 million attributable to the tariff refunds we sold in 2025. Diluted earnings per share was $2.17, an increase of 17.3%, and adjusted earnings per share, which excludes stock compensation and the loss on early retirement of debt, was $2.31, an increase of 19.1%. Tariff refunds net of strategic investments into price, labor, and marketing had a positive net impact on EPS and adjusted EPS by six cents during the quarter. There is a reconciliation in the earnings presentation on page 11 that details the impact from the tariff refund. From a balance sheet and cash flow standpoint, we remain in a position of strength. Total inventory was up 4.4% year over year, but on a per store basis was down 2.3% in dollars and down 5.6% in units as we continue to manage the flow of new product while expanding our store count.

We ended the quarter with strong liquidity and generated healthy, free cash flow. Net of tariff refunds of $32 million, representing a 49% increase year over year. This allows us to continue investing in the business while returning capital to shareholders. Cash balance was $298 million at the end of the second quarter, and we have an untapped $1 billion revolver. Remember, we refinanced our long-term debt in Q2 and improved our weighted average cost of debt by 50 basis points. We also amended and extended our ABL early in the second quarter, which directly led to the $1 million reduction in interest expense for the quarter. As part of the debt transactions, we also had a $1.9 million non-cash loss on early retirement of debt from the original 2020 issuance.

Our capital allocation philosophy has not changed. Approximately 50% of cash flow from operations on an annual basis is reinvested back into the business, and we expect to return the remainder to shareholders through dividends and share repurchases. In the first half of the year, we repurchased approximately $181 million of our shares, representing about 5% of our outstanding shares, paid approximately $19 million in dividends. We continue to fund strategic investments, including new stores, omni-channel capabilities, and technology initiatives. At the end of the second quarter, we had $256 million remaining on our share repurchase authorization. Looking to the back half of the year, we do expect to have continued share repurchases as conditions warrant, but we expect they will not be to the same level as the first half of the year. As I turn to guidance, the progress of the strategic initiatives in our growth algorithm give us confidence in maintaining our sales and comp guidance in the face of continuing consumer pressure. First, new stores continue to be a tailwind to the business, comping up mid-single digits while contributing 50 basis points of comp for the first half of the year.

We expect this contribution will grow as we move forward. Secondly, our e-commerce business grew 14% for the first half of the year as we expand our offering and functionality for customers, and we expect this to be a tailwind for years to come. Thirdly, we are growing the existing business by leveraging our loyalty platform to drive incremental sales, with the sales attributable to an Academy credit card up almost 20% during Q2. Finally, we are launching exciting new items like HOKA and Redfield firearms and are expanding growing TrendRight brands into shop concepts like Ariat. Halfway through the year, we are at or ahead of annual guidance across all metrics. And while the consumer remains pressured and there continues to be macro uncertainty, what is certain is that we are moving the ball forward and positioned to win in this challenging environment. We are updating select elements of our full year outlook to reflect the second quarter performance. Also planning for higher gas and freight prices and the timing of new store openings.

We are affirming our sales and comp guidance with sales in a range of $6.23 billion to $6.36 billion or growth of 3% to 5% and comp sales of flat to plus 2%. We are raising our gross margin rate guidance to 35.5% to 36.0% for the year, while affirming net income guidance in a range of $390 million to $415 million. We are also raising EPS to account for a lower share count. We now expect earnings per share of $6.05 to $6.45 and an adjusted earnings per share to be in the range of $6.50 to $6.90. Finally, we expect adjusted free cash flow in the range of $300 million to $350 million. At the midpoint, we expect total sales to be up 4%. Comp sales to be up approximately 1%, gross margin expansion of 100 basis points and net income to grow by approximately 7%, resulting in EPS growth of over 12% when compared to fiscal year '25. This EPS guidance does not include any impact from future share repurchases. As a reminder of our long-range plan, you should expect a 5% sales CAGR, double-digit EPS growth and high single-digit unit growth over the next five years. With that, we're ready for Q&A. Operator, please open up the line.

Operator

[Operator Instructions] Our first question comes from Chris Horvers with JPMorgan.

Please proceed with your question.

Question-and-Answer Session

Christopher Horvers

Can you talk about how you're thinking about the cadence of sales in the back half of the year? You have a lot of newness that's hitting. You've got the credit card potentially accelerating some of your transactions and ticket there. And then you also have the new store lift. You know, on the other hand, we have to be cognizant of comparison. And so how are you thinking about the cadence between the third and the fourth quarter? And then within that, can you isolate how much the back to school shift, tax holiday shift, was a detriment to the second quarter versus what you spoke to quarter to date?

Steven Lawrence

Sure, Chris, I'll start. I would tell you that if you look at just those four states with tax-free shifts, if that hadn't happened, we would have been essentially flat for the quarter. And that would have taken us to, we'd still be running positive quarter to date through Labor Day, but slightly less than we currently are. So it definitely impacted the end of the quarter, it gave us a good start to the first week or two of the quarter here, but we'd be running positive without that shift for Q3. And as we mentioned, we're running up low single digits positive through Labor Day, so we're excited about that. In terms of cadence throughout the back half of the year, the midpoint of the guidance implies roughly the continuation of the trend we saw in the first half. We're running up 1.1% comp through the first half of the year, the midpoint implied in the guidance would be roughly a 1% comp. I don't see there being a big variance between performance between Q3 and Q4 from a comp perspective. You know, we're up against negative comps from Q3 and Q4 last year.

I think we're down 0.9% in Q3, and I think down 1.5%, 1.6% in Q4. So fairly consistent from quarter to quarter. So we'd expect the business to be fairly consistent in the back half of the year. And yes, you're right. What we're excited about is, you know, we've been quietly investing in a lot of these long-term growth drivers for us over many years. And we feel like they're all starting to kind of take hold and really start making meaningful impact in the business. You know, obviously we've been opening up new stores now for four years. We had 47 stores in the comp base, in the quarter from '22 through '25 that we opened up.

By the end of this year, we'll have 63 of those stores in there as a lot of the back half stores from last year kind of pull into the comp base. We think that's going to continue to accelerate. But we think that the relaunch of the credit card and the combination with our loyalty program is off to a really good start. We think that's going to be a growth driver for many years. We think that in a world where the customer, at least the lower end consumer is really stretched, we think we've done the right thing in terms of reinvesting in price and providing some really outstanding value to them. On the flip side, the other thing that continues to work is newness. We feel like we've got a steady diet of new and innovative brands coming.

Obviously, the thing we're most excited about for this quarter would be the launch of HOKA. But, you know, the expansion of Chicken Legs, the Ariat shops we talked about, all those things should be growth drivers for us moving forward. One of the things we didn't talk about in the prepared remarks, but, you know, we were two years into this RFID journey that continues to help us from an in stock perspective. And I would also say that if you remember last year, the back half of the year was somewhat disrupted by some of the price change activity that was taking as a result of the tariffs. We start to lap this year, in most cases, in some cases we'll have even better pricing than we did last year. So all those things give us confidence that we think we can kind of go right down the goal post of hitting our guidance. I don't think it's going to be easy.

I think the consumer backdrop can continue to be challenged, but we feel really good about the initiatives we have, and it's showing so far through this year that we can overcome some headwinds out there.

Christopher Horvers

So as a follow-up on the gross margin, in the second quarter you reinvested in pricing about $11 million you mentioned mostly private label investments. So a two-part question. One is, is your outlook for gross margin any different than it was prior to today for the back half of the year? And some of your peers and brands have talked about expected higher clearance and promotional pressures and some of the footwear that you also carry. So I guess to what extent do you see that as a pressure in the market today, or are you anticipating embedding in the back half guidance?

Unknown Speaker

I think we'll break that one up, Chris. I think overall, embedded within the annual guidance that we gave, the fall assumption for gross margin is roughly flat. I think there's a couple of puts and takes to that. From a tailwind standpoint, shrink continues to be good news in both the first and the second quarter. I would expect that to continue. I think the overall tariff rate will be a tailwind. I think we will reinvest into what you would call a headwind, which would be pricing investments.

And I think fuel is going to remain elevated for the balance of the year.

Steven Lawrence

In terms of promotional and competitive backdrop, I mean, I definitely think we saw the same thing a lot of our competition did in terms of an increase in promotions around the peaks, most notably Father's Day, Fourth of July, back to school. We expect that to continue into holiday. You know, we're in a bit of a lull now as we kind of get past back to school, but our anticipation as we go into Q4 is that it will be more promotional than last year. We have that embedded into our plans and forecast. And as I said, we've been working on rationalizing pricing in the lulls to try to afford some of that increased promotionality. And I think we've got a good beat on how the back half of the year is going to play out, and I think we're ready for it.

Christopher Horvers

Thanks so much. Have a great fall season.

Operator

Our next question comes from Jeffrey Lick with Stephens. Your line is now live.

Jeffrey Lick

That was one who obviously, you know, your largest competitor announced had disappointing results, I guess, for a variety of reasons. You guys don't necessarily overlap with them perfectly merchandise-wise and or geographically. And I was wondering maybe you can just kind of, as you looked at that, what would you point out as, hey, this is where we were different, either merchandise or geographically?

Steven Lawrence

Yeah, I would start with, I think it comes down to assortment. And I think we have a really unique position in the marketplace because of the diversity of our assortment. You know, certainly we overlap with, you know, some people on an athletic footwear and apparel side of the business and maybe a little bit in sporting goods. But, you know, we also do a big outdoor grilling and backyard business. We do a big cooler and drinkware business. We have a a big outdoor business that has been really strong through the first half of year in terms of shooting sports and fishing and camping. So I think we're maybe our results are a little different than than some of the people out there that are maybe a little more invested in purely footwear or apparel is the diversity of the assortment. And so I think sometimes that does that doesn't work in our favor, certainly when you're in a the footwear cycle and you've got lifestyle footwear and athletic brands driving the business, I think that benefits people to an outsized perspective and probably we didn't reap the benefits of that and I think on the downside, we're a little more insulated because of the diversity of our assortment.

We give a range for guidance for a reason. I think what we can control with the initiatives that we have in place. And I would reiterate those. We've got the credit card loyalty program, which we're one quarter deep into, and it's driving really great results. We've got the reinvestment in the price. We've got a trending hard good side of the business. It's helping offset a little bit of softness in some of the softer side of the business. We had a ton of newness coming in with the new brands we're launching, notably HOKA, the wall of Chicken Legs, the Ariat shops, the Redfield launch, et cetera.

You got a dot-com business that's been running double-digit comps for multiple quarters. You got the RFID expansion I already mentioned and then the new stores coming into the waterfall. So those are all positives. You know, I think the wild card is just what is going to continue to happen with the consumer backdrop. That is something, you know, we we don't control. And we think we've got the appropriate guidance moving forward, and I think at the midpoint it would solve back to a positive comp. We think we're very confident we can be within kind of the goalposts on that guidance. But that would be the thing that would make it tough to, you know, guarantee, which I think we're looking for at 1%. At the risk of piggybacking on Steve, I would say that the midpoint of our back half.

Unknown Speaker

Guidance implies about a 1% comp. I think if you move beyond FY '26 and you look at the things that we talked with you guys about at the analyst day back in April, we feel really good about that long-term algorithm of sales up 5%, low single-digit comps, and double-digit EPS. I think once we get to the, the back of this year. If you look at what it is that we're at, the midpoint that we're forecasting, up 4%, up 10%, from an adjusted net income standpoint, and GAAP earnings per share up 12.8%. It feels like a prototype of what you should expect to us, but, yeah, back half embedded guidance is plus 1% comp.

Simeon Gutman

The percentage of customers that you defined as low income, have you told us that? And then the other follow-up is this. When we had Investor Day, you showed us a couple of stores. I think one was Searcy, one was Perimeter Georgia. If you take stores, and I don't know if this is true, but have a less competitive overlap, right? You learn from some of the openings, we talked about this from four or five years ago, and you've repositioned the openings. Is there a tale of different comps if you take a cluster of stores that are in these more favorable locations versus call it some of the less, ones that are just higher competitive overlap?

Unknown Speaker

Yes, so I think I'll start with your first part of that question, the percentage and the cohorts. You know, we talk with you guys about traffic and I.

Simeon Gutman

I think if you look at the customers above $100,000, it's our largest and our fastest growing cohort of customers. It's pushing 40%. If you look at those that are below $50,000, you know earlier this year they were about 30%. I think it's, you know, still generally in that neighborhood but the shrinking obviously yes yes the one's growing high single digits and one's shrinking. So I like to say that beginning with that trend back in Q3 of 2024, if you look at our customer portfolio, it's significantly de-risked associated with where we're at right now. Right now just based off of the changes that we're seeing. And I think that those changes are really a reflection of that commitment to value and I think that's going to be even more in demand going forward. Yes, we've pivoted a lot since we started reopening stores back in FY '22. Initially, those first nine stores in 2022 were very, very opportunistic.

I think where we see our strength is being able to serve that underserved customer in mid-sized markets, that Always Game family that's got kids in the home, they're playing sports. They like to get outside and do things in an outdoors environment. We're seeing when we get that algorithm right in terms of where we're launching the stores, which we pivoted more into, outsized comp growth. We talked about mid-single-digit growth for all of them. Of the new stores. I would say that's stronger in the stores that we've launched, you know, in '24 and the first part of '25. I'm really optimistic about the back half of '25 stores that get into the comp later in the year. Overall, 50 basis point, tailwind as it relates to those stores that are in the comp set.

And I think we're getting better and more targeted the further that we go along. And I think you'll see more of that in the 125 stores that we open over this long-range plan.

Steven Lawrence

The only thing I'd add to Carl's comment is if you look at the stores that are slated to open in the back half of this year, they're heavily weighted to those types of markets you just called out, Simeon. It's more mid-sized, smaller markets in our legacy or existing footprint, underserved customer, low competitive density, we have high expectations for those stores perform well.

Operator

Our next question comes from Michael Lasser with UBS. Your line is now live.

Michael Lasser

When you look at the category composition of what drove the business in the second quarter, a lot of hard goods, including sports and firearms. As you've moved into the current quarter where your comps are running up low single digits quarter to date, has it been the same categories that have driven the business, and can you achieve this midpoint of the guidance for the back half of the year if footwear and apparel remain under pressure?

Steven Lawrence

So we have seen the complexity of the business beneath the surface change a little bit, obviously, in August and early September. The footwear and apparel businesses are the ones that most are impacted by back to school. We saw both of those come back in the month of August. So what that tells us is the customer is still out there, they will shop when they need to. As I mentioned earlier, we're seeing them buy closer to need. So I think there was maybe a little bit of a shift out of back to school, at least for us because we tend to have that earlier back to school into August from July. Some of that was probably driven by the tax free moves as well. And if you look at how we modeled the back half of the year, we definitely shifted some investment around, you know, for the remainder of Q3 into Q4 to fuel the trends we're seeing on the hard goods side of the business.

And I think we've got the appropriate forecast for the soft side of the business of the business knowing that it's going to be a little more competitive from a pricing perspective.

Michael Lasser

My follow-up question is, obviously, there were a lot of moving pieces within the gross margin in the second quarter. So, can you give us more detail on what you're expecting for the gross margin in the back half of the year? As you move into 2027, should we be anticipating that Academy's gross margin is going to be down after you have lapped some of the differences different moving pieces from this year?

Unknown Speaker

Yeah, I think the, thank you for the question. You've got the annual guidance embedded within that annual guidance is for fall gross margin roughly flat. The puts and the takes, I'll just kind of reiterate what I said earlier. I think shrink will continue to be a tailwind and tariffs will be a tailwind. Headwinds will be that investment in pricing and I think fuel is going to be with us for the entire to the back half of the year. As it relates to next year's, we're not giving FY '27 guidance at this time. We will during when we typically do.

But I would just point you back towards what we talked you through in the analyst day related to going from a 9% EBIT to a 10% EBIT. That does not have a regression of gross margin embedded into it. The one thing, and I hope that you give us at least credit for transparency, but associated with the breakout of tariff refunds that we provided, what I will say is that 440 basis points of net gross margin impact in Q2, that is non-recurring. I think as it relates to FY '27 and beyond, we're not thinking about gross margin going down. About private brand penetration going up and how does you know new lower cost sourcing products allow us to do that. We're thinking about you know retail media network we put 30 basis points of EBIT margin in the waterfall that we showed you on analyst day. Look, it's going to be a smidgen this year in fall, but that's going to get bigger. We've got a credit card partnership that's performing well. We're seeing credit card spend inside of Academy up 20% year over year. And for the first time ever, we launched the MyAcademy Rewards MasterCard.

And so that provides a revenue stream for the company that will manifest itself on gross margin rate as well. So we're not planning to regress on gross margin in the back half of the year, nor in the LRP.

Operator

Our next question comes from John Heinbockel with Guggenheim Partners. Your line is live.

John Heinbockel

Hey, Steve, I wanted to ask, behavior of those higher income consumers, in terms of how they shop the store, buying closer to need, responding to promotion, what's their behavior like differently than the base? And then where do you think you're under-indexing with them? Where's the greatest opportunity to pick up wallet share?

Steven Lawrence

I think that the trends you cited are true of pretty much all of our income cohorts, but I think it's more exaggerated within the lower income cohort. So I think the shopping is even more episodic. They definitely come out during the peaks on the calendar, retreat during the lulls, and it takes some pretty deep discounting to get some of those people, I think, in the store during those time periods. That's one of the reasons when we talked about ways we can get them to activate with us. We talked about using clearance, right? That is a way we can deliver deep value at the end of the season to these customers. And what we found in our customer research was they told us, hey, we will buy, you know, the out-of-season bat this year so that my kid can play, you know, softball or baseball next year. And they're okay with that if they can get a really good deal.

So we're going through one of those periods right now in September. We go through another one as we exit fall into spring in February and early March. And I think they definitely come out then. I think they'll come out again during holiday, when we're running deep discounts around Black Friday and kind of those promotional windows. But I think you're just seeing more of a pronounced behavioral change from them than you do see from the upper income consumer. That being said, on the other end of the spectrum, newness continues to do well. So we will see almost agnostic of price that if there is something really new that they have to have, that they will buy it.

And so we're also leaning into that as well. But I think that's probably a little more of the higher end consumer than the lower end consumer. On the under indexing, where we under-indexing with the higher household income. I think the brand that we're launching, I think the HOKA going live with online and 15 stores out of the gate, that'll give us a really good read about how our customer responds to that and whether it drives more more customer cohorts in. I look at what we're doing with work in Western, you would think. That's not a guy out there who's road grading and stuff like that. That's a look and it typically has a higher household income that he's willing to invest in. And so I think that to the extent that we're launching new brands that are exciting and compelling, I think it'll draw more traffic, which is what we've seen from that above $100,000 household, but I think it'll drive new traffic as well.

John Heinbockel

And Carl, quick follow-up. The base leverage expenses is impressive. Where's the bulk of that coming from? Is that, you know, because it's gotta be a large number. Is it overhead predominantly? Is it a little bit of that supply chain? I guess, where is it coming from and then, I don't know how sustainable 120 or 130 basis points is, what's your thought on that?

Unknown Speaker

Yes, I actually really appreciate the question. So here today, SG&A is 20 basis point levered from a year ago. In the second quarter, we were 20 basis points of deleverage. We talked in my prepared remarks about where we're investing. That should not be a surprise to you guys. That is our long-term algorithm. And we threw in a little bit of tariff refunds on top of it. That was a deleverage of 150.

So where the 130 basis points of what I refer to as base leverage came from would be corporate labor and recruiting and, you know, maintenance and repairs and third-party spend with what we call professional fees. I think the team is doing a great job of managing safety incurrences, so things like workers comp and general liability, those are providing benefit for us and the team has managed healthcare costs well. So those would be some of the categories that I would include. And yes, I don't think it's realistic that it's going to be 130 basis points on a slightly negative comp, but I think if you do the math on what low single digit comps would mean, that gets to be really exciting and makes that 10% EBIT mark a little more real.

Operator

Our next question comes from Gregory Melich with Evercore. Your line is now live.

Gregory Melich

Thanks. I have two questions. First, thanks for the detail on the tariffs and the reinvestment. Just wanted to make sure we're thinking about the right way. If we think about that, what was in gross margin and price, that should be a number that sort of continues into the back half and maybe goes up a little bit, just given the way it flows in. And then on SG&A, should we consider the reinvestment and store experience to be something that's in the base in the back half, and then my follow-up was on the new innovation.

Unknown Speaker

Yes, I think as you think about reinvestment into the customer in the form of price, I think you should consider that as part of the algorithm for flat gross margin overall in fall. And the investments into customer experience, specifically with labor and marketing, was in some very select markets in the second quarter. Testing and learning, I would not bake that into the long-term algorithm.

Gregory Melich

Got it. Super helpful. And then I guess as you're seeing some of the benefits come and things like even treadmills, etcetera. How is the reallocation of the store footage going as you do the Jordan's shop in shop and even as you bring in HOKA and other things? Are we expecting a certain area to expand, maybe another area to contract, and is the SKU count growing or shrinking as part of this?

Steven Lawrence

Yeah, what I would tell you is that we're continuing to focus on localization. You know, I think that we've done a good job of localization over the past couple years. I think we can continue to do an even better job. And as we move forward, I think you're going to see us continue to kind of shift floor space around towards the trending categories. Maybe even reposition some things in the stores based off of what the localized preference is. We would tend to probably make those moves either A, in kind of the new store footprints as we roll out those new stores, or one of the things we shared with you guys at the analyst day is that we're going to be remodeling roughly 30 to 40 stores a year moving forward. So we'd be reallocating space as we go through each one of those, if it makes sense. So there definitely is some reallocation of space going happening and it's definitely going to be an ongoing thing for us over the next year. Multiple years.

And it's not just reallocation, it's also shifting things around to highlight and feature things that the customer showing a strong demand for.

Unknown Speaker

Yes, from a SKU count standpoint, I give a lot of credit to our Chief Merchant, Matt McCabe. He talked with me the day that I started about depth and breadth. I think the team does a good job of optimizing and reducing breadth to invest into depth and I think you're seeing that related to in-stock positions and I think you'll see more of that rationalization to invest into newness going forward.

Thanks. I want to close by thanking everyone for joining us today. I also want to recognize and thank the 22,000 plus Academy team members who are working tirelessly to provide our Always Game families the sports and outdoor gear they need to feel the fun in their busy lives. Additionally, I'm excited to welcome Matt Posh as our new EVP and Chief People Officer. Matt brings a wealth of retail knowledge and experience from his tenure at Burlington, and he's going to play an important role in building out and developing our team in the future. As remainder of this year plays out, we're going to be focused on driving sales, gaining market share, delivering value for our customers, and executing the strategic initiatives that will drive sustainable growth over the long term. Despite ongoing uncertainty related to the consumer environment, we believe that our strong balance sheet, disciplined operating model, and compelling value proposition position us well the remainder of the year. When you combine that with the momentum we're seeing so far in Q3 with sales out of back to school and labor coming in at a low single digit positive comp, we're confident in our ability to deliver against our updated guidance and remain committed to generating free cash flow, investing in profitable growth, and returning excess capital to our shareholders.

Have a great rest of your day.

Operator

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.

This live transcript is auto-generated without human intervention or review.

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SailPoint (SAIL) Fiscal Q2 2027 Earnings Call: AI ARR Tops $70 Million, Guidance Raised

Wed, 09 Sep 2026 20:00:46 +0000

Key Takeaways

Fiscal Q2 2027 ARR reached $1.231 billion, up 25% year over year and $11 million above the midpoint of company guidance.
SaaS ARR rose 36% to $847 million, while net new SaaS ARR increased 34% to $66 million. SaaS represented 97% of total net new ARR.
AI-driven ARR exceeded $70 million and generated more than 30% of Q2 net new ARR. Management said the AI-driven pipeline has more than doubled since Investor Day to over $200 million.
Revenue increased 17% to $309 million, adjusted operating margin was 20.3%, and free cash flow totaled $37 million.
SailPoint raised its fiscal 2027 ARR outlook by $11 million to $1.38 billion, while maintaining expectations for approximately $1.27 billion in revenue and $200 million in free cash flow.
Management said cloud migrations contributed approximately 4 percentage points to ARR growth, with more than two-thirds of migrations including an AI-driven solution.

Core Financial Data

Metric	Fiscal Q2 2027 result	Change or context
Total ARR	$1.231 billion	Up 25% year over year
SaaS ARR	$847 million	Up 36% year over year
Net new SaaS ARR	$66 million	Up 34% year over year
SaaS share of net new ARR	97%	Above the company’s guided range of 90%–95%
AI-driven ARR	More than $70 million	More than 30% of Q2 net new ARR
Revenue	$309 million	Up 17% year over year
SaaS revenue	—	Up 34% year over year
Revenue recognized over time	—	Up 22%, excluding about $36 million recognized at a point in time
RPO	$1.9 billion	Up 30% year over year
Current RPO	$931 million	Up 27% year over year
Adjusted operating margin	20.3%	Non-GAAP
Free cash flow	$37 million	12.1% margin
Dollar-based net revenue retention	113%	Gross retention remained in the high 90s

Business and Operating Performance

SaaS remained SailPoint’s primary growth engine. The company’s SaaS customer count increased 16% year over year, while average ARR per SaaS customer rose 17% to more than $400,000.

AI-driven products also expanded customer spending. Customers adopting these solutions increased annual spend by more than 60%. Management attributed demand to SailPoint’s integrated governance of human, machine and autonomous-agent identities through products including SailPoint Agentic Fabric, Human Fabric, Agentic Suites and the underlying SailPoint Atlas platform.

SailPoint said Agentic Fabric is generally available. The company also added integrations for Snowflake, Databricks, Cursor Enterprise and Anthropic’s compliance API. Its collaboration with AWS establishes SailPoint as a preferred identity governance solution for agentic AI on AWS.

The acquisition of Entro Security expanded discovery coverage to more than 1,200 nonhuman identity types. Acquired ARR from Entro was less than $3 million and was more than offset by currency headwinds, meaning reported net new ARR was consistent with organic constant-currency growth.

Cloud modernization remained another growth driver. Migrations contributed approximately 4 points to total ARR growth, and management continued to see a 2x to 3x ARR uplift from on-premises migrations. SailPoint Agentic Acceleration is being used both for IdentityIQ migrations and for replacing legacy or failed competitor implementations.

Management Guidance

Period	Metric	Management outlook
Fiscal Q3 2027	ARR	$1.29 billion, up 24% year over year
Fiscal Q3 2027	Revenue	$328 million, up 16% year over year
Fiscal Q3 2027	Adjusted operating margin	17.7%
Fiscal Q3 2027	Adjusted EPS	$0.07–$0.08
Fiscal Q3 2027	Diluted shares	Approximately 577 million
Fiscal Q3 2027	SaaS share of net new ARR	Approximately 85%–90%
Fiscal 2027	ARR	$1.38 billion, up 23% year over year
Fiscal 2027	Revenue	Approximately $1.27 billion, up 19% year over year
Fiscal 2027	Adjusted operating margin	Approximately 19%, including additional Entro costs
Fiscal 2027	Adjusted EPS	$0.32
Fiscal 2027	Free cash flow	Approximately $200 million
Fiscal 2027	SaaS share of net new ARR	Approximately 90%–95%

Management said AI-driven ARR is running ahead of the pace needed to reach its $100 million fiscal year-end target. It also reiterated fiscal 2029 targets of at least $2.1 billion in ARR, at least $800 million in AI-driven ARR, at least a 22% adjusted operating margin, and at least $400 million in free cash flow.

Risks and Watchpoints

A higher SaaS mix delays revenue recognition compared with upfront term-license revenue. Management estimated that each $5 million shift between SaaS and term ARR changes in-period revenue by approximately $10 million, with most of the impact flowing through adjusted operating income.
Q2’s higher SaaS mix created an estimated $5 million revenue timing headwind. Management stressed that this was a revenue-recognition issue rather than a demand issue.
AI-related pipeline growth may take time to convert because SailPoint operates with enterprise sales cycles. Many of the agentic offerings were launched only in May, shortly before the fiscal quarter ended in July.
Fiscal 2027 adjusted operating margin guidance includes additional costs associated with Entro.
Product development, release timing and availability remain at SailPoint’s discretion, and announced functionality may be delayed or not delivered.

Analyst Q&A Highlights

AI pipeline and conversion: Management said access to Chief AI Officers, CISOs and traditional identity buyers has improved. An overlay sales team is targeting these distinct buyer groups, while existing customers can upgrade from business suites to Agentic Suites without a major migration.

Proof-of-concept activity: SailPoint has hundreds of POCs in its pipeline over the next three to four quarters. Management said these discovery-led evaluations typically take 30 to 45 days, faster than a traditional suite purchase, and frequently identify substantially more agents and machine identities than customers expected.

Deal size and duration: RPO acceleration reflected larger customer commitments. Management said deal duration remained broadly consistent with historical levels, while deal sizes increased. Entro has not reduced initial deal sizes and may support larger transactions over time.

Migration economics: Migration activity tracked management’s expectations and contributed approximately four percentage points to Q2 ARR growth. The company continues to expect a 2x to 3x ARR uplift from migrations, with further expansion possible as customers add capabilities over time.

AI-driven ARR trajectory: Management expects AI-driven products to become a larger proportion of the business and said the company could exceed its $100 million fiscal year-end target. However, it did not revise that target during the call.

Full Earnings Call Transcript

Complete Earnings Call Transcript

Management Remarks

Operator

Thank you for standing by, and welcome to SailPoint's Second Quarter Fiscal Year 2027 Earnings Conference Call. [Operator Instructions] I would now like to hand the call over to Scott Schmitz, Investor Relations. Please go ahead.

Scott Schmitz

Good morning, and thank you for joining us today to discuss SailPoint's Fiscal Second Quarter 2027 Financial Results. Joining me today are SailPoint's Founder and CEO, Mark McClain; and our Chief Financial Officer, Brian Carolan.. For the Q&A portion of today's call, we will also be joined by our President, Matt Mills.

Please note that today's call will include forward-looking statements, and because these statements are based on the company's current intent, expectations and projections, they are not guarantees of future performance, and a variety of factors could cause actual results to differ materially.

This call will also include references to non-GAAP results, which exclude certain items that do not reflect our underlying business performance. Please reference in this morning's press release and our supplemental earnings presentation posted on investors.sailepoint.com for further information regarding our forward-looking statements and non-GAAP financial measures including reconciliations to the nearest comparable GAAP financial measures.

Additionally, please note that the development, release and timing of any features or functionality described for our products that are currently not available remains at our sole discretion on a when and if available basis and may not be delivered at all or should not be relied on in making purchasing or investing decisions.

And with that, I'd like to turn the call over to Mark.

Mark McClain

Thank you, Scott. Good morning, everyone, and thank you for joining us. Our strong second quarter highlights the compounding power of our identity security platform and new product innovations with AI playing an increasingly larger role in our success. We finished the second quarter with ARR of $1.231 billion, up 25% year-over-year, exceeding the midpoint of our guidance by $11 million. SaaS was especially strong, growing 36% year-over-year with SaaS net new ARR increasing 34% year-over-year.

In Q2, early adopters of our new solutions moved quickly to secure access to our agentic suites ahead of the planned Q3 release. Combining this momentum with our existing solutions, our total AI-driven ARR has already crossed $70 million as of the end of Q2. This momentum gives us tremendous confidence in our FY '29 year-end targets which include at least $2.1 billion in ARR, while continuing on our path of delivering greater than 20% durable growth.

Today, millions of nonhuman identities, from service accounts to autonomous AI agents, are exploding across the enterprise landscape, yet we believe the vast majority remain completely ungoverned. In fact, in our research released last month, we found that 97% of AI agents now have access to sensitive enterprise data, while only 21% of organizations surveyed say they are highly confident in their ability to manage that risk. Competitors are treating these agents as isolated identities. We view identity as a human plus AI challenge that needs to be solved with a unified approach, and we're doing it at scale for many of the world's largest enterprises.

You cannot safely secure an agent identity without deep accountable human context. Conversely, you can no longer govern human access without knowing what agents those humans own and operate. For every agent, an organization must know its origin, what data it can touch and which human is accountable when it goes off script. We believe no company is better positioned to solve this complex intersection in SailPoint.

This is no longer a future trend, it is a law. The EU AI Act contains specific human oversight and audit logging requirements, which are scheduled to become enforceable as early as 2027. We believe regulators will increasingly ask who is accountable for this agent and its actions. We built our identity platform to answer that question before regulators even chose to ask it.

Real-time human and agenetic identity governance is no longer just an IT operational task, it is now a CISO and boardroom priority. As our strategic relevance elevates to the offices of the CISO and the Chief AI Officer, we are unlocking significantly larger enterprise budget opportunities, accelerating our pipeline, and paving a clear multipronged path to our fiscal '29 targets.

This momentum is evident in our results. In the second quarter, our SaaS customer count grew by 16% year-over-year. Our average ARR per SaaS customer grew 17% to over $400,000. And our AI-driven pipeline has more than doubled since our Investor Day, which was less than 3 months ago. When recent headlines details how Frontier AI models broke out of their digital sandboxes, many labeled these as AI safety issues. We see them for what they are, identity governance failures, a massive problem, which we expect will get even more challenging as AI usage expands in the future.

The question I'm constantly asked by CIOs and Board members of other companies is simple. Can SailPoint protect our enterprise from these autonomous agent breakouts? The answer is yes. Because securing and governing all identities, including a genic identities is the exact problem our company was built to solve.

Let me give you an example of how we recently expanded our market position in nonhuman identity security at a global Fortune 500 company. Within a week of a proof of concept, we connected to a majority of their data sources, leading to discovery of more than 10,000 unknown agents and thousands of associated risks in their environment. This resulted in a multimillion dollar contract for our digital identity Flex offering alongside intro.

And another example of this momentum, we closed a 3-year 7-figure commitment with a global software company. This new customer is leveraging our core identity security cloud with advanced digital identity governance across thousands of machine identities while establishing a direct path to upgrade to our agentic business suite as they scale their AI infrastructure.

Our go-to-market engine is significantly more versatile than it was 6 months ago. We've expanded our entry points across CISOs, Chief AI Officers and other C-suite leaders to win new customers, securing human workforces, autonomous agent fleets or both together.

In Q2, we also expanded our ecosystem with new agent identity security connectors for Snowflake and Databricks. We introduced our Cursor Enterprise connector for autonomous coding agents, and launched a cloud enterprise integration utilizing Anthropics compliance API. Whether an agent is writing code, analyzing data or querying an LLM, SailPoint provides comprehensive visibility and human accountability in a single independent platform.

Let me expand on our innovation. Our approach is grounded in a continuous intelligent security loop across 3 pillars. First, we discover every identity across all platforms and map their entire lineage, so you know exactly what permissions they hold and who authorize them. Second, we govern them under a strict policy of 0 standing privilege, dynamically orchestrating life cycle policies across millions of agentic and nonhuman identities with support for global compliance frameworks. And third, we will protect the enterprise with the ability to deploy a kill switch when an agent violate to guardrail. We are working to enable real-time authorization, security and response and remediation capabilities integrated with the SoC.

To deliver on these pillars, we fundamentally advanced our platform this quarter with the launch of SailPoint identity security featuring two purpose-built products, Agentic Fabric, which is now generally available; and Human Fabric, which is the evolution of identity secured cloud. This enables organizations to move beyond static compliance into real-time threat aware enforcement across both human and nonhuman identities.

These aren't future promises. These real-time detection, stock integration and automated enforcement capabilities are available right now. Unifying AI and human identities under one control plane creates an immediate compounding effect. All of this runs on our core technology foundation, SailPoint Atlas. Atlas provides one unified data model, a powerful, comprehensive identity graph. And a shared set of AI services engineered for agent scale, real-time telemetry and in-line response.

We also accelerated our road map by acquiring intro security, and we are rapidly integrating its capabilities directly into the SailPoint Agentic Fabric. This expands our discovery capabilities to over 1,200 nonhuman identity types and provides deep lineage context. While other vendors are racing to bolt-on session visibility or point-in-time threat detection, we believe we are one of the first to bring deep machine credential discovery and full agent life cycle governance under one enterprise grade control plane.

Already this quarter, demand generated from live demonstrations of these capabilities at major industry events like Black Hat and AI 4 has translated directly into enterprise deals in our pipeline with the valuations and POCs at an all-time high.

Overall, the market response to our architecture and product road map has been exceptional with our AI-driven solutions accounting for more than 30% of our net new ARR in Q2.

Enterprises are also using agentic AI governance as a catalyst to accelerate cloud migrations. And through SailPoint Agentic acceleration, we have dramatically simplified the migration process from on-prem to SaaS. Let me give you an example.

This quarter, a global financial services firm signed a multiyear agreement to modernize with our SaaS platform to manage over 300,000 identities. By utilizing our automated onboarding tools, we dramatically reduced implementation friction and accelerated their migration by reducing weeks of configuration time to less than 10 hours.

Ultimately, our ability to deliver rapid time to value remains a major differentiator. As part of this modernization, the company also adopted our Digital Identity Flex model to help ensure long-term flexibility in managing nonhuman identities.

Now I'd like to turn to the competitive landscape. While many vendors market nonhuman identity or agentic AI governance, we differentiate on three fronts. First, monitoring is not the same as security. Simply watching an agent go road is just a dashboard of active breaches. Regulators and CISOs require proactive governance. SailPoint is designed to enforce accountability before the agent ever takes action. We are moving the industry beyond static compliance and into continuous automated governance and protection.

Second, governance is not a bolt-on feature. While others try to add governance to adjacent platforms, it lacks the depth of acquired for modern security. Through our Agentic and Human Fabric, governance is natively embedded to our core, giving organizations seamless, unified control across the entire converged workforce.

Third, access is not accountability. Giving an AI agent a log-in is easy. Proving to an auditor exactly what it did, who owns it and instantly revoking that access at enterprise scale requires a unified identity graph. You cannot protect an AI-driven enterprise on a fragmented stitch together architecture. We are shipping a unified control plane today.

Our architectural leadership isn't just our opinion. It is heavily validated by the industry analyst community, too. I'm incredibly proud to share that one of the industry's leading identity security analysts, named SailPoint the widely recognized leader in their latest identity and access governance leadership Compass released last month.

Additionally, Gartner Peer Insights has us at 4.8 out of 5, based on 824 reviews submitted in the Identity Governance and Administration category as of September 2, 2026. The market is consistently confirming that SailPoint is one of the only identity platforms that can handle this workforce convergence. This is further strengthened by our strategic collaboration agreement with AWS, which establishes SailPoint as a preferred identity governance solution for agentic AI on AWS.

In conclusion, SailPoint is delivering strong growth at scale, while redefining identity security for the AI era. The reality is clear. Basic monitoring isn't security. Governance isn't a bolt-on and access isn't accountability. This is why we believe no one else can do what we do.

By delivering a robust identity security framework that spans humans, cloud resources and all nonhuman identities, particularly autonomous AI agents, SailPoint empowers the enterprise to harness the power of AI with absolute confidence. Our customers don't just secure AI. They secure their future. We believe we have the platform, the architecture and the execution engine to lead this market.

Now I'll turn it over to Brian.

Brian Carolan

Thank you, Mark. Good morning, everyone, and thank you for joining us today. Fiscal Q2 '27 was another strong quarter with robust demand for our identity security platform. We are successfully executing a deliberate strategy to build a more durable and predictable business, delivering total ARR of $1.231 billion which represents growth of 25% year-over-year. The central driver of this continued growth is the rapid adoption of our SaaS platform. SaaS ARR grew 36% year-over-year to $847 million. Net new SaaS ARR reached $66 million, a 34% increase from last year, underscoring the ongoing market shift toward our cloud-native solutions. In fact, SaaS accounted for 97% of our net new ARR this quarter.

Within our SaaS platform, we are seeing healthy momentum across our AI-driven solutions, which accounted for more than 30% of our net new ARR in Q2. This is particularly evident within our installed base, where customers adopting our AI-driven solutions increased their annual spend by over 60%. Customer interest in the recent launch of our SailPoint Agentic Fabric and Agentic Suites is encouraging. Ahead of Q3 availability we saw strong demand from early adopters. As Mark mentioned, this brings our total AI-driven ARR to over $70 million, putting us well ahead of the pace to achieve our $100 million target by fiscal year-end.

As we discussed at our Investor Day, our AI-driven ARR definition encompasses our Agentic Fabric, our Agentic Suites and our Agentic add-on modules. We chose this definition because it reflects the underlying customer preference for an integrated identity solution across both human and nonhuman identities.

Regarding the migration of our on-prem installed base to our SaaS solutions, the unit economics remain compelling. This expansion continues to be driven largely by additional capacity, hosting cost and expanded functionality. In fact, over 2/3 of our migrations added an AI-driven solution. Most importantly, once customers migrate to our SaaS platform, they typically continue to expand and grow with us over time.

The migration contribution to our overall ARR growth was approximately 4 points this quarter. We believe we are still early in this motion and our latest AI innovations and the launch of SailPoint Agentic acceleration, an AI tool to accelerate deployments gives us confidence that this can be a durable growth driver.

As a reminder, as customers migrate from our on-prem solutions or land with SaaS first, there is a temporary timing impact on recognized revenue and adjusted operating income due to the shift from upfront license recognition to ratable SaaS revenue. As a general rule of thumb, each $5 million shift between SaaS and term impacts in-period revenue by approximately $10 million with the majority flowing through to adjusted operating income. While this tempers near-term reported growth, it strengthens the predictability and long-term health of our business as that revenue is recognized over the full length of the contract.

We saw this play out in the second quarter with a higher mix of net new SaaS ARR, which equated to approximately a $5 million revenue timing headwind. Putting this all together, we delivered total revenue of $309 million, an increase of 17% year-over-year, with SaaS revenue growing 34%. Excluding approximately $36 million of revenue recognized at point in time, primarily from term contracts, our revenue recognized over time grew 22% year-over-year.

Additionally, our remaining performance obligation, or RPO, growth accelerated to 30% year-over-year to reach $1.9 billion, and our current RPO grew 27% to $931 million. Our adjusted operating margin was 20.3%. We generated $37 million of free cash flow in our fiscal second quarter, representing a 12.1% free cash flow margin. Our dollar-based net revenue retention remained robust at 113%, and our gross retention remains in the high 90s.

Acquired ARR from Entro was less than $3 million, which was more than offset by currency headwinds in the quarter. In other words, our total net new ARR results are consistent with organic constant currency growth.

Turning now to guidance. For simplicity, I will refer to the midpoint of our guidance ranges where applicable. Full details can be found in this morning's press release and supplemental earnings deck, where you can also find additional modeling notes. For the fiscal third quarter of 2027, we expect ARR to be $1.29 billion, up 24% year-over-year. We expect revenue to be $328 million, an increase of 16% year-over-year with adjusted operating margin of 17.7%. We expect our diluted share count to be approximately 577 million shares and adjusted EPS to be $0.07 to $0.08.

For fiscal year 2027, we are flowing through the Q2 ARR upside to our full year guidance. This translates to an increase of $11 million to $1.38 billion, up 23% year-over-year. We expect revenue to be approximately $1.27 billion, an increase of 19% year-over-year. And we expect our adjusted operating margin to be approximately 19%, which is inclusive of additional costs for Entro.

We expect our diluted share count to be approximately 575 million shares and adjusted EPS to be $0.32. We continue to expect to generate approximately $200 million of free cash flow in FY '27. We expect SaaS to account for approximately 85% to 90% of our net new ARR in Q3 and approximately 90% to 95% for the full year 2027.

In summary, we believe our strong results, growth at scale, an innovative product road map position us extremely well for continued success in the AI-powered future. We are confident in our strategy and our ability to achieve our fiscal 2029 targets of at least $2.1 million of ARR, at least $800 million of AI-driven ARR, at least 22% adjusted operating margin, and at least $400 million of free cash flow. We believe our execution against these targets will deliver long-term value to our shareholders.

With that, let's invite Matt Mills, our President, to join us and open the call for questions. Operator?

Operator

[Operator Instructions] Our first question comes from the line of Matt Hedberg of RBC.

Question-and-Answer Session

Matthew Hedberg

Great. Congrats on the results. A lot of AI nuggets sprinkled through the prepared remarks hearing that the AI-driven pipeline has doubled since Investor Day. And also, I think you said AI-driven ARR was over $70 million this quarter and contributed, I think, meaningfully to net new ARR. I guess I'm wondering, can you help unpack like how that pipeline is converting? And I guess, as you continue to target $800 million in AI-driven ARR, by fiscal '29. Like how should we think about the progression towards that number? Talking about like attach rates to deal sizes. Just sort of curious on the mechanics because it feels like you guys are a really nice start there.

Mark McClain

Matt, it's Mark, and I'll probably start and turn it over to Matt for a little more. I think what we're seeing, not surprisingly, is just tremendous interest in what we've brought to market in the last few months. I think as we all have discussed and customers everywhere are kind of in a search mode on how to get their arms around the risks associated with AI, everybody is familiar with some of the famous reach or risk stories that have hit the news. And so -- what we're finding is just tremendous interest in this topic. And then I think Matt can comment more on kind of some of the shifts we made in our go-to-market approach, but we've, I think, successfully deployed a focused team in our field who can get in front of like the Chief AI Officer, help them understand specifically what SailPoint is doing to address those risks and differentiate that from some of the -- frankly, the noise that's out in the market around everybody talking about what they're going to do to help you with AI.

So I think what we're finding is we get the audience because there's interest in the topic, we're a credible player to come into the dialogue. And when we present in more specificity what we're doing, it tends to get very, very interesting and very fast. That's why we feel good about the pipeline build.

Matthew Mills

Yes. Matt, I'll just add, -- it's a pretty good place to be in and that there's a ton of interest in this topic, right? So it's much easier to get calls returned and get access to folks. And to that end, we're seeing a tremendous amount of interest in our products. It makes -- it's a pretty easy story, right? If you look at our install base, and when you start moving from our, let's say, business suites to Agentic, it's really an upgrade, right? It's not a modernization. It's not a big migration, it's an upgrade. And now you get access to all the agenetic tools. And so we're going through that process. I'll tell you another thing that's really interesting is we've pivoted a bit in terms of our go-to-market motions. As Mark said, we've got an overlay group that's really designed to sell to a different persona, right, which would be the AI side of the house, the security side of the house and still continue to work the traditional silos around identity. But that kind of trifecta there is proving to be fairly effective in us being able to drive opportunities and get into things that, quite frankly, maybe we hadn't been getting into.

Operator

Our next question comes from the line of Saket Kalia of Barclays.

Saket Kalia

Brian, maybe for you. I think most folks understand that more SaaS conversions means less upfront revenue. But could you maybe help us frame how your SaaS and upfront revenue outlooks are changing this year? Just to sort of flesh out why the ARR beat isn't necessarily flowing through to full year revenue? Just to explain the mechanics that we're all on the same page.

Brian Carolan

Saket, thanks for your question. So as you saw, we did land with a 97% SaaS net new ARR mix, which was above our guided range of 90% to 95%. I think just looking out to the second half, this is definitely not a demand issue. It's a rev rec timing issue. So we're expecting the full year to still remain in that 90% to 95% range. And that's what we're providing today as a range, so that could swing one way or the other. Each $5 million move in net new ARR means a $10 million move in revenue. So for Q3, we're expecting a range of closer to 85% to 90% SaaS mix given the Fed year-end. And then for the full year, it will be 90% to 95%. But just to reiterate, this ends up being a rev rec timing issue. You're going to recognize it either largely upfront in the period of sale or over time in the form of SaaS. It's definitely not a demand issue for us.

Operator

Our next question comes from the line of Brian Essex of JPMorgan.

Brian Essex

Thank you for the intro contribution, by the way. That was a popular question this morning. A question for me. I guess I have two related ones. Either Matt or Mark, how much of the traction and maybe more importantly, how much of your pipeline was competitive displacement? One of the things we're hearing about, particularly in the channel as AI as a catalyst for technology transformation kind of similar but maybe more accelerated to what we saw in the cloud transformation era.

And then maybe part two of the question, we heard about a greater-than-average amount of deal looked during the quarter. If that's true, fantastic results in spite of that, but we'd love to understand the deal dynamics? And what may have caused some of that -- some movement, if any, whether it was the size of deals or complexity of deals, just would love your color on those two points.

Mark McClain

Why don't I take the back half, let Matt have the first, Brian, just to clarify, we did not -- if we did, I apologize for any misunderstanding. We did not indicate any significant or any deal slippage of note. We feel like we closed the business we expected to close in the quarter. That's why we came in higher than our guided ARR number. There is a lot of complexity in getting some of these business closed. But I wouldn't say we saw any significant slippage. I think it's more that we are seeing tremendous pipeline build in the back half. And it is taking some time to convert. Just as a reminder, everyone, we launched a lot of these genetic solutions in the middle of early May and our quarter closed at the end of July. So with typical enterprise sales cycles, we knew we wouldn't see a tremendous amount of that convert in the quarter, but we did see some, and we're very excited about the pipeline build. And I'll let Matt talk about the whole when we see an agentic deal getting done, is that a displacement kind of a situation? Yes, no, how often that kind of thing.

Matthew Mills

Our next question comes from the line of Joseph Gallo of Jefferies.

Joseph Gallo

And also appreciate the Entro disclosure. This one is for Matt and Mark. I mean you spent a lot of time talking about the differentiation with -- in AI versus competitors. Are customers understanding that message because it still kind of feels like the Wild West. So like -- the actual question is, one, who are you seeing most in those deals? Is it identity vendors, backup and recovery or platforms? And then two, anything to note with those sales cycles relative to the company average sales cycle? Are they quicker? Or are they longer?

Matthew Mills

Joe, this is Matt. look, it's quite interesting. We're seeing a ton of interest in what we're calling the SailPoint Entro and the SailPoint Agentic Fabric. And really, what's happening is people are starting to realize that step one is to be able to identify what they don't know. We're really doing these and prosecuting these new opportunities with POCs, right? And we're kind of moving to this -- look, there's a lot of noise in the market. You guys already know this, right? And I think one of the ways we're combating it is saying, if you're buying something today, you're looking something today, look, you need to see it. you need to put it on your network, you got to use your data, use your use cases, and that's the only way you're going to find out it works. So that's an approach we're pushing. We have -- and if you look at our pipeline over the next 3 quarters, 4 quarters, we have hundreds of POCs that are already in the pipeline that we're going to go prosecute.

When you look at the time frame, it is accelerated. It's much quicker than a traditional agentic business suite purchase. And I think if you're looking for time lines, it's 30 to 45 days, right? And our hope is that we can accelerate further than that. But it's putting it on the customer's network, using their data, using their use cases and getting through it. And we're having a -- what's really interesting is if you go look at 50 of these, you could change the name of the company. The results are all very much the same. I had no idea. I had no idea this maybe agents, I had no idea that I have too many people that were using tools that we weren't using. We -- our company standardized on Copilot and nobody is using Copilot. They're using everything else. And it's not a dig on I'm just -- it's one of these things that it's just -- it's real and it's what we're dealing with. And I think the customers are amazed at what they're seeing.

Mark McClain

Jonathan Ruykhaver

The question I have is just around modernization flex. But I'd like to get a little bit more in terms of how that might be impacting IdentityIQ migration. I think some of the previous comments to highlight the need for IGA modernization. So I guess the specific question is, is this impacting any of your assumptions around SaaS migration in the second half? And also looking at the potential ARR uplift, which I think, Brian, you've said in the past, it's potentially 2 to 3x. Any change in how you're looking at those two

Matthew Mills

Yes. Thanks, Jonathan. I'll take that one. So yes, in fiscal Q2, migration momentum definitely continued. I think what we're seeing is that customers are buying into the vision, right? So -- and that's evident by about 2/3, actually, over 2/3 of our migrations that we completed in Q2, actually included AI-enabled products with it. So I think that is really compelling. We also have a tool called -- and a service called SailPoint Agenetic Acceleration and this basically simplifies and accelerates the migration process, making it much easier for customers to lean in and continue to move more towards our strategic vision that we have.

In terms of the uplift, we're still in that range of 2 to 3x up with the PON migration. Now that grows over time. When we do have a heavier mix of term, that's probably closer to 2x. But the important thing is that, that definitely grows and expands over time over the next several years out. And we just have more and more now to offer in terms of that expansion opportunity. So we really feel good about it.

Last thing I'll say, I think you were asking this question, this contributed about 4 points to our overall ARR growth in fiscal Q2, the migration activity alone along with the expansion.

Operator

Our next question comes from the line of Meta Marshall of Morgan Stanley.

Meta Marshall

Maybe building on that last question, I just wanted to ask about agentic acceleration. And just kind of the time line that you're seeing some of these accelerated migrations on and when you could when or if you could pivot agentic acceleration towards kind of legacy provider solutions?

Matthew Mills

Yes. Meta, this is Matt. So absolutely correct. It started out as an accelerating tool to be able to help our IQ customers move much more quicker and more efficiently to our SaaS platform. But today, we're far, far along the road of using this tool now for not only our -- the legacy that you're talking about, but replacing maybe some of our competitors who had some failed implementations. And even so far along as taking a new prospects RFP and using that for a source to actually go build out a POC that ultimately would end up as a production instance. And this is part of the selling adoption we're going through right now for this new agentic world. So we're pretty excited about it.

I'm sorry, yes, non-SailPoint environments as well, right? So that would be all the legacy stuff you're thinking about the, I'll just call them out the Oracles and the CAs, the traditional big legacy players.

Operator

Our next question comes from the line of Joshua Tilton of Wolf Research.

Joshua Tilton

Maybe just a two-parter for me. I appreciate the contribution to growth from the migrations in the quarter. But can you just talk to maybe how those four points compare to your expectations? How are migrations tracking relative to your expectations? And maybe also just relative to the context of the longer-term targets? Are they ahead of expectations, in line with expectations?

And then just the second part is for the back half, do you feel like you have this mix dynamic locked in to the updated guidance that we have? I noticed the mix drops in 3Q, but you're still expecting a similar SaaS net new ARR mix for the full year. So just help us understand how much confidence do you have that we won't continue to see revenue headwinds from this mix dynamic going into the second half of this year?

Brian Carolan

Josh, it's Brian here. So I would say that the contribution of the migration/modernizations so the growth was right in line with what we expected heading into the quarter. In terms of the mix assumptions for the second half of the year, the SaaS mix assumptions, and we're tilting more towards 85% to 90% because of the federal government year-end and fiscal Q3. We're still sticking with the 90% to 95% SaaS mix for the full year. And again, that could swing. It just -- that's the reality of the situation. Every $5 million of swing 1 way or the other could be $10 million of revenue. We monitor it, we track it. We track the pipeline. We try to dial it in as much as possible, but we do want to caveat it that, that is the range that you could see.

We feel good about the second half of the year. I think our guidance implies about 58% of our business would come in the second half of the year, Q3 and Q4, and that is right in line with where it was last year. So we feel good about the overall number itself of the net new ARR.

Operator

Our next question comes from the line of Shrenik Kothari of Baird.

Shrenik Kothari

So congrats again, and Entro seems to be really changing the front end of the sales motion, as you said. You now have hundreds of POCs in the pipeline and, Mark and Brian, you mentioned the cycles are materially shorter than traditional agentic suite becoming a faster new over motion. So my question is, as the mix potentially shifts towards these faster entry-led land, should we expect kind of smaller initial ACV but then a much larger subs sort of expansion opportunity into Agentic Fabric and then the broader suite? And part as the product boundary itself is surprisingly moving quickly from Discovery into like real-time run time, governance enforcement.

Beyond Entro, where are the remaining let's say, capabilities, either dynamic just in time or planning or any other run time remediation where you would still look at from an M&A or building organically?

Brian Carolan

I'll take the first one. This is Brian here. So we are not seeing any smaller deal sizes per se when intro is introduced into the selling process. In fact, I think it's expanding our non-human identity discovery using Entro. So I think it actually could be a compelling use case for maybe having even larger deal sizes at some point in the future. But for now, I would think of it as status quo even with Entro, but it does speed up and make the sales process more efficient from the early stages.

Matthew Mills

And Shrenik, on the second question, we did see a pretty dramatic expansion, as I said, of our discovery capabilities, particularly with Entro and we are continually developing a lot around our whole move toward more real-time governance. It's demanded in the world of Gentek, and we think it will kind of slide very much into the way people think about doing human identity governance, which has again been more asynchronous, a little less real time. But in this world, we're emerging toward the real-time ability to make decisions based on human access based on context is I think going to be the buzzword here. based on real-time context, candidate human or this agent get access to what it's trying to access. And so that is the place we continue to make significant investments in things like what we held just-in-time provisioning or just-in-time authorization. And we are building a lot there and continue to keep our eye on some of the early-stage technologies in the market to potentially supplement. You've seen us do that a couple of times in the last couple of years of kind of enhancing or accelerating our road map through a strategic technology acquisition. So those types of things are still very much in play for us, and we continue to scour the opportunities around the market for that.

Operator

Our next question comes from the line of Richard Poland of Wells Fargo.

Richard Poland

So I just wanted to ask about -- it sounded like early in the prepared remarks, you made mention that customers committed to some of the Agentic suites ahead of that Q3 launch. And so I just wanted to clarify, is it fair to say that there was some contribution in Q2 from the Agentic suites. And just as we think about Agentic suites and what's embedded there for the second half? Any, I guess, quantification or even qualitative framing for how we should think about Agentic suites ramping in the second half?

Brian Carolan

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.

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Korn Ferry (KFY) Q1 FY2027 Earnings Call: Revenue Rises 7%, AMS Expands Backlog

Wed, 09 Sep 2026 20:00:42 +0000

Key Takeaways

Korn Ferry’s Q1 FY2027 fee revenue increased 7% year over year to $756 million, marking a sixth consecutive quarter of growth.
Adjusted EBITDA rose 7% to $128 million, while the adjusted EBITDA margin remained unchanged at 17%. Adjusted diluted EPS increased 9% to $1.43.
New business grew 12%, and estimated remaining fees under existing contracts increased 14% to $1.92 billion. Management said the combined backlog reached approximately $3.5 billion following the AMS transaction.
Fee revenue grew across all regions: the Americas increased 9% to $442 million, EMEA rose 4% to $228 million and APAC returned to growth with a 1% increase to $87 million.
Korn Ferry completed its combination with AMS. Management expects AMS to reach $140 million in run-rate EBITDA within one year of closing, including $40 million of incremental EBITDA, and said it expects to achieve the target sooner.
Q2 FY2027 guidance calls for fee revenue of $860 million to $878 million, an adjusted EBITDA margin of 16.8% to 17.2%, and adjusted diluted EPS of $1.30 to $1.40.

Core Financial Data

Metric	Q1 FY2027 result	Year-over-year change / comment
Fee revenue	$756 million	Up 7%; sixth consecutive quarter of growth
Adjusted EBITDA	$128 million	Up $8 million, or 7%
Adjusted EBITDA margin	17%	Flat
Adjusted diluted EPS	$1.43	Up $0.12, or 9%
Consolidated new business	—	Up 12%
Estimated remaining fees under existing contracts	$1.92 billion	Up 14%
Internal business referral rate	29.4% of fee revenue	Up approximately 300 basis points
Marquee and Diamond accounts	About 40% of fee revenue	Stable
Dividends paid	$30 million	Q1 capital allocation
Capital expenditures	$15 million	Q1 investment

Korn Ferry expects approximately 56%, or $1.1 billion, of its quarter-end remaining contracted fees to be recognized over the next four quarters. The other 44%, or $835 million, is expected beyond that period.

Business and Operating Performance

The Americas generated $442 million of fee revenue, up 9%, led by Search and Workforce Solutions. EMEA revenue increased 4% to $228 million, with growth across all solution groups despite pressure from developments in the Middle East. APAC revenue rose 1% to $87 million, led by Search, after prior weakness associated partly with socioeconomic changes in China.

Search and Workforce Solutions recorded growth of approximately 10% to 11% during the quarter. RPO new wins totaled roughly $160 million, with about half coming from new clients. Management characterized RPO contracts as recurring but noted that the timing of large outsourcing awards can make new-business results uneven.

The internal referral rate reached 29.4%, compared with approximately 18% when Korn Ferry began measuring the metric. Management views the increase as evidence that its unified, client-focused go-to-market model is generating cross-selling opportunities.

The AMS combination creates a firm with nearly 17,000 employees across more than 130 offices. AMS adds capabilities in RPO, interim services, contingent workforce solutions, early-career and campus recruitment, and technology consulting. Management said AMS’s top 10 client relationships have an average tenure of 14 years.

Korn Ferry plans to prioritize debt reduction related to the AMS acquisition when deploying investable cash, while retaining flexibility to repurchase shares if management considers that use of capital more attractive.

Management Guidance

For Q2 FY2027, management provided the following outlook:

Metric	Q2 FY2027 guidance
Fee revenue	$860 million-$878 million
Adjusted EBITDA margin	16.8%-17.2%
Adjusted diluted EPS	$1.30-$1.40

The guidance includes two months of AMS results, covering September and October. Adjusted diluted EPS incorporates the after-tax effects of additional intangible asset amortization, net interest expense and shares issued in connection with the acquisition.

The outlook assumes no further changes in geopolitical conditions, economic conditions, financial markets or foreign exchange rates.

Risks and Areas to Watch

Management described the operating environment as challenging, citing the prospect of higher interest rates, limited growth outside data centers and AI-related activity, and continued conflict in the Middle East. It said conditions had not materially worsened over the prior three to four months.

AMS integration is another execution focus. Korn Ferry is targeting May 1, 2027, to move employees onto common SAP, CRM and related platforms. Cost benefits are expected to be weighted toward the period after platform integration, while revenue initiatives and client cross-referrals have already begun.

Seasonality is expected to remain consistent with Korn Ferry’s historical pattern. Management identified fiscal Q3 as the low point because of Thanksgiving and year-end holidays.

Analyst Q&A Highlights

AMS synergies and growth: Management expects AMS to increase run-rate EBITDA from approximately $100 million to $140 million within one year of closing and expressed confidence that the target will be reached sooner. Revenue expansion is the primary focus, supported by cross-selling across the combined client base, while procurement and platform scale offer cost-saving opportunities.

Backlog visibility: Korn Ferry ended Q1 with $1.92 billion of remaining contracted fees. Management said AMS adds longer-duration contracts, with approximately 40% of its backlog expected in the first year and 60% over the following four years. The combined backlog is approximately $3.5 billion.

Artificial intelligence in Search: Management said AI enables Korn Ferry to provide broader candidate pools and additional information, but it has not materially shortened search completion times because client scheduling and decision-making remain key constraints. The company is using AI cautiously because its proprietary data includes compensation information on 30 million people, data covering 30,000 companies, 113 million executive assessments and up to 15,000 success profiles.

Long-term growth framework: Management cited Korn Ferry’s historical companywide growth rate of approximately 10% to 12%. Following the AMS transaction, it described the historical growth mix as shifting from roughly 60% organic and 40% inorganic to approximately 50% organic and 50% inorganic. This was presented as a historical framework rather than formal guidance.

Full Earnings Call Transcript

Complete Earnings Call Transcript

Management Remarks

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Korn Ferry First Quarter Fiscal Year 2027 Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded for replay purposes. We have also made available in the Investor Relations section of our website at kornferry.com, a copy of the financial presentation that we'll be reviewing with you today.

Before I turn the call over to your host, Mr. Gary Burnison, let me first read a cautionary statement to investors. Certain statements made in the call today, such as those relating to future performance, plans and goals constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, although the company believes the expectations reflected in such forward-looking statements are based on reasonable assumptions, investors are cautioned not to place undue reliance on such statements.

Actual results in future periods may differ materially from those currently expected or desired because of a number of risks and uncertainties, which are beyond the company's control. Additional information concerning such risks and uncertainties can be found in the release relating to this presentation and in the periodic and other reports filed by the company with the SEC, including the company's annual report for fiscal year 2026 and in the company's soon to be filed quarterly report for the quarter ended July 31, 2026,

Also, some of the comments today may reference non-GAAP financial measures such as constant currency amounts, EBITDA and adjusted EBITDA. Additional information concerning these measures, including reconciliations to the most directly comparable GAAP financial measures is contained in the financial presentation and earnings release relating to this call. both of which are posted in the Investor Relations section of the company's website at www.kornferry.com.

With that, I'll turn the call over to Mr. Burnison. Please go ahead, Mr. Burnison.

Gary Burnison

Thanks, Regina, and thank you, everybody, for joining us. I'm going to have the team walk through the numbers. But first, I'd just comment that our performance was absolutely outstanding. All regions are up and it marks our sixth consecutive quarter of top line growth, which underscores the strength of our strategy. And we remain focused on executing with discipline, investing in opportunities that will drive sustainable impact and create lasting value for our shareholders all of which reflects the confidence we have in our strategic direction and long-term outlook.

As I reflected during our previous quarterly call, I used to talk about opportunities measured in the hundreds of millions of dollars. Today, I think, in terms of opportunities measured in the billions. And last week, we took another significant step in that direction with the completion of our combination with AMS. This brings together 2 iconic brands and creates a global leader in talent and organizational consulting. AMS is a world-class firm that propels our are KornFerry strategy to be the world conductor of talent and organizational orchestration.

We now offer 1 of the most comprehensive organizational talent solution portfolios in the world. The combined firm has nearly 17,000 colleagues in more than 130 offices, complementary strengths, and more expansive industry coverage, all united in a shared commitment to accelerate our clients' success. Together with AMS, we have profound operational capability, delivering technology-enabled talent solutions at scale supported by long-term contracted client relationships. We've deeply deepened our client-centric approach as we expand the breadth of our solutions with every relationship. And here, just a couple of examples that a global energy company. We're supporting their strategic and talent transformation. impacting 60,000 roles across 200 business units.

So we're a global consumer products company with more than 100,000 employees turn to us for worldwide delivery of org design, analytics and workforce planning. And at the heart of how we serve our largest clients is Talent Suite. powering our work and enabling better people decisions at scale. In fact, more than 90% of our Marquee and diamond accounts have an active talent suite subscription today. I couldn't be more excited about the evolution and the trajectory of our firm.

Today's Korn Ferry has a unique ability to serve our clients across the entire talent spectrum. Search is about identifying talent. Workforce Solutions is scaling that talent. And talent and organizational solutions is unlocking their potential. There's no question that technology will continue to play a significant role in the future, bridging the imbalance of supply and demand of labor, but it's not technology alone. people are the catalysts for organizational success. human beings, not human doings. It's a belief that defines who we are and that's why Korn Ferry is in the people business.

With that, Bob, I'll turn it over to you.

Robert Rozek

Great. Thanks, Gary, and good afternoon and good morning, everyone. Our financial performance continues to steadily improve and outpaced the broader industry. In the first quarter of FY '27, our fee revenue grew for the sixth consecutive quarter with strong earnings growth and steady profitability. Our improving performance in this ever-changing business environment really continues to underscore both the effectiveness of our strategy, the hard work and talent of our colleagues and our operational excellence. Before reviewing the quarter in detail and as we announced on our fourth quarter earnings call for fiscal year '26, we are now reporting our financial results of the company in 3 geographic segments, the Americas, EMEA and APAC. This new reporting structure aligns with our Wear Korn Ferry go-to-market initiatives and actually with how our clients engage with us. To assist with the transition from a global solution focus, to regional geographies. The slides posted in our investor presentation include 3 new solution groupings within each geographic region.

The 3 new solution grouping is our search which is the old executive search and professional search, talent and organizational solutions, which is comprised of consulting and digital and then Workforce Solutions, which is comprised of RPO in interim.

Now turning to our first quarter performance highlights. Estimated remaining fees under existing contracts grew 14% year-over-year to $1.92 billion led by global new business growth in Workforce Solutions. Our internal business referral rate increased to 29.4% of consolidated fee revenue, it's up by about 300 basis points year-over-year, and our marquee and diamond accounts remained steady at about 40% of consolidated fee revenue.

Now both of these metrics really demonstrate the fee revenue synergies we're creating with our Warora go-to-market activities. Our consolidated new business grew 12% year-over-year and fee revenue grew in all regions and all industry groups. The earner productivity, which we measure as new business per average fee earners annualized grew year-over-year in all regions.

Now I'll talk a little bit about the company results. late fee revenue grew 7% year-over-year to $756 million, again, marking our sixth consecutive quarter of growth. Earnings and profitability also remained strong. Adjusted EBITDA grew $8 million or 7% year-over-year to $128 million. Adjusted EBITDA margin was flat year-over-year at 17% and adjusted diluted earnings per share grew $0.12 or 9% year-over-year to $1.43. As previously mentioned, our estimated remaining fees under existing contracts were $1.92 billion at the end of the quarter. And we estimate about 56% or $1.1 billion will be recognized within the next 4 quarters, and the remaining 44% or $835 million will be recognized beyond next year.

Turning to our regional results. Fee revenue in the Americas grew 9% year-over-year to $442 million, led by growth in Search and Workforce Solutions. EMEA fee revenue continued to strengthen growing 4% year-over-year to $228 million. Growth was broad-based with strength in all solution groups. In APAC fee revenue inflected to growth in the first quarter, reaching $87 million, up 1% year-over-year, led by search.

Finally, we continue to maintain a disciplined balanced approach to capital allocation over the quarter. During the quarter, we paid $30 million of dividends and invested $15 million in capital expenditures. In the future, we will be inclined to use investable cash for the reduction of debt associated with the acquisition of AMS. However, we will also closely monitor our share price and use capital for that if we find that more attractive.

Turning to our outlook for the second quarter of fiscal '27. Assuming no further changes in worldwide geopolitical conditions, economic conditions, financial markets and foreign exchange rates and including the addition of AMS, it's only for 2 months, September and October, our second quarter fee revenue is expected to range from $860 million to $878 million. Our adjusted EBITDA margin is expected to range from 16.8% to 17.2% and adjusted diluted earnings per share are expected to range from $1.30 to $1.40 per share.

We have a page in the investor deck and provided some guidance assumptions. And you'll find adjusted diluted earnings per share includes the net after-tax impact of the 2 months of incremental intangible asset amortization, incremental interest -- net interest expense and incremental shares issued in connection with the acquisition of AMS.

In closing, we remain focused on executing our Wear Korn Ferry go-to-market initiatives, which are driving deeper, more durable client relationships. Additionally, with the recent addition of AMS to the Korn Ferry family, we will strengthen our position in RPO and interim while broadening our capabilities into contingent workforce solutions, and early career and campus recruiting. AMS has a substantial backlog of multiyear contracts and long-tenured client relationships.

Going forward, it is our goal to deepen the value of those client relationships, introducing clients to all their Korn Ferry offers. Together with AMS, we are a much stronger company with greater capabilities to drive client business performance through their most precious asset, which is their people.

With that, we would be glad to answer any questions you may have.

Operator

[Operator Instructions] Our first question will come from the line of Tobey Sommer with Truist.

Question-and-Answer Session

Tyler Barishaw

This is Tyler Barishaw for Tobey. I just wanted to start with the new reporting structure. Can you maybe give us how we should think about growth rates in each of these segments going forward?

Gary Burnison

Well, when you look at the firm as a whole, that's what I tend to look at. And this was precipitated. We made this decision several quarters ago that we had to change how we were facing off with clients. And what we wanted was not an isolated solution-by-solution approach, but rather a holistic face off with our clients as we are Korn Ferry. And so that's been a very systematic effort that's been driven top-down and bottom-up, top-down through our Marquee diamond accounts or in bottom up every single day through what we're doing in terms of looking at new engagements that are open.

So I look at the firm overall over the last 10 years, 20 years, and you'd find a growth rate that's probably going to be around 10%, 11%, 12%, something like that. Up until this latest investment that we've made, we looked at that growth rate, and we said 60% was organic. 40% was inorganic. Obviously, with the combination of AMS, that changes those calculations, and it's more like 50-50. So I first look at the overall firm's growth rate historically. And when I look at the demographic trends and what's happening in the world, there's no reason to believe. I don't certainly see any reason that, that kind of growth rate that we've experienced in the past, we wouldn't continue to experience now -- clearly, from quarter-to-quarter, there's going to be regional differences.

And APAC going back now several quarters has been impacted by the socioeconomic changes that have been happening, particularly, for example, in China. And so that region has been impacted pretty severely by that falloff since the pandemic. EMEA over the last several quarters is actually been our best-performing region. More recently, over the last couple of quarters, you'll see that the Middle East has had a pretty big impact on the results there. Then Americas has been steady. So I tend to look at it from a geographic perspective, the total first of in each geography. And what it really reflects is how we're trying to drive a client-centric approach.

And then when you look at solutions, this last quarter, the Workforce Solutions group and search. Those were both outstanding, really, really outstanding growth rates in 10%, 11%. And looking at new business over the last several months, it continues to reflect that trend.

Tyler Barishaw

And in your executive search business, can you just talk about how AI is driving efficiencies and whether that's changing completion times or changing the margin structure of this business.

Gary Burnison

It is. It's impacting the total firm. And it certainly has an impact on how we're completing searches. But the thing that we're very, very careful about there is the data that we have. We have significant proprietary data -- comp data on 30 million people around the world, 30,000 companies. We've done 113 million executive assessments. We have upwards of 15,000 success profiles. We have pretty sensitive information on not just what people have done, but who they are.

And so with respect to AI, particularly as it relates to the search group, we've been very, very careful about how we use that. And we're going to continue to be very cautious about that. because of the nature of our data. So certainly, it has had an impact. I think it's going to continue to have an impact, absolutely.

Robert Rozek

This is Bob. Maybe a little bit more granular. I don't -- I think what's happening is clients are expecting more from us in terms of candidates lakes and we're able to deliver more of it, but it is not materially impacted the time line of a search. It's pretty consistent with what we've been seeing all along. And a lot of it's dependent on the client scheduling making decisions and so on. So while we're meeting their demands on additional information quite the time line has not changed.

Gary Burnison

And Bob, it's an interesting point because what we're seeing from clients as a candidate is everybody, everybody seems to have a perfect resume. So what the -- our firm has been built on IP and data. And it's not what somebody has done at the levels that we operate, it's who you are. And so the IP and the data that I was talking about are absolutely fundamental to how we are dealing our search work as well as our talent and organizational development activities. So it's actually because of AI, it's actually increasing the demand for what we have given our -- the proprietary nature of the database. And ultimately, it's about who somebody is, you -- that's just the truth.

Operator

Our next question will come from the line of Trevor Romeo with William Blair.

Melissa McMahon

This is Melissa McMahon on for Trevor Romeo. I guess I just have a couple on AMS' start. Congratulations on closing that one, too. How do we think about the cadence of synergy realization? Like, I guess, how much of the $40 million do we think we can be achieved immediately after close versus how much is back-end loaded?

Gary Burnison

Well, what we said when we announced the investment was that we would get to $140 million of run rate EBITDA within a year -- within a year of the date of the announcement. The date of close actually is what we said. And so I look at that $40 million. And first of all, when you look at our track record, which is critically important here, we have an enormous track record of gearing the top line of a company that we make an investment in. That's demonstrated, it's proven and we also have a track record of tapping the economies of scale that come with platforms such as Korn Ferry. And so I'm absolutely 200% confident that we are going to achieve that level of incremental EBITDA and more because I think that the revenue opportunity here and the growth opportunity for us is enormous.

In terms of the exact timing, what we have said, as I indicated, is that incremental $40 million, you would see by a year from closing, which would have been last week. And we're going to achieve that much faster than that.

Melissa McMahon

Great. And then maybe just to follow up on that. I guess, how can we think about the role that seasonality plays for AMS? I know early careers and campus recruiting might have a schoolyear angle. Just wondering if there's anything else.

Gary Burnison

Yes, it does. And the also -- it's going to follow the typical kind of calendarization of holidays. And so that's -- you're absolutely correct, generally speaking. And Bob, I don't know if you want to provide any more precision around that.

Robert Rozek

Yes. So what I would do is I would just follow the traditional Korn Ferry seasonality. Their business is pretty similar to ours where we always have our low watermark in Q3 where you got Thanksgiving in the U.S. and then the year-end holidays. We give our people a week off, clients give their folks 1 week or 2 weeks off. So it's just not as many hours in that quarter. So you'll see that the same sort of pattern, if you will, that you experience with Korn Ferry.

Operator

Our next question will come from the line of George Tong with Goldman Sachs.

Keen Fai Tong

You saw a 12% new business growth in the quarter. Can you unpack that a little bit and talk about how much of that growth came from RPO or more lumpy wins versus recurring revenue wins?

Gary Burnison

Well, I would say the RPO is actually recurring wins when you look at the new business, clearly over the last several months, given what's happened in the Middle East and the demographic factors that we've talked about on previous calls, search and workforce solutions have been absolutely the stronger performers and what's been really nice to see and supported our thesis when we made this decision. is all the investments that we've made in Workforce Solutions and whether that's interim or RPO. that's really paying dividends. And in this quarter, the RPO new wins were something like $160 million, 50% of those were from new logos.

So you're going to see -- you're definitely going to see lumpiness around the, for example, the outsourcing wins. But that's 1 of the reasons why we entered into this investment with AMS because what you have there is you have recurring loyal client relationships of scale. and their client relationships there just take their top 10, the average tenure of those client relationships is 14 years. So 2/3 of their business is in the RPO area. And I look at that as incredibly sticky and recurring. And when you look at the combined backlog now, this firm has absolutely made an enormous transformation over the last decade and even 2 decades, where now you're looking at a firm that looks completely different. than the Korn Ferry where I started. And today, we've got a backlog of $3.5 billion now with AMS.

And so yes, the Workforce Solutions is an argo part and we've certainly seen a lift in new business, including, like I said, including the interim area, which has had a significant lift. And I think that's all that above-market growth has been driven by the WR Korn Ferry strategy and look at our -- the cross referrals this quarter, we're almost 30%, which is really, really good to see.

Robert Rozek

And Gary, you maybe just -- because I think the backlog commentary is really important for folks to understand. So if you look at our backlog, George, we were, at the end of the quarter, about $1.9 billion. and 60% of that or roughly 60% comes out into next year. And then after that, you probably have another 1.5 years for the remainder, what AMS brings is not only a very large backlog, but it's also given the strength and tenure of the customer relationships that Gary talked about, they're about 40% within the first year, 60% comes out over the next 4 years. So it gives us much more durability and visibility and resilience going forward.

Keen Fai Tong

Got it. That's helpful. And then you're expecting AMS EBITDA to go from $100 million to $140 million within the year. Can you break out how much of the the increase is going to come from revenue versus cost synergies?

Gary Burnison

Well, our focus is absolutely on revenue, and we've already -- we've hit the ground running. We've had big teams together now over the last week since we've closed, and there is obviously a little bit of pre-integration planning where we've mapped top 100 customers, put teams against them. There's actually meetings happening this week with clients. I mean we are absolutely all over that. It's certainly going to change the nature of our Marquee and Diamond portfolio that undoubtedly will go up. As you know, it's incredibly complementary given AMS' industry and geographic footprint. with Korn Ferry. And so I look at not only the RPO solution, but I look at contingent Workforce Solutions and early careers and technology consulting and integration as well as reskilling.

I look at all 5 solutions, if you will, very, very positively. And the contingent workforce solutions, I think could be something that is definitely, definitely multi-hundred million and could be multibillion dollars given the amount of money the company spend on the temporary side. And the offering is really cool where we will now go in and we can consolidate vendors and save a company 600, 700, 800 basis, 900 basis points on their spend.

I mean this is material, material savings and the contingent workforce solutions, we're going to take that given the relationships we have around the world. And it's the same with early careers with the early careers and the campus hiring that they do and just the marquee logos, their client logos are so impressive. And like I said, I mean, everybody's got a perfect resume and understanding who somebody is, is incredibly important to that hiring decision and then on the technology consulting side, they bring skills that we need, particularly around integrating talent suite with CRM and HR platform.

So I look at all of those and say, "Wow, over the next 3 to 5 years, you're going to see incredible lift, I believe, given this iconic brand and bringing our organizations together. So we are absolutely off and running on the revenue side.

And on the economies of scale side, we have a track record. And we have a global platform that is highly scalable. And so we definitely are going to look at the economies of scale. And whether that's in vendor spend, we're looking at that. very, very closely. And I would just go back to our track record and say, we do everything we say we're going to do and more. will we hit that $40 million? We will absolutely hit that. Will we hit it before 1 year, we absolutely will.

Operator

Our next question will come from the line of Mark Marcon with Baird.

Mark Marcon

One, Gary, just there's been a lot of mix news with regards to the economy, you obviously had really good results during this last quarter. Just wondering like how much of your performance would you attribute to just kind of the general macro versus what you guys are specifically doing? And what is your sense of how the macro has evolved over the last 3, 4 months? And what the near-term outlook is.

Gary Burnison

Well, I think the question of raising rates. I mean it's -- that's a real issue. And growth is very, very hard to come by for most companies if they're not building data centers or in the AI area. So I think it has been a challenging environment, and the Middle East has not made about any easier, and you see the impact on our EMEA results for sure. So has it -- has it worsened over the last 3 or 4 months, I would say no. But again, we've got the big question of increasing rates and more conflict in the Middle East. It doesn't seem to end.

I guess on the other side, Mark, what I would point out is just the tremendous demographic opportunities because there is a supply-demand imbalance, and you know this better than anybody. I mean the U.S. economy is only projected to produce like 5 million or 6 million jobs over the next decade compared to 25 million over the previous decade. So baby boomers are retiring -- it's -- and the labor force just isn't going to grow.

Gary, the other thing I would add to that is if you think about our go-to-market activities and go-to-market mindset, it's driven through the marque Diamond accounts, and it's all about deepening our client relationships and demonstrated by our referral rates going from 18% back when we started measuring up to almost 30% today. The only thing I would add for AMS, they operate very similar to us. And if you go back to 2020 and you look at their growth, Gary indicated it was kind of the same as ours. Their CAGR is 10%, 11%. Over 50% of that came from expanding their existing client relationships. So those go-to-market activities that are important to us are also obviously very important to them and very consistent with what we've done over time.

Operator

Thank you, both, And it appears there are no further questions, Mr. Burnison.

Gary Burnison

Okay. Regina, thank you for hosting this, and I thank everybody for joining -- and we're very, very excited about what we can do now with, I think, the dominant firm in talent and organizational consulting. So thank you all, and we'll talk to you soon. Bye-bye.

Operator

Ladies and gentlemen, this conference call will be available for replay for 1 week starting today running through the end of the day on September 16, 2026, ending at midnight. You may access the Echo replay service by dialing (800) 770-2030 and entering the access code to 267-2007, followed by the pound key. Additionally, the replay will be available for playback at the company's website, www.kornferry.com in the Investor Relations section. This concludes today's call. Thank you all for joining. You may now disconnect.

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APi Group Corp Stock (APG) Moved Down by 10.17% on Sep 9: Key Drivers Unveiled

Wed, 09 Sep 2026 19:15:29 +0000

APi Group Corp (APG) moved down by 10.17%. The Industrial & Commercial Services sector is down by 1.14%. The company underperformed the industry. Top 3 stocks by turnover in the sector: Nebius Group NV (NBIS) down 0.17%; S&P Global Inc (SPGI) down 2.27%; Waste Management Inc (WM) down 1.20%.

What is driving APi Group Corp (APG)’s stock price down today?

Investor sentiment shifted downward during APi Group Corporation's presentation at the Jefferies Global Industrials Conference. Although executive management reiterated long-term operational targets and highlighted a record contract backlog, market participants reacted cautiously to discussions regarding project timing, labor availability, and margin discipline in non-core services. The conference dialogue prompted short-term profit-taking, as investors reassessed the pace of near-term organic growth against a backdrop of broader industrial sector headwinds.

Sentiment was further weighed down by persistent insider selling disclosures leading into the session. Filings indicating substantial share dispositions by corporate directors and key investment holdings under Rule 10b5-1 plans created overhead supply pressure. Institutional investors often digest concentrated insider liquidations with heightened caution, which compounded downside momentum as market participants adjusted risk exposure.

Operational execution and integration risks related to recent acquisitions also contributed to the pull-back. Although recent transactions like Onyx-Fire Protection Services and WTech Fire Group enhanced top-line guidance, the market remains focused on potential margin dilution, rising input costs, and integration overhead. Investors are increasingly demanding clear evidence that accretive M&A will translate into sustained expansion of profit margins without compromising cash flow generation.

Despite the sharp downward volatility, APi Group's core fundamental thesis continues to rely on statutorily mandated safety inspections, high recurring service revenues, and an expanding order book. Near-term share performance, however, is expected to stay sensitive to margin execution metrics, integration milestones, and technical positioning as the market absorbs current institutional and insider rebalancing.

Technical Analysis of APi Group Corp (APG)

Technically, APi Group Corp (APG) shows a MACD (12,26,9) value of -0.760, indicating a sell signal. The RSI at 28.027 suggests sell condition and the Williams %R at 91.661 suggests oversold condition. Please monitor closely.

Fundamental Analysis of APi Group Corp (APG)

APi Group Corp (APG) is in the Industrial & Commercial Services industry. Its latest annual revenue is $7.91B, ranking 8 in the industry. The net profit is $-288.00M, ranking 63 in the industry. Company Profile

Over the past month, multiple analysts have rated the company as Buy, with an average price target of $52.60, a high of $55.00, and a low of $47.00.

More details about APi Group Corp (APG)

Company Specific Risks:

Acquisition Integration and Margin Pressures: Rapid capital deployment into recent bolt-on acquisitions—including WTech Fire Group and Onyx-Fire Protection Services—heightens execution risks, as any operational disruptions or delays in realizing cost synergies could pressure gross margins and cash flow.
Substantial Insider Share Offloading: SEC Form 4 and Form 144 disclosures reveal over $110 million in insider share sales over the past quarter, including multi-million-dollar sales by directors, creating equity overhang and signaling cautious sentiment from key leadership.
Debt-Financed Balance Sheet Expansion: Recent aggressive M&A activity has required additional leverage, raising debt service requirements and leaving profitability vulnerable if high interest rates persist or debt-funded assets generate lower-than-expected returns.
Input Cost Inflation and Supply Chain Risk: Ongoing cost inflation for specialized labor and materials, along with potential tariff pressures, threatens contract profitability across Safety and Specialty Services segments if cost increases cannot be passed onto clients.

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Grab Holdings Ltd Stock (GRAB) Moved Down by 7.23% on Sep 9: A Full Analysis

Wed, 09 Sep 2026 19:15:24 +0000

Grab Holdings Ltd (GRAB) moved down by 7.23%. The Software & IT Services sector is down by 0.72%. The company underperformed the industry. Top 3 stocks by turnover in the sector: Meta Platforms Inc (META) up 6.77%; Alphabet Inc Class A (GOOGL) down 2.31%; Alphabet Inc Class C (GOOG) down 2.19%.

What is driving Grab Holdings Ltd (GRAB)’s stock price down today?

Grab Holdings experienced a sharp decline driven primarily by a confluence of insider selling disclosures, regulatory uncertainties in core Southeast Asian operating markets, and persistent market skepticism regarding long-term top-line momentum.

The immediate catalyst pressuring sentiment stems from recent regulatory SEC filings detailing notable insider share sales by executive leadership, including Chief Executive Officer Anthony Tan, Chief Operating Officer Alexander Hungate, and other senior officers. Although these transactions were executed under pre-arranged Rule 10b5-1 trading plans designed for routine liquidity management, the public disclosure of multi-executive dispositions has intensified market anxiety over management confidence, prompting both retail and institutional investors to reduce exposure.

Beyond insider activity, mounting regulatory concerns across Southeast Asia have created persistent headwinds for the super-app operator. Market participants are closely watching policy developments in critical growth markets, particularly Indonesia, where potential proposals regarding driver commission caps and gig-economy labor protections could compress take rates across both the Mobility and Deliveries segments. Investors worry that tighter regulatory constraints could limit Grab's ability to maintain its target adjusted EBITDA margins without dampening driver retention or platform usage.

Fundamental growth concerns have further amplified the selling pressure. Despite previous quarterly operational beats and corporate buyback approvals, market focus has increasingly pivoted toward structural top-line deceleration compared to historical growth phases, alongside questions surrounding long-term free cash flow generation. The macroeconomic backdrop across emerging Asia, coupled with aggressive regional competition in ride-hailing and digital financial services, continues to cap valuation multiples.

From a market dynamics perspective, the downward move forced the stock into a technical breakdown, breaching critical support levels and setting new multi-month lows. This technical deterioration accelerated automated selling, triggered trailing stop-loss orders, and invited short-side momentum trading, escalating the overall intraday volatility.

Technical Analysis of Grab Holdings Ltd (GRAB)

Technically, Grab Holdings Ltd (GRAB) shows a MACD (12,26,9) value of -0.096, indicating a sell signal. The RSI at 27.577 suggests sell condition and the Williams %R at 98.485 suggests oversold condition. Please monitor closely.

Fundamental Analysis of Grab Holdings Ltd (GRAB)

Grab Holdings Ltd (GRAB) is in the Software & IT Services industry. Its latest annual revenue is $3.37B, ranking 85 in the industry. The net profit is $268.00M, ranking 95 in the industry. Company Profile

Over the past month, multiple analysts have rated the company as Buy, with an average price target of $5.84, a high of $8.00, and a low of $4.60.

More details about Grab Holdings Ltd (GRAB)

Company Specific Risks:

Executive Insider Liquidation: Recent Form 4 and Form 144 SEC filings revealed substantial insider share sales by executive leadership, including CEO Anthony Tan selling 400,000 shares and COO Alexander Hungate selling over 145,000 shares, stoking institutional concern over management confidence and driving shares toward new 52-week lows.
Regulatory Risks on Driver Commissions: Intraday volatility has intensified amid mounting regulatory scrutiny in core markets such as Indonesia over proposed driver commission caps, threatening to compress take-rates and squeeze profit margins across Grab's core mobility and delivery operations.
Persistent Profitability and Cash Flow Deficits: Institutional analysts highlight fundamental vulnerabilities, including weak organic cash generation and negative pretax operating margins, leaving the business reliant on outside capital or aggressive cost reductions to support long-term expansion.
Slowing Mobility Demand and Rating Downgrades: Bearish sentiment is growing around decelerating growth in Southeast Asian ride-hailing demand, prompting target cuts by firms such as Barclays and triggering technical breakdowns below all major moving averages.

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HP Inc Stock (HPQ) Moved Up by 7.07% on Sep 9: Key Drivers Unveiled

Wed, 09 Sep 2026 19:15:20 +0000

HP Inc (HPQ) moved up by 7.07%. The Technology Equipment sector is down by 0.22%. The company outperformed the industry. Top 3 stocks by turnover in the sector: Apple Inc (AAPL) down 0.12%; Micron Technology Inc (MU) up 2.52%; SanDisk Corporation (SNDK) up 0.62%.

What is driving HP Inc (HPQ)’s stock price up today?

HP Inc. experienced a strong upward surge driven primarily by major strategic announcements in artificial intelligence infrastructure and next-generation computing hardware. The company announced a high-profile collaboration with Red Hat and NVIDIA to deliver an enterprise AI platform designed for local workload management and edge AI inference. Integrating HP's workstation architecture with NVIDIA's advanced Grace Blackwell chips and Red Hat's AI orchestration software positions the firm to capture expanding corporate demand for hybrid AI deployment. Concurrently, investor enthusiasm was bolstered by the rollout of HP's expanded AI PC portfolio, which targets creators and developers, reinforcing market expectations that AI-enabled devices will drive higher average selling prices and stimulate a broader commercial refresh cycle.

Recent executive commentary at major institutional technology conferences further reinforced market confidence. HP's leadership underscored robust operational execution in its Personal Systems division, highlighted strong top-line momentum, and reaffirmed its elevated full-year earnings outlook. This operational optimism, coupled with recent bullish rating upgrades from research analysts who cited attractive valuation metrics and solid fundamental momentum, triggered increased institutional buying. Additionally, ongoing share repurchases and a consistent quarterly dividend yield continue to provide solid capital return support, attracting income-focused investors alongside growth-oriented buyers.

From a broader market perspective, HP is benefiting from a favorable positioning within the evolving hardware ecosystem. As enterprises move beyond initial AI experimentation toward dedicated local hardware deployment, HP's strategic focus on premium commercial PCs and enterprise edge solutions helps counter structural headwinds in traditional printing markets and raw material cost inflation. Although component pricing pressures and corporate governance transitions warrant continued monitoring, the confluence of high-impact AI partnerships, positive analyst revisions, and re-accelerating commercial hardware demand created strong momentum for the stock.

Technical Analysis of HP Inc (HPQ)

Technically, HP Inc (HPQ) shows a MACD (12,26,9) value of 0.210, indicating a buy signal. The RSI at 64.384 suggests neutral condition and the Williams %R at 1.704 suggests overbought condition. Please monitor closely.

Media Coverage of HP Inc (HPQ)

In terms of media coverage, HP Inc (HPQ) shows a coverage score of 45, indicating a moderate level of media attention. The overall market sentiment index is currently in extremely bearish zone.

Fundamental Analysis of HP Inc (HPQ)

HP Inc (HPQ) is in the Technology Equipment industry. Its latest annual revenue is $55.30B, ranking 5 in the industry. The net profit is $2.53B, ranking 6 in the industry. Company Profile

Over the past month, multiple analysts have rated the company as Hold, with an average price target of $26.30, a high of $33.80, and a low of $19.00.

More details about HP Inc (HPQ)

Company Specific Risks:

Component Cost Inflation and Margin Compression: Management commentary at recent institutional conferences highlighted escalating memory (DRAM/NAND) and storage costs, which are expanding as a percentage of the bill of materials and eroding Personal Systems operating margins, creating ongoing downside pressure on fourth-quarter profitability.
Plunging PC Unit Shipment Volumes: Financial results revealed a steep 16% year-over-year drop in total PC unit shipments—with consumer units down 19% and commercial units down 14%—indicating underlying volume weakness and over-reliance on price increases rather than organic unit growth.
Structural Revenue Contraction in Printing: The high-margin Printing segment continues to face persistent headwinds, with overall printing revenues declining 2% year-over-year and supplies revenue contracting 3%, underscoring secular declines in legacy office printing demand.
Skeptical Institutional Sentiment and Insider Selling: Sell-side Wall Street consensus maintains a cautious "Reduce" stance with average price targets significantly below current trading levels, complemented by net insider share liquidations that signal a lack of internal conviction in near-term upside.

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Apple Launches First Foldable iPhone Duo, Starting at $1,999

Andy Chen — Wed, 09 Sep 2026 18:32:34 +0000

TradingKey - On Wednesday, September 9, Eastern Time, Apple (AAPL) held its annual fall new product launch event at Apple Park, themed "Surprise and Shine." At the event, hosted for the first time by new CEO John Ternus, Apple officially unveiled its first foldable iPhone—the iPhone Duo—while also launching the iPhone 18 Pro, iPhone 18 Pro Max, and Apple Watch Series 12.

The core change at this launch event is not merely a hardware form factor upgrade; Apple is also seeking to build the iPhone into an "intelligent hub" connecting personal information, apps, services, and the hardware ecosystem through Apple Intelligence and Siri AI.

iPhone Duo Starts at $1,999, Goes on Sale Oct. 23

The iPhone Duo starts at $1,999, offers storage capacities ranging from 256GB to 2TB, with pre-orders opening on October 16 and official availability on October 23. The device comes in two color options: Starlight and Midnight.

When unfolded, the iPhone Duo features a 7.6-inch inner display, making it Apple's largest iPhone display to date; when folded, it features a 5.4-inch outer display, with a screen area reaching 90% of the iPhone 18 Pro. Both screens share the same aspect ratio, allowing content to maintain continuous display between unfolded and folded states.

The iPhone Duo features a titanium body, precision hinge, and dual-battery architecture, along with a custom vapor chamber cooling system. The inner display incorporates a nano-texture finish to reduce glare and reflections, while also helping to lower the visibility of the crease. The entire device supports IP68-rated water, dust, and splash resistance, with Touch ID integrated into the side button.

In terms of photography, the iPhone Duo is equipped with a 48MP Fusion main camera that supports up to 48MP shooting and 2x optical-quality zoom, alongside a 48MP Fusion ultra-wide camera. The foldable form factor also introduces new ways to shoot, such as using various device postures for hands-free video calls or capture.

In terms of performance, the iPhone Duo is powered by the A20 Pro chip, runs iOS 27, and supports Apple Intelligence and Siri AI. Apple stated that it will also support Apple Pencil connected via USB-C in a future update.

iPhone 18 Pro Series to Start at $1,199

Apple announced starting prices of $1,199 for the iPhone 18 Pro and $1,299 for the iPhone 18 Pro Max. For comparison, the iPhone 17 Pro and iPhone 17 Pro Max started at $1,099 and $1,199, respectively.

Pre-orders for the iPhone 18 Pro series will open on September 12, with availability starting September 18. The lineup will be available in Black, Silver, Glacier, and an all-new Burgundy.

The camera system is a key highlight of this upgrade. The iPhone 18 Pro and iPhone 18 Pro Max introduce a variable aperture for the first time, allowing the 48-megapixel Fusion main camera to automatically adjust the aperture based on lighting and depth-of-field requirements, or be manually adjusted by users in the Camera app. New Pro control features also support adjustments to shutter speed, white balance, and exposure histogram.

In terms of performance, the iPhone 18 Pro series is powered by the A20 Pro chip built on a 2-nanometer process. Memory bandwidth increases by 50% compared with the A19 Pro, GPU performance gains up to 40%, and the Neural Engine features a total of 32 cores to boost on-device AI models and computational photography capabilities.

Apple Embeds AI Further Into Everyday Use

At the event, Apple executive Lilian Rincon introduced Apple Intelligence and the new version of Siri. A live demonstration showed that users can snap a photo of ingredients at a fruit stand, ask Siri to recommend recipes, and add the required ingredients to a shopping list; Siri can also interact with third-party apps such as WhatsApp and Outlook.

The new Siri can understand the user's current task and provide assistance by combining personal context, such as on-screen content, messages, emails, and photos. Siri can also use the camera to understand what is in front of the user to answer questions or perform actions.

Apple specifically emphasized on-device processing. Ternus stated that Apple Intelligence will run directly on the device whenever conditions permit to protect user privacy. The new Siri is currently available in an English Beta, with French, Japanese, Korean, Portuguese, and Spanish versions launching in October. Apple has not yet disclosed when the new Siri will enter the EU and Chinese markets.

From the iPhone Duo to the iPhone 18 Pro, Apple's event highlighted two clear main threads: first, expanding the iPhone's hardware form factor via foldable screens; second, leveraging the A20 Pro, Apple Intelligence, and Siri AI to further transition the iPhone from a smartphone into an intelligent device that understands users' personal scenarios.

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Charter Communications Inc Stock (CHTR) Moved Down by 7.31% on Sep 9: Key Drivers Unveiled

Wed, 09 Sep 2026 18:15:26 +0000

Charter Communications Inc (CHTR) moved down by 7.31%. The Telecommunications Services sector is down by 2.44%. The company underperformed the industry. Top 3 stocks by turnover in the sector: SpaceX (SPCX) down 3.18%; Comcast Corp (CMCSA) down 6.23%; AT&T Inc (T) down 1.43%.

What is driving Charter Communications Inc (CHTR)’s stock price down today?

Charter Communications experienced significant downside pressure as a targeted repricing swept across the cable broadband sector. The sharp decline was primarily triggered by heightened market anxiety over persistent structural headwinds facing traditional cable operators. Investors remain concerned about aggressive competition from telecom rivals expanding fixed wireless access and high-speed fiber networks. These alternative technologies continue to capture market share, eroding cable's historic subscriber growth and pricing power in residential broadband. Furthermore, heightened scrutiny accompanied senior leadership appearances at major September investor conferences, where market participants anticipated cautious commentary regarding current-quarter subscriber trends and customer acquisition costs.

Company-specific developments have added an extra layer of caution for market participants. The upcoming leadership transition in the finance department, marked by the Chief Financial Officer stepping down in mid-October, introduces temporary administrative uncertainty during a period of significant strategic integration. Charter has recently absorbed major cable and media assets through complex corporate combinations, increasing overall leverage and capital expenditure burdens. While management has implemented proactive retention strategies, such as offering bundled streaming services at no extra charge to low-income and legacy tiers to mitigate churn, the market remains cautious about the near-term cash flow impact of these promotional efforts.

From an institutional research perspective, Charter continues to navigate a challenging macro and operational landscape characterized by ongoing cord-cutting in video and margin pressure in high-margin internet services. Although mobile line expansion offers a viable long-term strategy for convergence and customer retention, it has not yet fully counterbalanced subscriber attrition in core broadband products. Until Charter demonstrates sustained stabilization in broadband net additions and provides a clearer timeline for balance sheet deleveraging, the shares are likely to face ongoing valuation headwinds and heightened intraday volatility relative to the broader media and communications sector.

Technical Analysis of Charter Communications Inc (CHTR)

Technically, Charter Communications Inc (CHTR) shows a MACD (12,26,9) value of -3.532, indicating a neutral signal. The RSI at 40.405 suggests neutral condition and the Williams %R at 96.597 suggests oversold condition. Please monitor closely.

Media Coverage of Charter Communications Inc (CHTR)

In terms of media coverage, Charter Communications Inc (CHTR) shows a coverage score of 12, indicating a very low level of media attention. The overall market sentiment index is currently in neutral zone.

Fundamental Analysis of Charter Communications Inc (CHTR)

Charter Communications Inc (CHTR) is in the Telecommunications Services industry. Its latest annual revenue is $54.77B, ranking 5 in the industry. The net profit is $4.99B, ranking 6 in the industry. Company Profile

Over the past month, multiple analysts have rated the company as Hold, with an average price target of $227.34, a high of $700.00, and a low of $101.00.

More details about Charter Communications Inc (CHTR)

Company Specific Risks:

Broadband Repricing Pressure and Core Churn: Charter stock experienced a steep intraday decline of roughly 6% amid heightened market fears of sector-wide broadband price wars and ongoing subscriber attrition across core internet and residential service segments.
CFO Leadership Transition Uncertainty: The announced resignation of Chief Financial Officer Jessica Fischer, effective October 15, 2026, forces a transition to an interim CFO during a major corporate restructuring, creating execution and strategic continuity risks for institutional investors.
Balance Sheet Leverage and Capital Intensity: Following the Cox transaction, Charter assumed $840 million in additional net debt while projecting $11.4 billion in 2026 capital expenditures, forcing management to temporarily pause share buybacks to focus on debt reduction.
Accelerated Cord-Cutting and Margin Compression: Persistent double-digit declines in traditional cable television subscriptions continue to drag down video revenues, compressing operating EBITDA margins despite aggressive network evolution spending.

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HCA Healthcare Inc Stock (HCA) Moved Up by 5.26% on Sep 9: What Signal Does It Send?

Wed, 09 Sep 2026 18:15:25 +0000

HCA Healthcare Inc (HCA) moved up by 5.26%. The Healthcare Services & Equipment sector is down by 0.15%. The company outperformed the industry. Top 3 stocks by turnover in the sector: Unitedhealth Group Inc (UNH) down 2.14%; Thermo Fisher Scientific Inc (TMO) up 0.32%; Stryker Corp (SYK) down 0.03%.

What is driving HCA Healthcare Inc (HCA)’s stock price up today?

HCA Healthcare experienced strong upward momentum driven primarily by encouraging management commentary during a major institutional healthcare conference. Executives reaffirmed the underlying operational resilience of the nation's largest hospital network, offering clarity on patient volume trajectory and margin stability. Management highlighted that the overwhelming majority of its business units are performing at or above expectations, with core operating profit growth tracking toward the top of its historical multi-year target range. This reassuring outlook effectively relieved market concerns surrounding policy-related payer mix disruptions, particularly those stemming from the expiration of enhanced exchange tax credits, by demonstrating that robust commercial inpatient volumes and Medicaid supplemental funding offsets remain sufficient to protect core cash flows.

Confidence was further reinforced by strategic updates detailing ongoing network optimization and disciplined cost management. The company outlined significant ongoing capital deployment toward expanding outpatient capacity, urgent care facilities, and technology-driven efficiency programs, including enterprise artificial intelligence implementation. Coupled with recent corporate cost structure rationalizations designed to buffer against lingering inflationary pressures and rising uncompensated care costs, these measures reassured institutional investors that HCA retains superior operating leverage over regional healthcare operators.

The surge was amplified by favorable institutional positioning and attractive valuation dynamics. Following a period of share price weakness linked to earlier annual guidance revisions, the stock traded at a notable valuation discount compared to broader industry averages. Reaffirmed positive analyst ratings and bullish target price projections highlighted the expanding gap between the stock's discounted market multiple and its fundamental cash-generating capability. As executive commentary extinguished downside tail risks, institutional buyers stepped in, sparking a decisive intraday rally driven by fundamental re-rating and momentum buying.

Technical Analysis of HCA Healthcare Inc (HCA)

Technically, HCA Healthcare Inc (HCA) shows a MACD (12,26,9) value of -2.845, indicating a neutral signal. The RSI at 57.712 suggests neutral condition and the Williams %R at 33.199 suggests buy condition. Please monitor closely.

Fundamental Analysis of HCA Healthcare Inc (HCA)

HCA Healthcare Inc (HCA) is in the Healthcare Services & Equipment industry. Its latest annual revenue is $75.60B, ranking 7 in the industry. The net profit is $6.78B, ranking 2 in the industry. Company Profile

Over the past month, multiple analysts have rated the company as Buy, with an average price target of $453.21, a high of $579.00, and a low of $380.00.

More details about HCA Healthcare Inc (HCA)

Company Specific Risks:

Adverse Payer Mix Shift & ACA Coverage Losses: Accelerating loss of individual health insurance exchange coverage has expanded uninsured patient volumes, driving an estimated $1.0 billion to $1.2 billion unfavorable EBITDA impact for the fiscal year.
Contraction in High-Margin Surgical Volumes: Operational weakness is highlighted by declining year-over-year same-facility inpatient and outpatient surgical procedures, directly threatening revenue generation from high-margin elective care.
Pending Securities Fraud & Disclosure Investigations: Multiple law firms have launched formal inquiries into potential federal securities law violations following executive management's sharp downgrade to full-year net income and EPS guidance.
Elevated Operating Cost Structure: Persistent cost pressures from hospital-based physician fees, agency labor staffing, and medical supplies continue to compress operating margins across regional facility networks.

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Pinterest Inc Stock (PINS) Moved Down by 7.57% on Sep 9: Drivers Behind the Movement

Wed, 09 Sep 2026 17:15:23 +0000

Pinterest Inc (PINS) moved down by 7.57%. The Software & IT Services sector is down by 0.56%. The company underperformed the industry. Top 3 stocks by turnover in the sector: Meta Platforms Inc (META) up 6.26%; Alphabet Inc Class A (GOOGL) down 2.19%; Alphabet Inc Class C (GOOG) down 1.98%.

What is driving Pinterest Inc (PINS)’s stock price down today?

Pinterest experienced notable downward pressure as market participants reacted to corporate leadership transitions and persistent growth concerns. A key catalyst weighing on market sentiment is the unexpected resignation of Chief Financial Officer Julia Brau Donnelly, who is stepping down to pursue another role. Although the company announced an interim financial leadership arrangement while conducting an external search for a permanent successor, the sudden executive departure has introduced lingering uncertainty regarding operational continuity and long-term financial strategy. The leadership shift, coming alongside recent disclosures of insider selling, has amplified investor caution regarding governance stability during a crucial strategic pivot.

Beyond executive turnover, fundamental pressures within Pinterest's core digital advertising segment continue to weigh on investor expectations. Market sentiment remains constrained following a cautious revenue outlook for the third quarter, which signals a downshift in top-line growth velocity. The platform faces ongoing monetization hurdles in international markets, where revenue generation continues to lag North American benchmarks. Additionally, foreign exchange headwinds and calendar shifts in major retail promotion events have created incremental top-line friction, dampening enthusiasm among institutional investors who had previously priced in stronger acceleration across visual search and shoppable content.

Broader competitive dynamics and cost structures are further compounding the downside movement. As larger technology competitors aggressively deploy capital into automated advertising tools and generative artificial intelligence, Pinterest faces intensified competition for ad budgets. Simultaneously, rising infrastructure and operational investments required to enhance AI-driven visual recommendations are compressing profit margins. With valuation multiples trading at a premium compared to broader interactive media peers, the convergence of decelerating growth forecasts, executive turnover, and elevated capital demands has triggered multiple compression and sustained technical selling across institutional portfolios.

Technical Analysis of Pinterest Inc (PINS)

Technically, Pinterest Inc (PINS) shows a MACD (12,26,9) value of -0.898, indicating a sell signal. The RSI at 24.713 suggests sell condition and the Williams %R at 93.315 suggests oversold condition. Please monitor closely.

Fundamental Analysis of Pinterest Inc (PINS)

Pinterest Inc (PINS) is in the Software & IT Services industry. Its latest annual revenue is $4.22B, ranking 74 in the industry. The net profit is $416.86M, ranking 79 in the industry. Company Profile

Over the past month, multiple analysts have rated the company as Buy, with an average price target of $28.32, a high of $38.00, and a low of $15.40.

More details about Pinterest Inc (PINS)

Company Specific Risks:

Abrupt CFO Resignation and Executive Turnover: The unexpected departure of Chief Financial Officer Julia Brau Donnelly has created leadership uncertainty during a pivotal operational transition, placing Vice President of Finance Vikram Naidu in an interim role and raising institutional concerns over financial execution stability.
Decelerating Revenue Guidance and Monetization Bottlenecks: Management's projected Q3 revenue growth slowdown to 13%–15% highlights persistent challenges in converting user engagement into top-line ad growth, especially as large retail advertisers moderate campaign spending.
High-Volume Insider Dispositions and Selling Pressure: Recent Form 4 and Rule 144 SEC filings reveal ongoing multi-million-dollar stock sales by co-founder Benjamin Silbermann, compounding negative market sentiment during a multi-session downward slide that erased over $1.7 billion in equity value.
Infrastructure Margin Compression and Ad Competition: Ramping investments in GPU infrastructure for AI-driven visual search features and elevated stock-based compensation continue to weigh on GAAP profitability, while aggressive performance ad offerings from Meta and Google threaten Pinterest's ad-dollar market share.

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Pershing Square Ord Shs Stock (PS) Moved Down by 10.53% on Sep 9: Key Drivers Unveiled

Wed, 09 Sep 2026 17:15:23 +0000

Pershing Square Ord Shs (PS) moved down by 10.53%. The Banking & Investment Services sector is down by 0.42%. The company underperformed the industry. Top 3 stocks by turnover in the sector: Bank of America Corp (BAC) up 0.67%; Goldman Sachs Group Inc (GS) down 0.16%; JPMorgan Chase & Co (JPM) up 0.50%.

What is driving Pershing Square Ord Shs (PS)’s stock price down today?

Pershing Square experienced a sharp downward retreat and heightened intraday volatility as negative momentum took hold following a strong rally in the prior session. A major driver of the weakness stems from lingering investor skepticism regarding the persistent discount between the company's market valuation and its underlying Net Asset Value. Market participants are increasingly concerned about portfolio concentration, management fee structures, and strategic plans to introduce fund leverage. These structural worries, combined with growing frustration over the fund's relative performance compared to broader market benchmarks since its initial public offering, prompted swift profit-taking.

Recent regulatory disclosures detailing substantial portfolio adjustments by management have also intensified investor debate. While strategic shifts away from select mega-cap technology holdings into streaming media and financial infrastructure names were intended to capture asymmetric upside, the mixed market reception has underscored uncertainty surrounding execution and timing. Furthermore, after trading up significantly in the preceding session on lighter-than-average volume, the stock became vulnerable to a technical reversal as cautious analyst ratings and conservative consensus price targets constrained buying appetite.

Exacerbating company-specific pressures was a broader macroeconomic risk-off environment across U.S. capital markets. Escalating geopolitical conflict and a sudden spike in energy prices reignited fears over persistent inflation and prolonged monetary tightening. The resulting market-wide retreat hit high-beta asset management vehicles particularly hard, amplifying intraday selling pressure across the company's shares.

Technical Analysis of Pershing Square Ord Shs (PS)

Technically, Pershing Square Ord Shs (PS) shows a MACD (12,26,9) value of -1.038, indicating a neutral signal. The RSI at 45.426 suggests neutral condition and the Williams %R at 83.718 suggests oversold condition. Please monitor closely.

Fundamental Analysis of Pershing Square Ord Shs (PS)

Pershing Square Ord Shs (PS) is in the Banking & Investment Services industry. Its latest annual revenue is $348.77M, ranking 86 in the industry. The net profit is $249.78M, ranking 54 in the industry. Company Profile

Over the past month, multiple analysts have rated the company as Hold, with an average price target of $42.78, a high of $53.00, and a low of $36.00.

More details about Pershing Square Ord Shs (PS)

Company Specific Risks:

Persistent Net Asset Value Discount: Shares face heightened volatility as a deep discount to the firm's Net Asset Value (NAV) signals ongoing institutional distrust in asset valuations rather than a value-buying opportunity.
Portfolio Benchmark Underperformance: Analysts and institutional investors are expressing frustration over the fund's persistent underperformance relative to the S&P 500 index since its initial public offering, raising doubts about the core investment strategy.
Skepticism Over Fee Structure and Leverage: Market participants are increasingly critical of the company's management fee burden coupled with executive plans to add fund leverage, expanding downside financial risks in volatile market environments.
Governance and Ownership Concentration Risks: Sizable equity transfers—including CEO Bill Ackman's recent $400 million stock donation to a foundation—introduce concentrated non-commercial ownership blocks and potential governance uncertainties.

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Caseys General Stores Inc Stock (CASY) Moved Down by 15.56% on Sep 9: Drivers Behind the Movement

Wed, 09 Sep 2026 17:15:23 +0000

Caseys General Stores Inc (CASY) moved down by 15.56%. The Food & Drug Retailing sector is down by 0.43%. The company underperformed the industry. Top 3 stocks by turnover in the sector: Walmart Inc (WMT) down 0.07%; Caseys General Stores Inc (CASY) down 15.56%; Sysco Corp (SYY) up 3.16%.

What is driving Caseys General Stores Inc (CASY)’s stock price down today?

Casey's General Stores experienced a sharp downward revaluation following the release of its first-quarter fiscal 2027 financial results. Although the convenience-store operator delivered headline beats on both top-line revenue and diluted earnings per share, institutional investors focused intensely on the composition of those profits, near-term cash flow metrics, and the lack of an upward revision to full-year guidance.

A primary catalyst for the decline was concern over the quality and sustainability of the quarterly beat. A substantial portion of the profitability outperformance stemmed from favorable fuel margin expansion rather than organic volume gains. Same-store fuel gallons sold experienced a minor contraction, indicating that fuel profit gains were heavily reliant on favorable wholesale-to-retail price spreads. Because fuel margins are inherently volatile and subject to commodity price fluctuations, market participants generally assign lower valuation multiples to fuel-driven profit upside compared to recurring retail merchandise earnings. Meanwhile, inside same-store sales growth decelerated from prior-year levels, underperforming elevated street expectations for core retail momentum.

Investor sentiment was further dampened by management’s decision to reiterate, rather than raise, its full-year fiscal 2027 operational outlook. Given the magnitude of the quarterly earnings beat, the market had largely priced in a guidance upgrade. The conservative stance suggested potential cost pressures or margin normalization in upcoming quarters. Simultaneously, free cash flow declined year-over-year due to elevated capital expenditures directed toward new store builds and integration costs. Coming off a sustained rally that had elevated the stock's valuation, the combination of decelerating core retail trends, lower free cash generation, and a static full-year target triggered significant profit-taking across institutional portfolios.

Technical Analysis of Caseys General Stores Inc (CASY)

Technically, Caseys General Stores Inc (CASY) shows a MACD (12,26,9) value of -29.641, indicating a sell signal. The RSI at 19.295 suggests oversold condition and the Williams %R at 91.351 suggests oversold condition. Please monitor closely.

Media Coverage of Caseys General Stores Inc (CASY)

In terms of media coverage, Caseys General Stores Inc (CASY) shows a coverage score of 31, indicating a low level of media attention. The overall market sentiment index is currently in bearish zone.

Fundamental Analysis of Caseys General Stores Inc (CASY)

Caseys General Stores Inc (CASY) is in the Food & Drug Retailing industry. Its latest annual revenue is $17.56B, ranking 10 in the industry. The net profit is $714.45M, ranking 5 in the industry. Company Profile

Over the past month, multiple analysts have rated the company as Buy, with an average price target of $944.12, a high of $1069.00, and a low of $795.00.

More details about Caseys General Stores Inc (CASY)

Company Specific Risks:

Conservative Outlook and Reaffirmed Full-Year Guidance: Despite exceeding Q1 fiscal 2027 top- and bottom-line estimates, management maintained its full-year guidance unchanged, disappointing institutional investors who expected an upward revision and triggering fears of decelerating growth momentum.
Unbalanced Profit Growth Dependent on Volatile Fuel Margins: First-quarter earnings outperformance was heavily driven by a temporary surge in fuel gross margins to 47.8 cents per gallon from 41.0 cents a year ago, while same-store fuel gallons sold declined by 0.3%, highlighting a vulnerability to volatile wholesale pricing spreads rather than organic volume expansion.
Free Cash Flow Compression from High Capital Intensity: Quarterly free cash flow dropped significantly to $190 million from $262 million in the prior-year period due to elevated capital expenditures for store network expansion and integration remodels, straining cash conversion.
Accelerating Operating Expense Inflation: Total operating expenses expanded 8% year-over-year to $754.1 million, pressured by higher same-store hourly labor rates, increased credit card interchange fees, and rising corporate insurance costs.

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Dell Said to Plan $4 Billion Investment-Grade Bond Sale to Refinance Debt

Andy Chen — Wed, 09 Sep 2026 16:34:09 +0000

TradingKey - According to a Bloomberg report on September 9, Dell Technologies (DELL) is seeking to raise approximately $4 billion through an investment-grade bond offering to repay outstanding notes maturing in 2026 and for general corporate purposes. This financing comes amid rapid growth in demand for AI servers, as market focus extends from refinancing to whether Dell can leverage its AI business expansion to continue strengthening its credit fundamentals.

It is worth noting that this is not Dell's first bond issuance this fiscal year. Filings submitted by Dell to the U.S. Securities and Exchange Commission (SEC) show that it completed a $3 billion senior unsecured note offering in June this year, split across three maturities of 2031, 2034, and 2037, with coupon rates ranging from 4.75% to 5.25%.

Media reports citing Dell's financial reports show that as of the end of the second quarter of fiscal year 2027, its total short- and long-term debt stood at approximately $34.47 billion, up from approximately $31.50 billion at the end of fiscal year 2026.

As of press time, Dell's stock price narrowed slightly to 2.07%, trading at $544.93.

Source: TradingView

Dell Plans Four-Part Bond Sale, Final Size Yet to Be Determined

People familiar with the matter said Dell plans to issue a four-tranche bond offering with maturities ranging from 3 to 10 years, with the final size to be adjusted based on demand. Initial price guidance for the longest-dated tranche is a spread of up to 1.4 percentage points, or 140 basis points, over comparable U.S. Treasuries.

The offering is being managed by institutions including Barclays, Bank of America, Citi, Goldman Sachs, HSBC, JPMorgan, Toronto-Dominion Bank, and Wells Fargo.

In terms of the use of proceeds, the core purpose of this bond issuance is to refinance debt maturing in 2026, rather than simply adding leverage for expansion. For bond investors, the final issuance size, coupon rate, and subscription demand will serve as direct signals of how the market prices its credit risk.

AI Server Demand Drives Dell to Raise Sales Forecast

Specializing in servers and data center equipment, Dell is benefiting from rising global spending on AI infrastructure. Dell's stock has gained about 340% year-to-date, and earlier this month, the company raised its fiscal-year sales guidance by $25 billion, beating market expectations.

Dell is taking server orders equipped with Nvidia AI chips while also benefiting from a recovery in demand for traditional servers. As enterprises deploy AI agents, CPUs—which handle task coordination, management, and general computing—are regaining demand momentum, diversifying Dell's growth sources beyond GPU servers.

According to Dell's second-quarter fiscal 2027 disclosures, the company raised its full-year revenue guidance to $192 billion and increased its full-year AI server revenue target to $74 billion, with its AI server order backlog reaching $95 billion at the end of the period. These metrics indicate that AI demand has translated into stronger revenue visibility; however, whether orders can be delivered on schedule and recognized as revenue still depends on supply chain dynamics and the pace of customer capital expenditures.

What Debt Issuance Means for Credit Fundamentals

Bloomberg Intelligence analyst Robert Schiffman said that record operating momentum from the AI business should further solidify Dell's already sound credit profile, giving the company room to maintain a mid-BBB credit rating while repaying maturing debt and boosting shareholder returns.

The key to this financing is not the size of the bond issuance itself, but whether AI server revenue growth can sustainably cover funding needs across debt management, working capital investments, and shareholder returns. If AI orders materialize as expected, the bond issuance is more of a proactive optimization of the debt maturity structure; if server demand, profit margins, or supply chains come under pressure, leverage and financing costs will once again become the market's focus.

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Ubiquiti Inc Stock (UI) Moved Down by 10.02% on Sep 9: A Full Analysis

Wed, 09 Sep 2026 16:15:29 +0000

Ubiquiti Inc (UI) moved down by 10.02%. The Technology Equipment sector is down by 0.41%. The company underperformed the industry. Top 3 stocks by turnover in the sector: Micron Technology Inc (MU) up 1.99%; SanDisk Corporation (SNDK) up 1.62%; NVIDIA Corp (NVDA) down 0.81%.

What is driving Ubiquiti Inc (UI)’s stock price down today?

Ubiquiti Inc. experienced a significant downside movement as a convergence of profit-taking, valuation discipline, and lingering gross margin concerns weighed heavily on market sentiment. Following a strong multi-quarter rally driven by robust enterprise adoption of its UniFi and networking product suites, the equity faced intense selling pressure as market participants reassessed its risk-reward profile. The decline reflects a broader sentiment pivot in the wake of the company's recent fiscal fourth-quarter financial results, where despite delivering top- and bottom-line beats, underlying cost trajectory raised concerns regarding near-term profitability.

A primary fundamental headwind driving the pullback centers on gross margin sustainability. In its latest financial reports, Ubiquiti posted a sequential decline in gross margins, attributing the pressure to rising component costs, elevated freight expenses, and lingering supply chain bottlenecks. Management explicitly cautioned that higher component pricing and potential supply constraints could persist, threatening to constrain margins and limit top-line flexibility in upcoming quarters. In a high-expectation environment, any signals of sustained margin compression prompt rapid valuation reassessments among institutional investors.

Valuation dynamics and technical market mechanics also contributed to the sharp slide. The stock had been trading at an elevated valuation multiple relative to both the broader communications equipment sector and fundamental cash flow models, leaving little room for operational friction. Additionally, following the recent payment date of its quarterly cash dividend, short-term momentum traders and income investors moved to lock in gains. Ubiquiti’s concentrated ownership structure and relatively limited public float further magnified intraday price volatility when institutional sell orders accelerated.

Looking ahead, Ubiquiti’s core growth drivers—including strong enterprise hardware adoption, debt payoff, and cash generation capability—continue to provide long-term operational backing. However, short-term stock performance will remain sensitive to cost inflation headwinds and margin execution. Investors will be closely watching upcoming supply chain commentary, channel inventory trends, and gross margin stabilization before determining if the current retracement offers a compelling re-entry point.

Technical Analysis of Ubiquiti Inc (UI)

Technically, Ubiquiti Inc (UI) shows a MACD (12,26,9) value of -9.679, indicating a neutral signal. The RSI at 34.112 suggests neutral condition and the Williams %R at 92.678 suggests oversold condition. Please monitor closely.

Fundamental Analysis of Ubiquiti Inc (UI)

Ubiquiti Inc (UI) is in the Technology Equipment industry. Its latest annual revenue is $3.27B, ranking 12 in the industry. The net profit is $960.30M, ranking 8 in the industry. Company Profile

Over the past month, multiple analysts have rated the company as Hold, with an average price target of $734.50, a high of $980.00, and a low of $489.00.

More details about Ubiquiti Inc (UI)

Company Specific Risks:

Gross Margin Compression from Escalating Component Costs: In its fiscal Q4 earnings report and 10-K filing, Ubiquiti reported a quarter-over-quarter gross margin decline to 45.8% (down from 47.0% in Q3), warning that rising component and memory costs, paired with ongoing supply constraints, threaten to further pressure profit margins in upcoming quarters.
Severe Float Illiquidity and Concentrated Ownership Structure: Founder and CEO Robert Pera holds roughly 93% of total outstanding shares, leaving a public float of under 10%; this extreme insider concentration drastically restricts liquidity, creating structural fragility and triggering disproportional intraday price volatility on minimal institutional selling volume.
Overhang from Legal Investigations and Compliance Governance: Shareholder rights litigation firms, including Schall, Brown & Schwartz LLP, have launched active investigations into potential disclosure violations and breaches of fiduciary duties by Ubiquiti's leadership, aggravating market uncertainty surrounding internal corporate controls and regulatory compliance.
Analyst Bearishness and Lack of Corporate Transparency: Institutional sentiment remains restrained, underscored by Barclays maintaining an Underweight rating and a sub-market $489 price target; this target cut is compounded by Ubiquiti’s unconventional policy of refusing to host earnings conference calls or issue forward guidance.

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Comcast Corp Stock (CMCSA) Moved Down by 7.29% on Sep 9: A Full Analysis

Wed, 09 Sep 2026 16:15:25 +0000

Comcast Corp (CMCSA) moved down by 7.29%. The Telecommunications Services sector is down by 3.42%. The company underperformed the industry. Top 3 stocks by turnover in the sector: SpaceX (SPCX) down 4.38%; Comcast Corp (CMCSA) down 7.03%; Verizon Communications Inc (VZ) down 2.00%.

What is driving Comcast Corp (CMCSA)’s stock price down today?

Comcast experienced a sharp downward move in intraday trading following cautious management commentary at the Goldman Sachs Communacopia and Technology Conference. Chief Financial Officer Jason Armstrong spoke at the event, where updated messaging around key operational trends rattled investor sentiment. Concerns centered primarily on persistent headwinds in the core residential broadband segment, where management highlighted an ongoing challenging demand environment, competitive intensity, and market saturation. With broadband serving as the foundational profit driver for the company, executive signals suggesting continued subscriber pressure immediately prompted negative sentiment across the institutional market.

The downward pressure reflects broader structural challenges within the cable and telecommunications sector. Cable operators face aggressive competitive intrusion from telecom incumbents expanding fiber-to-the-home footprints, as well as wireless carriers aggressively courting cost-conscious consumers with discounted fixed wireless access home internet bundles. Compounding these connectivity headwinds is the relentless acceleration of linear pay-TV cord-cutting, which continues to erode legacy video revenues. While Comcast has achieved momentum in mobile line additions, ad-tech integration, and streaming profitability, these growing ancillary segments have not yet fully offset the revenue and margin impact of core broadband subscriber attrition and elevated retention costs.

From a valuation and institutional perspective, the stock's retreat underscores that low valuation multiples offer limited downside protection when operational catalysts are lacking. Although Comcast trades at a discount to broader communication services peers and offers an attractive dividend yield, institutional portfolio managers remain cautious regarding near-term growth visibility. The recent conference disclosures have triggered earnings estimate adjustments, with investors demanding clearer evidence of broadband subscriber stabilization, disciplined capital expenditure execution, and sustainable free cash flow expansion before driving a valuation re-rating.

Technical Analysis of Comcast Corp (CMCSA)

Technically, Comcast Corp (CMCSA) shows a MACD (12,26,9) value of -0.519, indicating a neutral signal. The RSI at 38.408 suggests neutral condition and the Williams %R at 95.507 suggests oversold condition. Please monitor closely.

Fundamental Analysis of Comcast Corp (CMCSA)

Comcast Corp (CMCSA) is in the Telecommunications Services industry. Its latest annual revenue is $123.71B, ranking 3 in the industry. The net profit is $20.00B, ranking 2 in the industry. Company Profile

Over the past month, multiple analysts have rated the company as Hold, with an average price target of $31.39, a high of $52.00, and a low of $21.00.

More details about Comcast Corp (CMCSA)

Company Specific Risks:

Cautious Executive Commentary at Industry Conference: CFO Jason Armstrong's presentation at the Goldman Sachs Communacopia + Technology Conference on September 9, 2026, triggered an intraday stock drop of approximately 4%, reflecting heightened institutional anxiety over persistent broadband subscriber headwinds and uncertain advertising demand across media assets.
Core Broadband Attrition and Fixed Wireless Competition: Comcast's primary earnings engine, domestic residential broadband, continues to face structural market share loss and pricing pressure due to aggressive expansion by Fixed Wireless Access (FWA) telecom providers and competitive fiber-to-the-home rollouts.
Share Buyback Pause During NBCUniversal Spinoff: Management's ongoing suspension of share repurchases to preserve liquidity during the corporate separation of NBCUniversal's cable networks removes a crucial mechanism for share price defense during broader market downturns.
Linear Cable Cord-Cutting and Streaming Margin Pressure: Accelerated subscriber declines in traditional pay-TV continue to compress high-margin affiliate and distribution fees, while direct-to-consumer digital streaming efforts require elevated content investments that squeeze operating margins.

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Vertiv Holdings Co Stock (VRT) Moved Down by 8.17% on Sep 9: What Investors Need To Know

Wed, 09 Sep 2026 16:15:24 +0000

Vertiv Holdings Co (VRT) moved down by 8.17%. The Industrial Goods sector is down by 1.24%. The company underperformed the industry. Top 3 stocks by turnover in the sector: Bloom Energy Corp (BE) down 1.13%; Vertiv Holdings Co (VRT) down 8.20%; General Electric Co (GE) down 2.80%.

What is driving Vertiv Holdings Co (VRT)’s stock price down today?

Vertiv Holdings Co. experienced a sharp downward pullback amid broader profit-taking across the artificial intelligence data center infrastructure complex and heightened valuation scrutiny. Following a prolonged multi-quarter surge driven by hyperscaler capital expenditures and surging demand for thermal and power management solutions, the stock has traded at elevated multiples. This high valuation hurdle leaves shares particularly sensitive to broader tech market retrenchment and investor sensitivity around quarterly project execution and delivery timing.

Recent strategic corporate actions have introduced additional short-term volatility. The company recently agreed to acquire UtilityInnovation Group in a substantial cash transaction to strengthen its data center microgrid and power architecture offerings. While strategically aligned with expanding power bottlenecks in AI infrastructure, the significant upfront capital deployment and potential earnout obligations have sparked near-term balance sheet and integration discussions among institutional market participants.

Additionally, industry competitive dynamics and portfolio adjustments have added selling pressure. Competitor M&A activity in the power technology sector and recent insider share sales executed under pre-arranged trading plans have contributed to a more cautious near-term tone. Although Vertiv maintains strong operational fundamentals backed by a substantial order backlog, institutional investors appear to be rebalancing positions and seeking valuation discipline amid broader technology sector softness.

Technical Analysis of Vertiv Holdings Co (VRT)

Technically, Vertiv Holdings Co (VRT) shows a MACD (12,26,9) value of 5.336, indicating a neutral signal. The RSI at 48.042 suggests neutral condition and the Williams %R at 59.680 suggests sell condition. Please monitor closely.

Media Coverage of Vertiv Holdings Co (VRT)

In terms of media coverage, Vertiv Holdings Co (VRT) shows a coverage score of 49, indicating a moderate level of media attention. The overall market sentiment index is currently in bullish zone.

Fundamental Analysis of Vertiv Holdings Co (VRT)

Vertiv Holdings Co (VRT) is in the Industrial Goods industry. Its latest annual revenue is $10.23B, ranking 17 in the industry. The net profit is $1.33B, ranking 13 in the industry. Company Profile

Over the past month, multiple analysts have rated the company as Buy, with an average price target of $331.02, a high of $400.00, and a low of $188.00.

More details about Vertiv Holdings Co (VRT)

Company Specific Risks:

Large Cash Outflow and M&A Integration Risk: Vertiv's SEC Form 8-K filing detailing the $1.45 billion upfront cash acquisition of Utility Innovation Group—along with up to $1.15 billion in potential EBITDA earnouts—substantially commits liquidity reserves and introduces significant integration risks in microgrid power architectures.
Project Execution Delays and Supply Chain Friction: Operational shifts in revenue timing for large multiphase AI data center projects, driven by component supply-chain congestion and tariff-related cost pressures, continue to strain intraday margin expectations and project deployment timelines.
Insider Equity Disposal and Analyst Downgrades: Recent SEC Form 4 filings detailing a 48% stake reduction by Director Edward Monser ($3.88 million sale), combined with broker downgrades from firms like Zacks Research to Hold, have dampened institutional sentiment.
Elevated Valuation and Hyperscaler Capex Sensitivity: Trading at a trailing P/E multiple exceeding 60x—substantially above historical intrinsic valuation models—the stock remains acutely sensitive to any slowdown or reallocation of capital expenditures by major AI hyperscalers.

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Western Digital Corp Stock (WDC) Moved Up by 3.35% on Sep 9: Key Drivers Unveiled

Wed, 09 Sep 2026 16:15:24 +0000

Western Digital Corp (WDC) moved up by 3.35%. The Technology Equipment sector is down by 0.41%. The company outperformed the industry. Top 3 stocks by turnover in the sector: Micron Technology Inc (MU) up 1.99%; SanDisk Corporation (SNDK) up 1.62%; NVIDIA Corp (NVDA) down 0.81%.

What is driving Western Digital Corp (WDC)’s stock price up today?

Western Digital experienced upward momentum and heightened intraday volatility as management delivered reassuring updates during an industry conference, reinforcing the structural growth narrative surrounding artificial intelligence and cloud storage infrastructure. Executive commentary emphasized that the vast majority of the company's business is now anchored in enterprise cloud customers, vastly reducing traditional consumer exposure following its strategic portfolio focus. CFO remarks highlighted robust pricing discipline, with average price per terabyte continuing to expand on a year-over-year basis alongside expanding gross and operating margins. With hard disk drive capacity substantially sold out through the end of the calendar year under long-term customer commitments, investors responded positively to the strong earnings visibility.

The stock's move was further amplified by broader memory and storage sector strength driven by relentless hyperscale cloud spending. Massive data expansion from AI inference and agentic workloads has created persistent supply tightness across enterprise storage solutions. Cloud titans continue to lock in multi-year purchase orders for high-capacity ePMR, UltraSMR, and next-generation HAMR drive platforms to satisfy density and power efficiency requirements. This tight market backdrop has enabled sustained pricing power, shielding leading storage producers from broader semiconductor market fluctuations and drawing strong institutional capital flows into the sector.

Positive market sentiment is additionally bolstered by Western Digital's capital return program and fundamental trajectory. Strong free cash flow generation has allowed the company to maintain a positive net cash position while actively returning capital to shareholders through dividends and share repurchases. Wall Street analysts have steadily revised fiscal year earnings estimates higher, pointing to high return on equity and disciplined capital expenditures as catalysts for sustained valuation re-rating. While insider transactions and broader equity market swings contributed to brief intraday fluctuations, robust institutional demand for AI-enabling storage infrastructure ultimately supported the positive price action.

Technical Analysis of Western Digital Corp (WDC)

Technically, Western Digital Corp (WDC) shows a MACD (12,26,9) value of 10.989, indicating a neutral signal. The RSI at 53.779 suggests neutral condition and the Williams %R at 2.237 suggests overbought condition. Please monitor closely.

Media Coverage of Western Digital Corp (WDC)

In terms of media coverage, Western Digital Corp (WDC) shows a coverage score of 47, indicating a moderate level of media attention. The overall market sentiment index is currently in bearish zone.

Fundamental Analysis of Western Digital Corp (WDC)

Western Digital Corp (WDC) is in the Technology Equipment industry. Its latest annual revenue is $12.92B, ranking 9 in the industry. The net profit is $9.29B, ranking 3 in the industry. Company Profile

Over the past month, multiple analysts have rated the company as Buy, with an average price target of $650.78, a high of $900.00, and a low of $428.40.

More details about Western Digital Corp (WDC)

Company Specific Risks:

Extreme Hyperscale Cloud Customer Concentration: Following the complete separation of its Flash business into SanDisk Corporation, Western Digital now operates as a pure-play hard disk drive manufacturer where cloud providers generate nearly 89% of revenue and its top 10 customers account for roughly 73% of sales, leaving the company acutely vulnerable to severe intraday downturns if any major cloud hyperscaler delays infrastructure deployment or reduces capex.
Technology Transition Execution & Competitive Pressure: Analyst updates, including a downgrade to Hold by Summit Insights and a lowered price target from UBS, cite heightened execution risks regarding the commercial ramp of Heat-Assisted Magnetic Recording (HAMR) drive platforms, alongside slowing enterprise and branded shipment momentum relative to key sector peers.
Valuation Multiples Premium Exposure: Trading at a forward P/E ratio exceeding 20x—more than double the computer storage device industry average of 10.36x—WDC's elevated valuation multiple creates amplified volatility and downside risk upon any market re-rating or sector-wide profit-taking.
Sustained Executive Insider Dispositions: SEC Form 4 filings submitted over recent sessions detail ongoing executive share liquidations, including open-market stock sales by Chief Legal Officer Cynthia Tregillis, adding negative investor sentiment overhang while shares trade near multi-year highs.

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Datadog Inc Stock (DDOG) Moved Up by 6.79% on Sep 9: Facts Behind the Movement

Wed, 09 Sep 2026 16:15:22 +0000

Datadog Inc (DDOG) moved up by 6.79%. The Software & IT Services sector is down by 0.90%. The company outperformed the industry. Top 3 stocks by turnover in the sector: Meta Platforms Inc (META) up 6.35%; Alphabet Inc Class A (GOOGL) down 2.65%; Alphabet Inc Class C (GOOG) down 2.43%.

What is driving Datadog Inc (DDOG)’s stock price up today?

Datadog experienced a strong upward trajectory accompanied by elevated intraday volatility, driven primarily by bullish fundamental commentary delivered by executive management at a major industry conference. Management reassured investors by highlighting accelerating top-line revenue expansion and a notable broadening of demand beyond specialized artificial intelligence workloads. The company reported that growth among non-AI corporate clients has reaccelerated substantially, while its AI-native customer cohort continues to expand at a rapid pace. Executives emphasized that observability tools are becoming a critical architectural layer for enterprise AI deployment, fulfilling essential roles in workload validation, real-time performance monitoring, and cloud cost governance. This strategic positioning reinforced investor conviction in the long-term compounding potential of the company's platform model.

The momentum was further amplified by positive sentiment across the broader cloud infrastructure and software sector. Recent earnings updates and upgraded product revenue guidance from peer data platforms provided cross-validation that corporate cloud optimization headwinds are continuing to abate. As enterprises transition from early experimentation to full-scale deployment of generative and agentic AI systems, reliance on unified monitoring and security solutions is intensifying. This favorable industry backdrop catalyzed fresh buying interest, enabling the stock to recover strongly from recent profit-taking following its earlier quarterly results.

Institutional portfolio flows and positive Wall Street analyst sentiment provided additional ballast to trading activity. Recent regulatory disclosures indicated position increases by notable institutional asset managers, helping absorb market focus away from routine executive insider sales conducted under pre-arranged trading plans. Furthermore, the consensus among research analysts remains decidedly constructive, supported by high customer retention metrics and expanding multi-product adoption across cloud security and developer tools. Although elevated infrastructure investments and near-term margin dynamics remain key factors for institutional investors to monitor, today's market action reflects renewed confidence in the company's growth trajectory and expanding addressable market.

Technical Analysis of Datadog Inc (DDOG)

Technically, Datadog Inc (DDOG) shows a MACD (12,26,9) value of -2.779, indicating a sell signal. The RSI at 45.661 suggests neutral condition and the Williams %R at 56.482 suggests sell condition. Please monitor closely.

Media Coverage of Datadog Inc (DDOG)

In terms of media coverage, Datadog Inc (DDOG) shows a coverage score of 42, indicating a moderate level of media attention. The overall market sentiment index is currently in extremely bullish zone.

Fundamental Analysis of Datadog Inc (DDOG)

Datadog Inc (DDOG) is in the Software & IT Services industry. Its latest annual revenue is $3.43B, ranking 84 in the industry. The net profit is $107.74M, ranking 142 in the industry. Company Profile

Over the past month, multiple analysts have rated the company as Buy, with an average price target of $284.12, a high of $330.00, and a low of $158.00.

More details about Datadog Inc (DDOG)

Company Specific Risks:

AI-Native Customer Concentration and Usage Cuts: Recent disclosures detailing usage reductions by a major AI-native client have heightened institutional concerns over revenue concentration, short-term contract optimizations, and top-line volatility across its key growth account segment.
Extreme Valuation and Multiple Compression Vulnerability: With the stock trading at a elevated trailing price-to-earnings multiple exceeding 400x, Datadog remains highly susceptible to sharp multiple compression if quarterly revenue growth decelerates below market projections.
Substantial Corporate Insider Liquidation: SEC Form 4 disclosures reveal persistent, large-scale insider selling totaling over $360 million in recent months, dampening sentiment as top management and board members systematically reduce holdings.
Deceleration Headwinds in Baseline Non-AI Segment: Wall Street research highlights emerging risk in Datadog's core non-AI observability products—which generate roughly 85% of total revenue—as growth in this foundational segment risks slowing in upcoming quarters.

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US Treasury Announces Buyback Expansion to $6 Billion, Yet 10-Year Yield Soars to Two-Year High

Andy Chen — Wed, 09 Sep 2026 15:29:21 +0000

TradingKey - On September 9, Eastern Time, the U.S. Department of the Treasury announced on Wednesday that it will buy back up to $6 billion in government bonds during Thursday's operation, targeting Treasuries with maturities of 10 to 20 years. This buyback size is three times that of regular operations and marks the first concrete move since Treasury Secretary Scott Bessent announced the expansion of the buyback program.

The U.S. Treasury stated that the action is primarily aimed at maintaining Treasury market functioning and improving liquidity in bonds of relevant maturities. The buyback operation will take place on Thursday, lasting 20 minutes and concluding at 2:00 p.m. Eastern Time.

Bessent had previously stated that the Treasury would at least double the size of its buybacks of outstanding Treasuries. The announced $6 billion amount is significantly above the former regular levels and higher than the $4 billion minimum previously set by the Treasury.

Although buyback operations are typically viewed as measures to boost bond demand and improve market liquidity, the market reaction was muted. As of press time, the benchmark 10-year U.S. Treasury yield rose to 4.853%, reaching its highest level since November 2023. The 30-year U.S. Treasury yield likewise surged to a relatively high level of 5.309%.

The rise in yields indicates that the market did not simply interpret the buyback program as a policy tool to push down long-term borrowing costs. Investors remain focused on factors such as the U.S. fiscal condition, long-term Treasury supply and demand, and the future path of interest rates.

The surge in Treasury yields may have been driven by the buyback size falling short of Wall Street expectations. Prior to the Treasury's announcement of the specific amount, Wall Street institutions held widely divergent forecasts for this buyback.

Institution	Forecast Size
Morgan Stanley	Up to about $10 billion
JPMorgan	$6 billion to $8 billion
Barclays	Slightly above $4 billion
Actual Treasury Announcement	$6 billion

Morgan Stanley strategists noted that, assuming no additional issuance of short-term Treasury bills and adherence to the Treasury's existing cash balance management policies, the remaining long-term Treasury buyback operations this quarter could reach up to $10 billion per session.

JPMorgan estimated that a buyback size of $6 billion to $8 billion per operation would be reasonable, whereas Barclays was more cautious, projecting the amount might only be slightly above $4 billion. The finalized $6 billion sits at the midpoint of these forecasts.

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Cloudflare Inc Stock (NET) Moved Up by 8.17% on Sep 9: Drivers Behind the Movement

Wed, 09 Sep 2026 15:15:23 +0000

Cloudflare Inc (NET) moved up by 8.17%. The Software & IT Services sector is down by 1.03%. The company outperformed the industry. Top 3 stocks by turnover in the sector: Meta Platforms Inc (META) up 6.52%; Alphabet Inc Class A (GOOGL) down 3.01%; Alphabet Inc Class C (GOOG) down 2.81%.

What is driving Cloudflare Inc (NET)’s stock price up today?

Cloudflare experienced a sharp upward surge and notable intraday volatility, largely fueled by expanding market enthusiasm around its latest artificial intelligence security capabilities and a strategic deepening with OpenAI. The rollout of its autonomous vulnerability discovery and remediation service within Cloudflare Managed Defense—utilizing advanced OpenAI frontier cyber models—empowers enterprise networks to identify software flaws, intercept edge attacks, and deploy automated code patches in real time. This integration reinforces Cloudflare's positioning as a critical security harness for AI-generated workloads and automated agent ecosystems, serving as the primary catalyst for the equity's outperformance.

The market's bullish momentum is further bolstered by secular tailwinds across cybersecurity and cloud edge computing. With automated and non-human traffic expanding rapidly to represent more than half of global network flows, enterprise security requirements are shifting away from traditional user-centric models toward AI-agent defense architectures. Demand for Cloudflare's Secure Access Service Edge, Zero Trust solutions, and Workers developer platform continues to escalate as organizations scramble to secure AI deployments. Coupled with a surging volume of global software vulnerabilities, these operational dynamics reinforce expectations for sustained top-line acceleration and enterprise multi-product contract expansions.

The positive trajectory was particularly pronounced given the backdrop of broader U.S. equity market softness, highlighting strong company-specific buying interest. Institutional sentiment remains supported by solid quarterly financial execution, raised forward guidance, and recent regulatory filings detailing increased holdings by prominent asset managers. While routine pre-arranged insider transactions under Rule 10b5-1 trading plans attracted brief market attention, investors remained focused on the company's expanding platform stickiness, developer ecosystem growth, and long-term monetization potential in edge AI infrastructure.

Technical Analysis of Cloudflare Inc (NET)

Technically, Cloudflare Inc (NET) shows a MACD (12,26,9) value of -2.179, indicating a neutral signal. The RSI at 56.664 suggests neutral condition and the Williams %R at 5.630 suggests overbought condition. Please monitor closely.

Fundamental Analysis of Cloudflare Inc (NET)

Cloudflare Inc (NET) is in the Software & IT Services industry. Its latest annual revenue is $2.17B, ranking 120 in the industry. The net profit is $-102.27M, ranking 538 in the industry. Company Profile

Over the past month, multiple analysts have rated the company as Buy, with an average price target of $333.91, a high of $400.00, and a low of $160.00.

More details about Cloudflare Inc (NET)

Company Specific Risks:

Gross Margin Compression from AI Infrastructure Costs: Cloudflare's adjusted gross margin contracted toward 72.8% due to increased infrastructure spending for AI workloads and developer platform loads, raising institutional concerns over near-term margin dilution and monetization pacing.
Restructuring Charges and Operational Execution Risks: Management's plan to reduce headcount by approximately 20% (roughly 1,100 employees) to transition toward an agentic AI operating model involves $140 million to $150 million in expected restructuring charges, creating execution uncertainty.
Valuation Multiples and Multiple Compression Vulnerability: Trading at hyper-elevated valuation multiples despite negative GAAP profitability (-8.21% net margin), the equity remains susceptible to sharp intraday sell-offs and downside re-ratings if top-line growth decelerates.
Sustained Executive Insider Dispositions: SEC Form 4 disclosures highlighting ongoing insider stock sales, including multi-million dollar share divestments by President and COO Michelle Zatlyn in early September, continue to weigh on market sentiment.

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KLA Corp Stock (KLAC) Moved Down by 3.82% on Sep 9: Facts Behind the Movement

Wed, 09 Sep 2026 15:15:22 +0000

KLA Corp (KLAC) moved down by 3.82%. The Technology Equipment sector is down by 0.45%. The company underperformed the industry. Top 3 stocks by turnover in the sector: Micron Technology Inc (MU) up 1.99%; SanDisk Corporation (SNDK) up 1.99%; NVIDIA Corp (NVDA) down 0.60%.

What is driving KLA Corp (KLAC)’s stock price down today?

KLA Corporation experienced downward pressure and heightened intraday volatility following management commentary at an industry conference alongside broader valuation re-evaluations across the semiconductor capital equipment sector. During its presentation at Citi's Global TMT Conference, executive leadership reaffirmed strong structural demand for process control and yield management solutions, driven by ongoing investments in high-bandwidth memory and advanced packaging for artificial intelligence infrastructure. However, management also highlighted near-term operational headwinds, including supply chain bottlenecks in specialized optical components and elevated input costs, which spurred immediate concerns regarding near-term gross margin trajectory.

The pullback reflects heightened sensitivity to operational execution given the stock's recent price appreciation and premium valuation relative to its broader peer group. Having rebounded sharply in previous sessions on favorable macroeconomic labor data and sector-wide momentum, KLA's elevated price-to-earnings multiple left limited cushion for operational frictions. Investors capitalized on the conference updates to lock in short-term gains, amplifying intraday volatility as technical support levels were tested.

Broader industry dynamics and macro sentiment further compounded the weakness. Persistent trade regulatory uncertainties surrounding global equipment export controls, combined with recent disclosures of insider share sales, contributed to a more cautious posture among market participants. While multi-year demand drivers in leading-edge foundry, logic, and memory remain intact, institutional investors appear to be temporarily de-risking positions to digest near-term cost pressures and await further clarity on supply chain stabilization.

Technical Analysis of KLA Corp (KLAC)

Technically, KLA Corp (KLAC) shows a MACD (12,26,9) value of 2.424, indicating a neutral signal. The RSI at 45.096 suggests neutral condition and the Williams %R at 36.986 suggests buy condition. Please monitor closely.

Media Coverage of KLA Corp (KLAC)

In terms of media coverage, KLA Corp (KLAC) shows a coverage score of 46, indicating a moderate level of media attention. The overall market sentiment index is currently in bullish zone.

Fundamental Analysis of KLA Corp (KLAC)

KLA Corp (KLAC) is in the Technology Equipment industry. Its latest annual revenue is $13.58B, ranking 15 in the industry. The net profit is $4.83B, ranking 11 in the industry. Company Profile

Over the past month, multiple analysts have rated the company as Buy, with an average price target of $229.27, a high of $325.00, and a low of $138.80.

More details about KLA Corp (KLAC)

Company Specific Risks:

Valuation Premium and Analyst Price Target Trims: Institutional analyst commentary and recent price target cuts, such as UBS lowering its target to $200, emphasize that KLA trades at a trailing and forward earnings multiple above 50x. This rich valuation leaves the stock exposed to severe multiple compression on any broader tech pullbacks or operational missteps.
U.S.–China Semiconductor Export Control Exposure: Intensifying trade frictions and expanding U.S. export regulations on advanced process control and inspection tools continue to threaten KLA's access to leading-edge manufacturing clients in China, creating substantial revenue overhang and geopolitical risk for its international order backlog.
Substantial Insider Equity Dispositions and Heavy Short Interest: SEC Form 4 and Form 144 filings highlight significant corporate insider selling, with executive officers unloading over 258,000 shares worth nearly $56 million in recent months. Combined with short interest climbing above 22% of the public float, this insider liquidation creates overhead supply and heightens intraday volatility.
Cyclical Volatility in Key Memory Customer Capital Expenditure: Near-term reallocations and ramp adjustments by major memory manufacturers (such as client shifts in High-Bandwidth Memory schedules) introduce demand volatility for KLA's specialized metrology and yield management systems.

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SpaceX Stock (SPCX) Moved Down by 3.98% on Sep 9: Facts Behind the Movement

Wed, 09 Sep 2026 15:15:20 +0000

SpaceX (SPCX) moved down by 3.98%. The Telecommunications Services sector is down by 2.79%. The company underperformed the industry. Top 3 stocks by turnover in the sector: SpaceX (SPCX) down 3.98%; AT&T Inc (T) down 1.52%; Verizon Communications Inc (VZ) down 1.95%.

What is driving SpaceX (SPCX)’s stock price down today?

The downward movement in Space Exploration Technologies Corp. (SPCX) was primarily triggered by a major post-IPO lock-up expiration event. Exactly ninety days following the company's June public listing, a scheduled tranche releasing hundreds of millions of Class A shares became eligible for secondary market trading. This sudden expansion in liquid public float generated substantial immediate supply overhang, prompting early institutional investors and employees to realize gains and putting strong downward pressure on the shares throughout the session.

The selling pressure was further amplified by profit-taking following recent short-term strength. In the preceding trading session, the equity experienced notable upward momentum driven by favorable initial research coverage and bullish Wall Street price targets highlighting long-term expansion in satellite broadband and space commercialization. However, with massive new share volume hitting the market on the lock-up expiration date, active market participants quickly stepped in to lock in profits, overwhelming near-term buying interest.

From a fundamental perspective, institutional investors remain attentive to the company's capital-intensive business model and ongoing bottom-line losses. While long-term sentiment is underpinned by prospective inclusion in major market indices and strong revenue growth, high forward valuation multiples leave the stock particularly sensitive to near-term liquidity shocks and float expansion. In the short term, trading dynamics are likely to remain volatile as the market absorbs the newly unlocked share supply alongside upcoming secondary releases.

Technical Analysis of SpaceX (SPCX)

Technically, SpaceX (SPCX) shows a MACD (12,26,9) value of 2.698, indicating a buy signal. The RSI at 56.296 suggests neutral condition and the Williams %R at 30.435 suggests buy condition. Please monitor closely.

Fundamental Analysis of SpaceX (SPCX)

SpaceX (SPCX) is in the Telecommunications Services industry. Its latest annual revenue is $18.67B, ranking 10 in the industry. The net profit is $-4.94B, ranking 61 in the industry. Company Profile

Over the past month, multiple analysts have rated the company as Buy, with an average price target of $231.23, a high of $800.00, and a low of $100.00.

More details about SpaceX (SPCX)

Company Specific Risks:

Massive Insider Lock-Up Expiration and Share Supply Overhang: The expiration of pre-IPO lock-up restrictions unlocks roughly 319 million shares on September 9, 2026, with tens of millions more releasing in subsequent days, creating substantial selling pressure and public float expansion.
Extreme Valuation Multiples and Persistent Unprofitability: Trading at a Price-to-Sales ratio exceeding 76x on a $1.9+ trillion market capitalization while generating annual net losses of approximately $4.94 billion, the stock remains highly vulnerable to sharp valuation compressions.
Intense Capital Expenditures and Heavy Cash Burn: Quarterly CapEx reaching $18.4 billion and ongoing free cash flow burn of roughly $15 billion per quarter threaten balance sheet sustainability, increasing the risk of future equity dilution or debt issuances to fund operations.
Execution Bottlenecks in AI Hardware and Launch Programs: The business faces stringent operational deadlines, including GPU deployments for major partners, data center reliability challenges, and high execution risks tied to the unproven commercial milestones of the Starship program.

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Marvell Technology Inc Stock (MRVL) Moved Up by 4.80% on Sep 9: What Signal Does It Send?

Wed, 09 Sep 2026 15:15:19 +0000

Marvell Technology Inc (MRVL) moved up by 4.80%. The Technology Equipment sector is down by 0.45%. The company outperformed the industry. Top 3 stocks by turnover in the sector: Micron Technology Inc (MU) up 1.99%; SanDisk Corporation (SNDK) up 1.99%; NVIDIA Corp (NVDA) down 0.66%.

What is driving Marvell Technology Inc (MRVL)’s stock price up today?

Marvell Technology experienced a strong upward move today, propelled by robust institutional demand and positive market sentiment surrounding its expanding AI data center infrastructure capabilities. Investor confidence was bolstered as management highlighted substantial multi-year top-line momentum during recent commentary, reiterating elevated revenue projections driven by skyrocketing demand for custom silicon, electro-optics, and advanced interconnect solutions. The company's strategic positioning across major cloud hyperscalers continues to reassure markets of its critical role in enabling next-generation hardware deployments.

Compounding the positive price action, Marvell announced details regarding its upcoming showcase of comprehensive end-to-end AI data center connectivity and memory solutions for the AI Infra Summit. Highlights such as Photonic Fabric technology, advanced switching platforms, and CXL-based memory solutions underscored Marvell's technological lead in resolving bandwidth and latency bottlenecks across AI clusters. This emphasis on solving critical scaling challenges reinforced investor expectations for sustained market share gains and long-term expansion in data center networking.

Broader semiconductor sector momentum and growing anticipation around Marvell's scheduled Investor Day also provided a favorable tailwind. Analysts and institutional investors are increasingly focusing on the multi-year upside bias in custom AI chip contracts and optical signal processing components. Although gross margin mix dynamics from high-volume custom silicon ramps remain an area of ongoing scrutiny, the market prioritized the company's re-accelerating revenue trajectory and dominant ecosystem relationships, sparking robust intraday buying interest.

Technical Analysis of Marvell Technology Inc (MRVL)

Technically, Marvell Technology Inc (MRVL) shows a MACD (12,26,9) value of -0.146, indicating a neutral signal. The RSI at 56.124 suggests neutral condition and the Williams %R at 33.253 suggests buy condition. Please monitor closely.

Media Coverage of Marvell Technology Inc (MRVL)

In terms of media coverage, Marvell Technology Inc (MRVL) shows a coverage score of 55, indicating a moderate level of media attention. The overall market sentiment index is currently in extremely bullish zone.

Fundamental Analysis of Marvell Technology Inc (MRVL)

Marvell Technology Inc (MRVL) is in the Technology Equipment industry. Its latest annual revenue is $8.19B, ranking 19 in the industry. The net profit is $2.67B, ranking 13 in the industry. Company Profile

Over the past month, multiple analysts have rated the company as Buy, with an average price target of $280.56, a high of $400.00, and a low of $90.00.

More details about Marvell Technology Inc (MRVL)

Company Specific Risks:

Gross Margin Dilution from Custom Silicon Ramp: Management guided non-GAAP gross margins down to 57.5%–58.5% for fiscal Q3 2027, citing a mix shift toward custom AI chip programs for hyperscale customers, which carry lower gross margins and compress overall profitability despite top-line expansion.
Customer Warrant Dilution and Revenue Haircuts: Recent 10-Q SEC filings disclosed the issuance of a 59-million-share customer warrant representing 6.4% share count dilution, which introduces significant contra-revenue accounting charges that threaten to reduce reported top-line revenue as milestones vest through fiscal 2033.
Severe Customer Concentration and Insourcing Vulnerability: Financial disclosures indicate heightened revenue concentration, with a single distributor accounting for 44% of sales and four major customers comprising 72% of receivables, leaving the business model vulnerable if hyperscalers accelerate internal silicon development or alter order schedules.
Premium Valuation and Deferred Payoff Timeline: Trading at an elevated forward GAAP P/E of ~124x and over 20x sales, institutional desk commentary highlights a structural mismatch, as major financial benefits from custom hyperscaler deals are deferred until fiscal 2029, exposing the stock to sharp de-rating during intraday repositioning.

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Shopify Inc Stock (SHOP) Moved Down by 3.54% on Sep 9: Key Drivers Unveiled

Wed, 09 Sep 2026 15:15:17 +0000

Shopify Inc (SHOP) moved down by 3.54%. The Software & IT Services sector is down by 1.03%. The company underperformed the industry. Top 3 stocks by turnover in the sector: Meta Platforms Inc (META) up 6.83%; Alphabet Inc Class A (GOOGL) down 2.97%; Alphabet Inc Class C (GOOG) down 2.77%.

What is driving Shopify Inc (SHOP)’s stock price down today?

Shopify experienced downward pressure and heightened intraday volatility as broader technology and e-commerce growth stocks faced sector-wide profit-taking. Following the stock's substantial earnings-driven rally in August on the back of impressive second-quarter Gross Merchandise Volume growth and elevated revenue metrics, the company's valuation multiple expanded significantly relative to software and internet retail peers. Today's pull-back primarily reflects macro-driven risk aversion and tactical portfolio rebalancing by institutional investors seeking to lock in recent gains amidst broader market choppiness.

Beyond macro sentiment, market participants continue to assess the cost implications of scaling merchant services alongside competitive shifts in artificial intelligence commerce tools. While subscription solutions maintain solid margin profiles and adoption of the platform's AI assistant continues to build, higher penetration in payment processing and merchant solutions naturally exerts mild pressure on overall gross margins. Additionally, ongoing debate surrounding potential market share overlap from rival digital advertising platforms offering localized merchant tools has kept short-term trader sentiment cautious.

From an operational perspective, Shopify retains robust structural growth catalysts, supported by strong third-quarter revenue guidance, high free cash flow conversion, and ongoing expansion into enterprise and international markets. However, in the near term, high-multiple growth equities remain vulnerable to institutional distribution during risk-off trading sessions. Investors will be watching key support levels and institutional capital flows as the stock digests recent gains ahead of upcoming retail holiday demand metrics.

Technical Analysis of Shopify Inc (SHOP)

Technically, Shopify Inc (SHOP) shows a MACD (12,26,9) value of -6.119, indicating a neutral signal. The RSI at 38.588 suggests neutral condition and the Williams %R at 99.430 suggests oversold condition. Please monitor closely.

Fundamental Analysis of Shopify Inc (SHOP)

Shopify Inc (SHOP) is in the Software & IT Services industry. Its latest annual revenue is $11.56B, ranking 32 in the industry. The net profit is $1.23B, ranking 40 in the industry. Company Profile

Over the past month, multiple analysts have rated the company as Buy, with an average price target of $171.38, a high of $220.00, and a low of $110.00.

More details about Shopify Inc (SHOP)

Company Specific Risks:

Extreme Valuation Multiple & Profit-Taking Exposure: Following a sharp late-summer price expansion, Shopify's trailing price-to-earnings multiple expanded toward 95–98x, exposing the stock to aggressive intraday sell-offs and valuation de-rating during broader shifts away from high-multiple growth equities.
Competitive Disintermediation from Big Tech AI Platforms: Institutional research highlights an escalating threat from major platforms like Meta Platforms, which are deploying native AI merchant tools, storefronts, and automated agents that risk eroding Shopify's core small-and-medium business merchant software revenue.
Margin Compression & Expanding AI Infrastructure Expenditures: Operating margins are facing pressure due to a revenue mix shift toward lower-margin Merchant Solutions combined with elevated capital expenditures and operational expenses required to build out proprietary artificial intelligence and LLM capabilities.
Governance Transition in Financial Oversight: The abrupt departure of Audit Committee Chair Prashanth Mahendra-Rajah, as detailed in recent SEC Form 8-K disclosures, introduces leadership transition risks and heightened investor scrutiny surrounding internal financial control oversight.

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SK Hynix ADRs Rise Over 5% to Record High as S&P Expects Up to 40 Trillion Won Buyback in Q4

Andy Chen — Wed, 09 Sep 2026 15:05:18 +0000

TradingKey - On September 9, US Eastern Time, SK Hynix ADR (SKHY) shares rose to a record high of $196.48, gaining over 5% intraday. Its total market capitalization reached $1.42 trillion, placing it less than a 5% gain away from Tesla's market capitalization ($1.47 trillion).

Source: TradingView

According to the latest forecast from S&P Global Market Intelligence, driven by strong demand in AI memory chips, SK Hynix is expected to announce a new share buyback plan in the fourth quarter of this year, with an estimated size between 20 trillion and 40 trillion Korean won (approximately $28 billion).

Furthermore, even after completing the large-scale buyback, the company will still have the capacity to pay generous dividends, adding a strong catalyst to the South Korean government's "Corporate Value-up" program and the rally driven by restructured shareholder returns.

Mohammad Hassan, Head of Asia-Pacific Equity Dividend Forecasting at S&P Global Market Intelligence, stated in an interview that the lower limit of SK Hynix's new round of buybacks is expected to be 20 trillion won, and "it could potentially hit the upper limit of 40 trillion won again."

In addition, South Korean brokerage KB Securities recently warned that memory semiconductor inventories at Samsung Electronics and SK Hynix have dropped to less than 10 days of supply, pointing to a significant shortage of available supply next year.

KB Securities pointed out in a report released on Monday that as artificial intelligence infrastructure investment expands at an unprecedented rate, the memory chip market is facing a severe supply shortage. A key factor exacerbating the shortage is the transition to next-generation High Bandwidth Memory, HBM4.

The firm noted that HBM4 requires approximately three times the wafer capacity of traditional DRAM. Given limited wafer capacity, full-scale mass production of HBM4 will inevitably reduce the available capacity for traditional DRAM. As a result, KB Securities expects DRAM and NAND demand to exceed supply by more than 10 percentage points next year.

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Applied Materials Stock Breaks Wedge as Rising Fab Forecasts Put $493 in Focus

Arslan Ali — Wed, 09 Sep 2026 15:00:00 +0000

TradingKey - Applied Materials enters September 9 with a verified September 8 close of $472.79, up 3.98% and essentially matching the supplied $472.80 chart reference. Price has broken above the falling-wedge boundary after buyers defended the $427.26-$440 demand zone, but the reversal still needs confirmation above the $486.70-$493.05 resistance cluster. Fundamentally, the timing is notable: management said at Citi that customer forecasts are still rising, DRAM greenfield construction could become a multi-year equipment cycle, and advanced packaging is expanding rapidly. CEO Gary Dickerson’s Goldman Sachs appearance later today is the next catalyst.

Q3 Revenue and Cash Flow Hit New Records

Applied Materials reported fiscal Q3 revenue of $9.12 billion, up 25% year over year. GAAP gross margin reached 50.3%, non-GAAP gross margin was 50.4%, and non-GAAP EPS rose 41% to a record $3.50.

The company also generated record quarterly operating cash flow of $3.04 billion. What stands out is that Applied is not simply shipping more equipment. It is also capturing better economics through higher-value products, stronger pricing and a mix tilted toward the most complex chipmaking steps.

Q4 Guidance Signals Another Step Higher

Management continues to guide for fiscal Q4 revenue of about $10.25 billion, plus or minus $500 million, with non-GAAP EPS of $4.02, plus or minus $0.20. At the midpoint, revenue would rise roughly 12% sequentially from Q3.

There has been no official guidance reduction through September 9. Applied has also raised its outlook for Semiconductor Systems and expects to grow faster than the broader wafer-fab-equipment market in calendar 2026, while customer visibility supports another strong year in 2027.

Citi Update: Customer Forecasts Are Still Rising

The latest update came from Applied Materials CFO Brice Hill during the Citi Global TMT Conference on September 8. Applied receives rolling eight-quarter forecasts from major customers, especially DRAM and leading-edge logic manufacturers, and management said those forecasts have continued increasing during the year.

Applied is tracking more than 100 semiconductor factories globally, with more than 10 fabs added to its tracker in each of the past two quarters. Management now sees demand visibility stretching toward 2030 and believes clean-room availability, rather than lack of chip demand, is becoming a meaningful constraint.

That changes the quality of the cycle. Equipment orders are often placed long before a fab starts production, so rising construction plans today can translate into multi-year revenue opportunities for AMAT.

DRAM Greenfield Fabs Could Become the Biggest Opportunity

The most interesting part of the Citi update was DRAM. Applied believes global DRAM wafer capacity could rise from roughly 1.6 million wafer starts per month to 2.0-2.4 million over the coming years, potentially requiring about 15-17 greenfield fabs through 2030.

That distinction matters because new fabs are far more equipment-intensive than upgrades. Management estimates a new 100,000-wafer-start DRAM fab can require roughly $10 billion of process equipment, while upgrading an existing facility may require only about one-quarter as much.

If HBM and AI-server demand truly force the memory industry into greenfield expansion rather than incremental upgrades, Applied Materials could capture a much larger equipment opportunity than the headline memory shortage alone suggests.

Advanced Packaging Is Becoming a Major Growth Engine

Advanced packaging is another increasingly important part of the story. Applied said the business generated about $1.4 billion in 2025 and is expected to grow more than 70% in 2026.

AI accelerators increasingly combine GPUs, CPUs, HBM stacks and chiplets in complex packages, raising demand for deposition, interconnect, thermal-management and inspection technologies. Applied is also investing in panel-level packaging, although management has been clear that this remains an emerging opportunity rather than a current high-volume business.

Services and Process Control Add Recurring Growth

Applied’s service business is growing more than 20%, above its longer-term mid-teens target, as high fab utilization drives more demand for parts, maintenance and optimization software.

Its process diagnostics and control business is also expanding quickly as Gate-All-Around transistors, 3D DRAM, future CFET architectures and advanced packaging make manufacturing more difficult. That broadens the earnings story beyond simply selling new deposition and etch tools.

Goldman Sachs Is Today’s Immediate Catalyst

CEO Gary Dickerson is scheduled to speak at the Goldman Sachs Communacopia + Technology Conference later today at 5:25 p.m. ET. After yesterday’s Citi commentary, investors will be listening for confirmation on 2027 demand, DRAM greenfield construction, advanced packaging growth, pricing and whether customer forecasts are still moving higher.

The main risks remain China export restrictions, execution as Applied expands manufacturing capacity, higher input costs and the possibility that tighter financing eventually slows AI data-center construction. For now, management says it has not seen that slowdown in customer forecasts.

Applied Materials Technical Analysis: $493.05 Is the Breakout Trigger

AMAT closed September 8 at $472.79, almost exactly matching the chart’s $472.80 reference, after rebounding sharply from the $427.26 demand zone. Price has pushed above the falling-wedge boundary, which improves the short-term structure, but confirmation is still needed above the declining moving average near $486.70 and horizontal resistance at $493.05.

Applied Materials Price Chart - Source: Tradingview

A sustained 2-hour close above $493.05 would strengthen the reversal considerably and expose $531.96. Beyond that, $575.51 becomes the larger recovery target.

RSI near 66 is well above its signal line around 43, confirming renewed buying pressure without yet reaching the 70 overbought threshold. On the downside, $464 is the first short-term pivot. More importantly, the $427.26-$440 demand zone must hold. A decisive break below $427.26 would invalidate the developing wedge recovery and expose $396.68.

Key Levels

● Latest completed close: $472.79

● Short-term pivot: $464

● Moving-average resistance: $486.70

● Breakout resistance: $493.05

● First upside target: $531.96

● Higher target: $575.51

● Key demand zone: $427.26-$440

● Major downside target: $396.68

● RSI: Around 66, bullish and not overbought

Why is Applied Materials stock in focus now?

Applied is benefiting from rising customer forecasts, record financial results, a potentially large DRAM greenfield-fab cycle and fast-growing advanced packaging demand. The next immediate catalyst is Gary Dickerson’s Goldman Sachs appearance later today.

What level confirms further AMAT upside?

A sustained 2-hour close above $493.05 would confirm the developing falling-wedge breakout and strengthen the case for $531.96, followed by $575.51.

Bottom Line

Applied Materials’ September 9 setup is compelling because the chart recovery is lining up with a fresh fundamental acceleration signal. Customer forecasts are still rising, DRAM greenfield construction could become a major multi-year equipment cycle, advanced packaging is growing rapidly and Q4 guidance remains strong. Technically, I favor further recovery while $427.26 holds, but $493.05 is the level that must break before the next leg toward $532-$576 is confirmed.

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Waterdrop (WDH) Q2 2026 Earnings Call: Revenue Rises 72.8% on Insurance Growth

Wed, 09 Sep 2026 14:32:33 +0000

Key Takeaways

Waterdrop Inc. (WDH) reported Q2 2026 net operating revenue of CNY 1.448 billion, up 72.8% year over year, led by an 80.5% increase in insurance revenue.
Operating profit rose 14.3% year over year and 39.2% quarter over quarter to approximately CNY 111 million. Net profit attributable to shareholders fell 10.3% year over year but increased 27.9% sequentially to around CNY 126 million.
Insurance-related income reached CNY 1.33 billion. Newly acquired customers increased 32.3% quarter over quarter, while first-year premiums from long-term insurance rose 33.4%.
AI-supported user interactions generated nearly CNY 100 million in first-year premiums. Management said AI is intended to contribute through revenue growth and operating efficiency rather than as a standalone business.
Management targets more than 40% year-over-year total revenue growth and over 10% operating profit growth for full-year 2026.
The board approved a dividend of $0.03 per ADS and a new share repurchase program of up to $50 million over the next 12 months.

Core Financial Data

Metric	Q2 2026	Change	Commentary
Net operating revenue	CNY 1.448 billion	+72.8% YoY	Growth was primarily driven by insurance
Insurance revenue	CNY 1.333 billion	+80.5% YoY	Represented the majority of total revenue
Operating profit	CNY 111 million	+14.3% YoY; +39.2% QoQ	Insurance operating profit reached CNY 180 million
Net profit attributable to shareholders	CNY 126 million	-10.3% YoY; +27.9% QoQ	Affected by tax items and nonrecurring gains and losses
Total operating costs and expenses	CNY 1.337 billion	+80.5% YoY	Reflected business expansion and higher customer-acquisition spending
Sales and marketing expenses	CNY 638 million	Versus CNY 199 million in Q2 2025	Third-party traffic-channel spending increased by approximately CNY 450 million
R&D expenses	CNY 68.8 million	+32.4% YoY	Cloud servers, token usage and other IT support costs increased
Cash and related positions	CNY 2.653 billion	As of June 30, 2026	Includes cash, cash equivalents, short-term investments and other cash positions

Business and Operating Performance

Insurance

Insurance-related income increased 80.5% year over year and 15.4% sequentially to CNY 1.33 billion. Segment operating profit rose 20% quarter over quarter to CNY 180 million.

Customer acquisition remained active. Newly acquired customers increased 32.3% sequentially, while first-year premiums from long-term insurance grew 33.4%. Products for customers with pre-existing conditions generated CNY 310 million in first-year premiums, and disability insurance contributed CNY 84 million.

Waterdrop continued to expand products with lower coverage barriers. New offerings included Rongyi Bao, described by the company as a long-term critical illness product requiring no health disclosure and providing five-year guaranteed renewability. The company also expanded Jixing Gaozhao with specified-disease coverage offering lifetime protection without health disclosure.

AI applications across customer-facing scenarios generated nearly CNY 100 million in first-year premiums. First-year premiums facilitated by the AI Medical Insurance Expert increased 25.6% sequentially. KEYI.AI had answered more than 13,000 underwriting questions by quarter-end, while users served by the AI Super Pre-Sales Assistant rose nearly 50% sequentially.

Medical Crowdfunding and Clinical Trials

As of June 30, 2026, Waterdrop Medical Crowdfunding had raised CNY 74.7 billion for 3.82 million patients, with contributions from approximately 499 million donors. The company continued upgrading AI-based risk controls for asset concealment, identity risks and inconsistencies across submitted materials.

The digital clinical trial solutions business enrolled more than 1,500 patients during the quarter, up 54% year over year, bringing cumulative enrollment above 17,000. Chronic-disease enrollment increased 80%, although management noted that these studies generally have higher screening-failure rates and require more precise and faster patient matching.

The E-Find Platform signed 167 new projects during the quarter. The number of pharmaceutical companies and contract research organizations working with the platform exceeded 255.

Shareholder Returns

The board approved a cash dividend of $0.03 per ADS, or $0.003 per ordinary share, payable to holders of record on October 9, 2026. The aggregate payment is expected to be approximately $10.8 million, with distribution planned for early November.

Waterdrop also authorized a share repurchase program of up to $50 million over the following 12 months. As of August 31, 2026, the company had cumulatively repurchased 62.9 million ADS for approximately $120 million since launching its first repurchase program.

Management Guidance

For full-year 2026, management targets more than 40% year-over-year growth in total revenue and over 10% growth in operating profit.

The company expects to maintain an active customer-acquisition pace through the second half of 2026 and full-year 2027. Management expects value from current customer acquisition to be realized progressively through renewals, upselling and cross-selling over the customer lifecycle.

Waterdrop expects its overall R&D expense ratio to remain stable and within what management considers a reasonable range, while shifting more talent and token-related spending toward AI. Spending may increase as usage scales, subject to return-on-investment discipline by application.

Risks and Areas to Watch

Sales and marketing expenses rose sharply as Waterdrop increased investment in third-party traffic channels. The timing and scale of returns from these customer-acquisition expenditures remain important operating considerations.
Net profit attributable to shareholders declined year over year despite higher revenue and operating profit, reflecting tax-related items and nonrecurring gains and losses.
Management said media reports concerning the enforcement of existing tax rules on policy dividends had affected near-term customer sentiment toward Hong Kong insurance, although it did not view the issue as a new policy specifically targeting that market.
Chronic-disease clinical studies have larger patient pools but also higher screening-failure rates, increasing the demands on matching accuracy and speed.
Waterdrop’s portable AI office assistant and related smart-hardware initiative remain at an early pilot-sales stage. Management said their current financial impact is limited.

Analyst Q&A Highlights

Hong Kong insurance and policy-dividend taxation: Management characterized recent attention as enforcement of existing tax rules rather than a new policy aimed specifically at Hong Kong insurance. It acknowledged a near-term effect on customer sentiment but said demand drivers such as multicurrency allocation, access to global healthcare resources and inheritance planning remained intact.

Insurance for pre-existing conditions: Waterdrop views this category as a demand-led growth opportunity. Its strategy combines differentiated underwriting and claims structures with AI-based matching by health condition, age and customer scenario. Management identified pre-existing-condition coverage, mid- to high-end medical insurance, and products bundled with health management or elderly-care services as areas with strong potential.

AI commercialization: Management does not plan to commercialize AI primarily as a standalone business. It expects AI’s value to appear through higher conversion, revenue growth and operating efficiency across acquisition, risk screening, advisory services and claims.

Customer-acquisition spending: Management said the objective is not simply to reduce acquisition costs, but to improve product-to-customer matching and conversion through AI. Waterdrop plans to continue expanding its reach while seeking longer-term returns from renewals and cross-selling.

Full Earnings Call Transcript

Complete Earnings Call Transcript

Management Remarks

Operator

Good morning, ladies and gentlemen, and thank you for standing by for Waterdrop Inc.'s Second Quarter 2026 Financial Results Earnings Conference Call. [Operator Instructions] As a reminder, today's conference call is being recorded.

I would now like to turn the meeting over to Ms. Tracy Lee. Please proceed, Ms. Lee.

Tracy Lee

Thank you, operator. Dear investors and analysts, this is Tracy Lee from Waterdrop Investor Relations. Please note that discussion today will contain forward-looking statements made under the safe harbor provision of U.S. Private Securities and the Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include, but not limited to those outlined in our public filings with the SEC. The company does not undertake any obligation to update any forward-looking statements, except as required under applicable law.

Also, this call includes discussion of certain non-GAAP measures. Please refer to our earnings release for a reconciliation between non-GAAP and GAAP.

Joining us today on the call are Mr. Shen Peng, our Founder, Chairman and CEO; Mr. Ran Wei, Director and GM of Insurance Business; Mrs. Li Jieru, Finance VP, Head of Strategy and Capital Markets.

Certain members of our management team will deliver their remarks in Mandarin, followed by an English translation. Moreover, a webcast replay will be available on our Investor Relations website.

I will now turn the call over to our CEO, Shen Peng. Please go ahead.

Peng Shen

Dear investors and analysts, thank you for joining Waterdrop's Second Quarter 2026 Earnings Conference Call. In this quarter, we maintained growth momentum and achieved a total revenue of CNY 1.45 billion, up 72.8% year-over-year and the net profit attributable to our ordinary shareholders of CNY 130 million. Since the first quarter of 2022, we have maintained profitability for 18 consecutive quarters.

Segment-wise, our insurance business continued to optimize user acquisition and conversion, driving 80.5% year-over-year revenue growth. Waterdrop Medical Crowdfunding had accumulated [indiscernible] medical funds for 3.82 million patients as of the quarter end. Our digital clinical trial solution business performed strongly with quarterly patient enrollment up over 50% year-over-year. This growth trend were underpinned by deep integration of AI across our core business scenarios. As of the end of June, the company has filed 88 large language model patents, including 10 of them overseas.

With strong performance and cash reserves, we continue to prioritize shareholder returns. Our Board recently approved 2 new initiatives. Firstly, the Board has approved a cash dividend of $0.03 per ADS or $0.003 per ordinary share payable to holders of record on October 9, 2026. The aggregate dividend payment is approximately $10.8 million with payments to be made in early November.

Second, the Board approved a share repurchase program of up to $50 million over the next 12 months. Since the initial program launched in 2021, we have repurchased approximately 62.9 million ADS for $121 million as of August 31, 2026.

The company remains committed to sustainable development and to getting back to society in meaningful ways. As of June 30, 2026, Waterdrop Charity platform has partnered with 119 public charitable organizations and launched more than 15,600 charity programs.

Waterdrop remains focused on growth and investment in core businesses. We expect our current incremental investment to continue translating into solid user base and future product potential. We always regard technology as a core driver of this company's growth. Today, our AI capabilities are actively expanded across the platform, enabling us to better capture growth opportunities in our existing businesses and further sharpen our competitive edge. At the same time, we are actively piloting new AI-driven initiatives for global markets and have made early progress in [indiscernible] markets. For full year of 2026, Waterdrop targets more than 40% year-over-year growth in total revenue and over 10% growth in operating profit.

This concludes our overview of Waterdrop's business performance. Now we will walk you through each of our business segments in more detail.

Wei Ran

Hello, everyone. This is Ran Wei. Let me first update you on our insurance business. In the second quarter, insurance-related income reached CNY 1.33 billion, up 80.5% year-over-year and 15.4% quarter-over-quarter. Operating profit was CNY 180 million, up 20% from the previous quarter. With continued refinement in our AI-driven user insight and conversion capabilities, newly acquired customers rose 32.3% sequentially. The first year premiums of long-term insurance grew 33.4% sequentially as we capture market demand for insurance this quarter.

On the product side, our core strategy remains improving the affectability of insurance products. This quarter, we delivered several new products in line with this direction, including the launch of Rongyi Bao, the market's first long-term critical illness insurance product that requires no health disclosure and offers 5-year guaranteed renewability. We also expanded our Jixing Gaozhao product metrics, which now includes the market first specified disease insurance offering lifetime coverage with no health disclosure. During this quarter, products for users with pre-existing conditions contributed CNY 310 million FYP and disability insurance at CNY 84 million.

On the service side, we adopted differentiated scenario-based operations across customer touch points. In this quarter, AI applications across our user-facing interaction scenarios helped generating nearly CNY 100 million in FYP. Among them, AI Pro insurance generates FYP in millions each month. FYP facilitated by our AI Medical Insurance Expert rose by 25.6% sequentially. In WeCom scenario, we executed our strategies directly from the demand identification and user profiling to key moment engagement and batch operation contributing over CNY 10 million in FYP during this quarter.

Long-term insurance sales, the value of AI ultimately comes down to expanding what our life planners can do. As of quarter end, our underwriting assistant KEYI.AI had answered more than 13,000 underwriting questions. Since its launch, our AI Super Pre-Sales Assistant has constantly outperformed human life planners on annual premium per lead. And the number of users it served grew nearly 50% sequentially. Powered by multi-agent collaboration, our AI conversion model captures user preference from natural language interaction, turning them into durable profiles we can draw on over time and proactively surface topics tailored to each user, effectively extending the reach of every life planner we have.

That concludes our update on the insurance business for the second quarter.

Next, let me briefly update on Waterdrop Medical Crowdfunding and Healthcare businesses. As of the end of June 2026, Waterdrop Medical Crowdfunding had cumulatively contribution from around 499 million donors up to 3.82 million patients and raised a total of CNY 74.7 billion. This quarter, we continue to upgrade our AI driven risk control models, further improving asset concealment detection and sensitive identity detection. By combining semantic analysis of ID information, medical materials and user-generated content, the upgraded engine can better identify heating inconsistency and improve risk control efficiency.

In our health care business, our performance exceeding expectations across several key metrics. We enrolled more than 1,500 patients in this quarter, up 54% year-over-year and cumulative patient surpassing 17,000. Growth was driven by the higher matching efficiency and stronger enrollment capability. Oncology projects remain our core focus, while chronic disease projects are growing most of the sequential growth this quarter. Although chronic disease studies have a larger patient pool, they typically carry a high screening failure rates and place greater demand on matching precision and speed.

Chronic disease enrollment increased 80% year-over-year in the second quarter, further validating our enrollment ability in high screening failures enrolling. Meanwhile, our proven enrollment track record is translating into deeper and broader trust among patient partners. In this quarter, E-Find Platform signed 167 new products and the number of pharmaceutical companies and CROs we partnered with surpassed 255. Going forward, we will continue to optimize operational efficiency and work with our partners to advance digitalization across the clinical business progression.

This concludes our update on the Crowdfunding and Healthcare businesses.

Jieru Li

Hello, everyone. This is Li Jieru. Next, I will walk you through our financial highlights for the second quarter of 2026. Before I go into details, please be reminded that all the numbers quoted here will be in RMB. And please refer to our earnings release for detailed information on our financial performance on both the year-over-year and quarter-over-quarter basis, respectively.

In the second quarter of 2026, Waterdrop delivered net operating revenue of CNY 1,448 million, up 72.8% year-over-year, maintaining a strong growth momentum. Our insurance business contributed about CNY 1,333 million in revenue, representing an 80.5% increase year-over-year. Net insurance businesses accounted for around 7.9% of total revenue, including CNY 63.6 million from Medical Crowdfunding service fees and CNY 35.2 million from our digital clinical trial solutions.

Total operating costs and expenses came in at about CNY 1,337 million in the second quarter, up 80.5% year-over-year. Operating costs were CNY 537 million, increasing 29% year-over-year. The increase was primarily driven by business scale expansion, including an increase of around CNY 63.8 million in cost of referrals and service fees as well as an increase of CNY 21.4 million in short message service costs and CNY 11.2 million in personnel costs, respectively.

Sales and marketing expenses reached nearly CNY 638 million compared with CNY 199 million in the same quarter of 2025. The year-over-year increase mainly reflect -- the year-over-year increase mainly reflected our active step-up in public domain traffic investment with marketing expenses for third-party traffic channels increasing by about CNY 450 million and marketing-related professional technical service fees increasing by around CNY 21.8 million. G&A expenses were CNY 93.4 million, up 27.2% year-over-year, mainly due to an increase of CNY 33.3 million in allowance for credit losses. This was partially offset by decreases of nearly CNY 10.5 million in personnel costs and share-based compensation expenses.

R&D expenses were CNY 68.8 million, up 32.4% year-over-year. The increase was mainly driven by cloud server fees, token fees and other IT support expenses, which rose by about CNY 11.1 million as well as an increase of CNY 6.3 million in personnel costs and share-based compensation expenses.

For this quarter, operating profit reached about CNY 111 million, up 14.3% year-over-year and 39.2% quarter-over-quarter. However, due to tax-related items and nonrecurring gains and losses, net profit attributable to shareholders was around CNY 126 million, down 10.3% year-over-year, but up 27.9% quarter-over-quarter.

As of June 30, 2026, cash and cash equivalents, short-term investments and other cash positions totaled about CNY 2.653 billion. Our cash reserves maintains ample and provide solid support for both business investment and shareholder returns.

As previously introduced, our AI is planning across four value chains: acquisition, risk screening, and claims, and it grows series by stage. We are not commercializing AI as a strong stand-alone business and its value will show up in our top line growth and bottom line growth we deliver. And as we introduced earlier in the user targeting and conversion, our AI directly support the user computation and the purchase decision, giving nearly CNY 100 million in FYP.

And in our long-term insurance advisory tools like our KEYI.AI and our AI Pre-Sales Assistant can help our life planners work more efficiently and efficiently and close more cases. On our operation, our AI customer service and quality inspection application have fully absorbed the actual volume as we scale.

In our R&D side, the overall R&D ratio is stable, but we are actively shifting resources towards AI, both in the talent and in token cost. As usage scales, the spend will grow naturally, but we are disciplined about ROI under each scenario, and we will keep the overall ratio to a reasonable range.

We have received no further questions online, and this concludes our Q&A session for today. Thank you to all the investors and analysts for joining us today.

Betsy, operator, back to you.

Operator

We are now approaching the end of the conference call. Thank you for your participation in today's conference. You may now disconnect. Have a good day.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]

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Sunbelt Rentals (SUNB) Fiscal Q1 2027 Earnings Call: Guidance Raised

Wed, 09 Sep 2026 14:32:21 +0000

Key Takeaways

Sunbelt Rentals (SUNB) reported record fiscal Q1 2027 revenue, adjusted EBITDA, adjusted operating profit and adjusted EPS for the period ended July 31, 2026.
Total revenue increased 11.2% year over year to $3.1 billion, while rental revenue rose 12.5% to $2.9 billion.
Adjusted operating profit grew 13.8% to $759 million, with margin expanding 60 basis points to 24.4%. Adjusted EPS increased 20.4% to $1.18.
North America Specialty led growth, with rental revenue up 25.3% and dollar utilization rising 300 basis points to 77%. North America General Tool rental revenue increased 7.4%.
Management raised fiscal 2027 guidance to total revenue growth of 6%–9%, rental revenue growth of 7%–10% and adjusted EBITDA of $4.92 billion–$5.12 billion.
Gross capital expenditure guidance increased to $2.75 billion–$3.15 billion as the company targets committed demand from mega projects, Specialty and energy opportunities.

Key Financial Data

Metric	Fiscal Q1 2027	Year-over-year change	Commentary
Total revenue	$3.1 billion	+11.2%	Broad-based General Tool and Specialty growth
Rental revenue	$2.9 billion	+12.5%	FIFA World Cup activity contributed about 250 basis points to growth
Adjusted EBITDA	$1.3 billion	+8.7%	Margin was 42.2%, versus 43.2% a year earlier
Adjusted operating profit	$759 million	+13.8%	Margin expanded 60 basis points to 24.4%
Adjusted EPS	$1.18	+20.4%	Supported by higher operating profit and share repurchases
Depreciation	$556 million	—	Depreciation grew more slowly than rental revenue
Free cash flow	$70 million	—	Affected by higher CapEx and equipment-payment timing
Gross rental CapEx	$759 million	Nearly doubled	Directed toward existing project wins and fleet demand
Net rental CapEx	$682 million	+78%	Supported higher fleet utilization and the project pipeline
Trailing 12-month ROI	14.6%	Improved from year-end	Management expects further progress during fiscal 2027
Net leverage	1.8x	—	Within the company’s long-term 1x–2x target range
Liquidity	Approximately $3.8 billion	—	Included additional financing flexibility

Business and Operating Performance

North America General Tool generated total revenue of $1.7 billion, up 5.7%. Rental revenue increased 7.4%, driven primarily by higher fleet on rent and improved rates. Dollar utilization remained at 47%. Adjusted EBITDA rose 3.2%, while margin declined to 51.5% from 52.8%, with higher fuel costs accounting for about half of the change.

North America Specialty delivered total revenue growth of 24.5% to $1.1 billion. Rental revenue increased 25.3%, led by Power and HVAC and supported by acquisitions and FIFA World Cup activity. Growth was also broad across climate control, scaffolding, flooring, pump, ground protection and temporary fencing.

Specialty adjusted EBITDA increased 19%, although margin declined to 45.8% from 48%. Management attributed about three-quarters of the margin change to faster growth in ancillary revenue, including labor-intensive installation and expertise for complex energy-management projects. The company said these services produce attractive returns and deepen rental penetration.

The U.K. segment reported revenue of $240 million and adjusted EBITDA of $61 million. Adjusted EBITDA margin was 25.4%, adjusted operating profit margin improved 10 basis points to 8.3%, and dollar utilization rose to 54%.

The modular acquisition contributed approximately 100 basis points to company rental revenue growth and about 300 basis points to Specialty rental revenue growth. Sunbelt completed the systems integration in early August. Management said the modular business had generated 669 tracked cross-selling leads valued at $24 million, including more than $2.5 million already landed and $14 million in formal requests for proposals.

Sunbelt opened 13 greenfield locations and completed two acquisitions that added 17 Specialty locations. It remains on track to open approximately 55 greenfield locations during fiscal 2027.

Management Guidance

Fiscal 2027 measure	Updated guidance
Total revenue growth	6%–9%
Rental revenue growth	7%–10%
Adjusted EBITDA	$4.92 billion–$5.12 billion
Adjusted EBITDA margin	Broadly consistent with the prior year
Gross capital expenditures	$2.75 billion–$3.15 billion
Net rental capital expenditures	$2.4 billion–$2.8 billion

Management said the higher outlook reflects fiscal Q1 performance, strength among large and strategic customers, mega-project activity and stable local nonresidential construction markets.

The additional fleet investment is directed toward specific opportunities in mega projects, Specialty and energy. Management characterized this as opportunity-driven rather than speculative CapEx, supported by committed customer demand and strong fleet productivity.

The company continues to expect strong free cash flow generation during fiscal 2027 despite higher investment. Management also reiterated confidence in achieving the 200-basis-point margin improvement discussed at its Capital Markets Day, without specifying a new timetable during the call.

Risks and Areas to Watch

Faster growth in ancillary revenue and Specialty can reduce reported adjusted EBITDA margin, even though management said these activities generate attractive returns on capital.
Higher fuel and delivery costs remain a margin consideration. Management indicated fuel surcharge recovery typically takes about one quarter.
Capacity is limited for certain high-demand equipment, including telehandlers, ultra booms and power-generation equipment of 300 kW and above. This may constrain additional fleet supply if demand accelerates.
Local nonresidential construction demand remains stable rather than accelerating in the company’s guidance assumptions.
Depreciation growth is expected to increase sequentially as the higher fiscal 2027 CapEx plan is deployed.
Data-center moratoriums are affecting certain localities, although management said project starts are increasing and the overall mega-project pipeline remains diversified.

Analyst Q&A Highlights

Pricing and utilization: Management said rental-rate momentum improved from May through July and continued into August. The company did not quantify the split between rate and volume, but emphasized gains in both rental rates and time utilization. Further rate acceleration would represent potential upside to guidance.

Margin progression: Management expects margins to progress through the year while remaining broadly flat year over year for fiscal 2027. Supporting factors include pricing, fuel and delivery cost recovery, operating efficiencies, strong utilization and rental revenue growth outpacing depreciation growth.

Fleet discipline: Only about $100 million of year-over-year fleet growth went into same-store General Tool branches, leaving those locations with approximately 1% more fleet despite higher rental revenue. Management cited this as evidence that it is not over-fleeting the local nonresidential market.

Mega-project diversification: Semiconductor projects account for 3% of Sunbelt’s mega-project universe, while data centers account for 13%. About 80% of projects in the pipeline are upcoming, ramping or active, generally providing at least a three-year horizon; 20% are ramping down.

Energy opportunity: Sunbelt sees continued demand across bridge power, commissioning, load banks, live events, backup capacity and broader electrification. Management said commissioning assignments can typically last eight to 12 months, depending on the project.

FIFA World Cup contribution: World Cup-related activity added an estimated 250 basis points to company rental revenue growth. Management said approximately 75%–80% of the associated revenue was in Specialty, with the remainder in General Tool, and that the work was accretive to adjusted operating income margin.

Full Earnings Call Transcript

Complete Earnings Call Transcript

Management Remarks

Operator

Greetings, and welcome to the Sunbelt Rentals First Quarter Fiscal Year 2027 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. [Operator Instructions] It's now my pleasure to turn the call over to Kevin Powers, Senior Vice President, Investor Relations. Kevin, please go ahead.

Kevin Powers

Thank you, operator, and good morning, everyone. This morning, I'm joined by Brendan Horgan, our Chief Executive Officer; and Alex Pease, our Chief Financial Officer. Today, we'll review our first quarter results for the period ended July 31, 2026, discuss our operating and financial performance, and we will share industry perspectives and strategic outlook. We will then open the call for questions.

Let me remind you that today's call will include forward-looking statements. These statements are based on the environment as we see it today and are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, the factors identified in the press release and 8-K filing as well as other filings with the SEC.

Today, we are reporting financial results on a U.S. GAAP basis. In addition, we will be discussing non-GAAP information that we believe is useful in evaluating the company's operating performance. Reconciliations to these non-GAAP measures to the closest GAAP equivalent can be found in the earnings release and the conference call materials.

Before we start, I'll note that we'll be attending the Morgan Stanley Laguna Conference next week, and we hope to see some of you there. And now I'd like to turn the call over to Brendan.

Brendan Horgan

Great. Thanks, Kevin, and good morning, everyone. As you've now come to expect, we'll begin with an update on our safety performance before heading into the quarter 1 highlights.

I'm proud to report that we continue to see world-class safety performance across the organization. In the quarter, we achieved a total recordable incident rate of 0.46 and a lost time rate of 0.14. Results like these do not happen overnight, they reflect the strength of our Engage for Life culture and our team's relentless focus on doing the right things the right way. I cannot thank our team members enough for their commitment to safety, dedication to our customers and their drive to get better every day.

Our culture of continuous improvement and disciplined execution remains a key differentiator for Sunbelt, and it continues to show up in our performance, especially reflected in our recent results.

Now on to the quarter. We delivered record first quarter results in revenue, adjusted EBITDA, adjusted operating profit and adjusted EPS. These results were supported by strong levels of demand across a broad range of end markets, including mega projects, energy, live events, industrial nonconstruction MRO along with another quarter of stability and demand in our local nonresidential construction markets.

Notably, rental revenue growth was broad throughout our customer base, with strength across small and medium enterprises and outsized growth with our large and strategic customers, growth that significantly outpaced the broader market, demonstrating the strength of our leading position and breadth of expertise and solutions. The momentum we're seeing across the business gives us confidence in the trajectory of the year ahead, and, as a result of this, we are raising our fiscal '27 guidance for revenue, adjusted EBITDA and CapEx. Alex will cover this and our financial performance in greater detail shortly. But first, I'd like to highlight the quarter and the drivers that underpin our confidence in the business.

Total revenue grew 11%, and rental revenue increased 13% as growth accelerated across North America General Tool and Specialty, which increased 7% and 25%, respectively. Adjusted operating profit increased 14% with margins expanding to 24.4%, while adjusted EBITDA increased 9% at a margin of 42.2% compared with 43.2% last year.

The adjusted EBITDA margin performance was consistent with our expectations, reflecting faster growth in ancillary revenues and in specialty. Although this mix shift affects EBITDA margin, Specialty generates structurally higher returns on investment than General Tool meaning each point of sales mix towards Specialty will, over time, enhance our return on capital.

Finally, adjusted EPS increased 20.4% to a first quarter record of $1.18, driven by higher operating profit and the benefit of our share repurchase program. These results reflect our disciplined investment, stronger price and execution, improved recovery of fuel and delivery cost and most importantly, our ability to deliver for our customers. That success is driven by the hard work, best-in-class execution and customer-obsessed mindset of our team members.

During the quarter, we continued to win across a broad range of opportunities from serving as the sole rental provider on a leading hospital expansion in Rochester, Minnesota, to supporting one of Canada's largest data center developments in Saskatchewan, to summer cooling solutions for large distribution and warehouse operations and, of course, one of our most watched projects this summer, the 2026 FIFA World Cup. While these are only a few examples of our proven position as a partner of choice for the most complex projects, we're experiencing strong broad-based customer activity, which continues to support higher fleet on rent levels, higher utilization and strengthening rate momentum.

As local activity remains stable, we're encouraged by the positive leading indicators, especially in 2 specific areas. First, when we look at the Dodge Momentum Index, it continues to show increased positive movement in planning activity, which historically moves into construction starts within 12 to 18 months. Second, industry supply and demand remains balanced, supported by strong utilization levels and improved pricing. Manufacturers have maintained capacity discipline, while fleet investment remains closely aligned with customer demand. As project activity expands, particularly across mega projects and energy demand, customer requirements become more complex, providers with scale, fleet availability and specialized expertise are best positioned to win. We believe these dynamics position Sunbelt to capture attractive growth opportunities across our markets.

Against this backdrop, broad-based growth accelerated throughout General Tool and Specialty. General Tool benefited from increased fleet on rent and activity across our local markets and strategic accounts. While Specialty delivered strong growth, notably across Power HVAC, climate control, scaffolding, flooring, pump, ground protection and temporary fencing. Within Specialty, Energy Solutions remain a significant opportunity for Sunbelt. As power needs become increasingly complex, our customers are looking for partners who can deliver both equipment and expertise. Through our energy management as a service offering, we're helping customers manage these needs across the project life cycle, positioning us exceptionally well to capture ongoing growth.

We'll continue to differentiate Sunbelt as our ability to leverage the full breadth of our platform to serve customers in more meaningful ways. Through the power of Sunbelt as we call it, we are increasingly bringing together our General Tool and Specialty offerings, which now include modular solutions capabilities. This enables us to support a broader range of customer needs and the integrated approach, deepens customer relationships, increase the share of wallet and creates new cross-selling opportunities throughout our current and future customer base. Importantly, our system integration of Aries into Sunbelt was complete in early August, which will help support future needs.

As we integrate modular solutions into our offering, the immediate cross-selling opportunity is evident. Our teams are introducing modular solutions to existing Sunbelt customers, while former Aries customers are gaining access to a broader General Tool and Specialty portfolio. This early adoption reinforces our view that customers value multiple solutions through a single relationship. Looking ahead, we see meaningful opportunities to expand modular through greenfield openings, fleet investment and continued integration across the power of Sunbelt.

Modular Solutions is currently in just 14 of our top 50 Sunbelt markets, and we continue to expect to significantly scale the business in the coming years.

With that, I'll turn it over to Alex for more detail on the quarter and updated outlook.

Alexander Pease

Thanks, Brendan, and thank you to everyone who joined us on the call today. As Brendan noted, first quarter momentum was strong across the business, led by broad-based growth across General Tool and Specialty. This was supported by the ongoing structural progression across our business and our industry as well as continued execution of our strategy to deepen market presence and expand our addressable market opportunities.

Total revenue increased 11.2% to $3.1 billion, while rental revenue grew 12.5% to $2.9 billion. The contribution from [ ARRIS ] acquisition contributed approximately 100 basis points to rental revenue growth and we estimate that the contribution from our efforts to support the FIFA World Cup added another 250 basis points to rental revenue growth in the quarter.

Total company average OEC increased 6% and also within rental revenue, ancillary revenues grew at more than 2x rental revenue growth. Moving to used equipment. While sales were $85 million compared to $103 million last year, we saw recovery rates increase pointing to pricing stabilization and demand within the used equipment market. As we continue to scale our new retail channel, we expect used equipment margins to improve further.

Depreciation was $556 million and adjusted operating profit increased 13.8% to $759 million, with operating margins expanding 60 basis points to 24.4%. The improvement in margins was primarily due to SG&A expense leverage and a reduction of depreciation expense as a percent of sales reflecting our disciplined approach to fleet growth investments.

Adjusted EBITDA increased 8.7% to $1.3 billion at a margin of 42.2% compared to the prior year quarter of 43.2%. We estimate that roughly 3/4 of the year-over-year margin change reflected higher relative growth in ancillary revenue, partially offset by rate improvement. Importantly, adjusted EBITDA margin improved 350 basis points sequentially from the fourth quarter, reflecting better recovery of higher fuel and delivery costs as well as pricing momentum.

Finishing up the P&L. Interest expense was $107 million and adjusted pretax profit was $652 million. Adjusted EPS increased 20.4% to $1.18 per share.

Turning to our segments. North America General Tool total revenue increased 5.7% to $1.7 billion. Rental revenue increased 7.4% and dollar utilization was consistent with last year at 47%. This improved growth was driven primarily by higher fleet on rent supported by rate improvement. Adjusted operating profit increased 4% and adjusted EBITDA increased 3.2% at a margin of 51.5% compared to 52.8% last year.

We estimate that about half the margin change in the quarter was the result of higher fuel costs, which was partially mitigated by rate.

Continuing with our segments. North American Specialty total revenue increased 24.5% to $1.1 billion. Rental revenue grew 25.3% and dollar utilization increased 300 basis points to 77%. Growth was broad-based across multiple verticals, led by Power and HVAC and also benefited from recent acquisitions as well as World Cup-related activity.

Our acquisition of Ares in May added approximately 300 basis points to Specialty rental revenue growth in the quarter. Adjusted operating profit increased 24.3% with margins consistent with last year, supported by ancillary revenue growth of more than 40% with strong returns on capital.

Adjusted EBITDA increased 19% with a margin of 45.8% compared to 48% last year. We estimate that about 3/4 of the margin change in the quarter was due to higher relative growth of ancillary revenues. As a reminder, within ancillary revenues, these offerings to our customers reflect the specialized expertise and labor-intensive installation often required for our solutions, particularly in complex energy management projects. These projects deliver attractive returns, deepen rental penetration and expand our addressable market.

U.K. total revenue was $240 million. Adjusted EBITDA was $61 million at a margin of 25.4%, while adjusted operating profit margin expanded 10 basis points to 8.3%. In addition, dollar utilization improved to 54%.

We continue to remain focused on actions to improve margins and return on investment within this segment. Moving on to CapEx. Gross rental capital expenditures nearly doubled to $759 million, and net rental capital expenditures increased 78% to $682 million. The higher level of investment is supporting existing customer project wins, while we are experiencing higher time utilization across the fleet as our project pipeline continues to grow.

Shifting to returns and cash flow. Our return on investment on a trailing 12-month basis remains strong at 14.6%, which was an improvement from year-end, and we expect continued progress this year. Free cash flow in the quarter was $70 million and the change compared to the prior year reflects significant growth in CapEx, combined with the timing of cash payments in the first quarter related to equipment landings, which occurred in the fourth quarter of 2026.

We expect free cash flow generation to improve throughout the year as our business continues to demonstrate through the cycle cash generation. This supported the opening of 13 greenfield locations in the quarter, and we remain on track to open approximately 55 this year. We also completed 2 acquisitions, including the previously announced Aries acquisition, which combined, added 17 specialty locations.

On the balance sheet, Net leverage was 1.8x at the end of July, within our long-term target range of 1 to 2x. Liquidity remained strong at approximately $3.8 billion. Of note, during the quarter, we completed an offering of $1.2 billion in unsecured senior notes, consisting of a $450 million tranche at a rate of 4.95% and a $750 million tranche at a rate of 5.65%. The success of these transactions demonstrates the strength of our balance sheet and our investment-grade rating as well as extending our debt maturity profile and providing additional financial flexibility. We intend to use the net proceeds for refinancing existing debt, funding capital expenditures and working capital and supporting other business opportunities.

During the quarter, we returned $363 million to shareholders through share repurchases and dividends. In the quarter, we made our final fiscal year 2026 dividend payment of $0.75 per share under our previous U.K. framework, and we're now transitioning to quarterly dividends as a U.S.-listed company.

Our first quarterly dividend of $0.30 will be paid on October 2, and our capital allocation priorities remain consistent: organic growth, bolt-on M&A, supporting our progressive dividend and finally, share repurchases.

Now let's move to fiscal 2027 guidance. We're raising our outlook for the year and now expect total revenue growth between 6% and 9% and rental revenue growth between 7% and 10%. These updated ranges reflect our first quarter performance, continued strength across our large and strategic customers, strong mega project activity as well as stable local nonconstruction -- nonresidential construction markets. We now expect adjusted EBITDA of between $4.92 billion and $5.12 billion. This represents solid year-over-year dollar growth, and we continue to expect full year margins to be broadly consistent with the prior year.

On fleet investment, we're raising gross capital expenditure guidance to between $2.75 billion to $3.15 billion and raising net rental capital expenditure guidance to between $2.4 billion and $2.8 billion. These increases are driven by demand that has exceeded our original expectations, particularly across mega projects, specialty and energy. The additional investment is targeted towards these specific growth opportunities and supported by committed customer demand and strong fleet productivity.

With these increases to guidance, we continue to expect strong free cash flow generation throughout the year, while investment levels are increasing to support accelerating growth opportunities across the business. We remain confident in our ability to generate meaningful cash flow and create long-term value for shareholders.

Before we begin the Q&A, I'm going to pass back to Brendan to give us some closing thoughts.

Brendan Horgan

Thanks, Alex. And to wrap things up, if there's one takeaway from today's call, it is what we have clear top line and bottom line growth and momentum. With broad-based strength across the business, as an organization, we remain laser focused on our customer success obsession, share gains, driving improved utilization, progressing rate further, improved recovery of fuel and delivery costs and advancing the operational excellence initiatives that support further efficiency gains. The team delivered a strong quarter, and as reflected in our increased guidance today, the beginning of what we expect to be a great year.

And with that, operator, we will open the call for questions.

Operator

[Operator Instructions] Our first question today is coming from Rob Wertheimer from Melius Research.

Question-and-Answer Session

Robert Wertheimer

So obviously, it's strong revenue momentum, op margins up, which is great. When you look at margin performance overall, ancillary drag, I guess, we can call it kind of a good thing. You had some fuel costs. Can you kind of remind us on what time frame you typically recover fuel costs? And does it feel as easy to do that as typical or as it should in this environment? In other words, can you get back pretty easily on that?

Brendan Horgan

Yes, sure. Rob, from a fueling standpoint, there's 3 points of course, where we charge for the service of fueling, fueling at the rental return, which is no real harder than it's ever been and it's remarkably just mechanical. Second will be on larger on-site fueling services that are part and parcel of an overall package and also would include in that larger live events. And there, we have a range of different agreements that are part of the overall engineered design and solution with pricing to the customer. And then, of course, a large element of that is just the -- what we charge for the service of delivery and pickup of our rental assets. It's also worth pointing out in all of that, this is all very high ROI because we're making margin on all of that. The margins vary a bit between those different tranches and different sort of product applications and scale. But nonetheless, we are seeing that progress as you've seen that sequentially, as you pointed out, that we are seeing all of this actually flow through positive incrementally to adjusted operating income.

Robert Wertheimer

Okay. Perfect. And then, obviously, revenue growth is pretty strong. Can you just update us on how you think about flow through? I don't know if there's any abnormal inflation pressures or investments you're doing or whether we continue to see kind of healthy flow-through.

Brendan Horgan

Yes. Thanks, Rob. Look, we look at flow-through from an EBITDA flow-through standpoint. We look at EBITA or an operating profit flow-through. And I think, really, the question is answered in the guide. So we've increased our rent revenue guide, and we've actually maintained our margin. You heard Alex talk about how ancillary revenue growth is significantly outpacing that of pure rental revenue growth. And that demonstrates really the focus and the discipline and the operational excellence initiatives that the business has underway that are driving incremental margins in those ancillaries and there -- as I've just said, they're being accretive.

Operator

Your next question is coming from Annelies Vermeulen from Morgan Stanley.

Annelies Vermeulen

So my first question was also on the margin. So you're keeping your EBIT margin guide flat year-over-year, but your operating profit margins are higher for the first time in a couple of years, I think, and that's despite the fact that I think you said previously, Aries would be a margin drag in year 1. So can we unpack that progress a little bit in terms of how much is the lower depreciation charge? How much is better rates or better utilization, better fuel pass-through that you've already touched on? Any mix effects to consider clearly with Specialty growing faster? And putting all that together, would you expect to continue progress operating profit margins in the coming quarters? That's the first one.

Alexander Pease

Okay. So there was a lot there, Annelies. So I'll do my best and then just feel free to ask follow-ons, if I don't get it all. So first of all, underlying the guide, we are continuing to assume that Specialty growth will outpace general tools. So you'll continue to have this mix impact, especially growth growing significantly more than General Tool, even though both segments will continue to demonstrate strong growth levels. So you will have that dynamic there.

We also -- because of the significant amount of mega project activity and live events, we'll still see significantly higher ancillary growth. So again, as a reminder, in Specialty, for this quarter, 75% of the margin was explained by this higher level of ancillary growth. We would anticipate that to continue.

In terms of the other factors that you mentioned, Brendan talked about fuel typically takes a quarter or so before we start realizing the benefits of the fuel surcharges and so we should anticipate seeing that. And then all of the operational efficiency initiatives that we're executing on around delivered cost recovery, as we mentioned, managing overtime expenses, staffing levels, those sorts of things are already generating significant operational benefits, and we'll begin to see the financial benefits of those.

Last thing I'll mention is, we've actually not baked in a lot of momentum on rate despite the fact rate improvement has accelerated through the quarter. So that would represent upside to the guide. We've also pointed out in our prepared remarks that the local residential construction markets remain stable and that's also what's embedded in our guide. So hopefully, that help unpack your question a little bit.

Annelies Vermeulen

Yes. Super clear. And then the second one was on the CapEx guide, which you've raised today. So could you talk a bit about where that additional fleet is going? And how much of that is indicative of what you expect for demand into next year rather than this fiscal year? And as part of that, do you have any concerns around overfleeting in the industry given all the CapEx increases we've seen across the sector so far this year?

Brendan Horgan

Sure, Annelies. I'll take that. Look, this CapEx that was deployed in the quarter and the CapEx that we have guided here today, the increase in the balance of the year CapEx, this is very much opportunity CapEx. So the growth CapEx inside of that, not that, which is not the replacement CapEx is going to areas of immediate opportunity. Be that our Specialty same-store branches, greenfield openings, which have been very, very biased to Specialty over the course of the quarter, mega project wins et cetera. I guess it's really important to your question though, when it comes to are we concerned with industry over-fleeting. And certainly, the way that we're seeing things today, I mentioned in the prepared remarks, we see a pretty strong discipline from an OEM capacity standpoint, said another way, they're just not creating all that much or manufacturing all that much more equipment going into the marketplace. And yes, we've seen CapEx raises from other public companies. It really demonstrates the big getting bigger because the opportunities that we're talking about today in many of these markets are just that.

Customers looking for a far broader a far broader solution that the likes of Sunbelt are able to deliver. One thing we've been watching extraordinarily closely, as we think about that local non-res market that we're talking about has good demand but is stable on a year-over-year basis. How much of the fleet growth is going to our same-store General Tools? So if you look at it in round numbers, our fleet size is about 1.4 bigger at the end of July than it was last year. And if you look at where that has grown, only $100 million or so has gone to our General Tool same stores, meaning those branches only have 1% more fleet than they had a year ago and look at the growth that they delivered in the quarter, which gives us great comfort that we're not over fleeting that local non-res business. Even though we continue to see improved signs there, what you're seeing from the business is, which is a bit added on to your first question that Alex covered, you're seeing improved time utilization. You're seeing improved rental rate. You're seeing improved operational excellence, discipline and execution, and that look no further than seen rental revenue growing at 12.5% versus depreciation growing at 2.5%. Very important that we're in this really good place from a supply and demand standpoint.

Operator

Next question is coming from Jerry Revich from Wells Fargo.

Jerry Revich

Alex, could you just go back to comments that you made earlier in terms of rental rate being a positive surprise. Can you just frame that for us? Typically in an up cycle, we see rental rate during the construction season up 50 to 100 basis points per month. Is that the magnitude of improvement that you're seeing? And can you just calibrate us on where your general rental time it stands versus prior cycle highs, just to put better perspective?

Alexander Pease

Sure. So I'll give you sort of the current state on the battlefield and then Brendan can talk about prior cycles just given his history. We obviously don't comment specifically on rate. But what I will say is the momentum with rate has been improving as we've gone through the year, and we're continuing to see that in through August. So as Brendan would have mentioned in his prepared remarks and also in his response to Annelie' question, supply and demand is tight. Utilization rates are up and fleet on rent is up. So all that would point to a very supportive rate environment. So that's sort of consistent with what we would see through the balance of the year. Obviously, as I mentioned in my response to Annelies' comment, to the extent the rate environment continues to accelerate, that would be upside to our guidance. And I'll turn it over to Brendan to comment on how this compares to prior cycles.

Brendan Horgan

Yes. First, Jerry, thanks. But I'll just say I don't think Alex said surprised if you did the aspire, I didn't mean to say is pre, we weren't surprised with rate over the course of the quarter. That was exactly what we expected. We challenged the team this year to drive the overall economic, and with the capital investment that the team has earned in the business, they've done just that. They've delivered strength in time utilization, strength in wins and strength in rental rate progressed nicely from a momentum standpoint from May to June to July and moving forward.

Yes. I think it's a fair characterization. I mean, let's face it, when it comes to primary OEMs that supply the industry, there's clear prioritization in terms of who gets the allocations first. And as you've come to expect from us, we are constantly working with our OEMs quite a long ways down the line. It is fair to say for certain high-demand SKUs, so whether that be telehandlers, ultra booms, power generation in the certainly 300 kW and above environment. There's not a whole heck of a lot of spare capacity out there. And as a result of that, we are able to get our preferred position to contribute to what we've guided in terms of increase there's not a whole heck of a lot of flex capacity out there beyond that. But all of that is going to contribute to even more positive as we talked about, as you mentioned in your question, dollar utilization, ability to inch up time utilization further, and it creates a strong rate environment.

Unknown Analyst

Yes. That makes sense. And then for the follow-up, Brendan, I think you mentioned earlier that data center is around 13% of the rental revenue exposure today. Obviously, I think a lot of investors are hyperfocused on the AI infrastructure build-out here in the States. Curious, do you have any color on what you're seeing from activity as it relates to maybe the rising moratorium that you've seen across the country in recent months? Or just any comments on visibility to that sector through the remainder of the year?

Brendan Horgan

Yes, sure. I mean, answered simply, there are -- we're seeing increased starts. So projects that were planned progressing to the actual start phase. Alex talked about the shape overall the mega projects in terms of their phases. And as we're seeing that, we continue to see the pipeline fill.

Now when Alex talked about the spread of overall mega project activity, that's actually what the mega projects have been in terms of segments from effectively this year through 2030. So yes, data centers is 13% of that overall. You have big contributing areas like energy and the rest that he mentioned. We are seeing some of that moratorium realities coming into effect in certain localities. However, in most of those that come to my mind right away, one of which is within 5 miles as a [indiscernible] where we're sitting this morning, we see that there are many starts that have just started before the moratorium. And then certainly, when you talk to our teams and our strategic sellers, what is to follow all of that is energy, energy, energy, and it's a big part of the opportunities that we're seeing. And this ranges from examples like bridge power, commissioning, certainly live events that you're seeing, redundancy desires, lack of grid reliance and capacity and then really just a general increased demand for electrification. So it's not a -- we're not concerned about an oversaturation in one particular area.

Operator

Next question is coming from Tami Zakaria from JPMorgan.

Tami Zakaria

Nice quarter. I wanted to circle back on all the rate comments, which I thought was quite interesting. So my question is, is the rate improvement you're seeing driven by your self-help initiatives like the intelligent customer pricing program? Or is the overall industry rental rates are improving? Or asked another way, it seems the industry rental environment is improving, but yours is improving more or faster due to self-help. Is that a fair comment?

Brendan Horgan

Look, I think the -- I don't know what other rates are doing other than the typical intelligence that we deploy by calling, et cetera. Look, our pricing is coming from, Number 1, discipline that we and the industry have shown now through the cycle; Number 2, through our ordinary plumbing and our ordinary intelligent customer pricing or dynamic pricing that we've had for quite some time. And yes, of course, we have this new next level customer dynamic pricing pilot that we've talked very widely about. But I wouldn't attribute this -- these actual gains from that at this juncture. We're seeing promise in those, and ultimately, when we do roll that out throughout the entire organization, we'll share that with you.

This is good old-fashioned discipline. This is customers' understanding that we are delivering breadth in solutions. We're delivering expertise in solutions, and furthermore, as the structural progression continues pricing of 2%, 3%, 4%, 5% here and there is not the difference maker for our customers. It's the right product for the right application, all tied together the right way to deliver success for their projects. So we just have overall momentum and a good landscape in order to execute.

Tami Zakaria

Understood. That's very helpful. And my next question is more near term. How should we think about the sequential improvement in EBITDA margin in 2Q versus 1Q? I think typically, you see, due to seasonality, call it, about 150 to 200 basis points of sequential improvement. Is that a fair assumption? Or are there other puts and takes we need to be mindful of for 2Q?

Alexander Pease

Yes. So I think we didn't guide to Q2. But I will say our expectation is you should see margin progress as we go through the year. We pointed to essentially flat margins year-over-year. And all the things that we've been talking about around rate, around some of the operational efficiency, movements around the very strong utilization rates around rental revenue growth, significantly outpacing depreciation growth, all of that would support turning the corner as we get towards the back half of the year.

Last thing I'd say is we didn't -- we haven't talked about this yet, but we are extremely committed and confident in our ability to deliver the 200 basis points of margin improvement that we talked about during our Capital Markets Day and sort of have line of sight to this level. And as Brendan mentioned in his call, because of the strong margin performance, you'll continue to see ROIC progress as we go through the year as well.

Operator

Our next question today is coming from Suhasini Varanasi from Goldman Sachs.

Suhasini Varanasi

My first question is on rates, please. It's very encouraging to see the rate improvement that you flagged during the call. Is it possible to maybe unpack how much was the contribution from rates versus volumes in the quarter? And did -- in Specialty, in particular, did the World Cup contributed in particular to rates? Was there a meaningful difference in rates excluding that live event? And maybe if you could give some color on early trading, that would be helpful.

Brendan Horgan

Sure. Let's start with early trading. Look, August felt like Q1 and hence give us confidence for the increased guide that we've shared today. The World Cup would be negligible in terms of impact on pricing, whether it be in the quarter or certainly for the year. We just -- we're not going to break down the details between the parts -- between rates and time utilization, rather I'll just refer back to our comments of strength and momentum in both and look back at, again, 2.5% growth in depreciation, 12.5% growth in net rent revenue.

Suhasini Varanasi

And my next question is just a housekeeping one, please. Given the growth rate and depreciation, which is so much lower compared to rental revenue growth in the quarter, how should we think about the phasing of depreciation growth for the rest of the year, especially in context of your CapEx guidance raise?

Brendan Horgan

Yes, you will see, consistent with our guide, we'll see that depreciation grow compared to the 2.5% as we progress sequentially through the quarter, and we'll see that in Specialty and General Tool as we remain focused and measured with that allocation as we go through the year, but you'll see that as we progress.

Operator

Next question today is coming from Neil Tyler from Rothschild & Company Redburn.

Neil Tyler

A couple from me, please. Firstly, just coming back to the topic of time utilization that you were discussing earlier. I just want to ask a couple of questions around given the sort of timing of landings and as we think sort of through the remainder of this year, are you still expecting time utilization to sort of to be broadly stable? Or are you anticipating sort of moving up sort of through the gears relative to, I guess, those sort of best 2 or 3 years that you mentioned earlier, Brendan? Can you still sort of expect to get towards what was a previous peak?

And then sort of thinking about that previous peak over the longer term, your earlier answer suggested to me that as a larger business, there should be scope for -- to raise that peak essentially. Is that the right way to think about, I guess, asset utilization more broadly? That's the first question. And I'll come on to my follow-up.

Brendan Horgan

Sure, Neil. I mean, I think we have to answer these, both in the context of the segment. So it's important that you look at General Tool time utilization is General Tool time utilization, and John Washburn and the team who lead that business focused on that by region, by district, by SKU, by cat class. And yes, we expect that with scale, we can set new heights. It's all part and parcel of our operational excellence programs that we have shared so clearly over time. I wouldn't go so far as to say that we're expecting significant incremental progression as we go through the year. There will be a certain seasonality element, of course, that we'll come on to.

And from a Specialty standpoint, once again, we're looking at that by SKUs within Specialty. But also remember, overall, Specialty carries a lower time utilization than the General Tool, but you would have seen, of course, in the quarter, about a 300-basis-point improvement from a dollar utilization standpoint in Specialty. So I would say really more stable as we go through the year rather than significant upside from a time utilization.

Alexander Pease

Yes. The only point that I'd add, which we covered in some of the prior comments on capital, all of this capital is pointed towards -- directly towards customer demand. This is not speculative capital. It's going towards megaprojects. It's going to large national strategic accounts and identified Specialty opportunities. So given that dynamic, you wouldn't expect to have a material impact on time utilization.

Neil Tyler

Got it. That's very helpful. And then the second question was really a follow-up to again, earlier comments, Brendan. When you were answering around sort of semis and data center, you mentioned the relationship with power. And I wanted to just clarify because obviously, there are power projects that are being constructed and then there's obviously your power business and power and HVAC. Is there any sort of alteration in the duration of rental in your power business in terms of you actually sort of playing the role of bridging power in those projects? Or is this -- are you specifically talking about servicing the construction of utility type power and other?

Brendan Horgan

Well, I mean, the short answer is all of the above. There is a significant -- if we look at the pipeline of mega project, of that 21% that we cited specifically, there is certainly an element of that, that is pointed directly to actually power some of the data center work that's going on. But there are many other aspects of that outside of that, and that's more just toward the grid in general. And then from a duration standpoint, it just depends. Commissioning is going to be 8 to 12 months when we were specifically commissioning, depending on what it is, whether it's a data center or it is a different type of project. And then also, of course, as part of that, you have the load bank contribution. Live events, well, they're live events. Super Bowl duration is different than a construction project and we have powering construction, which is different than the bridge power, the commissioning, the live events. And then, of course, there's the big piece, which is just behind the meter and general electrification, as I've said. Rest assured, there's a lot more to come from us overall as it comes to this -- or when it comes to this energy management as a service that we're seeing big opportunity in.

Operator

Next question is coming from Allen Wells from Jeffries.

Allen Wells

Just 2 very quick ones from me. Firstly, just on the FIFA World Cup revenues. Obviously, you flagged the 250 basis points impact on growth. But I'm not sure if I missed it, but did you split out how that was allocated between General and Specialty? And then is there any color you can provide on how we should think about the drop-through on that revenue and if it was accretive to margin in each division? That's my first question.

And then follow-up question would just be going back to some of the questions on the rate environment. Anecdotally, we hear over the last 18 months or so, they've been 1 or 2 of the kind of competitors that you had that had been pretty aggressive on rate. I just wondered if you could maybe make some comments on the general rate environment, what you're seeing out there in terms of some of that freight discipline? Is it coming back a little bit? Is that helping the broader rate environment overall for Sunbelt?

Brendan Horgan

Sure. I mean it's -- from a GT versus Specialty standpoint, it's 75-25, 80-20, Specialty to GT from a World Cup revenue standpoint. And look, as you would have seen in the print, it was incremental to operating -- adjusted operating income margins and that's the important thing to us because, ultimately, that's going to be also accretive from an ROI standpoint. I think we've said a lot when it comes to the rate environment, the pricing environment, our focus and our discipline. And I think that largely the industry is taking a very similar role. and most importantly for us, as I said before, our customers are looking for breadth in solutions, expertise in solutions, capability, proven track record in resume and that gives us the confidence as we move forward. There will always be some out there who will price differently, but that's not getting in our way to advance pricing.

Operator

We reach the end of our question-and-answer session. I'd like to turn the floor back over for any further or closing comments.

Brendan Horgan

Great. Thank you, operator, and thank you all for joining this morning. We are pleased to share a good first quarter and our optimism for the balance of the year, and we will look to seeing some of you at the conference next week. And otherwise, we'll speak with you in December as part with our Q2 results. Thank you.

Operator

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.

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UNFI Fiscal Q4 2026 Earnings Call: EBITDA Growth, Lower Leverage and FY2027 Guidance

Wed, 09 Sep 2026 14:32:20 +0000

UNFI closed fiscal 2026 with higher profitability, record full-year free cash flow and lower leverage. Management expects adjusted EBITDA and adjusted EPS to grow again in fiscal 2027, although remaining network optimization effects are expected to weigh on first-quarter sales.

Key Takeaways

Fiscal Q4 2026 sales exceeded $7.6 billion, down less than 1% year over year, while full-year sales were approximately $31.2 billion.
Quarterly adjusted EBITDA was $172 million. Full-year adjusted EBITDA rose 27% to $701 million, near the top of UNFI’s guidance range.
Adjusted EPS reached $0.69 in Q4 and $2.65 for the full year. Management attributed the result to operating performance, lower net interest expense and lower depreciation.
Full-year free cash flow increased by $84 million to a company record of $323 million. Net leverage declined from 3.3x to 2.2x, while net debt fell below $1.6 billion.
For fiscal 2027, management projects sales of $31.2 billion to $31.8 billion, adjusted EBITDA of $730 million to $780 million and adjusted EPS of $3.00 to $3.50.
UNFI authorized a new $200 million share repurchase program while retaining its priorities of organic investment and further deleveraging.

Core Financial Data

Metric	Fiscal Q4 2026 / FY2026 result	Change or context
Q4 sales	More than $7.6 billion	Down less than 1% year over year
FY2026 sales	Approximately $31.2 billion	In line with the updated outlook
Q4 gross margin	13.7%	Up approximately 30 basis points year over year
Q4 operating expenses	Approximately 12.9% of net sales	In line with management’s expectations
Q4 adjusted EBITDA	$172 million	Adjusted EBITDA margin of approximately 2.3%
FY2026 adjusted EBITDA	$701 million	Up 27% year over year
Q4 adjusted EPS	$0.69	Supported by operating gains and lower financing costs
FY2026 adjusted EPS	$2.65	Above the high end of company guidance
Q4 free cash flow	$80 million	—
FY2026 free cash flow	$323 million	Up $84 million; highest full-year level to date
Year-end net leverage	2.2x	Improved by 1.1 turns year over year
Year-end net debt	Less than $1.6 billion	Lowest since fiscal 2018
FY2026 share repurchases	Approximately $50 million	About 1.25 million shares at an average $40.15 per share

Business and Operating Performance

Management said underlying wholesale sales grew at a low-single-digit rate, in line with UNFI’s approximately $90 billion target addressable market. Reported sales were affected by an estimated 500-basis-point impact from network optimization and approximately 150 basis points from the unwind of short-term project work. The comparison also included the cycling of fiscal 2025’s cyber incident.

The Natural Products segment continued to outperform the broader market. Management said fiscal 2026 natural products sales grew about 7% and segment EBITDA increased 19%. In Q4, underlying Conventional Products sales declined at a mid-single-digit rate, although full-year conventional EBITDA increased by more than 50% as UNFI executed accretive network optimization.

Retail sales fell 8% in Q4, primarily because of planned store actions. Cub comparable-store sales improved by approximately 150 basis points sequentially from the third quarter after adjusting for the prior-year cyber impact. Management characterized the Cub strategy as being in its early stages.

UNFI completed the initial deployment of Lean daily management across 44 distribution centers. Fill rates, on-time delivery and throughput improved year over year for a fourth consecutive quarter. The company plans to deepen this program through Lean 2.0, with more emphasis on problem-solving, management routines and continuous improvement.

The company also consolidated its Racine, Wisconsin facility into an expanded Joliet, Illinois distribution center equipped with case-level automation. Management noted that implementation remains in its early stages and has involved some initial growing pains.

Other operating initiatives included more than 130 new private-brand SKUs, AI-enabled features for the UNFI Insights supplier platform and network-wide deployment of an AI-powered supply chain and procurement planning system.

Management Guidance

Fiscal 2027 metric	Management guidance	Key assumptions or timing
Sales	$31.2 billion-$31.8 billion	Approximately 1% growth at the midpoint
Adjusted EBITDA	$730 million-$780 million	High-single-digit growth at the midpoint
Adjusted EPS	$3.00-$3.50	Approximately 23% growth at the midpoint
Capital expenditure	Approximately $300 million	Includes automation, ERP and broader technology investments
Free cash flow	$275 million-$325 million	Higher capital spending is expected to offset EBITDA growth
Net leverage	Below 2.0x by fiscal year-end	Further debt reduction remains a priority

Management expects first-quarter sales to decline as UNFI continues to cycle network optimization and temporary project work. The company expects a return to profitable growth in the second half, when those comparison effects should be largely absorbed.

The midpoint of fiscal 2027 guidance implies approximately 10 basis points of year-over-year margin expansion. Management said this would position UNFI to reach its fiscal 2028 margin-rate target one year earlier than planned. The company also currently expects fiscal 2028 adjusted EBITDA to grow approximately 10% from the fiscal 2027 guidance midpoint.

The fiscal 2027 outlook assumes low-single-digit food inflation. Management said it does not rely on unusual procurement gains and has incorporated fuel costs using what it described as a high-confidence planning approach.

Risks and Focus Areas

Remaining network optimization and temporary project comparisons are expected to pressure reported sales, particularly in the first quarter of fiscal 2027.
Higher fuel prices have recently created an approximately $5 million net quarterly impact. UNFI is using hedges, contractual escalators and route optimization as countermeasures.
Management identified lower SNAP benefits and GLP-1-related volume pressure as broader factors affecting food retail demand.
Natural product fill rates remain below conventional product fill rates because of wider assortments, slower-moving SKUs, innovation and less stable supply patterns.
Retail remains highly competitive, and management said the Cub turnaround is still in its early stages.
The Joliet automation transition has experienced initial implementation challenges, although management expects longer-term service and efficiency benefits.

Analyst Q&A Highlights

Underlying growth and sales cadence: Management said UNFI’s underlying growth rate remains in the low-single-digit range. The expected first-quarter sales decline primarily reflects the timing of network optimization and temporary customer project comparisons rather than a change in underlying expectations.

New customer business: UNFI is gaining additional categories and share from existing customers while onboarding new banners. Management said major banner conversions can require six to nine months and are generally scheduled to avoid high-volume periods such as the holidays.

Fill-rate opportunity: Conventional and natural fill rates are improving at similar rates, but conventional remains higher. UNFI described fill-rate improvement as one of its largest operating opportunities and is using demand data, supplier coordination and its RELEX AI platform to improve inventory availability.

Capital allocation: Management’s current bias is toward organic investment because it sees substantial opportunities to improve the effectiveness and efficiency of approximately $4 billion in annual operating expenses. Deleveraging and opportunistic repurchases remain priorities, while M&A opportunities continue to be evaluated without being central to the current outlook.

Balance-sheet actions: UNFI repriced its term loan from SOFR plus 475 basis points to SOFR plus 400 basis points, which management expects to reduce annual interest expense by another $3 million. The company will continue evaluating its debt structure ahead of bond maturities at the end of calendar 2028.

Full Earnings Call Transcript

Complete Earnings Call Transcript

Management Remarks

Operator

Thank you for standing by. At this time, I would like to welcome everyone to the UNFI Fourth Quarter Fiscal 2026 Earnings Call. [Operator Instructions] I would now like to turn the call over to Jeremy Perron, Senior Vice President of Investor Relations and Corporate Development. You may begin.

Jeremy Perron

Good morning, and welcome to UNFI's Fourth Quarter and Full Year Fiscal 2026 Earnings Conference Call. Our earnings press release and presentation, which management will speak to, are available under the Investors section of the company's website. We've also included a supplemental disclosure file with key financial information. Joining me for today's call are Sandy Douglas, our Chief Executive Officer; and Matteo Tarditi, our President and Chief Operating Officer.

Before we begin, I'd like to remind everyone that comments made by management during today's call may contain forward-looking statements. These forward-looking statements include plans, expectations, estimates and projections that might involve significant risks and uncertainties. These risks are discussed in the company's earnings release and SEC filings. Actual results may differ materially from the results discussed in these forward-looking statements. Additionally, Sandy and Matteo will refer to certain non-GAAP financial measures. Definitions and reconciliations to the most comparable GAAP financial measures are included in our press release and at the end of the earnings presentation. Now over to Sandy.

James Alexander Douglas

Thank you, Jeremy, and thank you, everyone, for joining us this morning. In the fourth quarter of fiscal 2026, UNFI delivered solid results in line with our most recent outlook and completed a strong second year of our strategy to add value for customers and suppliers while becoming a more effective and efficient company.

Through consistent execution of our value creation strategy, we delivered fourth quarter adjusted EBITDA of $172 million, which contributed to full year adjusted EBITDA growth of 27% and free cash flow of $80 million in the fourth quarter and $323 million for the full year. And we reduced our year-end net leverage ratio to 2.2x, more than a full turn less than last year. At the same time, we strengthened capabilities to help our customers and suppliers grow profitably, continued improving our operating model and build momentum as we enter fiscal 2027.

Now turning to Slide 6. Let me take a few minutes to review UNFI's target addressable market, the basis for our value creation strategy. Over the past 2 decades, many of the most successful food retailers have built growth strategies centered on differentiation. While value remains critically important, many shoppers also continue to seek healthier foods, innovative products and locally relevant experiences. As a result, food retailers with differentiated value propositions have steadily gained share within the grocery industry over time. We continue to see this trend across a wide range of retailers, including natural and organic grocers as well as smaller chains and independents with unique locally relevant offerings.

These retailers are the foundation of UNFI's approximately $90 billion target addressable market, which is expected to grow in the low single digits over time. Our focus is helping these customers execute growth strategies to differentiate their shopping experiences in the marketplace and better compete with mass and discount retailers. Through a combination of our proprietary analysis and third-party research, we estimate retailers within our target addressable market grew in the low single digits and increased their combined share of the grocery industry by approximately 30 basis points compared to last year's fourth quarter.

Within this backdrop, UNFI delivered low single-digit underlying sales growth, in line with our target addressable market. As we've discussed previously, our reported sales included the impact of accretive network optimization actions and the unwind of short-term project work in our Natural Products segment, partially offset by the cycling of last year's cyber event. Excluding those factors, our underlying sales performance remained largely in line with the most consistent and growth-oriented portions of the market. Importantly, we believe our target addressable market will continue to grow because of the quality of our customer base and their alignment with enduring consumer priorities around health, innovation, quality and value.

Turning to Slide 7. Our value creation strategy is purpose-built for this part of the market and anchored on 2 priorities: adding value for customers and suppliers and becoming a more effective and efficient company. First, we're adding value for customers and suppliers by enhancing account management, merchandising and supplier support programs, innovative private brands and professional services that help our partners differentiate, compete and profitably grow.

Second, we're improving effectiveness and efficiency across the business through next-generation supply chain, technology and productivity initiatives that are steadily improving safety, quality and delivery accuracy for our partners while reducing our operating costs. Together, these strategic capabilities represent our road map to building a company that can best serve the most growth-oriented parts of our industry while supporting shared profitable growth for our customers, our suppliers and for UNFI.

Turning to Slide 8. In fiscal 2026, we made solid progress on our road map to strengthen our core capabilities while continuing to improve daily execution. This year, we launched more than 130 new private brand SKUs, including a variety of innovative health forward options. In Q4, we also refreshed one of our core seafood brands that offers a unique combination of quality and value. We've seen private brands continue to grow steadily across the industry, playing an important role in many retailers' differentiation strategies. We also continue to enhance our supplier support programs, which several of our investors saw in real time at our holiday and winter selling shows.

Most recently, we added new AI-enabled features on the UNFI Insights platform to make it easier for our suppliers to assess store-level performance, improve demand planning and achieve their goals. Throughout fiscal 2026, we also made progress towards becoming a more effective and efficient company. We continue to optimize our network to better serve our customers and suppliers over time, while investing in technology to support long-term growth. In the fourth quarter, we consolidated our Racine, Wisconsin facility and expanded our nearby Joliet, Illinois DC with full case automation, which is now in the early stages of implementation.

We also completed the rollout of our AI-powered supply chain and procurement planning platform to all DCs in our network, which is helping to steadily improve fill rates and inventory management while increasing free cash flow. In addition to technology investments, we focused equal attention on strengthening processes across our network. By year-end, we completed the initial deployment phase of lean daily management in 44 distribution centers, which is enabling ongoing improvements in our safety, quality, delivery and cost metrics. While we've made progress this year, we still see significant opportunities to continue improving our capabilities as well as our effectiveness and efficiency across the business.

The leadership updates we recently announced are another step forward in aligning our operating model more closely to our value creation strategy. Matteo's expanded role as President and Chief Operating Officer brings together our sales, supply chain, technology and lean organizations, creating stronger alignment between our customer relationships and our operational execution. We're also sharpening our focus on commercial capability building under Louis Martin's leadership. On that note, I'm pleased to officially welcome Alfredo Luchini as our new Chief Financial Officer, who is joining us on today's call. We're excited to have him on board as we continue executing our strategic priorities with strong financial discipline.

Turning to Slide 9. We've achieved significant improvement as we capped the second year of our value creation strategy with momentum continuing into fiscal '27. Over the past 2 years, we have consistently delivered on our earnings and cash flow commitments. We've grown adjusted EBITDA to over $700 million, generated substantial free cash flow and reduced net leverage from 4x in fiscal '24 to 2.2x in fiscal year '26. These results reflect the impact of our value creation strategy and the actions we've taken to improve execution, increase efficiency and strengthen the company's financial foundation. In fiscal '27, we're positioned for another year of continued progress with adjusted EBITDA up high single digits, sustained free cash flow generation and lower net leverage while returning to profitable growth.

As Matteo will detail shortly, the midpoint of our adjusted EBITDA outlook is $25 million above the targets we communicated during our 2025 Investor Day, reflecting our strong performance in fiscal 2026. Although it's early, we would expect this favorability to flow through to fiscal 2028. Importantly, we're confident in our ability to deliver long-term profitable growth within the most resilient segments of the grocery retail industry. Looking ahead, our teams remain laser-focused on helping our customers execute their differentiation strategies, supporting our suppliers' growth with these retailers and continuing to improve the service that we deliver every day.

With that, I'll turn the call over to Matteo to discuss our fourth quarter results and fiscal 2027 outlook in more detail.

Giorgio Tarditi

Thank you, Sandy, and good morning, everyone. Our fourth quarter results reflect disciplined execution of our value creation strategy. We delivered another quarter of underlying sales growth and improved operating leverage, closing out a strong fiscal 2026 in which we generated meaningful adjusted EBITDA growth and free cash flow while improving our financial flexibility. Today, I will provide additional insight into our fourth quarter and full year results, our year-end financial position and capital structure and our outlook for fiscal 2027.

With that, let's turn to our results. Starting with Slide 11. Fourth quarter sales were over $7.6 billion, bringing full year sales to approximately $31.2 billion, in line with the updated outlook we provided in June. Fourth quarter reported sales declined by less than 1% compared to last year. Excluding our planned optimization actions, short-term project work and the impact of cycling last year's cyber event, our underlying wholesale sales grew in line with our $90 billion target addressable market. We estimate the impact of optimization was approximately 500 basis points. The impact of short-term project work was approximately 150 basis points, and last year's fourth quarter was impacted by the temporary lost sales due to last year's cyber incident.

The majority of our customers buy both natural and conventional products to support the unique go-to-market strategies in the local markets they serve. Underlying sales in our natural products segment again outperformed the broader market, reflecting strong execution and continued shopper demand for natural, organic fresh and specialty products. Meanwhile, underlying sales declined mid-single digits in the Conventional Products segment. In retail, total sales were lower by 8%, largely reflecting planned strategic store actions as we optimize our footprint and strengthen the foundation of the business. In the fourth quarter, Cub same-store sales decline improved by approximately 150 basis points from the third quarter, even after adjusting for last year's cyber impact. We are encouraged by the steady progress, though our Cub strategy is still in its early innings.

Let's move to Slide 12 to review profitability drivers in the quarter. Our gross margin rate in the fourth quarter was 13.7%, approximately 30 basis points higher compared to last year, reflecting the benefits of our optimization work and favorable customer mix. In the fourth quarter, we made some incremental investments in technology, supply chain and commercial capabilities to accelerate the expected benefits from these actions. Operating expenses came in at about 12.9% of net sales, which was in line with our expectations. While we still have significant opportunities to improve, we continue to demonstrate progress on fill rate, on-time deliveries and throughput. These gains reflect the benefits of our effectiveness and efficiency initiatives, including network optimization, investments in our next-generation supply chain and expanding lean practices across our distribution center network.

Our disciplined execution and solid expense management resulted in adjusted EBITDA of $172 million, bringing full year adjusted EBITDA to $701 million, near the top of our guidance range. Our adjusted EBITDA margin rate in the quarter was approximately 2.3% of net sales, reflecting another quarter of solid margin improvement. The strong operating performance, along with lower net interest expense from reduced net debt and refinancing activities as well as lower depreciation expense resulted in fourth quarter adjusted EPS of $0.69 and full year adjusted EPS of $2.65, above the high end of our guidance range.

Looking to Slide 13. During the fourth quarter, we continued to improve our effectiveness and efficiency by deploying new technology solutions and by further embedding lean practices across our network. As Sandy mentioned, one of the key actions we made in the quarter was relocating operations from an older distribution center in Wisconsin to an upgraded facility in Illinois, equipped with automated case pick and each pick technologies. While it is still early and we have more work to do, we expect that this move will help us more effectively serve customers and suppliers in the Midwest over time while generating operating efficiencies for UNFI. This is the latest example of our network optimization planning. We've also completed the initial deployment phase of Lean daily management to 44 distribution centers.

With Lean daily management scaling across our DC network, we delivered our fourth consecutive quarter of year-over-year improvements in fill rates, on-time deliveries and throughput. We have made steady progress, but still believe we have significant runway to continue improving upon these metrics. To do that, we plan to deploy Lean 2.0, which advances systems and processes beyond our initial implementation so we can solve more problems closer to the point of impact. Lean will continue to be an important part of my new role.

Turning to Slide 14. Our strategic and operational discipline, combined with our planned CapEx spend supported free cash flow of $80 million in the quarter, bringing our full year to $323 million, in line with our expectations and $84 million higher than fiscal 2025. This also represents the highest full year free cash flow we have delivered to date. This free cash flow helped lower our net leverage ratio to 2.2x, a 1.1 turn improvement from the end of fiscal 2025. Net debt at the end of fiscal 2026 was less than $1.6 billion for the first time since fiscal 2018. In the fourth quarter, we repurchased about 420,000 shares of our stock for approximately $21 million, bringing our total for the fiscal year to about 1.25 million shares for approximately $50 million, equating to an average price per share of $40.15.

Our 8-K this morning also stated that our Board of Directors has authorized a new $200 million share repurchase program that replaces the one that was set to expire this month. This new program and the repurchases we have made to date reflect our conviction in our long-term value creation strategy. We also took action to reduce the cost of our capital structure in the fourth quarter, repricing our term loan from SOFR plus 475 basis points to SOFR plus 400 basis points, which is expected to reduce annual interest expense by another $3 million on top of the savings generated by the refinancing of the ABL earlier in the year.

Looking at Slide 15. We finished fiscal 2026 with operating momentum. And as we look to fiscal year 2027, our guidance reflects our confidence in the continued execution of our value creation strategy. Sales are expected to be in the range of $31.2 billion to $31.8 billion, up 1% at the midpoint. This outlook reflects the remaining impact from the optimization actions we yet have to cycle. As a result, year-over-year sales are expected to decline in the first quarter before returning to profitable growth in the second half. Adjusted EBITDA is expected to be in the range of $730 million to $780 million, representing a high single-digit growth rate at the midpoint, and as Sandy mentioned, $25 million above the target we communicated at Investor Day.

The midpoint of our sales and adjusted EBITDA guidance implies year-over-year margin expansion of 10 basis points, positioning us to achieve the fiscal '28 margin rate target that we set at our Investor Day 1 year earlier than planned. This expected margin expansion is largely driven by the continued execution of initiatives already underway and the timing of their anticipated benefits. Because these benefits are expected to build throughout the year, we expect revenue and earnings growth to be slightly weighted towards the second half, with the first quarter expected to follow historical trends for adjusted EBITDA as the lowest quarter of the year.

And we expect an adjusted EPS range of $3 to $3.50 per share, representing an increase of about $0.60 per share or 23% growth at the midpoint. These ranges represent a high confidence case supported by multiple initiatives across the business to achieve these targets. Also to reiterate what Sandy stated, we presently expect adjusted EBITDA in fiscal 2028 to grow approximately 10% versus our 2027 guidance midpoint, in line with the long-term growth rate we provided at our Investor Day and implying incremental margin expansion above our long-term target.

Turning to CapEx. We expect to deploy approximately $300 million in fiscal 2027, reflecting a higher level of organic investments to advance our capabilities as well as our effectiveness and efficiency agenda. This includes targeted automation, ERP deployment and broader technology initiatives designed to simplify processes and provide better and faster insights to operate the business. We will take a methodical, paced approach to technology investments, focusing on targeted implementations first, then a broader deployment.

Our outlook for fiscal 2027 free cash flow is between $275 million and $325 million, which reflects a year-over-year step-up in capital spending, offsetting the EBITDA growth. The midpoint of $300 million is also in line with our long-term target. We also expect to reduce net debt and improve our leverage ratio to under 2x by end of fiscal 2027. From a capital allocation perspective, we will continue to prioritize organic investments and deleveraging, and we'll also evaluate opportunistic share repurchases. Overall, we remain confident in our long-term value creation strategy.

Closing on Slide 16. As we begin the new fiscal year, we remain focused on continuing to support our customers and suppliers as they execute their unique growth strategies in a dynamic operating backdrop while simultaneously delivering our financial commitments. We continue to see significant opportunities ahead to strengthen our capabilities, improve execution and create long-term value for all our stakeholders.

With that, operator, please open the line for questions.

Operator

[Operator Instructions] And your first question comes from the line of Edward Kelly with Wells Fargo.

Question-and-Answer Session

Edward Kelly

I wanted to start on the top line. Obviously, still seeing some optimization headwinds. Could you provide a little bit more color on the 150 basis points of short-term project work? And then as we think about the upcoming year, can you help us a little bit in terms of the top line outlook by division and a little bit more on the cadence. And I'm just curious if there's any other optimization stuff that you are maybe contemplating that's not in the guide.

James Alexander Douglas

First, I would say the simplest way to understand the project work is that a large natural retailer asked us to help them make a strategic transition and we did some significant fresh business for them as a bridge from where they were to where they were going. This is a very appropriate use of our resources. It was profitable, and we are in the process of cycling it now having made the transition, and it's approximately 150 basis point drag on our reported sales results.

From an outlook standpoint, as Matteo said in his comments, we see 2027 as a year that will return to growth. We still continue to lap some of the optimization results that we achieved last year. And so we can quantify the headwind there, along with the tailwinds that we estimate from the success of our customer base and our target addressable market as well as our pipeline, which all are part of the mix that lead to a low single-digit guide for the year with an emphasis that growth is restored in the second half as we have pretty much fully lapped the optimization initiatives that are part of the base.

Edward Kelly

And just on where you are in terms of optimization overall, potential for further activity in the future?

James Alexander Douglas

Sure. DC optimization is really an initiative that we undertook to make sure that our DC fleet is designed for the future opportunity that we see in the business. And we've taken a number of actions so far. We continue to look at it to make sure that on an ongoing basis, our DCs are in the right spot with the right technology. It involves both increases in DC space, technology, new DCs as well as transitioning some DCs, sometimes merging them to make them more efficient. So the mainstream of the initiative is something that we're in the process of cycling, but we'll continue to look at it.

Operator

Your next question comes from the line of Alex Slagle with Jefferies.

Alexander Slagle

Congrats on the progress. I just wanted to follow up on Ed's question a little bit more, if there's any other color sort of on the segment level. Just trying to think if like conventional and retail, I mean, can the top line start to flatten out at some point in the back half? And on the bottom line, whether you expect sort of what the contribution could look like for those 2 segments, natural versus conventional?

Giorgio Tarditi

So first of all, we are pleased with the performance that the 2 segments delivered in 2026. So think about natural growing top line about 7% and growing EBITDA 19%, so showing strong operating leverage. And then conventional while going through an important year of accretive network optimization, growing EBITDA by more than 50%. So solid foundation to start with. When you think about 2027, we don't necessarily guide by segment, but let me give you a little bit of color. So the low single-digit growth for the top line is rooted into the customer strength, as Sandy said, the $90 billion market that continues to grow at low single digit and the commercial capabilities we're building.

And inside the low single-digit guidance, we continue to see natural organic specialty products to grow faster than the average market and the portfolio. So we expect to continue to see strength from the natural products. We continue to have our initiatives on productivity largely underway and then the return to profitable growth to compound on getting the EBITDA up 8% at the midpoint.

James Alexander Douglas

One final point I'd make is that ultimately, our product set is designed to serve the assortments of our customers. And so the natural evolution would be that customers are beginning to focus more on healthier, more differentiated product sets, which drives growth in natural. But our conventional products are particularly important products in many assortments. And while their year-over-year growth may be negative, the total combination adds value to customers and drives our growth proposition.

Alexander Slagle

Got it. And then just on the '27, '28 targets, I mean, how do the higher fuel costs impact this outlook and just the magnitude of the incremental headwind? I know it's something we initially weren't looking at a couple of years ago when we set the plan.

Giorgio Tarditi

Yes, Alex, we talked in kind of the 3Q, 4Q calls about a $5 million kind of net fuel impact in each quarter. And that's kind of in the high confidence mode that we always apply for our outlook, what we model for 2027. And equally importantly, if not more, is the countermeasures that we continue to deploy against fuel prices. So the first one is we have some fuel hedges in place to mitigate some of the inbound cost. Second, we have customer and supplier contractual escalations that again go through a lagging and a phasing, but they are in place to protect. And then the third one, which is the most important is the continuous focus on route optimization. So how do we continue to reduce miles per delivery and optimize routes. So the whole system benefits from lower fuel consumption besides contractual escalations and hedges.

Operator

Your next question comes from the line of Kelly Bania with BMO Capital.

Kelly Bania

Congrats on the leadership announcements. I wanted to go back again to the top line, I guess, that kind of underlying low single-digit sales growth that you noted for the quarter. Should we assume that you kind of got back 100% of the cyber incident impact in the quarter? Just trying to tighten that math up a little bit. And then as well, you mentioned in the press release onboarding of additional business from both new and existing customers. Can you share any color on the timing and magnitude and drivers for that new business?

James Alexander Douglas

Kelly, so the way I would describe the flow of the business is that I'll start with the pipeline. We've continued to earn bigger shares of our customers' business. It's the best kind of growth because it signals a healthy relationship and it often includes economies of scale. And so it's a real focus for us to continue to earn our customers' business, and that's a component of the outlook in terms of sales. We also have new banners, which are new relationships. And obviously, we've netted out any other changes in our customer base to be able to come to the guide.

What we've communicated today, and I think it's the best way to think about it is that the first quarter will continue to have a heavy amount of cycling from the optimization. And the second half of the year, we think we'll be fully back to growth. That gives you an idea of the staging, both of the pipeline and of the cycling of optimization. Finally, relative to the cyber event of last year, in general, we believe we've completely cycled it as we enter the first quarter. I mean there's little impacts here or there, but we worked very hard last year to manage through that in a way that was focused 100% on our customers' impact. And we did so in a way that was expedited, although it was, as everyone remembers, very challenging. And as we sit here today, we're a stronger company from a technology and security standpoint, and our customers have the benefit of that capability build. And this is solidly in the rearview mirror for them and for us.

Operator

Your next question comes from the line of Leah Jordan with Goldman Sachs.

Leah Jordan

I wanted to ask about food inflation. What are you seeing today? What is embedded within your outlook for FY '27? And then how are you thinking about forward buying opportunities in the year ahead? Because I think you have a small tailwind that you have to lap in the front half of this coming year that you gained last year.

Giorgio Tarditi

First of all, our strategy with suppliers and throughout our supply chain is always to keep our prices low, stable and predictable. That is the best answer and the best response to the industry and for our customers. When you think about our fiscal 2027 outlook, we've embedded low single-digit assumption for inflation, recognizing though that the environment is dynamic, and it includes areas like energy, logistics, we talked about fuel. So it is consistent with the signals that we receive. And again, our focus is to continue to work with our suppliers and our operational capabilities to keep prices low.

Relative to procurement gains, what -- again, very similarly, our strategy is always to work with our suppliers to avoid inflation and to avoid price increases. And we always view procurement gains as temporary and secondary. If you think about the $150 million of EBITDA growth in 2026, very largely driven by the productivity efforts, the accretive network optimization, a very residual part was driven by procurement gains. So we may be lapping some in the first and second quarter when we had them a little bit higher. But what we embedded in our '27 outlook is low single-digit inflation and basically no reliance on procurement gains on out of pattern, let's say, procurement gains.

Leah Jordan

Okay. That's helpful. And then maybe could you provide more detail on the trends in your retail business? What are you seeing across the competitive environment in your regions? What are you seeing from the consumer? Just continues to be kind of a top line and margin headwind for you. So how are you thinking about that?

James Alexander Douglas

Yes, Leah, it's Sandy. The way I describe our retail initiatives is early days. David Best, our retail CEO, has his management team in place. They've developed a strategy, and they're in the early stages of implementing it. And as Matteo said in his remarks, we're seeing sequential improvement in the top line and bottom line performance. We'll have more to say about that as we get more experience. But as you know, in particular, Cub is a great learning lab for us. And the management team that's been put in place is very high quality. We work closely with our franchise partners in the Twin Cities area, and we're excited about the potential, but early days as of now.

Let me answer your second question I forgot to about competitive environment. Broadly speaking, retail is and has always been in my entire professional life, a very competitive business, and it still is. Ultimately, if you look at the way we've segmented the business, and there's one slide that's in our provided materials, we continue to see natural organic and specialty players grow and gain share. We continue to see differentiated grocery companies grow and gain share. And we continue to see discounters grow and gain share, and they each do it in their own unique way. And at UNFI, our focus is trying to help retailers wherever they're segmented, particularly those that may not have been as differentiated in the past, like Cub, for example, to really take the actions necessary to create a winning strategy for their business on value, on assortment and on unique experiences. And I think we can follow Cub as an example, and that effort goes for all our customers, and we're seeing some early results from providing that support on top of a bed of continuously improving execution.

Operator

Your next question comes from the line of John Heinbockel with Guggenheim Securities.

John Heinbockel

Sandy, I wanted to start with fill rate, up 2%. How is natural fill rate progressing? Because I know that's obviously lower than conventional. Is that growing faster? Where do you see the opportunity there? And I guess it's very hard to tell how much sales you're leaving on the table because the fill rate is not higher. But maybe you can talk to that.

James Alexander Douglas

Sure, John. Good insightful question. Broadly, we're seeing fill rates improve in conventional and natural at about the same rate. However, you're right, conventional fill rates are higher, and it makes sense that they are. They're fast-moving consumer goods, a lot fewer SKUs and generally, volume is more stable, and there's plenty of supply. On the natural side, with all the innovation and the slow-moving SKUs, it's a whole different ball game. But we have created an enterprise-level project on fill rate. We consider improving it to be at the top of the most important things we can do for our customers, and that includes owning them.

The ultimate position that we want to put our customers in is being in stock at really very, very high levels. And then underneath that, understanding demand, understanding ordering patterns, understanding promotions and working with suppliers to get a differentiated amount of inventory and then using technology, which we've implemented, as you know, RELEX across our system to leverage AI to make sure that we're continuing to order and fulfill in the most technology supported way. And we're making some progress, but we continue to see it as the biggest improvement opportunity we're working on, and we expect to continue to improve.

John Heinbockel

Maybe a second question. As you think about -- you break out natural and conventional, but then you have, right, the customer types that are differentiated. So when I think about conventional product sales through less or undifferentiated channels, how do you think about that? And I would guess over time, right, as conventional gets smaller and as these customer types get smaller, right, you would think that your enterprise top line would gradually strengthen. Is that fair?

James Alexander Douglas

Yes, I think so. The way I look at it is that customers have their own assortment strategies and what our job is, is to support that. Now the advice we're offering is a couple fold as it relates to assortment. First, on items that are comparable with discounters, we need to work together to get costs down so our customers can be competitive. Beyond that, though, there's tremendous opportunities to decomparablize and move assortments towards private labels, which is a major focus of ours as well as natural, organic and specialty, a, because they're not comparable; and b, because they're on trend. And so to some degree, we're going to force that transition in mix simply by strategy and by consumer demand. But what I'll also tell you is that approximately 90% of our customers buy at least some of both. And so I return back to how I started, which is we're in the business of selling the products our customers want to sell. But at the end of the day, the math of it is going to be what you suggested, I expect. And I believe the health and wellness trends in food are enduring and will go for a long time.

Operator

Your next question comes from the line of Mark Carden with UBS.

Mark Carden

So to start, you walked through the competitive backdrop on the retail side of the business a bit earlier. Are you guys seeing any shift in competitive intensity on the distribution side of the business, just given the duration of some of the recent pressures that we've seen in grocery? You guys obviously have a bit more favorable exposure to your target market, but has there been any shift on either upfront money or on price in general?

James Alexander Douglas

Mark, I would say broadly that the wholesale industry continues to be very competitive. I think what maybe taking place is some incremental segmentation about where different players are focused, but you have to talk to the other companies to understand their strategy. I wouldn't be the right spokesperson for it. But ultimately, we operate a very efficient business with low margins and our productivity and operational improvement drives our margin expansion, not our price increases. We remain competitive, but we're focused, as we've said many times, on a subsegment of the market and particular needs and capabilities that support the strategy of customers in those segments. And that puts us, to a degree, in our own spot in the industry, although it's a very competitive industry, and we continue to sharpen our execution to make sure that our customers believe they're getting the best value for what they're trying to accomplish.

Mark Carden

Great. That's helpful color. And then as a follow-up, you guys called out the focus on Lean 2.0. Can you walk through just how this differs from your initial deployment, where you see the most opportunity for incremental improvement and how you're planning on phasing in these changes to your DC base? Is it voluntary like the first phase? Could this be implemented more quickly? Just color there.

Giorgio Tarditi

So pleased with the progress with the first phase. We deploy the basics of Lean daily management at 44 DCs. And really, what we saw in the last 4 quarters is green shoots of improvements in fill rates, on-time delivery, throughput, but still a very large opportunity in front of us. So we call them green shoots at the start, but there is a lot to do. When you think about 2.0, the plan here is to start going much deeper into 2 specific areas. The first one is management routines and specifically, how do we strengthen the problem-solving and daily management programs. So we spoke about the teams huddling at 7:00 a.m. at 44 DCs to look at the key performance indicators. We're going to start going much deeper into the countermeasures and how do we deploy technology, how do we deploy stronger quality, et cetera, et cetera, to problem solve.

The second area then is going to be continuous improvement, right? The Japanese word would be Kaizen, but it's how do you then take your foundation and you keep thinking about eliminating waste, improving effectiveness, improving efficiency. So the plan here is to go a little bit on the volunteering basis as we did with the 44 DCs, but we also start having a better understanding of where are the larger opportunities based on customer feedback, customer impact, suppliers, out of stock, et cetera. And so that's how we're going to prioritize. So it's going to be a little bit less of just raising your hand is a smarter way to cross check where is the biggest impact, where is the opportunity.

James Alexander Douglas

Mark, the one build I'd put on that is Matteo's answer to that question gives you a pretty good example of why we're optimistic about the impact he's going to make as Chief Operating Officer with sales, customer and supply chain and Lean and IT reporting to him, we're able to push that mix together and begin to take things to the next level.

Operator

Your next question comes from the line of Scott Mushkin with R5 Capital.

Scott Mushkin

I have 2 questions. But before that, I just wanted to say what an incredible job you guys have done with this company over the last 2 years, and it's much appreciated. So first question is more short term. It's industry related. I mean, obviously, you guys outlined the way you can grow. But in the broad industry, it looks like we're going to have some volume pressures as GLP-1s continue to erode demand and then also building price pressures throughout the whole industry. So I was just wondering if you could kind of put UNFI in that, if that's correct and how your business performs in that environment, if that's the short-term environment?

James Alexander Douglas

Scott, so clearly, there are some macros that are impacting everyone. I think the largest right now is fuel prices and the reduction of food assistance or SNAP programs, and that's impacting retail. GLP-1s are also impacting volume, but there's a positive and a negative. The negative is volume goes down, the positive is that healthier food goes up. So those are the 3 macros. Ultimately, retailers respond to it differently. And our exposure is attached to how our $90 billion target addressable market retailers action against the environment they're in.

And as I mentioned earlier, broadly speaking, they're making sure that their value is right. They're making sure that their assortment is right, and then they're continuing to work on their in-store experience depending on what their strategy is. Ultimately, the environment is dynamic. And if you look at the chart we have that goes back 20, 25 years, and that certainly includes all the time that I've been in the industry, I've never seen the industry not be dynamic. There have been periods of time when the macros were particularly challenging.

But if you look at it over time, the winners win regardless of the environment. And to some degree, there's a fair amount of opportunities that companies see when things are challenging to double down on their proposition. Now I don't want to be Pollyanna. We have to work on it. We have to be efficient. We have to improve our execution. We, at UNFI, think the opportunities to improve our service to our customers are significant and enduring, and we're relentlessly focused on them, and that's particularly important in this environment.

Scott Mushkin

That's great. So my second question is more of a long-term question. And obviously, you've gotten back -- you're going to be at 2x. So if you had to prioritize capital, organic growth versus M&A, buyback versus dividend over like a 3- to 5-year period, not like this year, because you're going to have free cash flow, it looks like at least a $300 million going forward. How would you structure that and think about that?

James Alexander Douglas

So we continue to generate strong cash flow. You saw the $560 million in the last couple of years, outlook for 2027 at the midpoint, $300 million. But again, reinvesting the same amount into CapEx. And for now, our focus is really to delever, go below 2x as we mentioned, and then continuing to find opportunities for organic investments with high returns and discipline. And this morning, we announced a new $200 million share buyback program. The Board approved that. So it's a combination of strong operations, strong free cash flow, continue to deleverage, reinvest into strong organic investments and then look for opportunistic ways to return money to the shareholders. And while doing that, we will continue to optimize our capital structure. We took the unsecured bonds down $150 million that generates interest savings. We refinanced the ABL with some savings. We repriced the term loan and generated savings. So it's a very comprehensive set of mechanisms to deleverage and continue to optimize the structure.

William Reuter

Got it. And then just my follow-up. You mentioned the headwinds in terms of optimization in the first quarter. And then, I guess, a little bit maybe still of this onetime program that resulted in some revenue. Is the underlying growth rate of the first quarter any different than your expectations for the rest of the year? Or is the difference in commentary about revenue growth 100% based upon just those items?

James Alexander Douglas

I think you've got it exactly. We see the underlying growth rate based on the performance of our target addressable market to be in the low single-digit area. And what makes it a little noisy is the cycling of the optimization and the project work with an individual customer.

Operator

Your last question comes from the line of Carla Casella with JPMorgan.

Carla Casella

I'm just following up on Bill's leverage question, just digging in. With the bonds currently callable at par and you paid down $150 million, as you noted, are there any thoughts -- do you need to keep a foothold in the bond market? Or could you go more towards loans? Or on the flip side, would you go more towards bonds, which currently you're paying less cost -- your bonds are less costly than your term loans?

Giorgio Tarditi

Carla, we continue to look at those opportunities. So the bonds will come up for full maturity at the end of calendar 2028. So it gives us a couple of years to continue to study the market. We got now the ABL and the term loan maturing in 2031. So again, that gives us a 5-year tranquility, in a way, to continue to study the market. So we'll -- under Alfredo's leadership and Sandy and all the kind of the governance that we have, we'll continue to look for opportunities to optimize our cost of interest and our capital structure. But fairly, again, early thoughts and again, pleased with what we've been able to do in the last 6 months with the bonds, term loan and ABL.

Carla Casella

Okay. Great. And then just on the subject of M&A, what is the -- are there a lot -- are you seeing more or -- fewer or more M&A opportunities? And then on the grocery side, specifically, you talked about Cub. Would you look towards more conventional grocery just to have more, I guess, test use cases to work with in your own portfolio? Or is that something where you could move away from retail over time? Any thoughts there?

James Alexander Douglas

Yes, Carla, this is Sandy. I would say, broadly speaking, that our outlook contemplates a significant priority around internal capability development. We see so much opportunity to improve the effectiveness and efficiency of the $4 billion a year that we have in operating expenses that we will continue on that path and maximize the value of our capital in terms of delivering customer benefit and shareholder returns.

As it relates to M&A, obviously, we're open to it. We continue to scan and evaluate the market. But at this stage, while we have not updated our capital allocation strategy beyond the focus on deleveraging and investing in the business and opportunistic return of dollars to shareholders through buybacks, we will continue to refresh that with the Street when we're ready. But I think if there's a bias, the bias is on improving execution for our customers and delivering value to our shareholders through internal investment rather than M&A.

Operator

I will now turn the call back over to Sandy Douglas for closing remarks.

James Alexander Douglas

Thank you. And in closing, thank you to all of our UNFI associates for delivering a strong fiscal year '26. And many thanks to our customers and suppliers for their continued trust and partnership. We are heading into fiscal '27 with solid momentum, a stronger financial foundation and a continued focus on executing our value creation strategy. While there is still much more work to do and much improvement to capture, we remain committed, and we believe we are best positioned to help our customers and suppliers differentiate and grow profitably while continuing to improve the effectiveness and efficiency of our business. I'm confident we have the right team to advance our long-term strategy and create long-term value for our stakeholders. We look forward to updating you on our progress next quarter.

Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

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Signet Jewelers (SIG) Fiscal Q2 2027 Earnings Call: Guidance Raised on Credit Deal

Wed, 09 Sep 2026 14:32:18 +0000

Key Takeaways

Signet Jewelers reported fiscal Q2 2027 revenue of $1.5 billion and same-store sales growth of 2.2%, marking the fifth positive comparable-sales quarter in the past six quarters.
Adjusted operating income increased 25% to $107 million, while adjusted diluted EPS rose 36%. The adjusted gross margin rate expanded 70 basis points.
Average unit retail increased 6%, supported by high-single-digit comparable growth at price points above $2,000. Bridal posted low-single-digit growth, while timepieces grew nearly 10%.
Signet renewed its consumer credit partnership with Bread Financial through December 2035. Management estimates more than $1 billion of incremental non-comparable revenue and operating income over the agreement’s life, with no loss-sharing obligation.
Management raised full-year same-store sales guidance to between flat and up 2.5% and adjusted operating income guidance to $535 million-$605 million. Adjusted EPS guidance increased by more than 10%.
The company increased its share repurchase authorization by nearly $400 million and plans to initiate a $125 million accelerated share repurchase in September.

Core Financial Results

Metric	Fiscal Q2 2027 result	Change or context
Revenue	$1.5 billion	Same-store sales increased 2.2%
Average unit retail	Up 6%	Driven mainly by sales mix and strength at higher price points
Adjusted gross margin	Approximately $600 million	Margin rate increased 70 basis points
Merchandise margin rate	Up 20 basis points	Included $13 million of tariff refunds above expectations
SG&A expense	Down $12 million	Expense rate improved 60 basis points
Adjusted operating income	$107 million	Up 25%; margin rate expanded 140 basis points
Adjusted diluted EPS	—	Up 36%
Ending inventory	$2.0 billion	Down 1% despite higher gold costs
Cash	Approximately $525 million	Up nearly $250 million year over year
Year-to-date free cash flow	—	Improved by more than $10 million year over year

Free cash flow benefited from inventory discipline and an improvement of one week in vendor payment terms. These gains were partially offset by incentive compensation payments and higher cash taxes.

Business and Operating Performance

Sales at price points above $2,000 increased at a high-single-digit comparable rate. Management attributed the quarter’s 6% increase in average unit retail primarily to mix, including stronger performance at Signet’s core brands and higher price points.

Bridal comparable sales increased at a low-single-digit rate. Fashion declined 1%, reflecting weakness at Banter and lower-priced metal jewelry, partly offset by growth at middle and higher price points. Timepieces remained a source of strength, with comparable sales growth approaching double digits.

Blue Nile generated 10% sales growth, although its results are excluded from Signet’s comparable-sales calculation. The company plans to convert more Blue Nile showrooms into full-service stores and introduce Bread Financial credit to Blue Nile customers before the holiday season.

Signet has launched redesigned customer-facing websites for Kay and Jared, with Zales scheduled to follow later in September. Management said early results showed better customer engagement, higher average order values and increased interaction with product pages. The changes focus on navigation, product presentation, on-model imagery, video and curated shopping experiences rather than a replacement of the underlying technology platform.

The company also introduced Kay’s “Love All In” campaign as part of a broader effort to modernize marketing and expand the occasions and relationships represented by the brand. Marketing spending declined during the quarter, while social media impressions and customer consideration increased at Kay, Zales and Jared.

Bread Financial Agreement and Capital Allocation

Signet renewed its primary consumer credit partnership with Bread Financial for an additional seven years through December 2035. The new agreement introduces profit sharing that was not included in the previous arrangement.

Management estimates the agreement will generate more than $1 billion of incremental non-comparable revenue and operating income over its life. The expected operating benefit is $200 million-$250 million over the next 36 months, with profit-sharing rates increasing over time rather than accruing on a straight-line basis.

For fiscal 2027, Signet expects $30 million-$40 million of non-comparable revenue and gross margin benefit. The company also expects to receive approximately $80 million of cash in fiscal Q3 following the agreement’s signing, which will be recognized ratably over the contract term.

The credit portfolio will remain owned by the third-party provider and will not be carried on Signet’s balance sheet. Signet will not share in portfolio losses. Management expects most of the agreement’s economic benefit to flow through over time, although some funds may be reinvested in customer experience and credit capabilities.

Signet increased its share repurchase authorization by nearly $400 million and announced a $125 million accelerated share repurchase. After completing the ASR, the company expects to have $575 million of authorization remaining and to have repurchased approximately $325 million of shares year to date.

Management Guidance

Guidance metric	Updated outlook
Fiscal 2027 same-store sales	Flat to up 2.5%
Fiscal 2027 adjusted operating income	$535 million-$605 million
Fiscal 2027 adjusted EPS	Guidance increased by more than 10%
Fiscal 2027 tariff refunds	$30 million, including $15 million realized in Q2
Fiscal 2027 capital expenditure	$150 million-$180 million
Fiscal Q3 same-store sales	Down 1% to up 2%
Fiscal Q3 adjusted operating income	$31 million-$48 million
Implied fiscal Q4 comparable sales	Down 2% to up 3%

Management attributed approximately two-thirds of the adjusted EPS guidance increase to the Bread Financial agreement, tariff refunds and additional share repurchases. The remaining one-third came from core operating performance.

The company expects full-year gross merchandise margin expansion, driven by the second half. Merchandise margin is expected to be flat to slightly higher in the back half, supported by pricing and assortment changes.

Signet expects full-year SG&A leverage but modest second-half deleverage. The latter reflects an additional $17 million-$25 million of incentive compensation expense associated with the higher outlook and the expected cash from the credit agreement.

For fiscal Q3, management expects $7 million-$9 million of tariff refund benefits and $12 million-$16 million from the new credit agreement. Approximately 40%-50% of the incremental incentive compensation expense is expected in the quarter.

Risks and Areas to Watch

Tariffs and elevated gold costs remain margin pressures. Management noted that tariff refunds do not fully offset the current-year tariff headwind, while the timing of indirect tariff refunds remains uncertain. Signet assumes no material indirect refund in fiscal 2027 but currently expects a similar or somewhat larger benefit than this year’s direct refunds in fiscal 2028.

The company is also accelerating holiday inventory receipts ahead of potential sanctions affecting countries that import Russian energy.

Higher gold prices have contributed to unit resistance at lower-priced metal jewelry, particularly at Banter. Management said this pressure is incorporated into guidance and is being addressed through product design, pricing, assortment mix and vendor collaboration.

Holiday performance remains important to the full-year outlook. Management expects consumers to remain focused on value and plans to maintain promotional discipline while using a broader range of brands and price points.

Analyst Q&A Highlights

Management said confidence in the second-half outlook is based on consistent execution, website improvements, inventory and SKU rationalization, refreshed merchandise, the Kay brand campaign and stronger holiday planning.

On average unit retail, management said the 6% increase was driven more by mix than pricing. The company expects near-term growth to continue leaning toward higher average unit retail, but its longer-term objective is a combination of modest unit growth and stronger average unit retail.

Regarding the Bread Financial agreement, management emphasized that the benefit is incremental to Signet. Most of the economic value is expected to flow through, although the company may reinvest some proceeds. Signet is not currently considering adding leverage against the expected credit agreement income.

Management said the redesigned Kay and Jared websites have produced encouraging early indicators, including improved engagement and higher average order values. These benefits are included in the company’s outlook, but management did not quantify them separately.

Full Earnings Call Transcript

Complete Earnings Call Transcript

Management Remarks

Operator

Hello, everyone. Thank you for joining us, and welcome to the Signet Jewelers Fiscal Year 2027 Quarter 2 earnings. [Operator Instructions] I will now hand the conference over to Rob Ballew Senior Vice President, Investor Relations and Capital Markets. Please go ahead.

Robert Ballew

Good morning. Thank you for joining us for today's earnings conference call. During today's discussion, we will make certain forward-looking statements. Any statements that are not historical facts are subject to a number of risks and uncertainties. Actual results may differ materially. We urge you to read the risk factors, cautionary language and other disclosures in our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. Except as required by law, we undertake no obligation to revise or publicly update forward-looking statements in light of new information or future events.

During the call, we will discuss certain non-GAAP financial measures. For further discussion of the non-GAAP financial measures as well as the reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures, investors should review the news release we posted on our website at ir.signetjewelers.com. With that, I'll turn the call over to J. K.

James Symancyk

Thanks, Rob, and good morning, everyone. I'd like to start today by thanking our Signet team. Your commitment and execution of Grow Brand Love is inspiring. We're building something great. So thank you for being a part of it. There are 3 key takeaways I'd like to leave you with today. First, we delivered another solid quarter with positive comps, now 5 of the last 6 quarters with positive comps each month of the quarter and drove more than 35% adjusted EPS growth. Second, we are accelerating our key brand initiatives, including merchandise refreshes enhancements to both the online and in-store customer experience and a more modern emotionally engaging marketing approach as we look to drive a positive comp over the holiday.

Third, we have growing confidence in our ability to deliver this year, and we're raising guidance for the second time. We had a solid quarter with comps up over 2%, reflecting high single-digit comp growth at price points over $2,000, including a strong Mother's Day. Time pieces continue to deliver strong category comp growth up almost double digit to last year. We delivered low single-digit comp growth in bridal led by stronger sales performance. Fashion saw a 1% comp decline, reflecting decreases in comps at banter and lower price points in general, largely metal pieces with nice sales growth at middle to high price points.

Beyond top line, we continue to navigate tariffs. This quarter reflects diligent and ongoing work from our team, led by Stacy Johnson Williams, who continue to minimize the impact of ongoing tariffs and pursue any and all available refund of direct tariffs previously paid. They are also actively working with our valued vendor partners to pursue recovery of any applicable indirect IEEPA tariffs and continue to build on further supply chain opportunities. The speed and agility of our team in their efforts here is a direct reflection of our improved operating model.

Looking forward to the second half, we have several initiatives working to differentiate Signet's brands. This week, we're introducing an important evolution of Kay, one of the most recognized jewelry brands in the U.S. We're building on Key's strong foundation with Love All In, a new campaign that brings a fresh expression of love to the Kay experience from our imagery and language to how and where consumers engage with the brand. The goal to Love All In is to move Kay from an idealized expression of love to something much more real and authentic while also expanding the occasions and relationships we can celebrate with them.

As we mentioned on the last call, we have redesigned the websites for Jared, Kay and Zales. We have launched both Kay and Jared and early results are promising. We expect Zales's to launch later this month. I'd encourage you to visit the Jared and K sites now. You'll immediately notice better imagery and product presentation that includes more realistic on model photography to help customers buy with confidence. A simpler navigation structure helps customers get to the right product faster alongside curated experiences that work to connect inspiration directly to product.

In short, it's a more modern, intuitive and inspiring shopping experience. This creates a foundation for digital growth by including deeper personalization, agentic discovery and greater omnichannel connectivity. I'd like to take a moment to thank our digital and technology teams. You delivered ahead of schedule while serving customers without disruption, and you've positioned us well for an important Q4 ahead. Alongside those efforts, we continue to transform our marketing playbook while driving efficiency and spend.

For example, we reduced marketing spend this quarter while driving positive comps and increased social media impressions, including unpaid impressions with the strongest increase in efficiency at our 3 largest brands. We also saw those 3 brands, Kay, Zales and Jared increase their customer consideration in the second quarter. Proof points like these give us confidence that stronger storytelling drives better brand engagement.

We believe the combination of our marketing playbook and refreshed websites can continue expanding reach and engagement to drive conversion through digital experiences that reinforce brand distinction rather than relying solely on paid traffic. Importantly, ahead of holiday, we've invested in opportunities within our assortment and across price points. We know the consumer is always focused on value across income brackets. And we will leverage the full strength of our portfolio to drive differentiation and serve customers.

This means both narrowing and deepening of top performers as well as fortifying trends and fast-following successes. We believe we are well positioned to deliver compelling value throughout the holiday season. and have provided more flexibility within our strategic vendor base to react quickly to trends.

Turning to my final takeaway today, we have growing confidence in our ability to deliver this year as we raised guidance for the second time. We are driving consistent results with momentum and focus. We're taking deliberate actions to strengthen our brands, deepen customer engagement and create long-term shareholder value.

Before I hand things over to Joan, I'd like to formally welcome our new Zales and Blue Nile Presidents. Jamie Cygielman, our new President for Zale's and Banter was most recently with Mattel, serving as Global Head of Dolls, which included leading the American Girl and Barbie lines. Jamie brings 30 years of experience building and transforming long-standing, well-known brands. Pam Cloud, our new Blue Nile President, joins us with more than 30 years of luxury retail experience. including more than 25 years with Tiffany & Company, a merchant at her core PAM understands the power of signature and proprietary collections as key to driving brand affinity.

With Jamie and Pam rounding out our brand leadership team, we believe we now have the right leaders aligned to the right strategy and the momentum to bring Grow Brand Love to life at scale. I'm excited for what this team will accomplish as we continue shaping the future of Signet. Summarizing my key takeaways today. First, we delivered another solid quarter with positive comps, now 5 of the last 6 quarters with positive comps each month of the quarter and drove more than 35% adjusted EPS growth.

Second, we are accelerating our key brand initiatives, including merchandise refreshes, enhancements to both the online and in-store customer experience, and a more modern emotionally engaging marketing approach as we look to drive a positive comp over the holiday. Last, we have growing confidence in our ability to deliver this year and we're raising guidance for the second time. With that, I'd like to turn it over to Joan.

Joan Hilson

Thanks, J.K., and good morning, everyone. We are pleased to announce that we have proactively signed an early renewal with our primary consumer credit partner, Bread Financial. After a competitive bidding process fueled by the strength of the portfolio. The new agreement extends the partnership an additional 7 years through December of 2035. The renewal includes a new profit sharing agreement that we estimate will generate over $1 billion to Signet in incremental noncomp revenue and operating income over its life. This includes roughly $80 million of cash expected to be received in the third quarter in conjunction with the signing of our agreement, which will be recognized ratably over the term.

We estimate an operating benefit over the next 36 months between $200 million and $250 million. And thereafter, the amount should increase through the term of the agreement. We expect between $30 million to $40 million of noncomp revenue and gross margin benefit this year, partially offset by higher incentive compensation. Importantly, there is no loss sharing within the agreement. This is incremental to our current profitability and is still expected to provide significant benefit to Signet even across recessionary scenarios.

In addition to the direct financial benefits, the agreement will also bring a number of customer enhancements over the next 12 to 18 months. These will focus on continued tech investments, robust analytics to enable data-driven marketing as well as an improved customer experience and credit capabilities to support customer needs, including cross-shopping amongst Signet brands. Additionally, we plan to offer credit from Bread Financial to Blue Nile customers for the first time ahead of this holiday season.

With this announcement, I'd like to thank our financial services team, which is led by Lisa Walker and also Vince Ticleni for their work, which brings tremendous value to shareholders and our customers.

Turning to progress on Blue Nile. We are doubling down on what makes Blue Nile differentiated within the Signet portfolio. Blue Nile has served as a diamond education resource since 1999. And we believe serves as one of the first touch points for consumers on their shopping journey. Building on this foundation, we'll be announcing a new luxury partnership in the coming weeks reinforcing the rarity and enduring value of natural diamonds while continuing to provide customers with exceptional choice across diamonds and other Gem stands.

Additionally, we will be transitioning more of the Blue Nile showrooms to full-service stores with an increased availability of on-hand assortment, particularly in the new collections. While not included in our comp sales, the brand delivered 10% sales growth this quarter. Now turning to the quarter. Revenue was $1.5 billion with comp growth of 2.2% and reflective of AUR growth of 6% with growth across channels and amongst categories, including bridal, time pieces and services.

Adjusted gross margin was roughly $600 million for the quarter, with rate up 70 basis points. Merchandise margin increased 20 basis points, reflecting a core performance in line with expectations and an additional $13 million of refunds of tariffs previously paid above our expectation. This offset a significant increase in gold costs and a higher effective tariff rate. SG&A expense decreased $12 million to last year, driving a 60 basis point rate improvement from operating model changes and continued spend discipline.

Adjusted operating income increased 25% to $107 million, driving 140 basis points of rate expansion. Adjusted diluted EPS increased 36%, reflecting operating income growth, higher interest income and a lower diluted share count. Now turning to the balance sheet. Inventory ended the quarter at $2 billion, down 1% to last year, even including the impact of gold costs.

Cash ended the quarter at roughly $525 million up nearly $250 million to this time last year. Free cash flow year-to-date improved by more than $10 million to last year driven by inventory and vendor payable management, improving by one week, partially offset by incentive comp payout this year as well as higher cash taxes.

Turning to share repurchases and capital allocation. With the new credit deal, core performance and our outlook, we are stepping up the pace of share repurchases while remaining committed to a strong balance sheet. To this end, this morning, we announced a nearly $400 million increase to our share repurchase authorization and a $125 million ASR and that we intend to initiate this month. Net, we will have $575 million of authorization remaining and repurchased roughly $325 million year-to-date after the completion of the ASR.

Combined with dividends, we'll have returned 12% of our recent market cap in the first 9 months of this year alone. With last year's free cash flow as a baseline and adding the benefits of the new credit deal, our shares trade at a pro forma yield of nearly 20%. Accordingly, we believe Signet shares remain undervalued and that share repurchases and attractive organic investments remain the best uses of capital to create value for our shareholders.

The incremental cash from the new credit deal will only increase our ability to invest in both of those. To recap, we delivered another quarter with positive comps and margin expansion leading to 36% adjusted EPS growth. We strengthened our balance sheet, signed a credit agreement adding meaningful value and are significantly stepping up our return of capital to shareholders while ultimately increasing our adjusted EPS guidance by over 10%.

Turning to guidance. We are raising our guidance for the year to reflect first half performance, a modest increase in expectations in the back half of the year, the improved economics from the credit renewal, refund of tariffs previously paid and additional share repurchases. For the full year, we now expect the same-store sales range to be flat to up 2.5% and increasing the low end guide 75 basis points. This reflects AUR and unit trends in the back half, similar to those in the first at the midpoint.

We now expect adjusted operating income between $535 million and $605 million, up nearly 10% or $50 million at the midpoint. This range includes the benefit from the new credit agreement and $30 million of refunds on tariffs previously paid, inclusive of the $15 million realized in Q2 and primarily direct refunds. Of note, the refund represents less than half of the net headwind from incremental tariffs in the current year. With respect to indirect refunds, we're assuming no material amount in the current year. However, timing on refunds of indirect tariffs paid is still fluid.

At this time, we expect indirect refunds to benefit fiscal '28 at a similar level or somewhat higher level than direct refunds this year. We are also actively working to accelerate holiday receipts in advance of any potential sanctions on countries that import Russian energy. As a result of these changes, we now expect GMM expansion for the full year, driven by the back half.

Turning to SG&A. We expect to show leverage in SG&A for the entirety of the year across the range with modest deleverage in the second half of the year. The deleverage in the back half reflects $17 million to $25 million in higher incentive comp expense as a result of the increase in our guidance and the expected cash from the new credit agreement. In addition to the above, we are also increasing fiscal '27 adjusted EPS guide to include additional share repurchases as well. In aggregate, our guidance range is increasing by over 10%.

Finally, for the year, we continue to expect $150 million to $180 million in capital expenditures. For the third quarter, our smallest quarter of the year, we expect a same-store sales range of down 1% to up 2% with adjusted operating income between $31 million and $48 million. This quarter, we expect $7 million to $9 million of benefit from refund of tariffs previously paid. We expect to benefit in the quarter from the new credit deal beginning in September in the range of $12 million to $16 million.

We expect 40% to 50% of the incremental incentive comp expense noted a moment ago to flow into the third quarter, causing modest SG&A deleverage. Before we turn to Q&A, I'd like to thank our team for their continued commitment and the execution of our Grow Brand Love strategy. Operator, now let's go to questions.

Operator

[Operator Instructions] Your first question comes from the line of Randy Konik with the Office of Jefferies. Please go ahead.

Question-and-Answer Session

Randal Konik

Yes. I guess first, J.K., when you think about your conviction and confidence for the back half of the year. What in your strategy or the recent strategies you've taken on and an execution improvement on the team and in different areas of that are giving you that confidence and conviction to kind of do well in that and continue this momentum into the back half of 2026.

James Symancyk

Yes. Randy, thanks for the question. I think you answered part of the question the way you asked it, honestly. It starts with consistent performance within the business. The fact that I felt like it's important that we've established credibility and accountability to do what we say we're going to do. And that's a track record this team has built. And that mantra of performing while we transform the business is an important part of what gives me that confidence.

I think the second this is a busy quarter, and it's evidence that we're doing a lot of things to really make the business better, both in the short term and the long term. And whether that's what we talked about with website redesign, some of the improvements in the core business, the credit deal, the underlying skew and inventory reduction that we're seeing across the business despite some of the external factors that might make those moves more challenging. The improvements we're seeing across merchandise programming, the relaunch of Kay's brand platform all of the strength of holiday plans that we know are coming.

That all gives me confidence, and I think, in particular, coming against a backdrop that has really tested those strategies and the way that our team has navigated that change is the other thing that really helps me have much more faith in our ability to affect our will on the outcome. And I think that's probably the third leg of the stool. It's -- we've got the right team in place. And I don't think you accomplish all these things if you don't have the right talent deployed against the right strategy. And when I look at that and I think about some of the things we talked about that are clearly adding value to the business in this quarter really does position us to strike that balance between improving short-term results.

But also gives us the fuel to invest in these things that we believe are going to create long-term value for both customers and ultimately, shareholders.

Randal Konik

Super helpful. And I guess, for Joan, one thing that we keep kind of telling people is to buy the math, and that means look at the cash flows that Signet generates and not just -- the overall cash flow, but the free cash flow like that. So maybe kind of give us a reminder on what you think is base level of free cash flow from an ongoing standpoint to give us some perspective of how you think about the CapEx needs of the business. You gave us a little math there before. .

And then maybe talk about, I guess, a couple of quarters ago, you gave us a change in philosophy on -- in terms of the financial capacity, I think you said you had like [Technical Difficulty] financial flexibility. You get down to the $1.5 billion, meaning you're more growth with the [Technical Difficulty] that's award of cash, but also cash flow. Just kind of give a perspective on that how we should be thinking about that going forward in already kind of put to ASR sounds like you need progressive privity board often. Just give us a bit more discussion on this topic.

Joan Hilson

Well, thank you for the question, Randy. I would say that the last part of the question, I think we were able to get the intent of the question. You were breaking up a bit. But to start off, the baseline cash flow, what I would share with the -- on the call here is that we are continuing to drive inventory discipline. One is you saw that we were down 1% in overall inventory even with gold costs, J.K. mentioned, inventory and SKU rationalization to really improve the health of our inventory. And so that's a lever we continue to pull spend discipline is another lever that we continue to pull.

And then the vendor payables, I noted in my prepared remarks that we have improved the days payable outstanding by 1 week, which is a meaningful change in our business. So applaud the teams for working with our vendors to really drive that improvement for us. And so we continue to drive free cash flow in a similar fashion while improving inventory and our vendor terms and agreements that we have. So continued positivity there.

As we look at our principles on capital allocation, we see a floor of liquidity at $1.5 billion. And we consider anything above that, and we can't target that at the end of the year, but we consider anything above that to be excess cash on the -- within our cash opportunities and number one, organic investment. J.K. talked about them -- we are investing in the website redesign. That is going well. So we'll continue to identify opportunities such as that to continue our organic investments, including our fleet.

We talked about $150 million to $180 million of capital investment. That's in our guidance. So that's, we think, an important use of capital. And beyond that, returning excess cash to shareholders is a very high priority for us. We talked about on the call that if you just use the baseline of FY '26, it's a pro forma 3% yield, and we believe that we have an attractive value within our stock and continue to prioritize the share buybacks. We also noted that we increased the authorization of our share buyback program.

And on the completion of our ASR of $125 million, we'll have $575 million remaining. So believe that we have a good capital allocation plan and priorities and look forward to continuing to drive that forward.

Operator

Your next question comes from the line of Paul Lejuez with Citi.

Paul Lejuez

Or if you could talk. I think you said you changed something in the back half of your guidance slightly. Just curious if you could talk about what that was, any comments about third quarter to date? And then on the credit agreement, I think you mentioned, Joan, the $200 million to $250 million in profit over the next 36 months. Can you just go into a little bit more detail on how that flows? I think you said $1 billion overall over the life of the agreement. So can you just talk about the difference between the next 36 months and then what happens beyond?

Joan Hilson

Sure. So if we first address the guidance question in the back half, we raised the midpoint of our same-store sales guidance for the full year, 37.5 basis points. So -- and that's based on the year-to-date performance and slightly higher expectations for the second half and we raised the low end by 75 basis points. So I say the same rate the low end 75 bps based on performance. We increased our adjusted EPS guide by 10% for the year, reflecting the year-to-date performance as well as the new credit agreement, the refund of tariffs previously paid and then the additional share repurchases.

So basically, 2/3 of that raise came from the newer items that I just mentioned and 1/3 came from the core performance. We're pleased with the performance in margin on the core business. We were at expectations in -- for the core performance in the first half of the year and see the back half flat to slightly up. So continuing to manage the merchandise margin well, the team has done a good job, as J.K. noted in his remarks.

And then we expect modest A leverage for the year including the increase in incentive comp. So -- and that's a $17 million to $25 million higher SG&A cost to us. So feel that with the management of merchandise margin, the management of spend discipline and really harvesting the benefits of our operating model shift, we've been able to really post up and raise our guidance for the year. And so we're very pleased with that.

With respect to the third quarter to date. As you know, we do not comment on intra-quarter performance as part of our practice. But what we can say is that we're currently well within the guidance range provided for the third quarter. And then with respect to the Bread deal, we are very much pleased with the partnership with the Bread Financial team and what I was sharing is that the economic benefit over the term of the agreement is greater than $1 billion through 2035.

And importantly, that includes consideration for any sort of recessionary activity, and that's important to note that there's no loss sharing within this agreement. So we feel confident in terms of the benefit that we've provided over the -- to $1 billion over the term of the agreement. It's a quarterly profit sharing, which is recorded as revenue and incremental operating income. And it is -- when you think about the $200 million to $250 million, that's over 36 months. And what that reflects is just a profit sharing on the performance of the portfolio as well as there are other elements of benefit to Signet economically within that range.

Joan, thanks for all the help on the credit agreement and the benefits. Just on a super simplistic level, is the benefit expected to, over the next 3 years, effectively take EBIT up 50% outside of any organic benefits to the business? Or would you expect some of those dollars to be reinvested or a good portion of those dollars will be reinvested into the business. So I'm just asking because it's a meaningful impact to your EBIT. And so I'm just kind of curious how we should think about the models building over the next 3 years because of it.

Can you talk a little bit about the performance of Fashion ex-Panther and then the role that LeBron is playing in that fashion performance?

James Symancyk

Yes, sure. We continue -- I think one of the things that is important to note on our breakdown, fashion is pretty much everything that's not bridal. So on the whole, I would describe it as flattish with banter. With the same comments we outlined in the call is driving more growth on the high end and the middle end. And then anything that is sort of in the lower end exposed has been where they're soft if that really is all tied to metal. And as we've seen -- as we move forward, we have confidence in both plans and what we've got in the pipeline in terms of new receipts and new programs for the holidays as well as how we're seeing the customer adjust to the new normals with gold that we feel strong about that performance.

Within fashion, I mentioned higher price points is an opportunity. We've seen strength there. Natural Diamond, we continue to see as an opportunity lab-grown diamond fashion still coming off of a low base, obviously, because so much of fashion has been without stone in our business but is driving growth for us. And then even though we don't carve it out time pieces is really a source of strength across the business that has kind of flirted around the double-digit growth line for a couple of years now. So I feel good about fashion.

I think as we go into the back half of the year, also more optimistic around some of the plans we have with men's, which has driven growth, color, which I think is an opportunity in our assortment today that we address moving forward. So looking to build on that momentum and really extended across all price points.

Operator

Your next question comes from the line of Mauricio Serna with UBS.

Mauricio Serna Vega

Great. I guess just maybe you alluded a little bit to the back half of the year, specifically for Q4, what's the implied comp in your guidance at the low versus the high end? And maybe you also talked a little bit about the promotions. Maybe could you elaborate a little bit more about what you saw in promotions this quarter on a year-over-year basis? And what are your expectations for the holiday season?

James Symancyk

Yes. Let me take promo first. I mean I think Joan hit it, importantly, we've maintained some really good discipline there and have really been -- I've been proud of the team's ability to manage that. I think we found ourselves in a position this last year, Q4, where given the start, we were a little more promotional going into it. I think we are much more confident of not only our base plan and the way we're attacking those kind of 3 parts of the season, how we're leveraging the strength of the portfolio.

I think we're more coordinated across our efforts going into the holiday this year. But we also have better contingency plans in place. And so I think you'll see that discipline hold I do believe, just given the state of the consumer that value is going to be a big story, value being sort of the right quality at the right price and really delivering on it, not necessarily meaning that in terms of high end or low end. But really, how do you set up the consumer to be motivated by value. And I think we are much more mindful of that it's reflected in our guide.

So when we talk about being well positioned for that and also going back to previous questions about margin, our expectation that we'll be able to hold and strengthen our margin performance as we go into it is something that is fully contemplated in that guidance. So we're -- that's what we're seeing. We're not seeing any sort of elevated or crazy promotional response from others in the industry right now. And so I think we've got the right kind of measured approach to make sure we've got the right value proposition to win during the quarter and also still deliver on the improvements that we're talking about.

Joan Hilson

Mauricio, to your question on the implied guide, the top line range is implied at minus 2% to plus 3% and it's an increase of approximately 25 basis points on the low end and 60 basis points on the high end, reflecting current performance. And then I would just articulate here that at the midpoint, we see ample opportunity in the fourth quarter for benefit for us. And where our 2- and 3-year stacks are -- if you look -- if you do the math, it's down low single digit on the 2-year and flattish on a 3-year. So I believe that there's ample opportunity in that quarter for us to really bring home a nice performance.

Mauricio Serna Vega

Got it. Very helpful. And then just one quick follow-up on the new credit agreement. I guess can you just give like a high level, what drives these benefits that you're going to get. What changed versus the previous credit agreement? And just to confirm that, that would still imply that you don't have -- you're not going to carry the credit in your balance sheet, right? I would assume that kind of continues to be the case.

Joan Hilson

Thank you for the question. Yes, it is not the credit portfolio, but will not be carried on our balance sheet. It is owned by the third-party credit provider. The change in the agreement is at the highest level, it's a profit-sharing agreement, which we did not have in our previous agreement. We're very pleased to be able to bring that through a competitive bidding process. And it was really on the strength of the portfolio that we have today and is something that our partners see as beneficial to both of us.

And so the profit sharing is something that we feel we'll both benefit from, but also the key point in that, Mauricio, is that there is no loss sharing. So if -- for example, if there was not a loss in the portfolio that would not impact, we would not share in a loss. And in fact, there are other revenue-generating opportunities with the agreement, which are all factored into the view that we gave of over $1 billion in benefit over the term of the agreement.

So we believe it's a very strong agreement for both parties and one that will really serve our customers well because we'll be able to continue to bring financial services offerings to them that enable cross-shopping and we're launching the Blue Nile credit card for the first time it had a holiday. We're really pleased with being able to do that in such a quick fashion. So overall, it was a very favorable outcome, we believe, for both of us.

Operator

Your next question comes from the line of John Keypour with Goldman Sachs.

Jonathan Keypour

Just a quick one on the credit agreement. I was just wondering if you mentioned that the economics improve, right, the sharing ratios increased over time. I'm just curious if there are like provisos or anything you have to accomplish for that to happen or if it just naturally scales as part of the deal?

Joan Hilson

That is part of the arrangement that we have in our agreement. There's no threshold. .

Jonathan Keypour

Okay. And then a follow-up just on unit growth. You mentioned you called out in the press release the higher ticket items did very well, high single-digit growth, but you flagged in the past that the sub $250 or the sub $150 like the cheaper it gets, the harder it gets to sell. I'm just wondering what you saw at that end of the latter and my understanding is that the lower priced items are actually quite high margin. So how does that factor into the margin expectations for the second half of the year?

James Symancyk

Yes. No, I appreciate the question. I mean the simple answer is it's all contemplated in the guide. We saw performance in Q2, consistent with what we expected. I'll remind you that a disproportionate amount of our unit performance happens within banter and our core brands happens online. It is outsized relative to what its contribution to revenue is. And so I won't go through all of all of those numbers, people are probably tired to hear me talk about price points and doing that math.

But we have actually taken actions as it relates to new receipts and the holidays that we believe fortify those positions. We're seeing -- we've tested a lot through Q2 and into Q3 that really informs that confidence. And those receipts, as we've talked about on these calls before, all happened to flow through and really September. And so it was consistent performance with what we had seen and consistent to what we had guided to.

And I would say one important distinction, I know there was a lot in the script, so I'll reiterate this, just in case anybody missed it. While we've got confidence in the plans that we have in place to improve it, we also haven't dimensionalize big changes in performance by price point as we look at the guide for the back half of the year. We think it -- so that guide reflects the consistency we talked about.

On your question around margin, yes, I mean, it's -- we have seen -- we've seen margin rate expansion modestly in the back half of the year. The guide contemplates that. And we've been able to manage mix. I think the reality is the percents obviously change and look a little more attractive on some of the lower price point goods. But the contribution and the flow-through on the higher price point is still really good and accretive for our business. And so where so much of our business happens is in that mid-tier and we've seen really good stability there.

And so no real callouts other than what we've talked about before. We continue to see an opportunity for some rate expansion in the back half of the year. As Joan put it, we saw improvement to the trend and saw that margin fall exactly where we thought it would for Q2 once you strip out tariff refunds. So feel good about where we're positioned going into the next -- this back half.

Operator

Your next question comes from the line of James Sanderson with Northcoast Research.

James Sanderson

Congratulations for a great quarter. Just wanted to go back to outlook for the rest of the year. You mentioned e-commerce platform improvements at Jared's and at case, wondering if you can take those learnings and help us understand how that might be a benefit to Zales going forward and if those benefits are part of your guidance already?

James Symancyk

Sure, Jim. And I'll clarify one thing you said just to make sure everybody is on the same page. It's not a platform change, it's user experience redesign. So the only reason I think that's important is obviously -- the more you best with the back end, the more you introduce potential challenges, that's not what we've done with our websites. Back end is functional. Companies invested a lot over the last several years to make the back end sound.

So when you think about that interworking were where we have fallen short, really was and our -- what does customers see and how do we connect with the customer in a way that they shop most today. And so we've redesigned that front-end experience for our 3 largest brands, Kay, Zales, Jared. We have launched live already, Jared and Kay. And what we said in the call is early results are promising. I think we didn't give specific numbers because I think it takes more than 2 or 3 weeks for us to start reporting on something like that, but we've come out of the gate strong.

We're seeing better engagement from customers. We're seeing average order value increases. We're seeing engagement with our product display pages higher. And all of those things bode well as you move into a critical time period for our for our -- for that to be a bigger part of our business. Importantly, too, we did all this no negative impact. This was -- our team did a tremendous job of managing all of this on the back end, running in parallel and flipping a switch in a time period where it frankly was seamless.

And so I really, really appreciate the work that went into it. We will launch Zales later this month. That gives us plenty of time to do 2 things, really: one, to really rebuild natural search algorithms and all the things that happen when you start to change content. But two, it also gives us an opportunity to learn where customers are engaging the most and how to best leverage those improvements in a way that we can play offense.

And when it's all said and done, I mean, it may sound soft, but better imagery, realistic on model presentation that really does help a customer imagine style and trend differently and how it might fit them. Much simpler navigation, they're sort of shoppable editorial and the ability to navigate the site and shop in a more modern, intuitive and frankly, more inspiring content. Part of that redesign is not just the wire frames of the page, but it's updated content, all new photography, imagery, introduction of live video, better engagement that really does help, whether you're in the discovery phase for something that you know you want or you're shopping for the -- you're just looking for a thing and you're trying to be inspired.

And so really like what we're seeing from customers so far and think that it obviously is going to help us as we go through the back half of the year.

James Sanderson

All right. I had one quick follow-up question on the credit agreement. Given the magnitude of the agreement, how does this improve the flow through profitability you expect out of the business over the next several years?

Joan Hilson

We would expect -- what I mentioned, Jim earlier is that we view it as an incremental to Signet and that it gives us the opportunity to consider some reinvestment and really bring a better experience to customers with the hope of continuing to grow the credit portfolio with our partner and again, include a greater profit sharing growth for the company. So we see it as a plus an incremental benefit, and it also provides flexibility for investments. .

James Sanderson

So would you expect that to slightly improve that outlook or that target going forward? Is that the right way to look at it?

Joan Hilson

We would expect, yes, as our outlook for our operating margin to improve.

Operator

There are no further questions at this time. I will now turn the call back to J.K. Symancyk, Chief Executive Officer, for closing remarks.

James Symancyk

Thank you, and thanks, everyone, for joining our call today, and thanks once again to our team. We look forward to discussing further detail on our holiday plans and our Grow Brand Love progress in December until then. Goodbye for now. Thanks.

Operator

This concludes today's call. Thank you for attending. You may now disconnect.

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PERMA-PIPE (PPIH) Fiscal Q2 2026 Earnings Call: Sales Rise 24%, Backlog Hits $142.3M

Wed, 09 Sep 2026 14:31:56 +0000

Key Takeaways

Fiscal Q2 2026 net sales increased 24% year over year to $59.6 million, driven by higher volumes in MENA and North America.
Net income attributable to common stock rose to $2.5 million, or $0.31 per diluted share, from $0.9 million, or $0.10 per diluted share.
Results included a $3.9 million charge for an uncollectible receivable, partly offset by a related $1.6 million tax benefit. Management is not currently pursuing recovery.
Backlog reached $142.3 million at July 31, 2026, up from $121.6 million at fiscal year-end. The company expects 40% to 50% of backlog to convert to revenue in the third quarter.
PERMA-PIPE secured $67.8 million of new orders during the quarter. Its leak detection business has already achieved approximately 80% of its full-year bookings target.
Management expects both the Ohio and Qatar facilities to reach full production by early 2027, subject to gradual ramp-ups focused on quality and safety.

Key Financial Data

Metric	Fiscal Q2 2026	Prior-year period	Change / commentary
Net sales	$59.6 million	$47.9 million	Up approximately 24%
Gross profit	$17.4 million	$14.4 million	Up approximately 21%
Gross margin	Approximately 29%	Approximately 30%	Broadly consistent year over year
Operating expenses	$13.2 million	$11.2 million	Included $3.9 million bad-debt charge and approximately $0.5 million of Ohio startup costs
Income from operations	$4.3 million	$3.2 million	Higher gross profit partly offset by increased expenses
Income before taxes	$3.9 million	$2.8 million	Non-GAAP figure was $8.3 million versus $4.9 million
Net income attributable to common stock	$2.5 million	$0.9 million	Increased year over year
Diluted EPS	$0.31	$0.10	Increased year over year
Six-month net sales	$109.8 million	$94.6 million	Up approximately 16%
Six-month operating cash flow	$13.3 million	$(1.3) million	Improved cash generation

Cash and cash equivalents totaled $31.8 million at July 31, 2026, while total debt was $36.1 million. Net debt declined to approximately $4.3 million from $13.8 million at the end of the prior fiscal year. Capital expenditures were $3.2 million for the first six months.

Business and Operating Performance

Higher volumes across MENA and North America supported quarterly growth. The Ohio facility is operational and ramping production, primarily to serve data centers as well as district heating and cooling applications. The Qatar facility is also ramping to support Qatar Energy and other regional and international customers.

Leak detection remains a strategic growth area. PERMA-PIPE said the business has secured approximately 80% of its full-year bookings target, with applications spanning water, energy, oil and gas, district heating and cooling, and digital infrastructure. The company is also pursuing equipment-manufacturer partnerships and multi-year monitoring and support agreements intended to create recurring service revenue.

In Saudi Arabia, Saudi Aramco qualified a new PERMA-PIPE product line designed for the kingdom’s energy expansion program. Management also reported recovering Canadian market activity in the second quarter.

The proposed Welspun joint venture would establish manufacturing capacity in Jordan and move PERMA-PIPE into pipe manufacturing. Jordan’s National Water Carrier Program is the initial anchor opportunity, but it is not a definitive award and is not included in backlog.

After quarter-end, PERMA-PIPE closed a new JPMorgan Chase global credit facility consisting of a $75 million revolver and a $14 million term loan. The agreement also provides an accordion feature for up to $50 million of incremental capacity and up to $30 million of letter-of-credit availability.

Management Guidance

Management said PERMA-PIPE is positioned for a strong second half of fiscal 2026, barring a material worsening of market or geopolitical conditions.

The company expects approximately 40% to 50% of its $142.3 million backlog to convert to revenue in the third quarter. Substantially all backlog is expected to be completed within 12 months.

Management expects the Ohio and Qatar facilities to reach full production by early 2027. Higher utilization, improved product mix and operating leverage are expected to support margin expansion. Management described its consolidated gross-margin objective as a return to “higher than 30s.”

The company said revenue growth should outpace corporate overhead as the business scales. Its identified project pipeline exceeds $900 million, although management explicitly cautioned that PERMA-PIPE does not expect to win all of those opportunities.

Risks and Watch Items

Tariffs in the U.S. and Canada have affected some operations and input sourcing. PERMA-PIPE is seeking local suppliers where possible, but cannot source every requirement locally.
Higher shipping costs and commodity prices are pressuring margins. The company can pass through some increases, but certain short-duration contracts do not permit repricing.
Ongoing conflict and geopolitical conditions in the Middle East could affect logistics, costs and project execution.
Project-based operations can produce meaningful period-to-period volatility because award, production and delivery timing may shift.
The $3.9 million receivable was fully written off after reviewing the customer’s financial position and ability to pay. Any future collection would be recognized as a subsequent recovery.
The Jordan joint venture and National Water Carrier Program remain prospective opportunities rather than definitive awards.

Analyst Q&A Highlights

Management said the Ohio facility is geared primarily toward data-center demand and related piping systems. PERMA-PIPE believes activity in this market could remain strong through approximately 2030 or 2031, based on its market intelligence.

On margins, management emphasized that fixed-cost absorption at the Ohio and Qatar facilities is the main near-term pressure from the ramp-up process. Greater volume and utilization are expected to improve operating leverage.

The new global credit facility is intended to improve liquidity management and enable PERMA-PIPE to compete for projects exceeding $100 million, an area where management said the company had previously faced financial-capacity constraints.

Management also confirmed that the Welspun partnership would provide a manufacturing base for Jordan and the wider Levant region. The strategy targets water, energy, oil and gas, and reconstruction-related infrastructure opportunities, but none were presented as secured awards unless already included in backlog.

Full Earnings Call Transcript

Complete Earnings Call Transcript

Management Remarks

Operator

Thank you. Good day and welcome to PERMA-PIPE International Holdings' Second Quarter Fiscal 2026 Earnings Conference Call. All participants are in a listen-only mode. [Operator Instructions] Please note, this call is being recorded. If you require operator assistance, please press star then zero. I will now turn the call over to Chuck Heaton, Chief Compliance Officer and Vice President at PERMA-PIPE. Please go ahead.

Unknown Speaker

Thank you, Operator. Good morning, everyone, and thank you for joining PERMA-PIPE International Holdings' second quarter fiscal 2026 earnings conference call. With me on the call today are Saleh Sagr, President and Chief Executive Officer, and Matthew Lewicki, Chief Financial Officer. Our second quarter results were issued this morning before market open. If you have not yet seen the release, it is available in the investor section of our website at investors.permapipe.com, where an archive of today's call will also be posted. Our Form 10-Q for the second quarter was filed this morning and is available on our IR site or at sec.gov. Before we begin, a reminder that our remarks today will include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended. These include, without limitation, statements regarding the expected future performance and operations of the company.

These statements should be considered subject to the many risks and uncertainties that exist in the company's operation and business environment, and our actual results could differ materially from what we describe today. Those risks and uncertainties are described in today's earnings release and in our filings with the Securities and Exchange Commission, which are available at sec.gov and in the Investors section of our website. Those include, among others, movement in input prices and our ability to pass through input costs, the timing of order receipt, execution, delivery, and acceptance, and possible reductions or cancellations of backlog. The risks of our international operations, competitive pricing, and supplier relationships, the level of government and customer infrastructure spending, and our ability to execute our strategic plan and growth initiatives. A complete discussion of these factors appears in today's earnings release and in our filings with the Securities and Exchange Commission, including but not limited to those under the heading risk factors in the company's latest annual report on Form 10-K. We caution you not to place undue reliance on any forward-looking statement. These statements are made only as of today's date, and we undertake no obligation to update them publicly, whether as a result of new information, future events, or otherwise.

In addition, on today's call, management will refer to certain non-GAAP financial measures that management considers to be useful and differ from GAAP. These non-GAAP measures should be considered supplemental to corresponding GAAP figures. Before turning the call over to our first speaker, in keeping with PERMA-PIPE's plans to elevate our visibility and engagement with the investment community on a more proactive basis, we recently engaged Alliance Advisors as our investor relations agency of record. To follow up with IR, please contact the 847 area code number listed in our press release or via investor at permapipe.com. With that, I will now turn the call over to Saleh Sagr, President and Chief Executive Officer. Please go ahead, Saleh.

Saleh Sagr

Thank you, Chuck. Good day and welcome to our shareholders, our board members, and our employees. It is a privilege to address you today on PERMA-PIPE's second quarter earnings conference call. Today marks an important milestone in how we engage with you. Beginning with this call, we are introducing regular quarterly calls to raise PERMA-PIPE's profile with the investment community. Our goal is straightforward, to provide analysts and investors with a consistent forum in which to hear directly from us about our results, our operational progress, where we are taking the business, and to ask questions of us. I will begin today with an overview of the second quarter performance, with focus on our strategy and operational accomplishments. I will then turn the call over to Matthew to review our financial results in detail.

Following Matthew's remarks, I will return to discuss our outlook for the second half of the year, after which we will open the call to your questions. First, I would like to take a step back and give everyone a brief overview of PERMA-PIPE. PERMA-PIPE is a global leader in pre-insulated piping, anti-corrosion coatings, and leak detection systems. We deliver mission-critical infrastructure that moves, monitors, and protects energy, water, and thermal systems in demanding environments around the world. Because our work centers on discrete, custom engineer developments rather than commodity supply, we compete on engineering capability, technology, quality, and execution while manufacturing close to the markets we serve. Since I became CEO over one year ago, PERMA-PIPE has pursued a clear set of priorities. Sustainable growth, customer-centric innovation, investment in our people and culture, disciplined execution, and consistent communication with our shareholders.

We have expanded our manufacturing footprint where demand has grown, extended our reach across MENA through our joint venture in the Kingdom of Saudi Arabia, and continue to develop and commercialize technologies that address increasingly important infrastructure needs. Governments and corporations worldwide are investing heavily in infrastructure to support energy security, water security, urban development, and their digital ecosystems. Our products and solutions are increasingly aligned with these global priorities. The long-term structural demand trends across the end markets we serve, district heating and cooling, oil and gas, water security, energy, industrial, digital infrastructure are creating durable tailwinds for our business. We entered the year following a record fiscal 2025, which was defined by our strong financial performance, disciplined execution, and continued progress in our long-term expansion strategy. We delivered net sales of $210.9 million, up 33% year over year. Net income attributable to common stock was $17 million, up 89%, and we ended the year with a backlog of $121.6 million.

Building on that strong foundation, we delivered a second quarter that demonstrated continued momentum across our business. Starting with slide two, we delivered net sales of $59.6 million, up 24% year over year. We grew net income attributable to common stock, to $2.5 million, or approximately $0.31 per diluted share, from $0.9 million, or $0.10 per diluted share, in the year-ago period. After absorbing a $3.9 million charge related to an uncollectible accounts receivable balance, partially offset by a related $1.6 million tax benefit, we ended the quarter with a backlog of $142.3 million. Importantly, our second quarter was not only about financial performance, but also about operational execution. We continue to execute against strategic initiatives that we believe will drive PERMA-PIPE's growth over the long term. First, our Ohio facility, which serves as an important growth engine for our North American business, went operational and is ramping production.

The facility extends our reach, expands our ability to serve customers, supports our North American growth strategy and provides additional capacity as demand continues to develop. Second, we ramp production at our Qatar facility, which is strategically positioned to serve the world's largest LNG exporter, Qatar Energy, as well as regional and international markets. The ramp underscores the growing importance of MENA to PERMA-PIPE, and our strategy of establishing manufacturing capacity close to our customers and the markets we serve. Third, we continue to see strong demand across our core markets. During the quarter, we secured $67.8 million of new orders, including significant awards from the oil and gas and infrastructure markets, as well as new mission-critical application for our leak detection solutions. Our quarter-end backlog provides us with a strong foundation for the second half of the year.

I want to highlight the performance of our leak detection technology. Leak detection is an increasingly important component of our overall strategy. Customers and infrastructure owners are placing greater emphasis on pipeline integrity and asset protection, early detection, operational reliability, and minimizing the potential environmental and financial consequences of leaks. We are seeing tangible evidence of this market opportunity in our leak detection business has already secured approximately 80% of its full-year bookings target. This is a significant achievement and provides us with strong visibility into the remainder of the year. More importantly, we believe this is indicative of a broader opportunity. Leak detection allows us to move beyond simply supplying pipes and into providing technology-enabled solutions that monitor and protect critical infrastructure through its operating life. We see meaningful opportunities to further expand PERMA-PIPE and our distributed fiber optic sensing capabilities across water, energy, oil and gas, district heating and cooling, and other critical infrastructure framework applications.

This is an area where we believe PERMA-PIPE has a differentiated position, and we intend to continue investing in the technology, market development, and commercial capabilities necessary to capture this market potential. In June, reflecting the growth in our market capitalization, PERMA-PIPE joined the Russell 2000 and Russell 3000 indexes, broadening our visibility within the investment community. Overall, we are pleased with the progress we are making. We are expanding our capacity, strengthening our geographic footprint, growing our technology-enabled offerings, and capitalizing on favorable secular trends across the markets we serve. With that overview, I will now turn the call over to Matthew to take you through our financial results in detail.

Saleh Sagr

Matthew? Matt Perault

Matthew Lewicki

Thank you, Saleh, and good morning, everyone. Before I turn to the numbers, I have two brief notes on how we manage the business and report our financial results. First, PERMA-PIPE operates as a single reporting segment, and we manage performance on a full-year basis. As our work is project-based, the timing of individual awards, production, and deliveries can move results meaningfully between periods. Second, unless otherwise noted, analysis of our second quarter results will be in comparison to the second quarter last year. Starting on slide three, net sales for the second quarter were $59.6 million compared with $47.9 million last year, an increase of approximately 24%. For the first six months, net sales were $109.8 million compared with $94.6 million, an increase of approximately 16%.

Growth and business growth both periods reflect higher volumes in both the MENA and North America regions. Gross profit for the quarter was $17.4 million, or approximately 29% of net sales, compared with $14.4 million, or approximately 30% last year. Gross profit dollars increased approximately 21% on higher volume, while gross margins were consistent with the prior year. For the first six months, gross profit was $32 million, or approximately 29% of net sales, compared with $31.1 million, or approximately 33% in the same period last year. The year-to-date margin comparison reflects product mix across various jurisdictions in the first quarter, particularly in Canada due to seasonal factors, startup and ramp up costs associated with our new Ohio manufacturing facility. Total operating expenses for the quarter were $13.2 million compared with $11.2 million last year. General administrative expenses were $11.9 million compared with $10 million.

General administrative expenses for the quarter included a $3.9 million charge related to an uncollectible accounts receivable balance for the specific customer and approximately $0.5 million in startup costs at our Ohio facility. Last year's second quarter included a $2 million non-recurring charge related to our CEO transition. Selling expenses were $1.3 million compared with $1.2 million last year. For the first six months, total operating expenses were $23.2 million compared with $20.1 million, resulting in an increase of approximately 15%. The increase was driven principally by the $3.9 million charge previously mentioned, partially offset by the non-recurrence of a prior year charge related to an executive departure. Income from operations was $4.3 million for the quarter, compared with $3.2 million last year. For the first six months, income from operations was $8.9 million, compared with $11.1 million.

The second quarter increase reflects higher gross profit partially offset by higher operating expenses. The decline over the first quarter was $1.2 million. Six months reflects lower gross profit and higher operating expenses. Net interest expense was $0.5 million for the quarter, compared with $0.4 million, and $1.1 million for the first six months, compared with $0.8 million in the same period last year. Income before income taxes were $3.9 million for the quarter, compared with $2.8 million last year, and $7.8 million for the first six months, compared with $10.2 million in the prior year. On a non-GAAP basis, income before income tax was $8.3 million compared with $4.9 million last year. For the six-month period, on a non-GAAP basis, income before income tax was $12.5 million compared with $12.3 million in the same period last year. Income tax expense was $0.6 million for the quarter, compared with $1.5 million last year.

Our effective tax rate was approximately 16% compared with 54% in the same quarter last year. The lower rate in the current quarter primarily reflects a tax benefit of approximately $1.6 million related to the uncollectible accounts receivable, recognized during the quarter. The prior year rate reflected changes in the mix of income and loss across the jurisdiction in which the company operates, which can cause the effective rate to vary meaningfully from period to period. Our effective tax rate for the six months was approximately 25% compared to approximately 30% in the prior year period. Net income attributable to common stock for the quarter was $2.5 million, or $0.31 per diluted share, compared with $0.9 million, or $0.10 per diluted share, last year. For the first six months, net income attributable to common stock was $4.3 million, or $0.53 per diluted share, compared with $5.8 million, or $0.72 per diluted share. Turn it to the balance sheet on slide four.

Cash and cash equivalents were $31.8 million at July 31, 2026, compared with $18.7 million at January 31, 2026. We held an additional $3 million of restricted cash, principally related to security deposits and financial guarantees. Total debt was $36.1 million at the end of the second quarter, compared with $32.5 million at the end of the previous fiscal year. The increase in cash, alongside a modest increase in total debt, brought net debt to approximately $4.3 million at quarter end and approximately $13.8 million at the end of the previous fiscal year. Subsequent to quarter end, we closed on a new global credit facility with JPMorgan Chase that replaces our prior revolving credit agreement we entered into with JPMorgan in April this year. The new facility consists of a $75 million revolving credit facility and a $14 million term loan, representing approximately $90 million of commitments in place at closing. It also gives us access to up to an extra feature for an additional $50 million of incremental capacity in the form of increased revolving capacity or incremental term loans.

At closing, we drew down the $14 million term loan and, together with available cash, repaid the outstanding balance under the prior J.P. Morgan credit agreement, and subsequently we repaid in full the mortgage note of our Alberta Canada plant. This new facility materially increases our revolving credit capacity and includes availability for letters of credit of up to $30 million, giving us greater flexibility to support working capital requirements, letters of credit, and general corporate purposes, including permitted acquisitions as we continue to expand in key markets. Net cash provided by operating activities was $13.3 million for the first six months, compared with a use of cash of $1.3 million in the prior year period. Capital expenditures were $3.2 million. Backlog at July 31, 2026 was $142.3 million, compared with $121.6 million at January 31, 2026. Backlog represents awards we hold under contract, and substantially all of it is expected to be completed within the next 12 months. We expect approximately 40% to 50% of backlog to revenue in the third quarter.

Stepping back at the first half mark, PERMA-PIPE has a stronger balance sheet, a materially lower net debt position, and a backlog that has grown since year end. As I noted at the start of my remarks, we manage this business on a full year basis and our first half performance positions us well for a strong 2026. With that, I will turn it back to Saleh for additional remarks.

Saleh Sagr

Thank you, Matthew. At the midpoint of the year, let me share how we see the second half of the year unfolding. We enter the back half of fiscal 2026 with a healthy momentum, supported by our backlog, a growing pipeline of RFP and quoting opportunities, and business development initiatives across each of our regions. We are well positioned for a strong second half of the fiscal year, barring a material worsening of market and geopolitical conditions. That confidence reflects the resilience of the markets we serve and increasing alignment between our solutions and the infrastructure priorities of our customers. Let me take you through where we see momentum. Within digital infrastructure, we are building on our U.S. strength to extend into Canada and the Middle East. We recently secured an award for a project in the Middle East presenting a greenfield opportunity for us with commercial providers and as nations across the region invest in sovereign digital infrastructure.

We view this as an important proof point for our leak detection technology beyond North America. It is also a reflection of the growing global demand for our solutions. We are also expanding our business development efforts to grow our leak detection market share. We are working to formalize relationships with select equipment manufacturers to embed our leak detection sensing technology into their product offerings. This approach allows us to leverage their established sales and marketing capabilities and extend our reach into attractive opportunities while creating a more scalable path for growth. By detecting and cooling, we are developing multi-year service agreements that pair the systems we install with ongoing monitoring and support, turning a one-time product sale into a recurring service-based revenue stream over the life of the asset. We believe this can create a more durable and predictable revenue opportunity while deepening our service. our relationships with our customers.

In oil and gas, Saudi Aramco has qualified our new product line specifically designed to serve the kingdom's energy expansion program. This gives us access to one of the world's largest markets for pipe coating solutions, provides an important competitive advantage in the region. Our local presence, established customer relationships, technical capabilities, and ability to provide specialized coating technologies and manufacturing support position us well to compete for opportunities as Saudi Arabia continues to invest in its energy infrastructure. In parallel, we saw a recovery in the Canadian market activity in Q2, and together these developments support our expectations for a stronger second half. Water security has taken on greater importance across MENA. As governments in the region continue to make substantial investments in water infrastructure, our business development efforts are especially focused on capitalizing on this infrastructure spend. More broadly, evolving geopolitical dynamics across MENA are intensifying the focus on regional infrastructure resilience, localization, and supply chain security. Our established footprint, technical expertise, and customer relationships position us to benefit from that shift.

Our recent Middle East Digital Infrastructure Award is a clear example. As nations across the region move to build sovereign assets closer to home, they are turned into partners that are already established locally and understand the requirements of these markets. We are also encouraged by the growing engagement and support we are receiving from the U.S. government in helping PERMA-PIPE pursue and convert infrastructure opportunities in the Middle East. For us, this is meaningful, and we believe it strengthens our ability to compete for and win larger cross-border infrastructure projects over time. Staying with MENA region, I want to spend a few minutes on our MoU in Jordan. Because we believe this is much more significant than a single product award. The joint venture the MoU proposes is consistent with our broader strategy of moving PERMA-PIPE closer to our customers, expanding our addressable markets, increasing our participation in large infrastructure programs, and creating new avenues for long-term profitable growth.

The MoU benefits us in several ways. First, it gives us an immediate project opportunity in our core business of corrosion protection through Jordan's National Water Carrier Program (NCP). The NCP is a major national infrastructure program addressing Jordan's long-term security requirements. Our partnership with Welspun brings us into pipe manufacturing, expanding our addressable market and complementing our existing coating and piping capabilities. Third, it establishes a manufacturing platform that can support a broader pipeline of water, energy, and infrastructure projects in Jordan and across the Levant region, as reconstruction and infrastructure investments accelerate. The NCP is the initial anchor opportunity, not our endgame. Based on our market intelligence, a manufacturing presence in Jordan puts us at the start of a multi-year, multi-sector demand opportunity.

The region's opportunities include additional water infrastructure projects, such as the Redence Water Project and other related to water transmission and infrastructure programs driven by Jordan's need to strengthen and expand its water network. In energy, opportunities associated with Arisha gas field and the land connection to the Arab gas pipeline. The Jordanian government has identified this as an important strategic energy project, with plans to significantly increase domestic gas production and develop the associated transportation infrastructure. The reconstruction of Syria, Gaza, Palestine, Lebanon, and Iraq points to significant longer-term demand for water, energy, district cooling, and oil and gas infrastructure. The scale is meaningful. In Iraq and Syria, for example, there is a multi-year initiative to rebuild the 1,100 kilometer Kirkuk to Baniyas oil pipeline corridor that is expected to draw major international participants. A manufacturing platform based in Jordan would position PERMA-PIPE as an in-region source of pipe manufacturing and coating as regional projects of this scale advance. Supporting our growth aspirations is the new global credit facility with JPMorgan Chase.

Our new facility is a powerful, non-dilutive tool through which to deploy capital into operations and assets that drive growth and create value for our shareholders. In closing, the opportunities before us are broader and greater than ever before, as is our capacity to pursue and win them. We are confident in our ability to convert them into sustainable growth and long-term value for our shareholders. With that, operator, please open the call to questions.

Operator

Thank you. We will now begin the question and answer session. [Operator Instructions] The first question comes from Arujan Sifula with Freedom Broker.

Unknown Speaker

Good morning. Good morning and congratulations on the strong quarter. Thanks for taking my question. Can you hear me? Yes, please go ahead with your question. Sorry, my question is, do you expect the recent introduced U.S. and Canadian tariffs to have any meaningful impact on the business, particularly on input costs? If so, how significant could that impact be?

Great question, Maj. Thank you for that. So let me begin basically with the two new facilities that we have ramping up, which have some impact on our margins so far. Ohio and Qatar facilities are both progressing through their utilization ramps. The primary near-term impact is the absorption of the fixed costs before the facilities are fully utilized. Increased, of course, any increase in volumes, we expect operating leverage, improved product mix, and higher utilization to drive our margin expansions. Our objective is to uh objective remains to return consolidated gross margins to higher than 30s. But also keep in mind that some of the impact in our margins currently is due to the ongoing conflict in the Middle East. Now, shipping costs have risen significantly.

Find out more

Oxford Industries (OXM) Q2 Fiscal 2026 Earnings Call: Guidance Cut as Lilly Pulitzer Weakens

Wed, 09 Sep 2026 14:31:43 +0000

Oxford Industries (OXM) reported lower second-quarter fiscal 2026 sales but improved adjusted profitability. Tommy Bahama delivered positive comparable sales, while continued weakness at Lilly Pulitzer prompted management to reduce full-year sales and adjusted EPS guidance.

Key Takeaways

Consolidated net sales declined to $394 million from $403 million. Company comparable sales fell 1%, including a 3% retail decline and flat e-commerce sales.
Adjusted gross margin expanded 140 basis points to 63.1%, supported by assortment, sourcing and pricing changes, higher initial markups and fewer off-price wholesale sales.
Adjusted EBITDA increased to $45 million from $43 million, with margin improving to 11.4% from 10.7%. Adjusted EPS was $1.34.
Tommy Bahama recorded low-single-digit comparable sales growth, including a return to positive comparable sales in Florida. Lilly Pulitzer posted a mid-single-digit negative comp.
Management reduced fiscal 2026 sales guidance to $1.43 billion-$1.47 billion and adjusted EPS guidance to $1.60-$2.00, citing Lilly Pulitzer’s challenges and cautious consumer sentiment.
Long-term debt fell to $73 million from $143 million at the end of the first quarter, aided by operating cash flow, lower capital spending and tariff refunds.

Core Financial Data

Metric	Q2 fiscal 2026	Comparison / context
Net sales	$394 million	$403 million in Q2 fiscal 2025
Company comparable sales	-1%	Retail -3%; e-commerce flat
Wholesale sales	-14% YoY	Primarily due to lower residual inventory sales through off-price channels
Food and beverage sales	+11% YoY	Primarily driven by non-comparable locations
Adjusted gross margin	63.1%	Up 140 basis points YoY
Adjusted SG&A	$210 million	$209 million a year earlier
Adjusted EBITDA	$45 million	$43 million a year earlier
Adjusted EBITDA margin	11.4%	10.7% a year earlier
Adjusted EPS	$1.34	Effective tax rate of 27.5%
Long-term debt	$73 million	Down $70 million from the end of Q1
First-half operating cash flow	$97 million	$80 million in the prior-year period; included $29 million of tariff refunds
First-half capital expenditures	$32 million	$55 million in the prior-year period

The company recorded a $42 million reduction in cost of goods sold for previously paid tariffs and received substantially the entire balance during the quarter or shortly thereafter. The impact was excluded from adjusted results.

Business and Operating Performance

Tommy Bahama

Tommy Bahama’s low-single-digit positive DTC comp partially offset weakness elsewhere. Florida returned to positive comparable sales after several softer quarters. Management said both men’s and women’s categories grew, with women’s outperforming men’s.

Wholesale sales declined, primarily because of lower off-price clearance activity. Management expects Tommy Bahama’s full-year comparable sales to remain slightly positive.

Lilly Pulitzer

Lilly Pulitzer remained the portfolio’s main pressure point, with a mid-single-digit negative comp and lower off-price wholesale sales. Management attributed the weakness primarily to assortment and marketing issues rather than a broad loss of confidence in the brand.

The company shifted too much inventory from entry price points toward higher-priced merchandise. Dresses priced below $200 represented about 35% of styles this year, down from roughly half last year. Management plans to restore a more balanced price architecture while retaining some expansion at higher price points.

Product lead times mean spring 2027 will be the first season in which Oxford can substantially reshape the full assortment. The reset will address pricing architecture, the balance of prints, patterns and colors, intended-use occasions, and the mix of new versus continuing styles. More targeted promotions are planned during the remainder of fiscal 2026 to support engagement and inventory sell-through.

Johnny Was and Emerging Brands

Johnny Was significantly increased EBITDA through higher gross margin, tighter inventory management, fewer promotions and disciplined SG&A control. Management characterized profitability improvement—not near-term sales growth—as the turnaround plan’s central objective.

Within Emerging Brands, management identified Southern Tide as the primary laggard. Oxford has appointed a new brand leader and consolidated finance, planning and operations oversight across the group.

Balance Sheet and Efficiency Initiatives

Inventory declined $20 million, or 12%, on a LIFO basis. On a FIFO basis, it fell $9 million, or 4%, led by reductions in Emerging Brands, Lilly Pulitzer and Johnny Was.

Oxford has initiated an enterprise-wide review focused on simplifying operations, improving efficiency and enhancing operating margins over the next several years. Initiatives include expanding utilization of the automated Lyons, Georgia, distribution center, simplifying the technology stack, advancing data analytics and AI capabilities, and optimizing the store fleet.

Management Guidance

Guidance item	Fiscal 2026 outlook
Net sales	$1.43 billion-$1.47 billion
Sales change vs. fiscal 2025	Down 3% to approximately flat
Company comparable sales	Low-single-digit decline
Adjusted EPS	$1.60-$2.00
Gross margin, excluding tariff-refund effects	Approximately 50 basis points higher
SG&A growth	Low single digits
Interest expense	Approximately $6 million
Effective tax rate	27%-28%
Capital expenditures	Approximately $60 million

The revised plan assumes lower sales at Lilly Pulitzer and Johnny Was, partially offset by growth at Tommy Bahama and Emerging Brands. By channel, management expects low-single-digit DTC declines and a high-single-digit wholesale decrease, partly offset by low-double-digit food and beverage growth.

For the third quarter, Oxford expects:

Sales of $280 million-$300 million, versus $307 million a year earlier.
Adjusted loss per share of $1.40-$1.20, versus a $0.92 loss a year earlier.
Gross margin expansion of approximately 100 basis points.
Low-single-digit SG&A growth.
An effective tax rate of approximately 24%.

Management also expects approximately 100 basis points of gross-margin improvement in the fourth quarter. Its fourth-quarter plan assumes comparable sales ranging from relatively flat to slightly positive, supported partly by promotions at Lilly Pulitzer and easier comparisons with the prior year’s tariff-related merchandising disruption.

Risks and Focus Areas

Lilly Pulitzer’s assortment and marketing problems are expected to weigh on fiscal 2026, as a substantial product reset cannot occur before spring 2027.
Higher promotional activity at Lilly Pulitzer could pressure realized selling prices, although management expects higher initial markups and channel mix to offset the effect on gross margin.
Management cited weaker consumer sentiment and higher travel costs as pressures on discretionary apparel spending.
The outlook assumes current Section 301 tariff rates remain in effect for the balance of fiscal 2026. Additional tariff increases would primarily affect future periods because of inventory receipt and sales timing.
Quarter-to-date comps were slightly negative, but management said promotion timing and the late Labor Day holiday created significant early-quarter noise.

Analyst Q&A Highlights

Tommy Bahama momentum: Management highlighted improving Florida performance and stronger growth in women’s than men’s. It expects slightly positive comparable sales for the full year.
Lilly Pulitzer recovery timing: Spring 2027 is the first season incorporating the full assortment reset. Resort merchandise may provide an earlier indication, while prior-year tariff-related product gaps could create some fourth-quarter upside.
Store conversions: Selected Johnny Was and Southern Tide stores are being converted to Lilly Pulitzer where management believes local brand awareness and store economics favor Lilly. The company said Lilly Pulitzer remains profitable despite current weakness.
Gross-margin confidence: Higher initial markups and a lower wholesale mix are expected to neutralize or more than offset Lilly Pulitzer’s increased promotional cadence.
Freight costs: Inbound container costs from Asia are slightly higher, but renegotiated outbound parcel contracts provide a partial offset. Management does not view the overall freight impact as material.

Full Earnings Call Transcript

Complete Earnings Call Transcript

Management Remarks

Operator

Greetings, and welcome to the Oxford Industries' Second Quarter Fiscal Year 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Brian Smith. Please go ahead.

Brian Smith

Thank you and good afternoon. Before we begin, I would like to remind participants that certain statements made on today's call and in the Q&A session may constitute forward-looking statements within the meaning of the federal securities laws. Forward-looking statements are not guarantees, and actual results may differ materially from those expressed or implied in the forward-looking statements. Important factors that could cause actual results of operations or financial conditions to differ are discussed in our press release issued earlier today and in documents filed by us with the SEC, including the risk factors contained in our Form 10-K.

We undertake no duty to update any forward-looking statements. During this call, we will be discussing certain non-GAAP financial measures. You can find a reconciliation of non-GAAP to GAAP financial measures in our press release issued earlier today, which is posted under our Investor Relations tab at our website at oxfordinc.com.

And now I'd like to introduce today's call participants. With me today are Tom Chubb, Chairman and CEO, and Scott Grassmyer, CFO and COO. Thank you for your attention, and I can turn the call over to Tom Chubb.

Thomas Chubb

Thank you, Brian. Good afternoon and thank you for joining us. I'm pleased to be here today to discuss our second quarter results, the performance of our brands, and our outlook for the balance of fiscal 2026. Overall, second quarter results were within our expectations, highlighted by year-over-year adjusted earnings per share growth and a low single-digit comparable sales gain at Tommy Bahama. We also delivered meaningful adjusted gross margin expansion despite a higher level of promotional activity, reflecting the progress our teams have made on assortment, sourcing, and pricing across the portfolio.

The strong cash flow we generated enabled us to make meaningful progress reducing debt in the second quarter. Refunds of previously paid tariffs contributed to that reduction. Maintaining a strong balance sheet and generating cash that can be deployed thoughtfully remained important priorities for us. Scott will provide more detail on our cash flow and balance sheet performance.

Tommy Bahama's second quarter results were consistent with our expectations. As our largest brand, its positive comparable sales growth provided important support to the overall portfolio and helped offset pressure elsewhere in the business. We were also encouraged by a return to positive comparable sales in Florida, a key market for the brand that had experienced softer results in recent periods. We are pleased with the consistency of the brand's performance and remain focused on sustaining that momentum through disciplined merchandising, marketing, and operating execution.

While we continue to deliver positive results at Tommy Bahama, performance at Lilly Pulitzer remained weak in the second quarter, and our outlook for the brand for the balance of the year is now below what we anticipated at the end of the first quarter. As we discussed on our first quarter call, Lilly Pulitzer entered the quarter with several product and marketing challenges. The core problem is the assortment, with the key issue being that we shifted far too much of our inventory investment out of our entry price points to higher price points. Second quarter results and the trends we are currently seeing indicate that those challenges have been more significant than we originally anticipated. We are responding with actions aimed at both near-term performance and the longer-term health of the brand.

Because of our product development lead times, spring 2027 is the first season in which we can substantially reshape the full assortment. In the meantime, we are refining our marketing and messaging, adjusting the promotional cadence, and managing inventory and expenses more tightly. Given current trends, we expect Lilly Pulitzer to be more promotional during the balance of the year. We will remain strategic and disciplined, using targeted promotional activity to support customer engagement and inventory sell-through while protecting the long-term integrity of the brand.

Promotions are 1 lever, but lasting improvement will also require stronger product relevance, marketing effectiveness, and execution. We are laser-focused on delivering these requirements. For spring 2027, our work is centered on 4 areas: our pricing architecture strategy, balance of print, pattern, and color, mix of intended use occasions between social and casual, and the proportion of new versus continuing styles. These assortment changes will not drive a positive trend change in fiscal 2026, but we believe they will create a more balanced and compelling assortment and better position Lilly Pulitzer for improved performance beginning with the spring 2027 season.

We remain confident in Lilly Pulitzer's long-term potential. The brand has a clear point of view, a strong emotional connection with its customer, and meaningful opportunities for improvement. That confidence does not lessen the urgency of the current situation. We are focused on addressing the issues directly and returning Lilly Pulitzer to the level of performance we expect from the brand.

At Johnny Was, we continue to make progress on the turnaround plan. The brand significantly increased EBITDA during the second quarter, driven by higher gross margin resulting from tighter inventory management and fewer promotions, together with disciplined SG&A cost management. There is still work to do, but we are encouraged by the improvement in profitability. Stepping back, weaker consumer sentiment has added pressure to discretionary demand. Our customers, particularly at Tommy Bahama and Lilly Pulitzer, tend to be active travelers, and although they continue to travel, higher airfare, lodging, and other travel costs may be leaving less room in their discretionary budgets for apparel. Even so, the steady performance at Tommy Bahama reinforces that compelling product and consistent execution can still produce solid results in this environment.

Our responsibility is to deliver that level of product relevance and execution more consistently across the portfolio. The continued softness at Lilly Pulitzer, including the impact of a more promotional posture for the balance of the year, together with softer demand in certain other parts of the portfolio, led us to lower our top and bottom line guidance for the remainder of the year. At Lilly Pulitzer, the issues are primarily assortment and marketing related, while the pressure elsewhere in the business is more closely tied to a more cautious, discerning consumer. We believe the updated guidance represents a prudent assessment of current business trends, the macro environment, and the actions we expect to take. Scott will provide more detail on our revised outlook and the assumptions underlying it.

Against this backdrop, our priorities are clear: sustain the positive momentum at Tommy Bahama, address the assortment and marketing issues at Lilly Pulitzer, and build on the profitability improvement at Johnny Was. We are managing inventory expenses and capital carefully while maintaining our focus on cash generation, debt reduction, and a strong balance sheet. After Scott's comments, I will turn briefly to discuss several broader actions underway across Oxford. As always, I want to thank our teams across Oxford. Their resilience, creativity, and commitment to our customers are the foundation of everything we do.

With that, I'll turn the call over to Scott for more detailed commentary on our financial performance and outlook.

K. Grassmyer

Thank you, Tom. Consolidated net sales were $394 million in the second quarter of fiscal '26 compared to $403 million in the second quarter of fiscal '25, and near the high end of our guidance range of $380 million to $400 million. The company comparable sales were down slightly at 1%, including a 3% decrease in retail sales and flat e-commerce sales. The decline in retail comp sales was partially offset by sales from non-comp stores open primarily in the prior year. Notably, food and beverage sales increased 11%, driven primarily by non-comp locations. Wholesale sales decreased 14% compared to the prior year, but was primarily driven by lower sales of residual inventory through off-price channels. By brand, sales growth at Tommy Bahama helped to partially offset decreases in our other businesses. Sales decreases at Lilly Pulitzer and Johnny Was were driven by a mid-single-digit negative comp and lower off-price wholesale sales, while the sales decline at Emerging Brands was driven primarily by lower wholesale sales. The positive sales growth at Tommy Bahama was driven by a low single-digit positive comp in our DTC channels, partially offset by a decline in wholesale sales driven primarily by lower off-price clearance sales.

Adjusted gross margin expanded 140 basis points to 63.1%, driven primarily by updated assortment, sourcing, and pricing strategies across our portfolio that resulted in higher IMUs, along with a change in sales mix with off-price wholesale sales representing a lower proportion of net sales. These factors were partially offset by a higher proportion of net sales in our DTC channels occurring during promotional events at Tommy Bahama, Lilly Pulitzer, and Emerging Brands.

Tariff cost included in inventory sold during the year were materially consistent with the prior year. As Tom mentioned, we recorded and received significant tariff refunds during the quarter. We recorded a reduction to cost of goods sold of $42 million of tariffs previously paid and received substantially the entire balance during the second quarter or shortly thereafter. The impact of these refunds was excluded from our adjusted results.

Adjusted SG&A expenses increased slightly to $210 million compared to $209 million last year, impacted primarily by new brick-and-mortar retail and food and beverage locations, as well as increases in software and consulting costs, and costs associated with the transition of our Lyons, Georgia, distribution center operations. These increases were partially offset by lower incentive compensation and cuts in more discretionary categories like travel. The result of this yielded adjusted EBITDA of $45 million, or an 11.4% adjusted EBITDA margin, compared to adjusted EBITDA of $43 million, or 10.7%, in the prior year.

Moving beyond EBITDA, adjusted depreciation and amortization increased by approximately $1 million compared to the prior year, primarily due to increases in depreciation related to our new Lyons facility. Interest expense was relatively flat compared to the prior year, as our average debt levels declined during the year. The effective tax rate of 27.5% was lower than the prior year of 29.6% due to certain discrete items that were more significant in the prior year. With all this, we ended up with $1.34 of adjusted EPS.

Moving to the balance sheet, inventory decreased $20 million to 12% on a LIFO basis that included a $10 million increase in to the LIFO reserve. On a FIFO basis, inventory decreased $9 million, or 4%, compared to the second quarter of 2025, with decreases in Emerging Brands, Lilly Pulitzer, and Johnny Was. We ended the quarter with long-term debt of $73 million, which is down $70 million compared to $143 million at the end of the first quarter, and compared to long-term debt of $81 million at the end of the second quarter of fiscal '25, and $116 million at the end of fiscal 2025.

Cash flow from operations provided $97 million in the first half of 2026, which includes $29 million received related to tariff refunds, compared to $80 million in the first half of 2025. We also had lower capital expenditures of $32 million in the first half of '26, compared to the first half of fiscal '25 of $55 million. The decrease, which primarily related to the addition of fewer new bricks-and-mortar locations and lower expenditures on the Lyons, Georgia, distribution center project, as that project comes to a close, also allowed for further reduction of our long-term debt. We're also paying dividends of $22 million.

And now I'll spend some time on our updated outlook for 2026. As Tom mentioned, the ongoing challenges in the Lilly Pulitzer business, along with our generally conservative view of consumer sentiment, led us to reduce our top and bottom line outlook for the remainder of the year. For the full year, we now expect a low single-digit negative comp for the total company, which is lower than our previous range of slightly negative to slightly positive. As a result of the change in our comp assumptions, we are revising our guidance range for the full year and now expect sales to be between $1.43 billion and $1.47 billion, or a decline of 3% to relatively flat, compared to sales of $1.478 billion in fiscal 2025. Our revised sales plan for the full year of '26 includes a sales decrease in Lilly Pulitzer and Johnny Was, partially offset by a sales increase in Tommy Bahama, and growth in the Emerging Brands. By distribution channel, the full-year sales plan consists of low single-digit decreases in our direct-to-consumer channels and a high single-digit decrease in wholesale, partially offset by a low double-digit increase in our food and beverage channel that is benefiting from the additional -- addition of new locations.

Moving on to gross margin, our outlook assumes that the tariff rates reflecting the recent Section 301 changes will remain in effect for the balance of fiscal 2026. Because those rates are only modestly higher than the rates applicable to most of our first half inventory receipts, we do not expect the changes to materially affect fiscal 2026 results. Any additional tariff increase implemented during the balance of the year would be expected to affect primarily future periods due to the timing of the inventory receipts and sales. When removing any tariff refund-related impact, we now expect an approximate 50 basis points increase in gross margin for the year with improved IMUs and a continuation of the shift to a higher proportion of direct-to-consumer sales to be partially offset by higher promotional activity, particularly at Lilly Pulitzer. As a result of these factors, we expect gross margins to improve approximately 100 basis points in both Q3 and Q4 fiscal '26 compared to the prior year.

In addition to lower sales and higher gross margins, we expect SG&A to grow in the low single-digit range, primarily due to the annualization of incremental SG&A from new stores added primarily in fiscal 2025, additional costs related to transition to the Lyons, Georgia, distribution center, and increased software-related costs. Also within EBITDA, we expect higher royalties and other income of approximately $2 million in fiscal '26, largely due to the normalization of sales from our licensing partners that were heavily impacted by the implementation of tariffs in fiscal '25.

Outside of EBITDA, we expect an increase in depreciation due to significantly all of the incremental costs to operate the new Lyons DC in fiscal '26 being depreciation related. We also expect interest expense of $6 million, which is lower than our previous estimate due to our recent significant reduction in debt. Considering all these items and a tax rate between 27% and 28%, we're revising our 2026 adjusted EPS guidance to $1.60 to $2 versus adjusted EPS of $2.11 last year. In the third quarter of '26, we expect sales of $280 million to $300 million compared to sales of $307 million in the third quarter of '25. This primarily reflects a mid-single-digit negative to low single-digit negative comp assumption and relatively flat wholesale sales.

By brand, we expect lower sales at Lilly Pulitzer and Johnny Was to be partially offset by a sales increase at Tommy Bahama and growth at Emerging Brands. We also expect gross margin to expand approximately 100 basis points, SG&A to grow in the low single-digit range, royalty income of approximately $3 million, an interest expense of $1 million, and an effective tax rate of approximately 24%. We expect this to result in third quarter adjusted loss per share between $1.40 and $1.20, compared to a loss per share of $0.92 last year. Our fourth quarter sales plan includes the benefits of some additional promotional activity, primarily at Lilly Pulitzer, along with most of our groups benefiting from the correction of tariff-related merchandising issues that significantly impacted our holiday season and fourth quarter results last year. As a result, our fourth quarter plan includes a comp assumption of relatively flat to slightly positive.

Moving to our CapEx outlook for the remainder of the year, we expect capital expenditures for the year to be approximately $60 million, including the $32 million spent in the first half of fiscal '26, compared to a total of $108 million in fiscal '25. The remaining capital expenditures relate primarily to new brick-and-mortar locations and the remaining capital expenditures for the new distribution center in Lyons, Georgia.

I will now turn it back to Tom for some closing comments.

Thomas Chubb

Thank you, Scott. Before we open the call for questions, I want to briefly discuss a broader review we recently initiated across the enterprise aimed at meaningfully enhancing operating margins in the next few years. The review is focused on opportunities to simplify the business, improve efficiency, and sharpen how we allocate resources across Oxford in order to become less dependent on historical rates of growth to fuel higher profitability. We are still developing our plans and expect to share more as they are finalized, but we believe it is important to highlight several actions already underway.

First, we have made significant progress ramping up the Lyons, Georgia, distribution center. As the facility matures, we'll look to take full advantage of our investment and move more product into the building, including from a legacy 3PL, to operate more efficiently across our increasingly automated footprint. With the major investment phase nearing completion, we also expect capital expenditures to normalize after several years of elevated spending on Lyons, which will increase the cash available for further debt reduction. With impending retirements within our technology leadership, we have transitions underway that will support a reassessment of our IT infrastructure with an eye towards simplifying our tech stack and advancing our data analytics and AI capabilities across the enterprise. We are also optimizing our store fleet, including converting selected Southern Tide and Johnny Was locations to Lilly Pulitzer, where we believe the market and location are better suited to that brand. We will continue to evaluate the fleet market by market and location by location and make changes where we believe they will create the greatest long-term value.

We have a new brand leader at Southern Tide, and also within our Emerging Brands group, we consolidated oversight of the group's finance, planning, and operations functions to improve consistency and efficiency. These are a few examples of the actions underway alongside the work at Tommy Bahama, Lilly Pulitzer, and Johnny Was. We believe these actions will simplify the business, strengthen execution, and position Oxford for more consistent performance and stronger returns over time. We'll have more to say about all of this in December.

With that, we're happy to take your questions. Paul?

Operator

Thank you. [Operator Instructions] Our first question is from Ashley Owens with KeyBanc Capital Markets.

Question-and-Answer Session

Ashley Owens

Maybe just to start, I wanted to focus in on Tommy Bahama because I thought the point about you calling out the return to positive comps in Florida was very important, just given the size of that market. Could you unpack what helped drive that improvement in the quarter? Whether you're seeing similar strength across both the men's and women's categories?

Thomas Chubb

Yeah, thank you, Ashley. Great questions. And we were -- and I'm glad you called it out because we really were thrilled to see Florida turn positive. As you know, for a number of quarters now, it's been negative for the most part in Tommy Bahama, and that is such a big and important part of our business that when it's negative, it's tough. When it's positive, it makes the whole world seem better. So very glad to see that. Men's versus women's overall in Tommy this year, men's has been up. Women's has actually been up more than men's, which we're happy to see. As you know, we've believed for a long, long time that women's has a huge opportunity in Tommy Bahama. We've made steady progress in growing that business and what we've seen this year has been really encouraging.

Ashley Owens

Great. And then maybe just quickly on Lilly as well. So I think you were very explicit that spring '27 is that first season where you can and are working to reshape the assortment. And that the changes -- we're not going to see that positive trend change until fiscal -- within this year. I guess, should we now think about Lilly as being a spring '27 recovery story? Could there be improvements in the comp with some of that planned promotionality through the back half of the year?

And then just any proof points to, kind of, watch out for that would tell you that the reset is working ahead of the launch. Then maybe just 1 on the modeling side of things with the gross margin guidance. I think it was 100 bps improvement in both Q3 and Q4, despite those elevated promotions at Lilly. Just anything you can say as to what's giving you the confidence in that outlook, particularly if that consumer demand does remain a little bit pressured.

Thomas Chubb

Yes, so I think you understand this, Ashley, but the length of the product pipeline is really the issue. So you get into spring '26, you realize that you've got a really pretty significant assortment issue, but you've got the rest of the year's product already in the pipeline and you can do limited things to adjust for it. So spring '27 is the first season where we were able to really incorporate what we realized was wrong about the assortment in spring '26. The rest of the seasons for '26 were already fundamentally in the pipeline.

There are some other reasons to think that there might be some fourth quarter upside in Lilly and that's just because last year they were struggling through the tariff-related gaps in the product assortment and they overall had a weak fourth quarter last year. So you might see some upside because of those things in the fourth quarter. And then the other thing is the resort product line, I think, which will look more like the spring '27 line, I think, could give us some early reads, but you're not really going to know till very late in the quarter when you've got some spring stuff. And then on the gross margin question, certainly a good question.

And I'll let Scott walk you through that, why we feel good about what we're projecting.

K. Grassmyer

Yes, we are starting with higher IMUs. Also, wholesale will be a little bit lower percent of the total mix, so that will help neutralize or more than offset the higher promotional cadence that we do expect out of Lilly this year.

Operator

Our next question is from Janine Stichter with BTIG.

Ethan Saghi

You got Ethan on for Janine. First, I was just wondering what's driving the divergence between Tommy and the rest of the portfolio? Is it product, demographic, geography, or something else? Just any color you could give on that.

Thomas Chubb

K. Grassmyer

Yeah, yeah, for the year, Tommy, I mean, we expect them to be slightly positive for the year. And so yes, slightly positive comps for the year.

Mauricio Serna Vega

Got it. And then just on, on Lilly Pulitzer, I guess, just was wondering how are you thinking about the, the assortment strategy? I guess like on a go forward basis. I guess I recall like last year in '25 one of the things that had been successful was to move that -- bring more assortment that was higher AUR. And now it sounds like it seems maybe it went too far. So is the right strategy being more towards the historical type of AURs? Or just trying to figure out from that perspective, how should we think about the assortment strategy?

And then I think you also mentioned on the prepared remarks that you were converting some, I think it was Johnny Was and Southern Tide stores into Lilly Pulitzer. Like, what's the rationality behind that considering that the brand -- the brand seems to be still, obviously struggling and you expect that to continue throughout the rest of the year?

Thomas Chubb

Yes, good questions, Mauricio. And we have, over the last several years, been able to grow the higher-priced business at Lilly Pulitzer. And even this year we continue to have success in those higher-priced points. But think of your pricing strategy as like a pyramid where that top tier, which for us in dresses is $400 and up, it's the little tiny triangle at the top of the pyramid and then you go down the pyramid, the pieces get bigger and bigger. That's, I think, the way almost any brand in the world is set up from a price architecture standpoint. And so what we did this year, you captured it, is I think we just went too far too fast in shifting up the pricing tiers and so last year in our entry price point bucket -- and for us, that's dresses, which are a big category under $200.

Last year that would have been about half of the styles that we offered, would have been in that price bucket. This year it was down to almost down to a 3rd. I think it was like 35%. That was just too much too quickly. And as a result of that, some of those customers were willing to move up a price point, but a lot of them I think were not. And that's been -- I think the the bigger part of our problem has been the price architecture. So going forward, what we've done is we've gone back to what we had in '25. And '26 will move a little more in the upward direction than '25 -- excuse me, '27 will move a little more upward than '25, but that'll be a lot back from '26, if that makes sense.

Mauricio Serna Vega

Yes.

Thomas Chubb

Thomas Chubb

Thank you, Paul, and thanks to all of you for your interest. We look forward to talking to you again in December, and hope all is well until then.

Operator

This concludes today's conference. You may disconnect your lines at this time. Thank you again for your participation.

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Nanox Imaging (NNOX) Q2 2026 Earnings Call: Revenue Up 37%, $40.7M Impairment

Wed, 09 Sep 2026 14:31:42 +0000

Nanox Imaging (NNOX) reported higher Q2 2026 revenue, but losses widened sharply after a non-cash impairment charge. Management emphasized Nanox-Arc commercialization, new reimbursement pathways and cost reductions as it works to extend the company’s cash runway.

Key Takeaways

Q2 2026 revenue increased 37% year over year to $4.2 million, supported mainly by the consolidation of Nanox Health IT, which contributed $0.9 million.
GAAP net loss widened to $55.5 million from $14.7 million, primarily due to a $40.7 million non-cash impairment of intangible assets related to the Nanox AI solutions business.
Cash, cash equivalents and restricted deposits totaled $31.4 million at June 30, 2026, versus $60 million at December 31, 2025. Nanox subsequently raised $8.5 million in gross proceeds.
Nanox expanded its U.S. commercialization footprint to 10 signed distribution partnerships. A Nanox-Arc system at a RadNet facility is in commercial use and integrated into routine clinical workflow.
The first Nanox Imaging Network site in Philadelphia has started scanning patients, with paid claims ranging from $200 to $700. Management estimates potential annual revenue of $0.5 million to $1 million per site, depending on utilization and reimbursement.
Workforce reductions in Israel and South Korea, together with the transition to third-party manufacturing, are expected to generate approximately $2 million in annualized savings beginning in 2027.

Key Financial Data

Metric	Q2 2026	Q2 2025	Change or context
Revenue	$4.2 million	$3.0 million	Up 37% year over year
Teleradiology revenue	$3.0 million	—	Largest reported revenue segment
AI and software revenue	$1.0 million	—	Includes contribution from software activities
Imaging systems and OEM revenue	$0.2 million	—	Remained limited during the quarter
GAAP gross loss margin	-1,051%	-107%	Affected by the $40.7 million impairment recorded in cost of revenue
Non-GAAP gross loss margin	-13%	-21%	Improved year over year
GAAP operating expenses	$11.8 million	$11.3 million	Increase reflected Nanox Health IT consolidation and higher legal expenses
Non-GAAP operating expenses	$11.1 million	$10.2 million	Increased year over year
Adjusted EBITDA loss	$11.3 million	$10.4 million	Loss widened by $0.9 million
GAAP net loss	$55.5 million	$14.7 million	Primarily affected by the non-cash impairment
Non-GAAP net loss	$11.6 million	$10.9 million	Loss widened by $0.7 million
Cash, cash equivalents and restricted deposits	$31.4 million	—	Balance at June 30, 2026

Nanox said the impairment reduced the fair value of intangible assets associated with its AI solutions business, excluding Nanox Health IT, to $1.9 million. The charge did not affect liquidity and was excluded from adjusted EBITDA.

Business and Operating Performance

Nanox-Arc commercialization

Management said commercialization has taken longer than expected because installations require coordination on permitting, shielding, construction and workflow integration. Nanox is increasingly using established imaging-sector partners to accelerate deployment.

The company now has 10 signed U.S. distribution partnerships. Its latest agreement is with Associated X-Ray Imaging Corp., which has already supported an operational Nanox-Arc installation in New England.

A Nanox-Arc system deployed at a RadNet facility is in commercial use. Other recent U.S. activity includes installations at an orthopedic center in Florida, an urgent care unit in New York and the first Nanox Imaging Network site in Philadelphia. Some locations are performing hundreds of scans per month, while one customer converted from a medical screening unit arrangement to a capital equipment purchase.

Outside the U.S., Nanox completed an end-user deployment in the Czech Republic and advanced deliveries in Romania and Greece. It also appointed Solme RCSA as a distributor in Costa Rica and continued developing opportunities in Slovenia, Ecuador and Argentina.

Nanox Imaging Network

The Philadelphia site has begun scanning patients and receiving insurer and payer reimbursements. Paid claims have ranged from $200 to $700 each.

Based on its preliminary business model, management believes each site could generate $0.5 million to $1 million in annual revenue. Actual performance will depend on utilization, reimbursement, payer mix and site-level execution.

Teleradiology, AI and health IT

USARad’s revenue grew year over year during the first half of 2026, averaging 14% growth as its client base expanded. The business also renewed an engagement with a multinational aerospace organization and retained the Joint Commission’s Gold Seal of Approval.

Nanox signed an exclusive U.K. reseller agreement with Vertec Scientific Limited for its AI bone solution. It also launched five new AI pilots across the U.S. and India.

A Cedars-Sinai pilot comparing Nanox AI Health AVC with standard-of-care tools for assessing aortic valve calcification produced more than 92% agreement. Separately, a university-affiliated medical center received institutional review board approval for another study and is moving into data collection.

CMS code G0680 became effective on April 1, 2026, covering algorithmic analysis of coronary artery calcium and aortic valve calcification from eligible chest CT scans. Management views the code as a potential reimbursement pathway for the Nanox AI cardiac solution when payer, documentation and medical-necessity requirements are satisfied.

Nanox Health IT contributed meaningful first-half revenue and added more than 20 projects that went live. The company is integrating the business with Nanox AI, Nanox-Arc and USARad.

Cost restructuring

Nanox reduced its Israel-based workforce by 15% and its South Korean workforce by approximately 67%. The company idled its Korean chip production line and plans to rely on qualified third-party manufacturing partners for future volume production.

Nanox has also begun preparations to sell its South Korean manufacturing facility. Management expects the restructuring to lower fixed costs and cash burn while concentrating resources on commercialization and core technologies.

Management Guidance

Management expects recent commercialization activity to begin contributing more visibly over the next few months, including direct sales, distributor pipeline conversions and expansion of the Nanox Imaging Network. It did not provide a specific quarterly revenue target.

The restructuring initiatives are expected to produce approximately $2 million in annualized cost savings beginning in 2027. The CFO said most of those savings should appear in operating expenses, with a smaller portion reflected in cost of goods sold.

Nanox is preparing to use RSNA 2026 as a commercial platform for Nanox-Arc, Nanox AI and its broader imaging ecosystem, as well as a kickoff for 2027 customer and business-development activity.

Risks and Areas to Watch

Commercialization has taken longer than management initially expected, with permitting, shielding, construction and integration slowing the transition from agreements to active use.
The impairment assessment was triggered by a significant decline in the company’s share price and reduced forecasts for revenue and operating results.
Cash and restricted deposits fell to $31.4 million by quarter-end. Although Nanox raised $8.5 million after the quarter, management said it intends to continue raising funds from various sources.
Adjusted EBITDA loss and non-GAAP net loss both widened year over year despite revenue growth.
Nanox Imaging Network site economics depend on utilization, reimbursement levels, payer mix and local execution.
CMS reimbursement for the AI cardiac solution remains subject to eligible examinations and applicable payer, documentation and medical-necessity requirements.

Analyst Q&A Highlights

Management said it currently has no visibility into additional impairment charges but will reassess asset values as required under accounting standards.

The CFO estimated the latest pro forma outstanding share count at approximately 70.6 million shares.

On system placements, management cited recent activity in Greece, Romania and the Czech Republic, while systems for Peru and Argentina were awaiting import licenses. U.S. activity included an IDN installation, an urgent care deployment, an orthopedic clinic and three systems associated with the Nanox Imaging Network.

Asked about further operating expense reductions, the CFO declined to provide a target. He said Nanox continues to review its expenses and would disclose additional measures when appropriate.

Full Earnings Call Transcript

Complete Earnings Call Transcript

Management Remarks

Operator

[Operator Instructions]

Please be advised that this conference is being recorded. I would now like to hand the conference over to your speaker today, Mike Cavanaugh, Investor Relations. Please go ahead.

Unknown Speaker

Good morning and welcome to Nanox Imaging's Q2 2026 Earnings Call. Earlier today, Nanox Imaging Limited released financial results for the quarter ending June 30, 2026. The release is currently available on the investor section of the company's website. With me today are Erez Meltzer, Chief Executive Officer and Acting Chairman, and Guy Nathanson, Chief Financial Officer. Before we get started, I would like to remind everyone that management will be making statements during this call that include forward-looking statements regarding the company's financial research and development, manufacturing, commercialization activities, regulatory process, and clinical activities, and other matters. These statements are subject to risks, uncertainties, and assumptions that are based on management's current expectations as of today and may not be updated in the future. Therefore, these statements should not be relied upon as representing the company's views as of any subsequent date.

Factors that may cause such a difference include, but are not limited to, those described in the company's filings with the Securities and Exchange Commission. We will also refer to certain non-GAAP financial measures to provide additional information to investors. The reconciliation of the non-GAAP to GAAP measures is provided with our press release, which reconciles the following non-GAAP measures to the closest equivalent figures under GAAP: non-GAAP gross margin, non-GAAP research and development expenses, non-GAAP sales and marketing expenses, non-GAAP general and administrative expenses, non-GAAP net loss, and adjusted EBITDA loss. With that, I'd now like to turn the call over to Erez Meltzer.

Erez Meltzer

Thank you all for joining us today. In the 2 months since our last call, we have advanced commercialization across several areas of the business. Our management team has completed a thorough review of the business and started implementing lessons learned with progress reflected across our commercial, operational, and strategic priorities. Today, I will focus on the steps we are taking to improve execution, extend commercialization, and support the long-term value of the Nanox platform. While our business is trending in the right direction, as we discussed last quarter, our commercialization has taken longer than we expected. When we initiated the commercial phase, we had already provided preliminary financial results last month, and our results are substantially consistent with those previously disclosed figures.

The main friction points have been, as mentioned, operational. Commercialization required close side-by-side coordination with small and medium-sized imaging centers, particularly around permitting, shielding, construction timelines, and integration. These are practical deployment requirements, but they have been important lessons as we refine how we move systems from commercial agreement to active utilization. By identifying where the friction has occurred, we have been able to shape the changes we are now implementing. Most importantly, we are increasingly leveraging commercial partners with established relationships and workflow in the imaging space to meaningfully enhance our presence in the U.S. At the same time, our direct sales effort continued to support additional Nanox-Arc CapEx agreements and deployment activity, including the first Nanox imaging network installation in Philadelphia, which has already scanned its first patients.

Beyond the U.S., we continue Nanox-Arc deployment activity across Europe and Latin America, advanced new Nanox AI commercial and pilot programs in India and the U.S., and move forward with the restructuring of our South Korea operations to better align resources with our core technologies and commercialization priorities. We continue to broaden our U.S. footprint through strategic collaborations, customer evaluations, and deployment activities, including our recently announced collaboration with RadNet and ongoing work with leading clinical institutions with the goal of expanding our engagement with healthcare chains and increasing activity within those chains.

As we disclosed in our last call, the Nanox system has been operational for several months at RadNet sites. RadNet is the largest outpatient imaging center operator in the United States and has deployed a Nanox-Arc system at one of its facilities where it is now in commercial use and integrated into routine clinical workflow. We continue to explore opportunities for clinical research, including early lung nodule detection. We believe this represents an important step in demonstrating Nanox-Arc's clinical value in a major outpatient imaging setting, and we are excited to continue this collaboration. We recently deployed a Nanox-Arc system through a capital equipment sale to an internationally recognized orthopedic center in Florida, which is part of an IDN, Integrated Delivery Network. As this organization integrates the system into its orthopedic imaging workflow, we are launching a strategic collaboration aimed at broadening the clinical use of Nanox-Arc in orthopedics and generating clinical experience in a high-volume specialty care environment.

We believe the true measure of innovation in medical imaging lies in clinical relevance and potential to improve patient care. Our continuing engagement with leading healthcare organizations reflects our commitment to generating more real-world evidence and evaluating a growing number of clinical applications for our technology. For example, we recently installed an Arc system in an urgent care unit located in New York. Turning to our commercial distribution partnership, we are seeing channel partners build pipeline activity that supports future CapEx sales. In addition, our U.S.-based subsidiary, Nanox Impact Inc., has entered into a distribution agreement with Associated X-Ray Imaging Corp., a New England-based provider of medical imaging equipment and services specializing in X-ray, MRI, and CT systems to support deployment of the Nanox-Arc across the region. We now have 10 signed commercial distribution partnerships in the United States. Associated has already supported the customer installation of the Nanox-Arc that is installed and operational, further demonstrating its ability to support deployment and service in the region. The agreement follows other recent engagements, including Digital X-Ray Imaging, Integrity Medical Services, and Elite Surgical Technologies. The goal is to supplement our direct sales force and increase our presence economically as we pursue broader coverage of major U.S. markets.

We are also expanding joint commercialization activity with our partners, including participation in Howard's annual sales summit, our webinar partnership with RadNet, and ongoing sales and marketing initiatives. As more customers, channel partners, and physicians gain firsthand experience with Nanox-Arc, we are seeing encouraging utilization, including sites performing hundreds of scans per month, and one customer transitioning from MSUs to CapEx purchase. The Nanox Imaging Network proof of concept is beginning to contribute to our commercialization strategy by targeting segments that may offer potentially higher reimbursement rates, such as worker compensation groups and concierge medical providers. Through this initiative, Nanox completed the first Nanox imaging network installation in Philadelphia, and the site has begun scanning its first patients. It is encouraging that we are already seeing reimbursement from insurers and payers with paid claims in the range of $200 to $700 per claim. This provides early validation of the commercial opportunity for the Nanox imaging network and supports our focus on targeted care segments where reimbursement dynamics can be favorable. Based on the preliminary business model, we believe each site may have the potential to generate annual revenue in the range of $0.5 million to $1 million, depending on utilization, reimbursement, payer mix, and site-level execution.

In our rest of the world markets, we advance commercialization activities across Europe and Latin America. During the quarter, we completed an end-user deployment in the Czech Republic and advanced system deliveries in Romania and Greece were local distribution partners, which we have discussed on previous calls. We also appointed Solme RCSA as our new distribution partner in Costa Rica, further expanding our presence in Latin America. We also continue to develop commercial opportunities with distributors in Slovenia and Ecuador, and are preparing to ship the system to Argentina. Since the acquisition, our Teleradiology Services Division, USARad, continued to deliver strong and consistent revenues during the first half of 2026, which grew on a year-over-year basis, averaging 14% growth driven by continued expansion of our teleradiology client base. USARad Holdings Inc. has once again earned the Joint Commission's Gold Seal of Approval for ambulatory healthcare accreditation by demonstrating continuous compliance with its performance standards. The gold seal is a symbol of quality that reflects a healthcare organization's commitment to providing safe and quality patient care.

We also extended USARad engagement with a leading multinational aerospace organization. This renewal reflects the value of USARad services offering in our ability to support large organizations with reliable, high-quality teleradiology services. We continue to view the radiology business as both a source of recurring revenues and an important channel for advancing the commercialization of our broader imaging and AI solutions. Nanox AI advanced on both the commercial and the clinical fronts during the quarter. We recently announced that Nanox entered into an exclusive sales reseller agreement with Vertec Scientific Limited for the Nanox AI bone solution in the United Kingdom. Vertec is also the exclusive supplier of Hologic DXA scanners in the U.K., and has an extensive network of key opinion leaders, clinics, and hospitals. Moreover, we launched 5 new AI installations, pilots, across the United States and India. These engagements expand our clinical and commercial footprint and provide opportunities to demonstrate the value of our AI solution in real-world healthcare settings.

We are actively supporting these organizations through the evaluation process and look forward to advancing discussions around broader deployments. We also completed a pilot study with Cedars-Sinai comparing Nanox AI Health AVC with standard of care tools for assessing aortic valve calcification. The study demonstrated greater than 92% agreement between the two approaches, reinforcing the accuracy of our technology and supporting its potential integration into existing imaging workflows. In addition, IRB approval has been received from a leading university-affiliated medical center for an upcoming clinical study and we are now moving forward with data collection. To end my update on the AI business, I would like to share some reimbursement news. In the U.S., the Centers for Medicare and Medicaid Services established a new Healthcare Common Procedure Coding System, coding code G0680, effective April 1, 2026, for algorithmic analysis of coronary artery calcium and aortic valve calcification from chest CT scans. This creates a potential reimbursement pathway for the Nanox AI cardiac solution when used with eligible chest CT exams and when applicable payer, documentation, and medical necessity requirements are met.

We view this as a positive development that may help support commercial adoption of Nanox AI by enabling providers to incorporate AI-driven analysis into existing imaging workflow. The new reimbursement code may expand the addressable market for the Nanox AI cardiac solution by creating a direct reimbursement pathway for outpatient imaging centers and clinics performing eligible chest CT examinations. This pathway may enable qualifying providers to incorporate our cardio solution into existing CT workflows and receive reimbursement without requiring an additional imaging procedure. We are exploring further our engagement with two of our leading research sites, Meir Medical Center and Rabin Medical Center, by expanding our ongoing clinical work into rheumatology, an area we believe may represent a meaningful extension of the Nanox-Arc value proposition. Together with these centers, we are evaluating the potential role of the Arc in the assessment and long-term management of chronic rheumatology conditions. While still in the research stage, we believe this work may help broaden our understanding of additional clinical applications for the Arc and inform future opportunities in rheumatology. I'd like to share a few additional updates on our OEM relationship and pursuits.

Varex tubes are undergoing the final integration process to become a main X-ray tube source for the Nanox-Arc X-system. We've additionally taken receipt of a Varex multi-beam X-ray vessel utilizing multiple Nanox emitters and have begun our initial testing. We are excited to measure our emitters' capabilities in this configuration and have potential partner interest in the areas of security, food inspection, and of course medical. Regarding Oak Ridge National Laboratory prototypes, we have completed and delivered prototypes of the latest design iteration to Oak Ridge for their assessment and integration with their intended application in security use cases. We are also pursuing discussions with other entities for this purpose. Overall, interest in the Nanox breakthrough source technology remains very strong. The Nanox Health IT that we acquired at the end of 2025 has proven to be a valuable addition to Nanox and continue to contribute meaningful revenue in the first half of the year, supported by an expanding customer base and more than 20 new projects going live.

As we complete our integration to make the business more scalable and begin to more fully leverage its synergies with Nanox AI, Nanox-Arc, and USARad business segments, we are very excited about the growth potential of this business. Turning to our South Korea operations, as we previously disclosed, we have been evaluating a range of strategic alternatives aimed at optimizing our cost structure and maximizing the value of our asset in Korea. Following this review, we have decided to move forward with a broader structural transformation of our South Korea operation. As part of this process, we've idled our chip production line and reduced our workforce in Korea by two-thirds. We are transitioning volume production activities to qualified third-party manufacturing partners. In parallel, we have initiated the necessary processes with the relevant authorities and other stakeholders in preparation for the sale of the manufacturing facility. We believe these actions will further streamline our operating model, reduce our fixed cost base and burn rate, and allow us to focus our resources on our core technologies and commercialization priorities. Guy will work through the specifics of the restructuring in his financial overview.

We are also preparing for RSNA 2026, where we plan to engage with customers, partners, and key opinion leaders across the radiology community. RSNA provides an important platform to present our end-to-end imaging solution across Nanox-Arc, Nanox AI, and our broader imaging ecosystem, while supporting business development, customer engagement, and awareness of our recent commercial and clinical activity. We are preparing for RSNA 2026 with the goal of building on last year's success and using the event as a strong commercial kickoff for 2027. I will now turn the call over to Guy, whom we are very pleased to officially welcome to the team.

Guy Nathanzon

Thank you, Erez. Before I begin, I would like to say that I'm very excited to be at Nanox, and I look forward to helping drive our future success as we seek to change medical imaging. Thank you. As we implement the lessons we have learned and drive commercial growth, we've also sought various ways to extend our cash runway to the point where we are at a sustainable run rate. During the quarter and subsequently, we have taken deliberate steps to implement effective measures, including reduction to our cash expenditures and cash burn. Among those steps have been a 15% headcount reduction of our Israeli-based employees, and as previously noted, a reduction in our activities at our Korean location, mainly in the chip fabrication facility, as well as an approximately 67% in our headcount in Korea. We will instead rely on our OEM partners to supply the chips we need for future demand. The estimated annualized cost savings from these steps are expected to be approximately $2 million beginning in 2027. Along with cost reductions, we also recognize the need for additional capital and have recently raised fresh capital via an existing ATM program and a registered direct offering in August that raised together a total of $8.5 million of gross proceeds.

All figures that I'm reviewing now relate to the second quarter ending June 30, 2026. And all comparable figures relate to the comparable quarter of 2025, unless otherwise noted. Q2 2026 revenue was $4.2 million, compared to $3 million in Q2 2025, representing a year-over-year increase of 37%. The increase was driven mainly by the consolidation of the Nanox Health IT, formerly known as Vasal Healthcare IT business, which was consolidated as of November 19, 2025, and accounted for $0.9 million of revenue in Q2 2026. The company generated revenue of $3 million from our teleradiology services, $1 million from our AI and software solutions, and $0.2 million from the sale of imaging systems and OEM services. Q2 2026 adjusted EBITDA loss, a financial measure that is derived as described below under non-GAAP financial measures, was $11.3 million, compared with adjusted EBITDA loss of $10.4 million in Q2 2025. Q2 2026 GAAP gross loss margin was -1,051% compared to a GAAP gross loss margin of -107% for Q2 2025.

Okay. Now we can swap, no we can't do that. for the balance of the year. Jeff, can you hear me?

Jeffrey Cohen

Yes. I can, yes.

Erez Meltzer

Wed, 09 Sep 2026 14:31:28 +0000

Key Takeaways

InnovAge ended fiscal 2026 with approximately 8,230 participants across 20 centers, up 6.3% year over year and 2.2% sequentially.
Fiscal 2026 revenue increased 15.9% to $989.7 million, supported by higher member months and Medicare and Medicaid capitation rates.
Adjusted EBITDA rose approximately 175% to $94.6 million, lifting the adjusted EBITDA margin to 9.6% from roughly 4.0% in fiscal 2025.
The company recorded a fiscal 2026 net loss of $0.7 million, compared with a $35.3 million loss in fiscal 2025. Management said one-time legal accruals affected annual net income.
For fiscal 2027, management expects revenue of $1.05 billion to $1.085 billion and adjusted EBITDA of $105 million to $115 million.
Management is prioritizing growth within existing centers while applying a high bar to de novo development and M&A. Technology, AI and tighter utilization management are central to its margin strategy.

Key Financial Data

Metric	Q4 FY2026	Fiscal 2026	Change and context
Ending census	Approx. 8,230	Approx. 8,230	Up 6.3% year over year and 2.2% sequentially
Member months	24,520	—	Up 6.6% year over year and 1.9% from Q3 FY2026
Revenue	$262.0 million	$989.7 million	Q4 rose 4.0% sequentially; annual revenue increased 15.9%
External provider costs	$115.7 million	$449.8 million	Annual costs rose 4.3%; cost per participant declined
Cost of care, excluding D&A	—	$312.1 million	Up 16.1% year over year
Center-level contribution margin	$62.6 million	$227.8 million	Annual contribution increased 48.2%
Center-level contribution margin rate	23.9%	23.0%	Annual margin expanded 500 basis points
Net income (loss)	$9.8 million	$(0.7) million	Q4 improved from a $29.9 million Q3 loss; annual loss narrowed from $35.3 million
Adjusted EBITDA	$24.3 million	$94.6 million	Annual adjusted EBITDA increased approximately 175%
Adjusted EBITDA margin	9.3%	9.6%	Management retains a long-term target above 10%
De novo losses	$0.3 million	$10.6 million	Down from $15.3 million in fiscal 2025
Cash and cash equivalents	$97.9 million	—	Short-term investments were $43.4 million
Total debt	$63.3 million	—	Includes the senior secured term loan and finance leases

Business and Operating Performance

Revenue growth reflected higher enrollment and capitation rates. Member-month expansion was primarily driven by the California, Colorado and Florida centers. Q4 revenue also benefited from Medicare risk-adjustment reconciliation and a full-year Colorado Medicaid rate true-up.

External provider cost per participant declined, mainly due to lower permanent and short-stay nursing facility utilization and lower pharmacy expense following the shift to in-house pharmacy services. These gains were partly offset by higher assisted-living utilization and increased assisted-living and permanent nursing facility unit costs.

Internal cost of care increased due to higher wages, third-party pharmacy fees and shipping costs, contract services, supplies, administrative expenses and fleet costs, including contracted transportation.

Management described the next phase as “InnovAge 3.0,” focused on scaling its value-based care platform. Priorities include increasing capacity at existing centers, improving participant retention, standardizing Epic workflows and using data to reduce variation across locations.

InnovAge is also expanding selected AI tools. Pilots included clinical decision support for frailty and geriatric care and a medication-optimization agent. Management said the pilots were encouraging but that it remains too early to quantify their effects on quality, utilization or economics.

Management Guidance

Fiscal 2027 guidance	Range or assumption
Ending census	8,625–8,850 participants
Census growth	Approximately 5%–7.5%
Member months	101,000–102,500
Revenue	$1.05 billion–$1.085 billion
Adjusted EBITDA	$105 million–$115 million
De novo losses	$0.4 million–$0.8 million
Medicare rate increase	Approximately 1.5%–2.0%
Medicaid rate increase	Low single digits

Management expects a more moderate fiscal 2027 rate environment than in fiscal 2026. Earnings growth is therefore expected to depend more heavily on enrollment, retention, utilization management, operating efficiency and lower variation across centers.

The Medicare assumptions include the transition to a 50-50 blend of the V22 and V28 payment models beginning in January. Management said InnovAge’s high prevalence of participants with dementia provides some benefit under V28.

Risks and Areas to Watch

California and Colorado Medicaid rate-setting processes were not complete at the time of the call. The two states represent approximately 70% of InnovAge’s census, making final rate outcomes an important variable for fiscal 2027.

State budget pressures could affect Medicaid reimbursement. InnovAge has included what management considers responsible assumptions in its guidance, but final California and Colorado rates remain uncertain.

The company also faces execution risk as it seeks to preserve or improve margins despite less favorable rate growth. Key variables include medical utilization, wage and transportation costs, participant retention and center-level operating consistency.

Legal and settlement expenses increased by a net $36.8 million in fiscal 2026, primarily due to accruals for various legal matters.

Management highlighted federal interest in expanding access to PACE and potentially applying elements of the model to other senior populations. However, discussions remain preliminary, and fiscal 2027 guidance assumes no policy changes or new opportunities.

Analyst Q&A Highlights

Growth strategy: Management said the first priority remains filling and expanding capacity at existing centers. InnovAge is interested in suitable acquisitions but will maintain a high return threshold for M&A and de novo projects.
Margin expansion: Management expects efficiencies across external care, internal cost of care and corporate overhead. More center-level analytics and accountability are intended to improve utilization and productivity.
Enrollment cadence: Census growth is generally strongest in the first two fiscal quarters, softens in the third quarter because of competition during open enrollment, and returns to a more normalized pace in the fourth quarter.
In-house capabilities: Pharmacy, durable medical equipment, palliative care and behavioral health have improved operational control and allowed InnovAge to retain margin previously paid to third parties. Management indicated that most core in-sourcing initiatives are now complete.
PACE policy discussions: Potential reforms include simplifying enrollment, improving awareness and marketing, and reducing barriers to geographic expansion. Policymakers are also exploring whether an interdisciplinary, center-based model could serve Medicare-only adults with functional limitations before they become eligible for PACE.

Full Earnings Call Transcript

Complete Earnings Call Transcript

Management Remarks

Operator

Thank you for standing by, and welcome to the InnovAge Fourth Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, today's program is being recorded.

And now I'd like to introduce your host for today's program, Ryan Kubota, Director of Investor Relations. Please go ahead.

Ryan Kubota

Thank you, operator. Good afternoon, and thank you all for joining the InnovAge 2026 Fourth Quarter and Fiscal Year-end Earnings Call. With me today is Patrick Blair, CEO; and Ben Adams, CFO. Jen Browne, President and COO, will also be joining the Q&A portion of the call.

Today, after the market closed, we issued an earnings press release containing detailed information on our 2026 fiscal fourth quarter and year-end results. You may access the release on the Investor Relations section of our company website, innovage.com. For those listening to the rebroadcast of this call, we remind you that the remarks made herein are as of today, Tuesday, September 8, 2026, and have not been updated subsequent to this call.

During our call, we will refer to certain non-GAAP measures. A reconciliation of these measures to the most directly comparable GAAP measures can be found in our earnings press release posted on our website. We may also make statements that are considered forward-looking, including those related to our 2027 fiscal year projections and guidance, future growth prospects and growth strategy, our clinical and operational value initiatives, the impact of ongoing macroeconomic, geopolitical and industry-related challenges, reductions in PACE reimbursement rates and changes in risk adjustment methodologies, legal proceedings, enforcement actions and litigation and disputes, including civil investigative demands and other expectations.

Listeners are cautioned that all of our forward-looking statements involve certain assumptions that are inherently subject to risks and uncertainties that can cause our actual results to differ materially from our current expectations. We advise listeners to review the risk factors discussed in our annual report on Form 10-K for fiscal year 2026 and any subsequent reports filed with the SEC. After the completion of our prepared remarks, we will open the call for questions.

I will now turn the call over to our CEO, Patrick Blair. Patrick?

Patrick Blair

Thank you, Ryan, and good afternoon, everyone. I'd like to begin by thanking our InnovAge colleagues, our participants and their families, our government partners and our shareholders for their continued trust and support. As we close fiscal 2026 and begin fiscal 2027, I want to spend a little more time than usual today putting our results and our outlook into a broader context.

Fiscal 2026 was an exceptional year for InnovAge and a key milestone in the transformation of the company. We entered the year with clear objectives: deliver high-quality care for our participants, grow census, continue strengthening the operating foundation of the business, maintain a strong culture of compliance and translate the investments we've made over the last several years into improved financial performance. We delivered against those objectives. Adjusted EBITDA increased approximately 175% compared with fiscal 2025, and we believe we are ahead of schedule to achieve our 10-plus percent long-term adjusted EBITDA margin target.

Importantly, we would have generated strong net income for the year, which was ultimately impacted by onetime legal accruals. The rate environment also developed somewhat more favorably than we anticipated during the year, which contributed to our performance. But the larger story of fiscal 2026 is the continued improvement and growing durability in the underlying business. We're operating with stronger leadership, better technology and data and substantially more discipline around how we manage medical costs, operating costs and performance.

I've said for some time that the best measure for the health of our company is when employee engagement, participant satisfaction, quality outcomes, census growth and financial performance, our 5 pillars, all improve together. We believe they can and fiscal 2026 provides evidence of that. I'm incredibly proud of what our team accomplished, but I'm even more focused on what the progress of the last several years now enables us to achieve.

Internally, we have begun describing the evolution of the company in 3 chapters. InnovAge 1.0 was about building the platform. The organization transitioned from its not-for-profit roots to become a for-profit and ultimately a publicly traded company. We expanded geographically, opened and acquired centers, invested significant capital and established a national PACE platform capable of serving thousands of seniors. InnovAge 2.0 was about strengthening that platform. It began during a difficult period for the company when operational compliance needed to be strengthened.

Over the last 4 years, we have worked to address those issues, executed operational improvement opportunities, improved relationships with our regulatory partners, strengthened clinical and operational leadership, implemented a PACE-specific Epic EMR across the enterprise, standardized processes, invested in our people and infrastructure and developed substantially greater visibility into the performance of the business. At the same time, we returned to growth and significantly improved our financial performance. Much of that progress occurred faster and created more value in a shorter period than we anticipated when we began the work.

We're now entering what we think of as InnovAge 3.0. If 1.0 is about building the platform and 2.0 is about strengthening it, 3.0 is about scaling its capabilities and capitalizing on the opportunity in front of us. Our objective is to build an increasingly sophisticated value-based care platform capable of serving meaningfully more seniors while delivering strong, sustainable performance that allows us to reinvest in the business and earn an appropriate return.

This starts with our core PACE business. There remains considerable opportunity to grow census within our existing footprint, expand the capacity of our centers and diversify the channels through which eligible seniors learn about and access PACE. But 3.0 also means looking across a longer time horizon. We're strengthening our capabilities as both a payer and a provider so that we can better manage quality, total cost of care and participant outcomes. We're investing in technology and AI to improve clinical decision-making, productivity and the participant experience. We're evaluating opportunities to increase the physical and operating capacity of our existing centers.

We're beginning to more actively evaluate de novo markets, M&A opportunities, joint ventures and other partnership models that could expand our reach over time. And we intend to remain energetically engaged with policymakers as they consider ways to expand PACE and potentially apply some of the capabilities of the model more broadly. Not every opportunity we evaluate will become part of our strategy, and we will continue to be disciplined about where we invest our time and capital. What has changed is our ability to look further ahead at a broader set of opportunities while continuing to execute within the core business.

There's an essential point I want to emphasize as we talk about this next chapter. Our ambitions for InnovAge 3.0 do not change the foundation on which we operate. Quality of care and compliance remain nonnegotiable. PACE participants are among the most medically and socially complex individuals in the health care system. Our participants, their families, CMS and other state partners place extraordinary trust in us. We take this responsibility very seriously. The lessons of the last several years are deeply embedded in how we operate the company today.

As we grow, we intend to continue investing in operations and clinical leadership, compliance infrastructure, data and monitoring and the systems necessary to identify risk and variation earlier. We will not compromise those standards. An important part of preparing for this next chapter was strengthening the operating leadership of the company. Earlier this summer, Jen Browne joined us as President and Chief Operating Officer. Jen brings significant experience leading complex multisite health care and value-based care organizations, including senior leadership roles at Optum and Strive Health. She has experience across clinical operations, quality, growth and performance improvement and understands what it takes to build scalable operating systems.

Although Jen has only been with us for a few months, she has moved quickly to understand our centers, our people, our opportunities and the areas where we can continue to improve. Her addition gives us significantly greater leadership capacity at precisely the time we're asking the organization to take another step forward. Her immediate priorities include driving greater consistency across centers, strengthening center-level accountability, improving our use of Epic across the entire interdisciplinary care team, improving the participant experience and building the operating and analytical capabilities necessary to support our next phase of growth.

There are several investments underway in fiscal 2027 that illustrate how we're thinking about InnovAge 3.0. Let's start with participant experience. We're investing in a more connected participant experience across the entire journey, including how participants and families communicate with us, receive information, schedule care and understand what to expect. Our participant 360 and voice of the customer initiatives, along with investments in omnichannel communication technology, enhanced integration of inbound calls, scheduling and transportation are aimed at creating a more consistent and seamless experience across our centers.

Next, our technology and data infrastructure. Over the last few years, we've made substantial investments in systems, including Epic, Oracle and Salesforce. The opportunity is to make those systems work more effectively together and make the information they contain more useful to the people delivering care. At the center of the PACE model is the interdisciplinary care team. These teams continuously evaluate participants and identify opportunities for small proactive interventions that can prevent much larger clinical events. We have an opportunity to surface better information and insights directly into their workflows so our teams can make more informed decisions earlier.

We also have an opportunity to get significantly more value from Epic. During fiscal 2027, we're working to expand and standardize scheduling, visit types and documentation across interdisciplinary teams. This should give us greater visibility into capacity, productivity and care delivery patterns while also strengthening the clinical and compliance oversight. The third area is artificial intelligence. We're approaching AI pragmatically and with discipline, with appropriate human oversight and accountability built into how these tools are developed, tested and used.

Every use case must answer a basic question: can it help us improve care, improve the participant experience, reduce administrative burden or help operate our centers more efficiently. If it can, we test it, we measure it. And if the results justify it, we scale it. We're particularly encouraged about the potential for AI-enabled physician decision support. We recently completed pilots of 2 capabilities designed to give our clinicians better information and insights directly within their existing workflows while keeping clinical judgment and decision-making firmly with the provider.

The first is an AI-enabled consultation agent designed specifically around the complexities of frailty and geriatric care. It is intended to provide our primary care physicians with on-demand clinical information and specialist-level perspectives to inform thexpect our eir evaluation of a participant. In our pilot, the tool helped physicians manage a broader range of clinical needs within the interdisciplinary care team and was associated with fewer external specialist referrals.

We also piloted a medication optimization agent that reviews a participant's medication regimen in the context of their broader clinical information and surfaces potential opportunities for medication and dosing optimization for the clinician to consider. Both pilots demonstrated the concepts in a controlled environment, and we are now beginning to scale these capabilities more broadly across the organization. It's still too early to quantify their impact on quality, utilization or economics, but we're encouraged by what we've seen to date. We also have several additional AI use cases in development that we expect to pilot over time. Scheduling and transportation are other good examples.

Transportation is fundamental to PACE and extraordinarily complex operationally. We coordinate thousands of trips for participants with different clinical needs across large geographic areas while simultaneously coordinating center schedules, outside medical appointments and care team capacity. We believe AI and better analytics can help us anticipate demand, improve routing and scheduling, reduce cancellations and make better use of the capacity we already have.

Taken together, we expect these investments to translate into measurable improvements in the performance of the business, not just new capabilities. A better and more consistent participant experience should improve satisfaction and retention, reduce voluntary disenrollment and support stronger net census growth. Better data, analytics and clinical decision support should help our care teams intervene earlier, limit unnecessary utilization and more effectively manage the total cost of care.

There's also something occurring outside of InnovAge that I believe is valuable to the long-term story. The level of federal interest in PACE feels as strong as it has been at any point in recent years. We see this developing along 2 parallel tracks. The first is the existing PACE program. There is meaningful work underway with CMS, CMMI, the National PACE Association and PACE organizations to better understand the barriers that have historically limited the growth and adoption of PACE and could responsibly allow the existing program to serve more seniors. We believe this is an important conversation.

PACE has demonstrated that a fully integrated full risk model can produce strong outcomes for highly complex seniors while helping them remain safe in their homes and communities? Yet PACE continues to serve only a small portion of the population that could potentially benefit from the program. So understanding barriers to growth, whether they involve awareness, enrollment, eligibility, program requirements, development time lines or other structural issues, is essential if the country wants more seniors to have access to the model.

The second track is more exploratory. There are productive conversations occurring with CMS and CMMI, both directly with individual PACE organizations and through the National PACE Association about whether some of the capabilities and attributes that make PACE successful could potentially be applied to additional senior populations. These conversations are still early. We don't know where they will lead, whether they will result in a new model or on what time line. We're, therefore, being appropriately measured about it, but we're honored to be a part of the dialogue and to provide our experience, ideas and feedback. And I think the 2 tracks should be considered together. The first question is how we strengthen the existing PACE program and responsibly remove barriers that prevent it from serving more eligible seniors today.

The second question is whether elements of PACE's core model could extend to other populations. Both reflect a broader question facing the U.S. health care system. How do we care for a rapidly growing senior population with increasingly complex medical and social needs in a way that produces better outcomes and allows more people to remain in their homes and communities. Our view is that PACE organizations have an important role to play in that conversation.

Earlier this year, HHS' Office of the Assistant Secretary for Planning and Evaluation released a study examining outcomes across integrated care models for individuals eligible for both Medicare and Medicaid. Among its findings, PACE participants experienced fewer hospitalizations and emergency department visits and lower mortality than comparable beneficiaries in non-integrated Medicare Advantage plans.

We also had the privilege of hosting HHS Secretary, Robert F. Kennedy, Jr., at our Thornton, Colorado center, where he was able to see firsthand how an interdisciplinary team brings medical care, long-term services and supports, transportation, nutrition and social services together around the participants. We don't know where any policy discussions may lead, and our outlook does not assume any changes to the PACE program or future opportunities. But the combination of growing evidence supporting the model, an aging population, increasing pressure on institutional care and a high level of engagement from federal policymakers makes this a key moment for PACE.

Let me now turn to fiscal 2027. We're targeting ending census of approximately 8,625 to 8,850 participants, representing census growth of approximately 5% to 7.5%, total revenue of approximately $1.05 billion to $1.085 billion, and adjusted EBITDA of approximately $105 million to $115 million. I think it's important to put this guidance in context. On our last call, we discussed our expectation that the fiscal 2027 rate environment would be more tempered than we experienced during fiscal 2026. We now have better visibility, and overall, the rate environment has continued to trend better than we expected when we gave initial guidance. This provides some additional support to our top line outlook.

Like many states across the country, some of our state government partners are navigating meaningful fiscal pressures and the implications of our rates are not yet fully known. California and Colorado are 2 markets where we have worked with our state partners in the PACE rate setting processes, which have yet to conclude. We've incorporated what we believe are responsible assumptions into our fiscal 2027 outlook based on the information available to us today, while recognizing that the ultimate rate outcomes are not yet final. Together, California and Colorado represent approximately 70% of our census.

On Medicare, we currently expect our county rate increases adjusted for the continuing transition of the V28 risk adjustment model to result in a net rate increase of approximately 1.5% to 2.0%. Ben will provide more detail on the components of our guidance. From my perspective, the main point is that fiscal 2027 gives us an opportunity to demonstrate the increasing durability of the business. We will not have all the same rate increases that contributed to fiscal 2026.

Our ability to continue growing earnings in fiscal 2027 will, therefore, depend increasingly on execution. That means growing enrollment and improving retention, tightening our management of utilization and total cost of care, reducing variation across our centers and using technology and AI with the goal of operating the company more efficiently and effectively.

Before I turn the call over to Ben, I want to recognize the approximately 2,500 InnovAge colleagues who made fiscal 2026 possible. Behind every metric we report is a participant whose life is affected by the care we provide. It's a senior who can remain living in his or her home and community. It's a family with greater peace of mind. It's a caregiver who knows there is an interdisciplinary team managing the complexity of their loved one's care. That is our purpose. Today, we're operating from a very different position than we were 4 years ago.

We have a stronger organization, a stronger leadership team, a more capable operating platform, greater financial capacity and considerably better visibility into the business. We have demonstrated an ability to execute consistently over several years. And throughout it all, quality, compliance and the well-being of our participants remain the foundation of everything we do. We're excited about fiscal 2027 and increasingly confident in the longer-term opportunity ahead of the company.

With that, I'll turn it over to Ben for more detail on the financials.

Benjamin Adams

Thank you, Patrick. We are pleased with our fiscal 2026 performance. Building on Patrick's comments, I'll focus on the financial results that demonstrate the progress we've made across the business. Starting off our fiscal 2026 highlights with census. We served approximately 8,230 participants across 20 centers as of June 30, 2026, which represents annual growth of 6.3% and sequential quarter growth of 2.2%. We reported 24,520 member months in the fourth quarter, an increase of approximately 6.6% compared to the fourth quarter of fiscal year 2025 and an increase of approximately 1.9% over the third quarter of fiscal year 2026.

Total revenues increased by 15.9% to $989.7 million for fiscal year 2026. The increase was primarily driven by an increase in member months coupled with an increase in capitation rate. The increase in capitation rates includes rate increases for both Medicare and Medicaid, and the increase in member months was primarily due to growth in our California, Colorado and Florida centers. Compared to the third quarter, total revenues increased by 4.0% to $262.0 million in the fourth quarter, primarily driven by growth in member months and higher capitation rates.

The capitation rate increase was largely attributable to Medicare risk adjustment reconciliation and a full year Colorado Medicaid rate true-up, both recognized in the fourth quarter. We incurred $449.8 million of external provider costs during the fiscal year, a 4.3% increase compared to fiscal year 2025. The increase was driven by an increase in member months, partially offset by a decrease in cost per participant. The decrease in cost per participant was primarily driven by a decrease in permanent nursing facility and short-stay nursing facility utilization and a decrease in pharmacy expenses associated with the transition to in-house pharmacy services.

The decrease in external provider cost per participant was partially offset by an annual increase in assisted living and permanent nursing facility unit costs and an increase in assisted living utilization. During the fourth quarter, we incurred $115.7 million of external provider costs, an increase of 2.2% compared to the third quarter of fiscal year 2026. The increase was primarily driven by an increase in member months. Cost of care, excluding depreciation and amortization, was $312.1 million, an increase of 16.1% compared to fiscal year 2025. The increase was due to an increase in member months coupled with an increase in cost per participant.

The overall increase was driven by higher salaries, wages and benefits associated with higher wage rates, an increase in third-party fees and shipping costs associated with in-house pharmacy services, an increase in contract services, an increase in supplies and administrative costs and higher fleet costs, inclusive of contract transportation. For the fourth quarter, cost of care, excluding depreciation and amortization, increased 7.7% compared to the third quarter. The overall increase was primarily due to an increase in fleet costs, including contract transportation, an increase in supplies and administrative costs and salaries, wages and benefits due to higher wage rates.

Center-level contribution margin, which we define as total revenues less external provider costs and cost of care, excluding depreciation and amortization, which includes all medical and pharmacy costs, increased 48.2% to $227.8 million in fiscal year 2026 compared to $153.6 million in fiscal year 2025. As a percentage of revenue, center-level contribution margin increased 500 basis points to 23.0% compared to 18.0% in fiscal year 2025. For the fourth quarter, center-level contribution margin was $62.6 million compared to $61.0 million for the third quarter of fiscal year 2026, an increase of 2.5%.

As a percentage of revenue, center-level contribution margin of 23.9% decreased by approximately 30 basis points compared to 24.2% in the third quarter of fiscal year 2026. Sales and marketing expenses of $34.4 million increased 21.8% compared to fiscal year 2025, primarily due to increased headcount, wage rates and marketing spend to support growth. For the fourth quarter, sales and marketing expenses increased by 13.6% compared to the third quarter of 2026 as a result of additional marketing spend and consulting services.

Corporate, general and administrative expenses increased 36.4% to $166.5 million compared to fiscal year 2025. The increase was primarily due to the $36.8 million net increase in our litigation and settlement expenses, primarily related to the accrual for various legal matters, higher employee compensation and benefits expense as a result of organizational restructuring activities, executive severance, increased headcount and higher wage rates, partially offset by lower variable compensation, the year-over-year increase of consulting services expense and software license fees.

For the fourth quarter, corporate general and administrative expenses decreased 56.8% to $33.1 million compared to the third quarter of fiscal year 2026. The decrease was primarily due to litigation costs and settlements recorded in the third quarter. Net loss was $0.7 million compared to a net loss of $35.3 million in fiscal year 2025. We reported a net loss per share of $0.02 compared to a net loss per share of $0.22, each on both a basic and diluted basis. Our weighted average share count was approximately 135.7 million shares for the fiscal year on both a basic and fully diluted basis.

For the fourth quarter, we reported net income of $9.8 million compared to a net loss of $29.9 million in the third quarter and net income per share of $0.06, each on both a basic and diluted basis. Adjusted EBITDA was $94.6 million for fiscal 2026 compared to $34.5 million in fiscal 2025 and $24.3 million for the quarter compared to $30.5 million in the third quarter of fiscal year 2026. Our adjusted EBITDA margin was 9.6% for fiscal 2026 and 9.3% for the fourth quarter. We do not add back losses incurred by our de novo centers in the calculation of adjusted EBITDA. We define de novo center losses as net losses related to preopening and start-up ramp through the first 24 months of de novo operations.

Accordingly, de novo losses have decreased in fiscal year 2026 as our Tampa, Orlando and Crenshaw centers have progressed beyond the initial 24-month de novo period. We incurred $10.6 million of de novo losses in fiscal year 2026. This compares to $15.3 million in fiscal year 2025. For the fourth quarter, de novo losses were $0.3 million associated with our planned centers in California. This compares to $3.9 million of de novo losses in the third quarter of fiscal year 2026. Turning to our balance sheet. We ended the quarter with $97.9 million in cash and cash equivalents plus $43.4 million in short-term investments. We had $63.3 million in total debt on the balance sheet, representing debt under our senior secured term loan and finance lease obligations.

Turning to fiscal 2027 guidance, which we included in today's press release and based on information as of today, we expect our ending census for fiscal year 2027 to be between 8,625 and 8,850 participants and member months to be in the range of 101,000 to 102,500. We are projecting total revenue in the range of $1.05 billion to $1.085 billion and adjusted EBITDA in the range of $105 million to $115 million. And we anticipate that de novo losses for fiscal 2027 will be in the range of $0.4 million to $0.8 million.

I will also provide some additional color on a few of the components that comprise our guidance assumptions. Starting with revenue. As we highlighted last quarter, we are expecting a Medicare rate increase of 1.5% to 2% and low single-digit rate increases for Medicaid. As a reminder, Medicare rates are based on county-specific rates established by CMS and updated each January as well as prospective risk score adjustments that occur in January and July. Effective January 1, we will move to a 50-50 blend of the V22 and V28 payment models as part of CMS' ongoing transition to V28. The anticipated impact of this change is reflected in the guidance we are providing today.

We expect fiscal 2027 to be a year focused on preserving and expanding upon the progress we've made while navigating a more challenging rate environment and making disciplined margin management a key priority. Importantly, our focus on margin discipline is intended to ensure we have the flexibility to invest in future growth opportunities while maintaining the strong operating foundation Patrick described. To support this effort, we will continue to build on our clinical and operational value initiatives while pursuing additional efficiencies across the organization, while we remain committed to delivering high-quality care and outcomes for our participants.

I also want to quickly mention that our 2 Florida centers and our Crenshaw center in California have transitioned out of their de novo status. And as a result, will not be included in the calculation of de novo losses in fiscal 2027. De novo losses in the upcoming fiscal year are primarily related to Bakersfield. Overall, we believe our guidance reflects a balanced outlook that is designed to protect margins, maintain quality and support continued sustainable growth across the business.

In closing, fiscal 2026 marked a meaningful step forward for InnovAge. We improved profitability, strengthened center-level performance and ended the year with a strong balance sheet. Looking ahead to fiscal 2027, our focus will be on disciplined execution. While the rate environment is expected to be more moderated than fiscal 2026, we believe continued progress in utilization management, operating efficiency and enrollment growth could position us to preserve margins and continue building shareholder value.

Operator, that concludes our prepared remarks. Please open the call for questions.

Operator

And our first question for today comes from the line of Benjamin Rossi from JPMorgan.

Question-and-Answer Session

Benjamin Rossi

When we think about PMPM trends for next year, you mentioned net rates being up 1.5% to 2%, Medicare up in a similar range and then Medicaid in the low single digits. Can you just walk us through some of the variables going into your PMPM assumptions and how you're factoring things like county level rates, risk adjustments and other puts and takes? And then with the potential policy-driven areas, you mentioned the V28 shift? How are you factoring those changes into your assumptions regarding risk adjustment calculations?

Benjamin Adams

Yes, sure. Ben, so we can -- let me give you some highlights. So we obviously look at -- we get the Medicare county rates, and then they're adjusted for the phase-in of V28. This year, we're 10% -- well, excuse me, 10% V28, 90% the old model. Next year, it's going to be 50-50, and I believe it kicks off in January when it phases in. So we get basically half a year of the 50-50 phasing. So we've gone through and looked at the calculation about how that's going to affect us. And obviously, for PACE plans, we're impacted differently than MA plans.

One of the things that we've spoken about before is what happens with dementia coding, which obviously is treated favorably under V28. And so we get a boost there because of the high prevalence of dementia among our participants. So all of that sort of factors in together to go to that 1.5% to 2% increase in the Medicare side that we've talked about. On the state rates, it's been -- it's a little bit more complicated because 2 of our states, California and Colorado, are very important to us. And the rates of California don't get finalized until a little bit later in the year. And we've got some working assumptions internally about how we think about those that factored into our budget and into our guidance.

Same thing for Colorado, where really we're waiting for the final public policy adjustments there to know what the net impact is going to be like. So we've rolled all of that into our assumption about rates going forward for next year. And we think based on what we've seen so far and all the intelligence that we have today that, obviously, the rates aren't going to be as robust as they were last year. But if you think about the rate environment we're going to have this year, we think it's one that we can operate within effectively. So we look at it as being sort of a manageable rate environment for 2027, if not as robust as it was last year.

Benjamin Rossi

Super helpful. And I guess as a follow-up, Patrick, I appreciate your commentary on the 3 chapters for InnovAge and some of the scaling efforts as part of this third chapter. When we think about strategic growth priorities as you head into 2027, at a high level, how are you prioritizing efforts to fill and add to existing centers versus adding new centers via M&A, de novos or JV partnerships? And can you just give us an update on how you're thinking about your M&A pipeline as well?

Patrick Blair

Yes. Thanks a lot for the question. I think our focus continues to be the capacity in our existing centers. We certainly have capacity, and we're working hard to explore ways to create more operational capacity in our existing centers as well. I think when we think about de novos, I think in general, we are establishing a pretty high bar for what's an effective and appropriate de novo for us. I think -- we think the right acquisitions over a 3- to 5-year period could deliver a better return on invested capital than de novos. We certainly have a couple of markets that over the next few years, we'd like to enter.

But we're also coming off a period where we had a pretty heavy de novo thrust with both centers in Florida. The Crenshaw market was essentially a de novo in many ways and then our Sacramento center. So I think we've got a pretty high bar for de novos. On the M&A side, I think that's probably where we'd be more interested in finding the right opportunity. I think we -- I think Crenshaw is a good example of buying a business that was sort of in the early stages of its growth and sort of wasn't meeting expectations. And by virtue of sort of connecting it to our platform, we've been able to control -- excuse me, grow the market significantly, and the business is performing real well. And so I think there's more there.

The team is proactively approaching and reviewing everything coming to market. I'd like to believe that when a PACE program is considering a sale, we're a likely call -- as Ben mentioned, the business now is producing strong cash flows and cash conversion, and we've got a lot of opportunity on the balance sheet. But at the same time, we're going to keep a pretty high bar related to M&A as well, just given the strength of our core business and the business that we see there. So we're going to be very disciplined.

But we're looking at all of the avenues as it relates to growth. And I think that's one of the things that distinguishes sort of this next chapter from the last 2 is we have the capacity, the time, the leadership expertise and capacity to really start looking more aggressively into sort of the growth side of the equation. And the better the platform, the more of a competitive advantage that, that should provide us as we explore new opportunities.

Operator

And our next question comes from the line of Matthew Gillmor from KeyBanc.

Matthew Gillmor

Maybe following up on the 2027 guidance discussion and particularly in the margin expansion. I think the guidance implies 10.3% adjusted EBITDA margins versus the 9.6% you reported for fiscal '26. So nice expansion there even with some of the investments you mentioned. Ben had mentioned sort of a disciplined approach towards margin management as a priority. I was hoping you could give us some flavor for what that entails. And ultimately, what is driving the margin upside in 2027, even on top of some of the investments that you've highlighted for us?

Benjamin Adams

Yes. Matt, I think -- well, sort of going back to philosophically how we're approaching it, we said a couple of years ago at our Investor Day that we really thought that sort of 10% plus was what we think of as the long-term sustainable margin. And when we think what that means, it really means that, first of all, it allows our state and federal partners to get good value for the dollars that they are investing in the PACE program and it allows us to earn a good margin and give our shareholders a very good return on their investment.

And most importantly, it provides more than enough funds for us to invest in the quality of our participant care and ensuring that our participants really have a top-notch experience with us. And so that philosophy that we really laid out 2.5 years ago has remained unchanged. And so when we think about what we're seeing this year, without commenting specifically on margins because the guidance sort of is what the guidance is, I think we've sort of looked at the business and said, going forward, we're getting some efficiencies out of third-party care by being mindful of what our utilization rates are. In terms of our internal cost of care, we are getting some efficiencies out of that business. And Jen Browne, who joined us recently, is really spearheading the effort to put a lot of data analytics down into the centers so we can really monitor closely the utilization and the efficiency that comes out of that area.

And so we think that's going to be very beneficial to margins this year going forward. And then also, you've probably seen over the last 3 years or so, us becoming more efficient on the general and administrative line item, and we expect that trend will continue this year as well. So when you sort of think about the goal of defending to slightly improving margins and getting towards that long-term sustainable margin, it's really all 3 of those components working in concert together that will get us there.

Matthew Gillmor

Great. Very helpful. And then on the policy discussions that you mentioned with CMS, I think there was 2 areas that sort of stood out to me. One was reducing barriers and then also looking at adjacent populations. I appreciate these discussions sound pretty early, but I was hoping you could give us some flavor for where the opportunities are from where you stand, for example. So what are the barriers that could be removed that would make a big difference? What are the types of adjacent populations that would benefit from PACE, that sort of thing? Any details would be helpful.

Patrick Blair

Yes. Thanks for the question. I think the second part first, which is sort of the barriers to PACE. Most of the barriers center around making it easier to enroll in PACE as well as making it easier to expand and enter new markets. Those are sort of at its core, those are the -- there's variations of specific regulations that we provided feedback on that we think could be very helpful. But it's really about making it easier to enroll in PACE, building awareness of PACE, making it easier to market and build awareness to the program as well as the ability to apply and expand into new territories much more easily. So that's sort of the core.

When you think about sort of the market adjacencies, I think there's just a recognition that there's a large and growing population of Medicare-only adults. So they're not dual eligible. They're Medicare only. Many of them are adults with functional impairment, and they sit upstream of PACE today. And they're not yet eligible for Medicaid, but they're already on kind of this measurable trajectory toward institutional care. And if you think about many of the models today, they're not really designed for the population that sort of sits upstream of PACE, the Medicare beneficiaries. They're not designed to manage this combination of functional needs and clinical needs in a really coordinated way.

And I think what we believe and what other PACE programs believe that what is missing at sort of at scale is a model that can consistently deliver that center-based care supported by an interdisciplinary team that's accountable for outcomes, that's seeing the patients with high frequency. There's a lot of in-person engagement. So the conversations that are happening at various nodes in the policymaking and regulatory market are really asking sort of this overarching question, is there a population upstream of PACE where one could test whether an earlier center-based interdisciplinary model for these Medicare beneficiaries with functional limitations, could you change the trajectory of that functional decline, reduce acute and post-acute utilization, which benefits Medicare, reduce long-term nursing facility care, which would reduce -- would benefit Medicaid would lower the total cost of care, could slow the spin down of these populations to Medicaid, which saves both the federal government and the state government money based on how the program would be funded.

So as I said, these are early conversations. We're not privy to or involved in all of the conversations that we understand are occurring. But we think there's real interest and curiosity among the policymakers about how could the PACE model of care serve a population upstream of PACE. And so we're just kind of honored to be a part of it and honored to be able to share our thoughts and ideas, but there's also great work being done by the National PACE Association and other PACE organizations on the same topics. So it is kind of an exciting time to be thinking about how the PACE model could be used to serve new populations.

Operator

And our final question for today comes from the line of Jared Haase from William Blair.

Christine Rains

It's Christine Rains on for Jared. I'm hoping you can give some color on the pacing of census and revenues contemplated in your guidance?

Benjamin Adams

I'm sorry, you broke up a little bit there, part of the question. If you wouldn't mind repeating it again.

Christine Rains

I apologize. Just about the cadence of census and revenues that is contemplated in your 2027 guidance.

Benjamin Adams

Yes. Yes. So got it, the cadence. Okay. So I guess what I would say is the thing about the business, I think we've seen over the last 2 or 3 years is when you think about census, it's become relatively predictable for us. If you go back and you take a look at the census increase over the last couple of years and you go back and make an adjustment for some of the [ LOMI ] issues we discussed last year in the first 6 months of the year, you'll see a pretty steady increase in census kind of quarter-by-quarter. And just to remind everybody, when we go through the census build or the enrollment build over the course of the year, we usually have a very good first quarter, which for us is kind of like the September quarter.

The second quarter is usually pretty good. It's the third quarter where we typically see some softness, and that's related to some of the competition associated with open enrollment during that period of time. And then we sort of return to a more normalized rate of enrollment in Q4. So the way I think about it is, if I were you guys building a model or things like that, I would go back and look at the last few years, make a little bit of an adjustment for the first 6 months of last year related to the [ LOMI ] issue that we've talked about and then think about 3 quarters of relatively steady growth with a pause in the middle during our third quarter.

Christine Rains

Got it. That makes a lot of sense. And then you've previously talked about seeing some cost benefit this year from bringing in-house certain functionalities like pharmacy. So wondering if you can put any numbers to this incremental benefit? And also if you see any other areas of care that you think it would make sense to bring in-house as of now?

Benjamin Adams

We don't break out specific dollars associated with those initiatives. But I think what you've seen is you've seen a general step-up in margins in the business over the last couple of years, and that really reflects the fact that we've brought in-house things like DME and palliative care and behavioral and other things as well as our own in-house pharmacy. So I think all of those have done a couple of things for us.

First of all, and probably most importantly, they've given us much more operational control over the business. So we can ensure much higher quality for our participants, and we have much more control over our operations than if we were to delegate some of those activities to contracted third parties. And then obviously, the benefit to us is we recapture some of the margin that we would have otherwise ceded to folks. So it's really showed up for us in 2 different ways.

I think going forward, I think a lot of the core activities that we wanted to in-house, we probably in-house at this point. And Patrick talked about in his comments the fact that in this 3.0 version, we're sort of a little bit more of a forward-leaning organization. So we're going to be looking towards growth opportunities in the future, recognizing that a lot of the turnaround or the turnaround is complete, a lot of the operational things that we have to do, we've really satisfied over the last 8 quarters or so.

Patrick Blair

I might add to that, Ben, just the notion of we do feel that AI is one of the tools that we feel can help us get more out of the platform that we already have. So all the areas Ben mentioned, the opportunity now that we're approaching very pragmatically with a lot of discipline is how can we use AI, not for the sake of saying we're doing AI, but really through the lens of solving specific problems where we believe that technology can improve care, can improve the participant experience or just make us more efficient.

And I think the clinical side of the business, all of the clinical disciplines that go into an interdisciplinary team, we're seeing a real opportunity to address variation that you can find from a distributed multisite business. There's lots of variation on what services are provided, how much of those services are authorized and ordered by our providers. And so using AI in sort of this world of clinical decision support where we're developing tools that can bring -- I think about it as sort of a specialist level of insights directly into the physician workflow and creating the opportunity to help our physicians manage more conditions within the interdisciplinary team.

And when a specialist is needed, make a more precise referral to the right provider. I mean these are tools that we think could be particularly powerful in helping us manage the total cost of care. And Ben mentioned pharmacy. We've already implemented a pilot that uses AI to help identify polypharmacy issues, drug interactions and participants who might benefit from having the pharmacist more engaged. We're talking about scheduling and transportation back to the comment about growth, how can we create additional capacity inside our core business, so that we can achieve our growth targets without needing to be reliant on a de novo market entry or M&A.

And we see using AI to help us in our scheduling and transportation in particular, that is going to be a big opportunity for us. So I'll just add that on a lot of what we're trying to do, what we've done in the past around bringing third-party clinical disciplines into our portfolio. Now we're going to go back behind those and ask the question, how can AI create more value? And that's sort of the path we're on right now.

Operator

This does conclude the question-and-answer session as well as today's program. Thank you, ladies and gentlemen, for your participation. You may now disconnect. Good day.

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ODDITY (ODD) Q2 2026 Earnings Call: Revenue Falls 25% as Ad Dislocation Persists

Wed, 09 Sep 2026 14:31:22 +0000

Key Takeaways

ODDITY (NASDAQ: ODD) reported second-quarter 2026 net revenue of $181 million, down 25% year over year, as IL MAKIAGE continued to face elevated customer acquisition costs caused by an advertising-account algorithm dislocation.
Adjusted EBITDA was $13 million, above the company’s prior outlook of $8 million to $10 million. Adjusted diluted EPS was $0.20.
First-order net revenue declined approximately 40%, while repeat-order net revenue fell approximately 20%. Average order value declined about 8%.
SpoiledChild remains on track, according to management, to grow at least 35% and approach $350 million in 2026 net revenue. METHODIQ is expected to generate more first-year revenue than SpoiledChild did.
Management expects the year-over-year net revenue decline to improve to approximately 5% in Q3 2026, with adjusted EBITDA of $18 million to $20 million.
Full-year 2026 guidance calls for an approximately 19% net revenue decline and adjusted EBITDA of $30 million to $32 million.

Core Financial Data

Metric	Q2 2026 result	Change or context
Net revenue	$181 million	Down 25% year over year
First-order net revenue	—	Down approximately 40% year over year
Repeat-order net revenue	—	Down approximately 20% year over year
Average order value	—	Down approximately 8% year over year
Gross margin	68.7%	Down from 72.3%; approximately 360 basis points of compression
Adjusted EBITDA	$13 million	Above company outlook of $8 million to $10 million
Adjusted diluted EPS	$0.20	Adjusted basis
Free cash flow	Increased by $14 million in Q2	Decreased by $8 million in the first half
Cash, cash equivalents and investments	$561 million	At quarter-end
Credit facilities	$350 million	Undrawn

The gross-margin decline reflected lower average order value and product-mix changes, including a shift away from IL MAKIAGE skin products. Adjusted EBITDA was also affected by higher customer acquisition costs, fixed-cost deleverage and increased acquisition spending for SpoiledChild.

ODDITY repurchased 5.6 million shares for $80 million during the quarter. Year-to-date repurchases totaled 11.7 million shares for $163 million, reducing ordinary shares outstanding by approximately 20%. The company had about $87 million remaining under its $200 million authorization.

ODDITY also repurchased $50 million face value of its 0% June 2030 exchangeable notes for $35 million.

Business and Operating Performance

IL MAKIAGE

IL MAKIAGE remained the primary source of revenue pressure. Management attributed the disruption to audience drift within the algorithm of its largest advertising partner, which has reduced the brand’s ability to reach relevant customers and sharply increased cost per acquisition.

The impact extended beyond first orders. Lower acquisition earlier in the year reduced the repeat revenue that would normally follow, while some repeat purchases also depend on advertising exposure.

ODDITY and its advertising partner remain in intensive testing. Management said it believes the issue is technical and solvable, but confirmed that it has not yet been resolved. The company’s goal is to return IL MAKIAGE to growth in 2027, supported by a pipeline of products whose launches were delayed during the disruption.

SpoiledChild

SpoiledChild delivered continued growth and remains on track to expand at least 35% in 2026, approaching $350 million in net revenue. Management said the brand’s 12-month net revenue repeat rate remains well above 100%.

Although SpoiledChild has also experienced some effect from the advertising dislocation, the impact has been less severe than at IL MAKIAGE. ODDITY increased acquisition spending because management considers the brand’s 12-month contribution margins attractive.

The company plans further international expansion and has more than eight products and categories in development for 2027.

METHODIQ and ODDITY Labs

Management said METHODIQ’s first-year revenue is expected to exceed SpoiledChild’s first-year result. The medical-grade brand launched with 30 products spanning makeup, non-prescription products and personalized prescription protocols.

Hyperpigmentation has emerged as a leading category. METHODIQ combines computer-vision assessments, provider-issued treatment plans and prescription or non-prescription products. One highlighted product was Mellan-X 509, powered by an ODDITY Labs molecule combination.

Management plans to expand METHODIQ into additional categories in 2027, including longevity and metabolic health. The initial offering is expected to include legally available prescription injectables and peptide therapies.

ODDITY continues to invest in AI-assisted molecule discovery at ODDITY Labs. Management said AI could accelerate research processes, while early in-vitro work in aging has shown potential for increasing collagen synthesis and reducing aging markers.

The company also plans to launch Brand Four in 2027.

Management Guidance

Period	Net revenue outlook	Adjusted EBITDA outlook
Q3 2026	Approximately 5% year-over-year decline	$18 million to $20 million
Full-year 2026	Approximately 19% year-over-year decline	$30 million to $32 million

Management expects Q3’s year-over-year decline rate to improve materially from Q2 because it believes the worst acquisition-driven pressure is behind the company. Repeat revenue and SpoiledChild’s growth are expected to support the improvement.

The company remains cautious about Q4 because the allocation of advertising spending is not yet determined. A greater share of spending directed toward testing would be less efficient for near-term revenue generation.

Risks and Areas to Watch

The IL MAKIAGE advertising algorithm dislocation remains unresolved, despite intensive testing with ODDITY’s largest advertising partner.
Higher customer acquisition costs continue to pressure revenue, adjusted EBITDA and contribution economics.
Reduced first-order activity creates a compounding effect on future repeat revenue.
Q4 visibility remains limited because management has not finalized how much advertising budget will be allocated to testing versus revenue generation.
IL MAKIAGE is working through excess inventory purchased in anticipation of stronger revenue. Management expects inventory to be better balanced in 2027.
Israel revenue and the company’s local store base remain exposed to volatility associated with the war.

Analyst Q&A Highlights

Management said IL MAKIAGE could return to growth after the advertising issue is resolved, but emphasized that remediation is still underway. ODDITY is also exploring broader distribution and additional marketing channels while maintaining direct-to-consumer operations as a central source of customer data.

On repeat purchasing, the company said its consolidated 12-month net revenue repeat rate remains well above 100%, supported by both IL MAKIAGE’s existing customer base and SpoiledChild.

ODDITY has shifted part of IL MAKIAGE acquisition from Try Before You Buy toward direct purchase to reduce signal distortion. Management believes at least 50% of acquisition could move to the Buy model without a notable effect on unit economics, though it does not plan to eliminate Try Before You Buy.

Management continues to view a high-60% gross margin as a longer-term range. It does not consider Q2’s pressure structural, citing the potential to improve average order value after the acquisition disruption is addressed and to further optimize METHODIQ’s gross margin.

Full Earnings Call Transcript

Complete Earnings Call Transcript

Management Remarks

Operator

Good morning and welcome to ODDITY's Second Quarter 2026 Earnings Call. Today's call is being recorded and we have allotted time for prepared remarks and Q&A. At this time, I would like to turn the conference over to Maria Lycouris, Investor Relations for ODDITY. Thank you. You may begin.

Maria Lycouris

Thank you, Operator. I am joined by Oran Holtzman, ODDITY's Co-founder and CEO, and Lindsay Drucker Mann, ODDITY's Global CFO. Niv Price, ODDITY's CTO, will also be available for the question and answer session. As a reminder, management's remarks on this call that do not concern past events are forward-looking statements. These may include predictions, expectations, or estimates, including statements about ODDITY's business strategy, market opportunity, future financial performance, customer acquisition costs, and potential long-term success. Forward-looking statements involve risks and uncertainties, and actual results could differ materially due to a variety of factors. These factors are described under forward-looking statements in our earnings press release issued earlier today and in our most recent annual report on Form 20-F filed with the Securities and Exchange Commission on March 17, 2026. We do not undertake any obligation to provide any information on the form and update forward-looking statements, which speak only as of today. Finally, during this call, we will discuss certain non-GAAP financial measures, which we believe are useful supplemental measures for understanding our business. Additional information about these non-GAAP financial measures, including their definitions, are included in our earnings press release, which we issued today. I will now hand the call over to Oran.

Oran Holtzman

Thank you, everyone, for joining our call today. While we continue to work through the ad account dislocation at IL MAKIAGE, I am pleased to report progress in our business that hopefully positions us for recovery in 2027 and beyond. SpoiledChild had a good quarter and a strong year to date, 2026 overall, and it is on track to grow at least 35 percent this year and approach $350 million of net revenue in 2026. METHODIQ is showing great promise after launching only several months ago. We expect the brand to deliver first-year revenue ahead of SpoiledChild's first year and with huge potential for the future. Both SpoiledChild and METHODIQ are building ambitious plans for 2027, and we will update you in coming months. For IL MAKIAGE, we continue to work extremely hard with our main ad partner to solve the algorithm dislocation and remain hopeful that we are on path to normalization. We worked day and night to solve the algorithm dislocation, and we continue to believe, based on data that we see, that it is technical in nature, solvable, and has nothing to do with the brand runway. Big picture, we remain bullish on ODDITY's future despite our recent customer acquisition cost challenges. We are working tirelessly to strengthen our business, move past the dislocation, and return to playing offense in what we see is one of the most attractive markets in the world. Beauty and wellness has long been a large, resilient, and highly profitable growth market. We see the category in an exciting period of transformation today, with consumer demand for channel and product creating major shifts. Putting the current technical problem we face aside, we believe we are positioning our business to win in this moment and lead the next phase of growth. With over 70 million users on our direct consumer platform, we believe we have a clearer view than others on where the demand is and how to best serve the customer. Consumers are smarter than ever before. They have more information ready at their fingertips, and they demand more from their products, more efficacy, more personalization. The appetite for beauty and medicine is converging as a result. Consumers want real solutions to their pain points from the inside out. They are taking control into their own hands. A lot of that is happening online outside of regional channels like store or medical office. ODDITY's portfolio of trusted brands today is built to serve consumers across a full range of needs, spanning categories, and product types. From beauty to wellness to medical grade, from cosmetics to OTC to prescription products, the goal is to reduce friction and deliver unmatched experience, best-in-class products, and precise treatment protocols that truly solve consumer problems and pain points. Let us look at hyperpigmentation as an example of how our integrated platform works and how we are building a moat with vision technology, personalized treatment regimens, and ODDITY Labs. Hyperpigmentation is a big success story for METHODIQ, showing higher customer satisfaction and retention signals, which is the best indicator for us that we are onto something great. Our plans for this market began with ODDITY's user data which showed us how much demand our user had for addressing dark spots and uneven skin tone, and also how unhappy they were with the current solution. With this insight, we made a deliberate push into app implementation and delivered something better. We built one of a kind user experience at METHODIQ, which includes computer vision assessment that identifies dark spots on the skin, the relevant data analysis are then passed to a METHODIQ provider who issues a personalized treatment plan aimed at maximizing efficacy and minimizing side effects. It might be prescription or non-prescription or both and can involve sequencing different products across several months to optimize for the best outcome. The entire experience is designed to mimic and improve upon a high-touch experience at the doctor's office, but with incredible convenience. One of METHODIQ's hyperpigmentation hero products is Mellan-X 509 powered by an ODDITY 1007 ODDITY Labs spotted molecule combination. It targets visible discoloration of the skin with reduced side effects. This is just the beginning of what we think ODDITY Labs can do in hyperpigmentation. We have additional molecules in development, and we are making good progress finding new pathways that we believe will help us tackle hyperpigmentation from multiple angles at once. This is just an example of how ODDITY's integrated platform is meeting unmet demand, and we are just at the beginning. The strong start of METHODIQ has increased our conviction in the medical-grade space. We are acquiring a more determined customer with attractive LTVs and good cross-sector characteristics. Acquisition costs are higher as compared to makeup, but we believe the AOV retention, as a result, expected paybacks justify the cost. Consumers are increasingly comfortable getting medical care online and looking to brands like METHODIQ for innovation and upgrading offerings to meet their needs. We are positioning METHODIQ to be a leader in this backdrop and launching new categories and products across 2027. This will build on our infrastructure of prescription and pharmacy fulfillment to better serve existing customers and also reach new audiences. The opportunity set is large and we are moving quickly. We plan to have more updates on this expansion in the coming months. Turning to SpoiledChild, we launched SpoiledChild around 4.5 years ago as a multi-category wellness brand. It has scaled faster than our expectation and is on track to approach $350 million of net revenue in 2026, which will put it more than a year ahead of the time it took IL MAKIAGE to hit that milestone. SpoiledChild continues to deliver very strong customer service cohorts metrics like AOV and repeated scale. 12 months net revenue repeat rates for the brand are well in excess of 100 percent today. As we said in prior calls, we believe SpoiledChild is being impacted by the algorithm dislocation issues IL MAKIAGE is facing, but to a lesser degree, and this has allowed us to continue scaling the brand. We are hopeful that as we work through the acquisition cost challenges with IL MAKIAGE, we will then be able to deliver efficiencies also for SpoiledChild. The strong consumer metrics we see in SpoiledChild give us confidence in the brand's future potential. We plan to continue to invest in the base direct-to-consumer business while heading new growth levers in 2027. Moving to IL MAKIAGE, where we continue to work on resolving our account dislocation with our largest advertising partner and returning to normalized audience and CPA. We continue to work very closely with this ad partner to fix the problem, and while we are not there yet, every day that passes is helping us get to fixing the issue. We and the ad partner are in intensive testing mode, and those tests are very important for solving the algorithm dislocation. Looking ahead on ODDITY level, we are hopeful the worst is behind us. As our guidance indicates, we have seen sequential improvement in the rate of the year-over-year revenue decline at ODDITY, and we expect third quarter net revenue will decline approximately 5 percent year-over-year. While ODDITY's revenue decline was severely impacted by the algorithm's dislocation, we are seeing relatively stable trends in other parts of the business that are less correlated to the acquisition spend. We continue to work hard on other advertising channels as well. Our goal for 2027 is for IL MAKIAGE to return to growth. We have an amazing pipeline of new products ready to support the brand once acquisition costs recover. We continue to work 24/7 until this technical problem is fixed. We remain hopeful that the amount of resources and time we spend on it will lead to a resolution like any other big problem we faced since I started the business 14 years ago. Full power, non-stop hard work until fixing the problem, no other way. With that, I will hand it over to Lindsay. Thank you.

Unknown Speaker

Thanks, Oran. Let us turn to our second quarter results, which I will refer to on an adjusted basis. You can find the full reconciliation to GAAP in our press release. Net revenue declined 25 percent versus the prior year to $181 million at the favorable end of our guidance for net revenue to decline between 25 percent and 30 percent. The decline was driven by a year-over-year reduction in sales of IL MAKIAGE, which continues to be adversely impacted by a dislocation in its ad account with its largest advertising partner. This dislocation continues to impact IL MAKIAGE's ability to reach the right audience and is driving sharply higher CPA, impacting acquisition revenue, most notably in first orders, but also in the portion of repeat orders that are sensitive to acquisition spend. For example, existing customers that see an ad and are motivated to buy again. We are also now seeing the compounding impact of lost repeat sales that would have naturally flowed through from customers making first order purchases early in the year. Specifically, ODDITY net revenue from first orders declined approximately 40 percent in the second quarter versus the prior year, driven by IL MAKIAGE. Net revenue from repeat orders declined approximately 20 percent in the quarter from the prior year period. AOV declined by approximately 8 percent in the second quarter versus the prior year, largely driven by a decline in IL MAKIAGE AOV. The decline in IL MAKIAGE AOV was driven by the above-mentioned reduction in first orders, which carry higher AOV than repeat. It was additionally impacted by product mix shift away from IL MAKIAGE skin. Gross margin was 68.7 percent in the quarter compared to 72.3 percent in the prior year. Gross margin compressed approximately 360 basis points year over year, driven in part by the decline in AOV. We delivered adjusted EBITDA of $13 million ahead of our outlook for adjusted EBITDA of $8 million to $10 million. The year over year decline versus the prior year was largely driven by the IL MAKIAGE algorithm dislocation, which has two primary impacts on our P&L. First, significantly higher CPA versus the prior year. Second, the decline in revenue and resulting deleverage on our fixed costs. Adjusted EBITDA was also negatively impacted by our decision to ramp acquisition spend for SpoiledChild in support of faster revenue growth, where our upfront investments support attractive 12-month contribution margins. Operating expense as discussed on prior calls, our approach is to balance sustained growth investments with finding cost efficiencies to support the bottom line. This has translated into continued investments in areas like ODDITY Labs and our technology infrastructure, with some greater filtering and prioritization around projects where we see nearer-term payback potential. We remain bullish about the potential for ODDITY Labs to provide real differentiation in product efficacy and experience with many applications in our portfolio, and the hyperpigmentation example from Oran is just one area. We also continue to invest in areas like aging, where our molecules have shown early in vitro promise in increasing collagen synthesis and reducing aging markers. Moving down the P&L, adjusted diluted earnings per share was $0.20 for the quarter. Free cash flow increased by $14 million in the quarter and decreased by $8 million in the first half of the year. Our inventory investments year-to-date include purchase commitments made last year in anticipation of much stronger revenue results for IL MAKIAGE, as well as inventory purchase to support growth in SpoiledChild and METHODIQ. IL MAKIAGE today continues to work through excess inventory, and we plan to be in better balance in 2027. We exited the quarter in a strong liquidity position with $561 million of cash, cash equivalents, and investments on our balance sheet. Our $350 million in credit facilities remain undrawn. During the quarter, we continued to act on what we believe is an attractive price for our shares. We repurchased 5.6 million shares in the period for $80 million. This brings our total year-to-date repurchase amount to 11.7 million shares for $163 million, which reduced our ordinary shares outstanding by approximately 20 percent. Approximately $87 million remains outstanding on our $200 million buyback authorization. Separately, in March, 857,000 shares were removed from our public float to Oran Holtzman's open market purchases. In June, we repurchased $50 million face value of our 0 percent June 2030 exchangeable notes at a discounted price of $35 million. We will continue to be opportunistic in managing our capital structure in order to drive shareholder value. Turning to our outlook, for the third quarter, we expect net revenue to decline approximately 5 percent year-over-year, a meaningful sequential improvement versus the first half as we believe the worst of the acquisition-driven revenue pressure is behind us. We expect adjusted EBITDA to be between $18 million and $20 million. For the full year, we expect net revenue to decline approximately 19 percent year-over-year, driven by the decline in net revenue in first half and we expect adjusted EBITDA will be between $30 million and $32 million. And with that, I will turn the call back to the Operator for questions.

Operator

[Operator Instructions] Our first question is from Dara Mohsenian with Morgan Stanley. Please proceed.

Thank you very much, guys. See you next quarter.

Operator

Thank you. This will conclude today's conference. You may disconnect at this time, and thank you for your participation.

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MIND Technology Fiscal Q2 2027 Earnings Call: Backlog Falls

Wed, 09 Sep 2026 14:31:16 +0000

Key Takeaways

Marine technology product revenue was approximately $5.6 million in fiscal Q2 2027, with aftermarket activity contributing about 87% of the total.
Gross profit was approximately $2.1 million, representing a 37% gross margin. Management said low revenue reduced fixed-cost absorption despite the typically higher margins of aftermarket sales.
MIND Technology reported a net loss of approximately $1.7 million, compared with net income of $1.9 million in fiscal Q2 2026. Adjusted EBITDA swung to a loss of approximately $949,000 from positive $3.1 million.
Firm backlog fell to approximately $4.8 million as of July 31, 2026, from $7.6 million on April 30, 2026, and $12.8 million a year earlier.
Management expects fiscal 2027 results to be below fiscal 2026 and said weak order conversion will likely pressure performance for another quarter or two.
The company ended the quarter with $15.8 million in cash, $36.7 million in working capital and no debt. Its potential-order pipeline remained several times larger than firm backlog, including projects worth $10 million or more each.

Core Financial Data

Metric	Fiscal Q2 2027	Comparison or context
Marine technology product revenue	Approximately $5.6 million	About 87% came from aftermarket activity
Gross profit	Approximately $2.1 million	37% gross margin
General and administrative expense	Approximately $3.3 million	Down sequentially and year over year
Research and development expense	Approximately $407,000	Up sequentially and year over year due to component-cost timing
Operating result	Approximately $1.8 million loss	Approximately $2.7 million income in fiscal Q2 2026
Adjusted EBITDA	Approximately $949,000 loss	Positive $3.1 million in fiscal Q2 2026
Net result	Approximately $1.7 million loss	Approximately $1.9 million income in fiscal Q2 2026
Cash	Approximately $15.8 million	Approximately $19 million at the start of fiscal 2027
Working capital	Approximately $36.7 million	More than $4 per common share, according to management
Firm backlog	Approximately $4.8 million	$7.6 million on April 30, 2026; $12.8 million on July 31, 2025

Business and Operating Performance

Aftermarket sales—including spare parts, repairs, services and support—provided most of fiscal Q2 revenue. Management characterized this business as more recurring than new-system orders because customers must maintain installed equipment even when capital spending is delayed.

New-system demand remained constrained as customers delayed commitments amid geopolitical and commodity-price uncertainty. Middle East project interruptions also delayed new awards, project starts and payments from certain customers.

Management said the pipeline of potential orders remained several times larger than firm backlog. MIND Technology is pursuing several sizable opportunities, including individual projects valued at $10 million or more. Some of these projects depend primarily on government agency budgets and procurement cycles rather than Middle East conditions.

The company continued investing in passive array technology for maritime security applications, as well as upgrades to its source controller and towed streamer products. Management said it is gaining early traction in maritime security and is also pursuing non-energy projects, particularly in Southeast Asia.

Management Outlook

Management expects fiscal 2027 results to be below fiscal 2026 because customer interest is not converting into firm orders at the anticipated rate. Current conditions are likely to pressure results for another quarter or two, although the timing depends heavily on developments in the Middle East.

The company expects delayed projects to return gradually rather than through a sudden surge in orders. Management also said some pipeline opportunities could still be delivered during fiscal 2027, but that likelihood declines as the fiscal year progresses.

Management expects stronger margins if revenue returns to more normalized levels, supported by cost optimization and improved production efficiency. It also expects the fiscal year-end cash balance to be measurably above the quarter-end level, contingent on collecting a delayed customer receivable.

Risks and Areas to Watch

Firm backlog has declined sharply as existing orders were executed and new-system decisions were delayed.
Middle East instability has interrupted projects, delayed awards and affected customer cash flows and payment timing.
Elevated oil prices have not yet triggered firm orders because customers are focused on price durability and project certainty.
Low revenue reduced fixed-cost absorption and pressured gross margin.
Government-funded projects can move slowly because of budget and procurement cycles.
Management is reviewing production and R&D costs, particularly staffing-related expenses, while seeking to avoid damaging longer-term growth prospects.

Analyst Q&A Highlights

Management said Middle East conditions could influence capital allocation between strategic transactions and share repurchases, but it did not commit to either path. No common shares were repurchased during fiscal Q2, partly because blackout periods and possession of material nonpublic information can restrict market activity.

The company remains open to acquisitions, combinations and smaller adjacent transactions. Management said any transformative deal should increase scale and improve the stability of revenue, earnings and cash flow without jeopardizing MIND Technology’s balance-sheet progress.

Management estimated annual public-company costs at approximately $2 million to $3 million. It said further operating-cost actions are being evaluated mainly in production and R&D, while much of the available G&A reduction has already been implemented.

Regarding liquidity, management said the current cash balance was roughly above the $15.8 million reported at July 31, 2026, though not dramatically higher. It expects delayed collections to support a more meaningful increase by fiscal year-end.

Full Earnings Call Transcript

Complete Earnings Call Transcript

Management Remarks

Operator

Welcome to the MIND Technology Second Quarter Fiscal 2027 Earnings Conference Call. Please note this conference is being recorded.

[Operator Instructions]

Zach Vaughan

Thank you, Operator. Good morning and welcome to the MIND Technology Fiscal 2027 Second Quarter Earnings Conference Call. We appreciate all of you joining us today. With me are Robert Capps, President and Chief Executive Officer, and Mark Cox, Vice President and Chief Financial Officer. Before I turn the call over to Robert, I have a few items to cover. If you would like to listen to a replay of today's call, it will be available for 90 days via webcast by going to the investor relations section of the company's website at mind-technology.com, or via a recorded instant replay until September 16. Information on how to access the replay was provided in yesterday's earnings release. The information reported on this call speaks only as of today, Wednesday, September 9, 2026, and therefore, you are advised that time-sensitive information may no longer be accurate as of the time of any replay listening or transcript reading.

Before we begin, let me remind you that certain statements made by management during this call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations and include known and unknown risks, uncertainties, and other factors, many of which the company is unable to predict or control, that may cause the company's actual future results or performance to materially differ from any future results or performance expressed or implied by those statements. These risks and uncertainties include the risk factors disclosed by the company from time to time in its filings with the SEC, including in its Annual Report on Form 10-K for the year ended January 31, 2026. Furthermore, as we start this call, please also refer to the statement regarding forward-looking statements incorporated in our press release issued yesterday. And please note that the contents of our conference call this morning are covered by these statements.

Robert Capps

Now, I'd like to turn the call over to Robert Capps. Okay, thanks, Zach, and thank you all for joining us today. As usual, I'll touch on the results for the second quarter and provide an update on the current market environment. Mark will then provide a more detailed review of our financials, and I'll return to wrap things up with some remarks about our outlook. Our second quarter results reflect the ongoing market softness, offset to some extent by the resilience of our aftermarket business. Order flow continues to be constrained, and customers are maintaining their wait-and-see approach amid a very unsettled geopolitical and commodity price environment. Our results reflect this. Despite these headwinds, our aftermarket business continues to provide a recurring stream of revenue.

That gives us a durable base through a period when new system orders are difficult to predict. This allows us to remain patient and opportunistic rather than reactive. Last quarter, I laid out two dynamics in the broader energy landscape with the potential to drive increased activity and order flow. There's a growing need for energy security following a significant supply disruption, and a favorable oil pricing backdrop is expected to support a resurgence in exploration activity. We believe both dynamics remain intact, but they have yet to result in firm orders. The [war with Iran] has had a significant impact on our recent results. Certain ongoing projects in the Middle East have been temporarily interrupted. Additionally, and perhaps more importantly, the award and commencement of additional projects in the region have been delayed.

These factors have caused customers to delay spending plans. They also, in some cases, have interrupted our customers' anticipated cash flow, in turn cause certain customers to delay payments to us. We are confident these amounts will be received, just not within the timeframes we originally anticipated. We continue to believe energy independence is top of mind for governments and operators alike, and there's a real need to replenish lost production and secure reliable supply. We expect that to drive exploration investment over time. However, at the present, the stops and starts at the [war with Iran] have created such volatility within the energy markets that customers are hesitant to commit to project timing. While oil prices remain elevated relative to historical standards, it's the durability of these prices, not the level, that drives investment decisions.

The futures market does not expect today's prices to last. What matters more to our customers and to their customers is certainty. into the conflict would remove much of that uncertainty impacting projects today. We would then expect these programs to move forward. We see a resolution to the war as good for our business. Now, our backlog of firm orders as of July 31, 2026, was approximately $4.8 million compared to $7.6 million as of April 30, 2026, and $12.8 million as of July 31, 2025. Protracted customer decision-making regarding new system orders and the execution of our existing backlog during the quarter were the drivers of the decline. As our backlog continues to illustrate, there is considerable variability in the pace and timing of new orders.

This has been magnified by the ongoing macro uncertainty. I'll remind you that even in a normal market, new orders don't always arrive at a constant rate throughout the year. Importantly, we continue to view these as temporary pauses as customers iron out their operational plans and evaluate market conditions. Despite the near-term softness, the longer-term outlook for the marine exploration and the survey industry, and more specifically our business, remains very positive in our opinion. We've begun to see early signs of recovery and feel that an uptick in activity is inevitable. I'll talk a bit more about this later. Outside of our backlog, which is defined as orders for which we have a purchased order or a signed contract in hand, the pipeline of potential orders remains solid and is several times greater than our firm backlog.

We are continuing to pursue certain significant projects, including some worth $10 million or more each. We have taken actions in recent months to strengthen our positioning and make ourselves more competitive bidders. This provides us with optimism as we work to convert these opportunities into firm orders in coming periods. Turning to our results, marine technology product revenues for the second quarter of fiscal 2027 were approximately $5.6 million. The majority of this revenue, roughly 87%, came from aftermarket activity consisting of spare parts, repairs, service, and other support activities. We've talked at length in recent quarters about this component of our business and its critical role within our overall results. This has become increasingly important as system orders have slowed.

While the aftermarket business is influenced by the general activity level within the industry, it is more recurring in nature than orders for new systems. Customers might be slow to purchase new systems, but their existing equipment will need maintenance to keep operating. This benefits MIND Technology, Inc. since expenditures for aftermarket activity are generally operating costs as opposed to capital expenditures. As our installed base of Seamap products expands, so does the potential for increased aftermarket activity. The second quarter was a difficult one, and our results reflect that. Our aftermarket activity held up and continued to generate meaningful revenue at a time when system orders were effectively on hold. This allows us to manage through a period of disruption and position the company for when activity improves. I remain confident in the opportunities ahead of us, and I believe it is just a matter of time until order flow returns.

Now, I'll let Mark walk you through our second quarter financial results in a bit more detail. Thanks, Rob, and good morning, everyone.

Mark Cox

Revenues for marine technology product sales totaled approximately $5.6 million for the quarter. As Rob mentioned, our second quarter results continued to be impacted by general market softness and our customers taking a more cautious approach to the decision-making process. Despite these headwinds, we are benefiting from aftermarket activity that provides a solid foundation of recurring revenue. This activity supports our overall results and serves as a buffer in times of reduced large system order volume. Second quarter gross profit was approximately $2.1 million. This represents a gross profit margin of 37% for the quarter. Although a significant portion of our second quarter revenue came from aftermarket activity, which typically generates higher margins than larger system orders.

Lower overall revenue in the quarter resulted in less fixed cost absorption impacting our gross margin. As revenue returns to more normalized levels, we expect our cost optimization efforts and improved production efficiencies to support stronger margins. Our general and administrative expenses were approximately $3.3 million for the second quarter of fiscal 2027. This was down both sequentially and when compared to the same quarter a year ago. Our research and development expense for the second quarter was approximately $407,000, which was up sequentially and compared to the second quarter of fiscal 2026. This increase was due to the timing of cost recognition for component purchases. Consistent with prior periods, these costs were largely directed toward the development and enhancement of our streamer systems and source controller offerings.

Operating loss for the second quarter of fiscal 2027 was approximately $1.8 million compared to operating income of approximately $2.7 million in the second quarter of fiscal 2026. The second quarter Adjusted EBITDA loss was approximately $949,000 compared to Adjusted EBITDA of $3.1 million in the same quarter a year ago. Net loss for the second quarter was approximately $1.7 million compared to net income of $1.9 million in the second quarter of fiscal 2026. As of July 31, 2026, we had working capital of approximately $36.7 million, including $15.8 million of cash on hand. This compares to approximately $19 million of cash at the beginning of the fiscal year. I would caution against reading that change as a reflection of our cash burn rate. Movement in cash reflects the timing of receivable collections as much as it does operating performance.

As Rob mentioned a moment ago, collections in the first half of fiscal 2027 were slower than we anticipated due to circumstances impacting certain of our customers' markets. For a more accurate measure of our operating performance, we would point to our Adjusted EBITDA. The company continues to maintain a clean debt-free balance sheet with a simplified capital structure. We also maintain operational flexibility to pursue strategic opportunities should they arise. I'll now pass it back over to Rob for some concluding comments. Okay, thanks, Mark.

Robert Capps

We are operating in a challenging macro environment, and our customer's wait-and-see approach reflects that. Customers continue to delay order commitments regardless of industry or end use, which limits our visibility, and will likely pressure results for another quarter or two. Much of that timing depends on conditions in the Middle East, which remain unsettled. We're not going to predict when that will change. However, I want to emphasize that we believe demand has not gone away. Although the timing remains uncertain, customers are actively evaluating several sizable projects, which we view as an encouraging sign for future activity.

As conditions stabilize, we expect customers will reactivate their capital programs, and we're positioning the business to respond quickly when they do. Customer interest and engagement remain solid, but they're not converting into firm orders at the rate we expected at this point in the year. As a result, our expectations are that our fiscal 2027 results will be below fiscal 2026. Despite this view, two things give us confidence in our ability to manage through this period. Our aftermarket business provides a steady stream of recurring revenue that supports our results, and we have meaningful working capital, including cash on hand. This gives us the flexibility to invest in the business and act on opportunities as they arise. Our conviction regarding the longer-term prospects has not changed.

The underlying dynamics within the marine technology industry remain intact, and we are seeing opportunities to capitalize on new areas of focus within the market. Rather than pull back during this slowdown, we have continued to invest in our technology that is beginning to open doors. As an example, we've started gaining traction with our passive array technology and maritime security applications. Still early days, but we believe this technology provides a cost-effective solution to a real operational need. We're encouraged by the interest we've received and look forward to providing updates as things develop. We are also pursuing upgrades and improvements to our source controller and towed streamer products, which we believe will generate new opportunities. In recent quarters, I've discussed our capital allocation strategy.

We have a simple capital structure and a debt-free balance sheet, and we ended the quarter with $15.8 million in cash. This liquidity gives us flexibility that not all small public companies possess. We are constantly evaluating opportunities to create meaningful long-term value for our stockholders. Our first priority is always to preserve the strength of the company. This includes funding operations through a period of reduced order flow and lower revenue, while continuing to invest in technology that positions us for the recovery we expect. Beyond that, we see a real need to add scale, and we are actively pursuing opportunities to do so. As we've said previously, there are several paths available to us.

We can execute organic growth initiatives that we have identified. We can acquire assets or businesses adjacent to what we already do, we can combine with another organization. What we will not do is jeopardize the progress that we've made in MIND Technology, Inc. by chasing something that does not fit what we do. That being said, we continue to actively seek out transformative transactions. And we also recognize that another attractive use of capital is stock repurchases, especially at current price levels. We believe that recent prices for our stock do not accurately reflect the true value of the company. I point out that as of the end of the most recent quarter, we had working capital of approximately $36.7 million, which equates to more than $4 per common share. Now, despite these apparently attractive economics, we did not purchase any of our common stock during the second quarter.

I understand how many of you are frustrated by this lack of activity. We do believe our stock at current levels represents a good investment. However, there are often limitations on when we can be active in the market. We are precluded from buying or selling, for that matter, our stock during blackout periods, pending the release of periodic financial results. Additionally, we cannot buy or sell our stock when in possession of material information that has not yet been disseminated to the market. These situations could include ongoing preliminary discussions regarding new business or for strategic transactions. We will continue to assess the appropriate time to enter the market against our other capital priorities.

Going forward, preserving and enhancing value remains our primary focus, and we will allocate capital to the areas where we see the greatest return. In closing, the market remains soft, but I am confident about where this business is headed. The projects our customers have deferred have not gone away, and the underlying demand fundamentals are only growing. When activity returns, we intend to be ready for it. We have no debt, real liquidity, and an aftermarket business generating recurring revenue, and technology that is expanding our addressable markets. We're using this period to improve our positioning and sharpen our competitive edge.

We are focused on innovating, adding scale, and partnering with customers that appreciate the value we deliver. We look forward to executing on these priorities, which we believe will drive improved stockholder value. With that, Operator, I think we can now open the call up for some questions.

Operator

[Operator Instructions]

Our first question comes from the line of Tyson Bauer with KC Capital. Please proceed with your question. Good morning, gentlemen.

Question-and-Answer Session

Tyson Bauer

Hello, Tyson. I'm just going to follow up quickly on your last comment and that is given the Middle East conflict on and off situation and no resolution seemingly coming quick. How does that sway your capital use decisions for MIND Technology, Inc.? Does that accelerate some of these things you've talked about as far as improving shareholder value and growing the business? Or do you hang on to that cash a little tighter and you see how things kind of play out? And the follow up to that, as you talked about, these blackout periods and a lot of things, irons in the fire you have going, would you anticipate that most, if not all, of Q3 may be in those blackout periods?

Robert Capps

Let me address the last one first. Not necessarily. Again, I don't want to telegraph when we may or may not be in the market, but I wouldn't say that's necessarily the case. I think the situation in the Middle East is something we have to contemplate when we look at capital allocation. If we see a lesser opportunity in the very near term for, you know, new business that might steer us a different direction as far as where we might allocate capital. Maybe if we were inclined to buy back stock at that point, something more strategic. But again, I just don't want to telegraph what we're going to do, but it's something we do have to contemplate. But for sure, the Middle East situation has gone on much longer than I think any of us anticipated, and certainly has a bigger impact than we originally anticipated.

Tyson Bauer

Now you do obviously have business that should not be impacted by the Middle East such as scientific activity in Asia, South Asian Sea, your Scandinavian customers that have been big in the past, critical mineral exploration off the coast of Africa and some of those areas. So when we look at this pipeline being frozen, is it more at the government level for these types of projects, or is it more at the In addition to the corporate budgeting level, there's a kind of a combination at this point.

Robert Capps

So, you know, good luck pushing forward.

Robert Capps

Man. I appreciate it. Okay. Take care, sir.

Operator

This now concludes our question and answer session. I would like to turn the floor back over to management for closing comments.

Robert Capps

I'd just like to thank everyone for joining us today and look forward to giving you ongoing updates about our progress and talking to you again after our third quarter. So thank you very much.

Operator

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. Please disconnect your lines and have a wonderful day.

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Braze (BRZE) Fiscal Q2 2027 Earnings Call: AI Adoption Drives 26% Revenue Growth

Wed, 09 Sep 2026 14:30:47 +0000

Key Takeaways

Braze (NASDAQ: BRZE) reported fiscal Q2 2027 revenue of $227 million, up 26% year over year and 8% sequentially. Management calculated organic revenue growth of 24%, excluding the $6.6 million contribution from BrazeAI Decisioning Studio.
Non-GAAP operating income increased to $22 million, or 9.7% of revenue, from $6 million and 3.4% a year earlier. Free cash flow reached a record fiscal second-quarter level of $22 million.
Total customers rose 15% year over year to 2,789, while customers spending at least $500,000 annually increased 28% to 361 and represented 65% of ARR.
Dollar-based net retention was 110% across all customers and 112% among large customers, with the latter improving by 100 basis points sequentially.
Paid adoption of Decisioning Studio, Agent Console, AI Item Recommendations and Predictive Suite reached roughly one-third of large customers, up about 900 basis points from fiscal Q1.
Management raised its revenue guidance for fiscal Q3 and the full year. Fiscal 2027 revenue is now expected at $910 million to $913 million, with an 8% non-GAAP operating margin at the midpoint.

Core Financial Data

Metric	Fiscal Q2 2027 result	Change or context
Revenue	$227 million	Up 26% YoY and 8% QoQ
Subscription revenue mix	91%	Remaining 9% comprised professional services and configuration/onboarding fees
Non-GAAP gross profit	$156 million	Margin of 68.6%, versus 69.3% a year earlier
Non-GAAP operating income	$22 million	Margin of 9.7%, versus $6 million and 3.4% a year earlier
Non-GAAP net income attributable to shareholders	$21 million	$0.19 per diluted share, versus $17 million and $0.15 a year earlier
Operating cash flow	$24 million	Versus $7 million a year earlier
Free cash flow	$22 million	Versus $4 million a year earlier
Cash and marketable securities	Approximately $414 million	Includes cash, cash equivalents and restricted cash
Total customers	2,789	Up 15% YoY and 76 customers QoQ
Customers spending at least $500,000 annually	361	Up 28% YoY; contributed 65% of ARR
Dollar-based net retention	110%	Large-customer retention was 112%
Remaining performance obligations	$1.1 billion	Up 27% YoY
Current RPO	$691 million	Up 24% YoY

Braze completed its $50 million accelerated share repurchase in August, acquiring approximately 2.1 million shares. Another $50 million remains under the board’s authorization.

Business and Operating Performance

Bookings were supported by competitive replacements of legacy marketing clouds and point solutions, as well as vendor consolidation. Management highlighted new business and expansion activity involving Chime, David Jones, Foxtel Group, Insurify, Property Finder and Wilson Sporting Goods, among others.

AI adoption remained a central growth driver. Decisioning Studio generated $6.6 million of quarterly revenue, while paid adoption across four BrazeAI products reached about one-third of the large-customer base. Almost 80% of Braze accounts used Operator more than 10 times over the previous 90 days, and more than half of that group used it over 100 times. More than 650 customers have created their first agents.

Management said Operator is encouraging customers to adopt more channels, multivariant experimentation and advanced personalization. The company believes this can support retention and expansion because customers using three or more channels and advanced features have historically generated higher dollar-based net retention.

Braze also signed a three-year strategic collaboration agreement with AWS. The agreement establishes a dedicated co-selling program, joint go-to-market commitments and incentives for AWS sellers. It also expands work on data and AI, including Agent Console integrations with Amazon Bedrock.

Professional services represented part of the remaining 9% of revenue. Approximately 90% of professional services revenue is recurring and recognized ratably. Management expects professional services to account for 9% to 10% of revenue going forward as customers migrate to new pricing packages and demand for AI-related services grows.

Management Guidance

Period	Guidance
Fiscal Q3 2027 revenue	$229 million to $230 million
Fiscal Q3 non-GAAP operating income	$16 million to $17 million
Fiscal Q3 non-GAAP operating margin	Approximately 7% at the midpoint
Fiscal Q3 non-GAAP net income	$15 million to $16 million
Fiscal Q3 non-GAAP EPS	$0.13 to $0.14
Fiscal 2027 revenue	$910 million to $913 million
Fiscal 2027 non-GAAP operating income	$75.5 million to $76.5 million
Fiscal 2027 non-GAAP operating margin	Approximately 8% at the midpoint
Fiscal 2027 non-GAAP net income	$72.5 million to $73.5 million
Fiscal 2027 non-GAAP EPS	$0.64 to $0.65

The full-year revenue range represents approximately 23% year-over-year growth at the midpoint. Management expects at least 400 basis points of operating margin improvement for the year.

Fiscal Q3 profitability will include expenses associated with Forge, Braze’s annual customer conference, and other global customer events. The company is also investing in additional sales capacity ahead of the next fiscal year.

Risks and Areas to Watch

Non-GAAP gross margin declined by 70 basis points year over year, primarily because of higher premium messaging volumes and Decisioning Studio personnel included in cost of revenue. Management also expects the normal seasonal decline in gross margin during the holiday quarter as messaging volumes increase.

Current RPO growth moderated, which management attributed to renewal seasonality and the comparison against the OfferFit acquisition. Fiscal Q4 and Q1 are typically Braze’s largest renewal quarters.

AI monetization remains at an early stage. Management acknowledged that customer adoption can be constrained by cost controls, data access, brand governance, compliance requirements and lengthy enterprise approval processes.

The migration of customer success entitlements from subscription revenue to professional services also affects year-over-year comparisons between the two revenue categories. About half of the customer base has migrated to the new pricing structure.

Analyst Q&A Highlights

AI-driven expansion: Management said Operator can make advanced AI optimization the default when campaigns are created, potentially accelerating adoption of paid capabilities and increasing channel usage.
Decisioning Studio pricing: The existing use-case price range remains about $250,000 to $300,000. The planned Decisioning Studio Go offering will provide a more constrained, largely self-service option paid for through action credits.
Competitive positioning: AI capabilities now feature in every request for proposal, according to management. Braze is positioning its platform as both an AI application layer and infrastructure for customers pursuing their own development projects.
Enterprise pipeline: Management remains focused on large enterprises and legacy-platform replacements. It expects fiscal Q4 to retain its typical strength in transactions exceeding $1 million because of enterprise budget cycles.
AWS distribution: Braze expects the AWS agreement to build on growing AWS Marketplace procurement and improve alignment across regions and industry verticals, although management did not quantify its expected pipeline contribution.

Full Earnings Call Transcript

Complete Earnings Call Transcript

Management Remarks

Operator

Welcome to the Braze Fiscal Second Quarter 2027 Earnings Conference Call. My name is Leila, and I'll be your operator for today's call. [Operator Instructions] I'll now turn the call over to Christopher Ferris, Vice President of Braze Investor Relations.

Christopher Ferris

Thank you, operator. Good afternoon, and thank you for joining us today to review Braze's results for the fiscal second quarter 2027. I'm joined by our Co-Founder and Chief Executive Officer, Bill Magnuson; and our Interim Chief Financial Officer, Pankaj Malik. We announced our results in a press release issued after the market closed today.

Please refer to the Investor Relations section of our website at investors.braze.com for more information and a supplemental presentation related to today's earnings announcement. During this call, we will make statements related to our business that are forward-looking under federal securities laws and the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

These statements include, but are not limited to, statements regarding our financial outlook for the third quarter and fiscal year ended January 31, 2027, the anticipated benefits from and product advancements due to ongoing developments in BrazeAI technology; our anticipated customer behaviors, including vendor consolidation and replacement trends and their impact on Braze, our potential market opportunity and our ability to effectively execute on such opportunity; the execution and anticipated benefits of our share repurchase program and our long-term financial targets and goals, including our expectations regarding our profitability framework.

These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations and reflect our views only as of today. We assume no obligation to update any such forward-looking statements. For a discussion of the material risks and uncertainties that could affect our actual results, please refer to the risks identified in today's press release and our SEC filings, both available on the Investor Relations section of our website.

I'd also like to remind you that today's call will include certain non-GAAP financial measures used by management to evaluate our ongoing operations and to aid investors in further understanding the company's fiscal second quarter 2027 performance in addition to the impact these items have on the financial results.

Please refer to the reconciliations of our non-GAAP financial measures to the most directly comparable financial measures calculated in accordance with U.S. GAAP included in our earnings release under the Investor Relations section of our website. The non-GAAP financial measures provided should not be considered as a substitute for or superior to the measures of financial performance prepared in accordance with U.S. GAAP. And now I'd like to turn the call over to Bill.

William Magnuson

Thank you, Chris, and good afternoon, everyone. We delivered a strong second quarter, generating $227 million of revenue, up 26% year-over-year and 8% from the prior quarter. We also continued to realize operating efficiencies, improving non-GAAP operating margin by over 600 basis points year-over-year. Dollar-based net retention for our large customer cohort, who spend at least $500,000 annually continued to inflect positively, rising 100 basis points to 112% in the quarter.

And we generated a record second quarter free cash flow of $22 million. Our results, robust pipeline, channel expansion and customer adoption of AI solutions provide us with the confidence to raise our revenue guidance for the third quarter and the full year. We are also pleased to raise our operating income guidance for the full year and are on track to deliver at least 400 basis points of operating margin improvement, in line with our long-term profitability framework.

Brands are adopting ever more sophisticated strategies and racing to deploy AI-driven solutions to leverage their first-party data and direct-to-consumer relationships, and this is reflected in our results. Bookings were strong in the quarter, driven by competitive takeaways from legacy marketing clouds, point solutions and a vendor consolidation motion that continues to gain traction.

Net customer additions rose 76% sequentially, up 15% year-over-year, while customers spending at least $500,000 annually increased by 12% sequentially, up 28% year-over-year. Notable new business wins and existing customer expansions included Boots Thailand, Chime, David Jones, Foxtel Group, Insurify, Omaze U.K., Property Finder and Wilson Sporting Goods, along with many others. Brands across a diverse set of industries and geographies continue to graduate from legacy platforms to Braze.

These included a global quick service restaurant, a bank in APAC, a European retailer and an American challenger bank. Upsell momentum remained robust, driven by expanded channel adoption, deeper data platform integrations and growing engagement with our rapidly advancing BrazeAI capabilities, including Agent Console, Decisioning Studio and Operator.

While AI monetization is still early, enterprise customers are realizing ROI using our solutions and adoption is accelerating. Paid adoption of our AI tools, Decisioning Studio, Agent Console, AI Item Recommendations and our Predictive Suite reached roughly 1/3 of our large customer cohort in Q2, up about 900 basis points from Q1. And that adoption is changing how customers send messages and personalize product experiences.

As teams put Agent Console and Decisioning Studio to work, they pair the added intelligence with upgraded engagement strategies, experimenting with more advanced cross-channel programs and deeper personalization. We expect this adoption trend to compound as marketers are pushed to get more sophisticated in an AI-driven world and as our composable AI architecture keeps making Braze smarter and easier to use. We also recently signed a 3-year strategic collaboration agreement with AWS.

It establishes a dedicated co-sell motion, a joint go-to-market commitment and incentives for AWS sellers to bring Braze into their accounts. More of our customers are choosing to procure Braze through AWS Marketplace, drawing on cloud commitments they already have in place. And this agreement makes that path easier while extending our reach across international markets and industry verticals.

It also deepens our work with AWS on data and AI, including the model integrations that let Agent Console run on Amazon Bedrock. You'll see us build on all of this over the coming quarters with more to come at Forge. That partnership lives at the infrastructure layer. But the question underneath most investor conversations right now is what sits above it. As AI models improve and converge, where does enduring value get created?

The market's answer is coalescing around the Harness, the layer of context management, workflow orchestration, proprietary data, feedback loops, permissions and evaluations that turns raw model intelligence into reliable business outcomes. We agree, and the market has just found a word for what Braze has spent 15 years building for marketers.

The 4 foundational strengths I've walked through on our last 2 calls, the Braze data platform as the foundation for first-party context, our vertically integrated data and decisioning stack, our composable AI ecosystem and our position as both a revenue engine and mission-critical infrastructure are the anatomy of an Agentic Harness.

And the same vertical integration that made our stream processor, what we believe is the highest scale, most performant engine in our industry, has now become something bigger, a complete environment where marketer AI is built, deployed and trusted with production workloads. And when we talk about this in technical terms, for a marketer, the Harness has a much simpler purpose.

It's what closes the gap between having a great idea and being able to ship it. Start with what the agents know. Personalization rooted in a brand's own data is the difference between a front desk reading from a script and a concierge who has known the guest for years. Engineering that knowledge securely and at massive scale is what the Braze data platform was built for.

Among our large customers, 87% use the Braze data platform, 91% have adopted Canvas and 57% use cloud data ingestion, our reverse ETL suite, which enables bidirectional data flow between Braze and the major cloud data warehouses, including AWS Redshift, Databricks, Google BigQuery and Snowflake. The context system has 3 connected parts.

The Braze data platform holds the first-party data, Canvas carries the live operational context of every customer journey and BrazeAI puts both to work. Agent Console agents executing on that context in the moment and Decisioning Studio learning from every outcome to optimize the decisions ahead. This quarter, we continued to widen those context streams.

Cloud data ingestion now connects customer data warehouses directly into Decisioning Studio to power one-on-one personalization without middleware and our new knowledge sources feature adds semantic search to Agent Console. As this engine runs, we're not just ingesting data, we're also producing tremendous amounts of it.

Currents keep expanding the scope of what it streams out with user profile updates now in beta and the entire BrazeAI catalog generating output all along the way, content variants, experiment results and observability data on every decision the AI makes. This data is so valuable that adoption of our export features is near universal. Amongst our large customers, 96% use our SDK, 98% use our rest APIs and 87% recapture the data that Braze generates through either Currents streaming or Snowflake data sharing.

That depth flowing in both directions is what gives the context layer its power. Next is how the work gets done and how it gets better. We've said since inception that Canvas is a programming environment, and we built it like one, application context, a scalable distributed runtime, debugging and observability and full versioning and collaboration controls.

For years, that depth has given Braze a higher ceiling than our competition. And Operator is now unleashing marketers to reach it, letting all of Braze shine through. And the timing could not be better because coding is the single skill that the foundation models have advanced most quickly. These models love to code, and we handed them a proper development environment to build in.

Because we vertically integrated Operator skills with the design and metadata of the dashboard itself, for Braze workloads, Operator's bespoke intelligence is racing ahead of the foundational models that it's built on, providing proprietary advantage for our customers to further enhance their productivity.

Operator now builds Canvases end-to-end, configuring the Agent Console and Content Optimizer steps inside them, and it can navigate the entire dashboard on its own. Describe your goal from any page and it goes where the work needs to happen. Virgin Media O2, one of the U.K.'s leading telecom providers, used Operator to cut their campaign quality assurance process from 6 hours down to mere seconds and their build iterations from 2 days to about 15 minutes.

And the learning half of this loop is compounding just as fast. Content Optimizer is replacing manual A/B testing with always-on optimization across hundreds of message combinations all at once. Motorway, a car selling platform in the U.K., recently used it to mix and match subject lines, body copy and call to action in a single campaign, driving 114% lift in clicks and driving 37% more car valuations by their consumers, their key conversion metric.

Meanwhile, Decisioning Studio is steadily taking responsibility for making compound decisions of what to send, when, on which channel and with which offer, all optimized against the precise business outcomes our customers choose. Then the part that decides whether any of this reaches production, trust. AI is compressing every step of the campaign launching path from brief to build to approval.

The brief is becoming a prompt. The build is becoming a conversation with Operator, but compression only helps if your standards survive it. Well, you can dump a 100-page brand book and every historical campaign result into a giant context window and hope for the best, it's slow, expensive and produces lower quality, higher volatility outcomes. The answer is to make the standards part of the machine.

That's Agentic Standards now in beta. Teams encode their brand guidelines, content standards, tracking mechanisms and compliance rules once. Every campaign then gets checked against them automatically with a pass or fail. Operator fixes the issues that it finds, and audit logs record every check and every response. The brand book becomes enforceable standards. The approval chain becomes an audit trail, automated nearly everywhere, but still with human sign-off wherever the customer wants it.

Last September at Forge, we asked a room of senior executives to raise their hand if they let an AI system send content to their customers without review. No one was ready yet, but we knew that wasn't a technology gap. It's a trust gap and closing it is a product problem that we are solving. And as AI advances in cybersecurity capability, the challenge of trust is extending beyond the dashboard. In the post-Mythos communication environment, agentic traffic is rising fast.

There's more noise for brands to cut through and more sophisticated threats probing their defenses. In an environment this adversarial, your pipes better not be dumb. They need to be secure, high performance and automatically optimizing. The major inbox providers are deploying increasingly stringent AI-driven filtering that rejects generic content. The answer is personalization built on context.

Protecting deliverability is no longer a niche issue for the marketing team. It has become a whole company revenue protection challenge. The same is true for anti-fraud protections, where tighter sending controls and AI-enhanced countermeasures against traffic pumping have made us better watch guards for our customers.

And our technical account managers are increasingly the guides for this new terrain, helping ensure our customers' data flows, product integrations and messaging architectures are designed securely, navigating them through the many governance and security gates required to ramp up their agentic workloads safely. That backdrop also explains the evolution of our services revenue, where 2 distinct trends are playing out.

The first is mechanical. Starting with last year's pricing and packaging changes, we began breaking out services more explicitly in new business order forms and at renewal. Under our prior structure, customer success entitlements were primarily bundled into platform fees. As customers move to the new structure, some revenue that was previously bundled as subscription is now packaged as professional services and year-over-year comparisons of the 2 lines reflect this reclassification as cohorts migrate.

As we stated on our last earnings call, approximately 90% of our professional services revenue is recurring, recognized ratably over the same term as subscription revenue. The remaining 10% of our services revenue comes from the minority of customers who opt for lightweight onboarding directly from Braze, although more than 80% of new Braze customers now leverage our growing ecosystem of Braze-certified agency partners as they kick off long-term services engagements that will maximize their ROI from Braze over the long term.

The second driver of these trends is simply demand growth, and you just heard the reasons for it. As AI scales volume and risk together, customers are investing in the expertise that protects the ROI of their primary revenue channels. And where does the Harness go from here? We are excited to see AI acceleration of marketer productivity building along 3 dimensions as we invest further in Operator specifically and BrazeAI more generally. First, seeing Operator take on larger and more complex projects.

The multistep work that used to require a specialist blocking off their week and extended collaboration with engineering is now built automatically. Second, moving from executing tasks to keeping watch. Think of Operator as a supervisor that never goes off shift, monitoring the AI systems, making optimization and decisioning choices, watching channel volumes, broad signals and deliverability trends and flagging anything that drifts off course. And third, AI that works with whole teams instead of individuals.

Most AI productivity gains so far have gone to individual users, but customer engagement is a team sport that crosses marketing, data and engineering and supporting how those teams work together is where we see the next wave of value. This is composable intelligence, agents that do the work inside Braze while also working directly with the people and systems at the brands we serve.

And customers are adopting these features with enthusiasm. In the last 90 days, almost 80% of Braze accounts engaged with Operator more than 10x and over half of those turned it into a habit, chatting with Operator more than 100 times in that same time period.

Operator has also rapidly driven record declines in customer support tickets, letting our premium support stay focused on high complexity, high-value challenges, delivering stronger customer outcomes and higher post-sales efficiency at the same time. But this is not just a reflection of cases. Operator is helping our customers build, and it's already a sophisticated builder in its own right.

At a hackathon that we hosted alongside City x City Sydney, a team from an Australian food and beverage brand put Operator through its paces. They were already using Braze Surveys to follow up with customers after their coffee purchases, and they wanted to upgrade those follow-ups with stronger personalization based on the feedback itself while introducing new channels to their most engaged customers.

Operator took them through the whole setup. It found the right survey data, took them into Agent Console to build a sentiment agent and configured and tested the outputs. Then it drafted a new Canvas, added the agent step and templated the results into a follow-up text message. Customers who expressed negative sentiment were routed accordingly, and the agent summarized each customer's specific feedback, so the follow-up spoke to the exact concern they raised.

If the coffee was cold, the message said so. By leveraging Operator for this multistep build, idea to implementation took only about 10 minutes. Marketing technology has always forced a trade-off. Every gain in power came with added complexity and every ambitious idea took specialists, time and patience. We believe that we are now breaking that trade-off. Braze is getting both more powerful and easier to use at the same time.

When a marketer watches an idea, go from creative spark to working prototype in just minutes, they remember why they fell in love with this work. And that's the flywheel that we're building. The product itself inspires the builder spirit. Our hackathons, events and community feed it, and ambitious creative marketers bring their ideas to life faster, amplify their performance with leading-edge AI and carry their whole teams farther.

Braze was born out of a hackathon. True to our roots, we've been hosting them all over the world, and they're driving great early adoption for Agent Console. Over 650 customers have now made their first agents with more being added every day. The hardest part of this industry has never been the idea. It was the distance between having one and being able to ship it.

That distance is what this Harness collapses because a Harness after all, is not what keeps you on the ground, it's what lets you fly safely. Our technology is made for this moment, and so are the marketers using it. Our job is to teach them to fly again. They take it from there.

We have a lot more to share about Operator, Content Optimizer, Agent Console and Decisioning Studio at Forge in just a few weeks, and we hope to see you there, either in person or on the live stream. While we won't be hosting a full Investor Day this fall, we will be welcoming investors for a reception on the evening of Tuesday, September 29. Contact Investor Relations for more details. Thank you for your interest and support in Braze. With that, I'll turn the call over to Pankaj.

Pankaj Malik

As Bill stated, we reported a strong second quarter with revenue increasing 26% year-over-year to $227 million, driven by a combination of existing customer contract expansions, renewals and new business. BrazeAI Decisioning Studio contributed $6.6 million of revenue in the quarter, implying an organic year-over-year revenue growth rate of 24%.

Subscription revenue remains the primary component of our total top line, contributing 91% of our second quarter revenue, while the remaining 9% represents a combination of recurring professional services and one-time configuration and onboarding fees. Approximately 90% of our professional services revenue is recurring with revenue recognized ratably over the life of the contract.

As Bill noted, demand for these services is growing as AI adoption scales. Total customer count increased 15% year-over-year to 2,789 customers as of July 31, 2026, up 367 from the same period last year and up 76 from the prior quarter. Our total number of large customers, which we define as those spending at least $500,000 annually, grew 28% year-over-year to 361.

And as of July 31, 2026, these customers contributed 65% to our total ARR compared to a 62% contribution as of the same quarter last year. Measured across all customers, trailing 12-month dollar-based net retention was 110%, while trailing 12-month dollar-based net retention for our large customers was 112%, up from 111% in the prior quarter.

Expansion was again broadly distributed across industries and geographic regions. In the second quarter, our total remaining performance obligations was $1.1 billion, up 27% year-over-year. Current RPO was $691 million, up 24% year-over-year. The year-over-year increases were driven by contract renewals and upsells and the signing of new customer contracts. Non-GAAP gross profit in the quarter was $156 million, representing a non-GAAP gross margin of 68.6%.

This compares to a non-GAAP gross profit of $125 million and non-GAAP gross margin of 69.3% in the second quarter of last year. The decrease in year-over-year margin was driven primarily by high premium messaging volumes and the addition of Decisioning Studio headcount attributable to cost of revenue. Total non-GAAP operating expenses were $134 million, 58.9% of revenue compared to $119 million or 66% of revenue in the prior year quarter.

The improved efficiency reflects our disciplined approach as we effectively balance investing in our growth priorities while working towards achieving our long-term profitability targets. Non-GAAP operating income was $22 million or 9.7% of revenue compared to non-GAAP operating income of $6 million or 3.4% of revenue in the prior year quarter.

Non-GAAP net income attributable to Braze shareholders in the quarter was $21 million or $0.19 per share compared to $17 million or $0.15 per share in the prior year quarter. Now turning to the balance sheet and cash flow statement. We ended the quarter with approximately $414 million in cash, cash equivalents, restricted cash and marketable securities. Cash provided by operations during the quarter was $24 million compared to cash provided by operations of $7 million in the prior year quarter.

Including the cash impact of capitalized costs, we achieved record second quarter free cash flow of $22 million compared to $4 million in the prior year quarter. We expect our free cash flow will continue to fluctuate from quarter-to-quarter given the timing of customer and vendor payments. Finally, we are pleased to report that we completed our $50 million accelerated share repurchase program in August, buying back approximately 2.1 million shares.

Approximately $50 million remains on the Board's authorization. We regularly review our capital allocation priorities and will look to return capital to shareholders when appropriate. Now turning to guidance. For the third quarter of fiscal 2027, we expect revenue to be in the range of $229 million to $230 million, which represents a year-over-year growth rate of approximately 20% at the midpoint.

In line with normal seasonality patterns for our business, third-quarter operating income will be affected by the cost of Forge, our annual customer conference, as well as several global customer events scheduled during the quarter. Third quarter non-GAAP operating income is expected to be in the range of $16 million to $17 million at the midpoint.

This implies a non-GAAP operating margin of approximately 7%. Third quarter non-GAAP net income is expected to be $15 million to $16 million and third quarter non-GAAP net income per share in the range of $0.13 to $0.14 per share based on approximately 114.5 million weighted average diluted shares outstanding during the period. For the full fiscal year 2027, we expect total revenue to be in the range of $910 million to $913 million, which represents a year-over-year growth rate of approximately 23% at the midpoint.

Fiscal year 2027 non-GAAP operating income is expected to be in the range of $75.5 million to $76.5 million. At the midpoint, this implies a non-GAAP operating margin of 8%. Non-GAAP net income for the full fiscal year is expected to be in the range of $72.5 million to $73.5 million, and net income per share is expected to be $0.64 to $0.65 per share based on a full year weighted average diluted share count of approximately 114 million shares.

By embedding AI-driven intelligence into the core of our platform, we continue to elevate what's possible in customer engagement. Looking ahead, Braze remains fully committed to an ambitious innovation road map while staying disciplined and firmly on track to meet our long-term financial targets. And with that, we'll now open the call for questions. Operator, please begin the Q&A.

Operator

[Operator Instructions] Our first question will come from Ryan MacWilliams with Wells Fargo.

Question-and-Answer Session

Ryan MacWilliams

It seems like the big shift this year in AI has been long-running agents, and it's great to see you guys take advantage as it's now generally available that Braze Operator can chain together a multistep work from a single prompt. But how do you think these more powerful models and agents can help unlock new use cases for Braze from here with customers?

William Magnuson

Yes. Thanks. And we're super excited about this. I mentioned in the prepared remarks that I think it's the first time in our history that we're combining together both enhanced capability with enhanced ease of use and higher productivity, higher ability to build, et cetera. A lot of the structure and the capabilities that we put around the Canvas environment are being highly effectively utilized by Operator.

And it has been fantastic to see as well that Operator is providing differentiated capability on top of the foundational models, abilities to use Braze in a more generic fashion. The way that, that is being driven is because of the vertical integration of the development environment into Operator skills and intelligence. So when Operator runs, it has a deep understanding of all the features available to it in its development environment, similar to how Cursor would integrate with an entire IDE.

And it has full access to all of the metadata around how the -- our customers' integrations of Braze are set up in the first place. And so it can see all the different attributes and events and the full data schemas, and it understands what the goals of the campaigns are. And through Agentic Standards, it has increasing levels of understanding of compliance measures, brand voice, style, et cetera.

When you pull all of that together in a vertically integrated environment like Braze, you just get this incredible building capability. And so on the one hand, we're really excited and seeing customers able to really unleash their builder spirit, bring their creative ideas to life more quickly.

We also are really excited about what this means from a product-led growth standpoint. when you look at our pricing and packaging evolution over the last few years, a big part of what we've been trying to accomplish with the shift toward action credits and being able to use these more fungible credits more flexibly for customers is that it also allows for us to use Operator to point their adoption toward more of these more advanced features that are also monetized by Braze.

And so whereas in the past, we would release a new feature or we would enhance a new channel, and we had to wait for the very kind of human manual process of being able to enable a broad field around that, enable the customer community around it, have them then build up the -- get over the activation energy of trying it out for the first time, potentially needing to build additional resources, et cetera.

Instead, all of that happens instantaneously and automatically. When we build out new capabilities, when we do something like roll out Content Optimizer into beta, we're doing the same thing with Decisioning Studio Go right now, we're going to have a lot more to talk about at Forge. The ability for adoption to happen instantaneously upon those becoming available is unlike it has ever been before.

And so we're really excited about Operator coming in, driving enhanced productivity, getting our customers all the way to our capability ceiling and really breaking through it with their creativity right out of the gate. And then that also being able to drive really strong monetization and adoption outcomes for us because it's effectively like product-led growth on steroids where Operator itself just drives the adoption agenda.

Ryan MacWilliams

I appreciate that. That reflective cycle could be pretty powerful. And then I know you mentioned it's early for AI monetization. And look, you got really sophisticated customers that want a high degree of certainty before they put AI into production.

But in terms of AI translating into like near-term revenue for Braze, are there certain types of customers you're looking at who are now more forward in deploying AI use cases? Or is it products like Operator that might get more adoption? Like how do you think we start to see more tangible results of AI increasing Braze consumption?

William Magnuson

Well, Operator, we've been seeing week-over-week increases in penetration across the customer base and its stickiness is incredible. I mentioned the acceleration of a customer that tries it out 10x, more than half, and that's a number that's been increasing every week as well, accelerate to using it more than 100x. And we've got people that are doing all of their work in Operator now.

And we're just seeing that as soon as people get a taste of it that it really drives immediate adoption and habit forming around that. And what that means is that we've also been able to start to build out Operator defaults that are driving additional adoption of these more advanced AI capabilities. That's something that we actually only started within the last few weeks. But I mentioned the build example during the prepared remarks from our City x City Sydney hackathon that we did back in August.

And that -- in that example is the automatic creation of Agent Console. But we've also said for a long time that there's capabilities we have like Personalized Paths in the past and now Content Optimizer and Decisioning Studio Go, where it's just simply the case that basically every campaign that gets created should be using these AI optimization capabilities.

But the reality is that in the past, due to bandwidth concerns or creative production requirements or just a lack of knowledge or confidence in utilizing these new features that adoption often lag the availability, but we're seeing that collapse down now as well.

And so our ability to, for instance, roll out Content Optimizer and just turn that into the default way that a push notification campaign or an e-mail campaign gets built in the first place is -- that provides a new capability that we're just really excited is going to continue to accelerate adoption.

And so I think not only do you get the full capabilities of Braze being on display for a higher percentage of our customer base more quickly, which helps with our differentiation and helps with customer ROI, but it just helps us drive the monetized adoption of these new capabilities as soon as we build them.

Operator

Your next question will come from DJ Hynes with Canaccord.

David Hynes

Yes. I mean I think the biggest thing about our pipeline is that there's still a huge amount of addressable market that is living on legacy technology and Braze is their AI bet. And so we are -- we certainly see customers being cost conscious. As people are adopting Agent Console, they are certainly doing the calculations to figure out what it's going to cost them in advance.

There's not just kind of a reckless running into the adoption of these technologies. But we built out capabilities like Agent Console being cognizant of the -- of customers' needs to budget and control these costs as well. We actually think that it's a critical component of the Harness.

And I walked through all the different capabilities within Braze that make up the Agentic Harness for marketers and billing and cost controls and having the right observability and understanding to that is certainly an important input into adoption and scaling of new use cases. And so we are seeing that.

But I think that the biggest underlying trend that we're seeing is that organizations are seeing that they need to have the combination of being able to have the full first-party context that is actionable with advanced AI within a platform that provides them the right guarantees and scalability and security and performance to be able to bring to life these more advanced AI capabilities and drive new strategies within their organizations.

And that's exactly what Braze has to offer them. And so we're continuing to orient our go-to-market priorities around being able to drive that legacy replacement cycle. And we are excited to see more and more customers adopting Braze as exactly where they're making their AI investments.

The pace at which customers are eagerly adopting and just the feedback that we get from customers around them being able to bring to life visions that they've had about how they would be able to run their customer engagement programs and what's now possible for them within Agent Console and how quickly they're able to build that utilizing Operator. We feel it compounding together, and we're excited about what that means.

Raimo Lenschow

Okay. Perfect. Yes, makes sense. That's really helpful, Bill. And then one quick number question. You were really much better this quarter on operating profitability. If I look at guidance, though, it looks like it's slightly below consensus. Some of that is timing. There's Forge as well in Q3. Is there any other factors that kind of drove the better this quarter and slightly below next quarter?

William Magnuson

The only thing is, yes, I mean, the timing around Forge in Q3, we also are -- we're excited to be able to be investing with new sales capacity heading into next year as well. And so we're starting the hiring push to be able to have the right seller capacity as we start next year now, and we're investing in that.

And so we didn't -- we were excited with the Q2 beat. We continue to see strong operating income results. We raised the full year operating income margin percentage for -- as a result of that Q2 beat. And we're going to continue to balance investment into the back half of the year with this continued strong performance and year-over-year improvements.

Operator

Our next question will come from Scott Berg with Needham.

Scott Berg

Bill, you seem pretty pleased with the initial adoption of a variety of your AI modules here. You talked about some accelerating traction there. But as you've seen those customers adopt those modules, is it also driving expanded use of the core Braze platform?

I mean when I look at things, whether it's Decisioning Studio, et cetera, I can see a real scenario where someone is using, it could be more profiles, more channels, more flex credits as they're able to create some of these campaigns more quickly. Just didn't know if you're seeing any of that tangential impact yet.

William Magnuson

Yes, we definitely are. And one of the things that we're seeing in the hackathons as well is people adopting things like multichannel strategies as well as multi-variant experimentation strategies with more eagerness. Those are the types of strategies that I think historically have always been a good idea for people to adopt. But because they required more work or more creative production, et cetera, they just didn't see the adoption that their performance potential deserved.

And so the most exciting thing, I think, that we're seeing from the Operator build-outs is just that there's been a lot that we've built in the last 5 to 8 years, in particular, that hasn't seen the level of adoption that it probably deserved to given what it had to offer to customers. And we're now seeing that gap get closed. And so that is resulting in customers utilizing more advanced features, expanding to more new channels more quickly and driving our automated experimentation capabilities.

And as I mentioned before, we're in the early innings of starting to have those more advanced ways of building Canvases and of driving cross-channel strategies and then driving experiment automation as well as decisioning, just by default and making that be the way that new campaigns and new Canvases get built in the first place.

And we're excited about what that means from a long-term retention as well as customer expansion standpoint because we already know that customers that adopt Braze with 3, 4, 5 channels as well as using our more advanced features that they have higher DBNR than other customer cohorts do, et cetera. And what Operator has the potential to, therefore, do is to make nearly every customer look like those that we already know have higher levels of retention and customer growth potential.

Scott Berg

Very helpful. And then from a follow-up perspective, if I go back to my notes when you acquired the OfferFit a year ago, I think you all talked about an ASP uplift from that product being, I believe, it was $300,000 or $400,000 kind of an average level deal. Is that what you're still seeing today? Or is the uplift maybe something different than your initial expectations?

William Magnuson

Yes. So the use case price range that we talked about around the acquisition is around $250,000 to $300,000, I believe. And we've seen the pricing power around that maintain itself. We are also building out Decisioning Studio Go, and we're going to have more to share about that at Forge. And that is, of course, that is a self-serve offering that will be able to be deployed more quickly and be able to be priced and paid for with action credits.

And so that allows for a customer to adopt it without the larger upfront costs around it. Now of course, that is a more constrained deployment of the model. It doesn't have as much flexibility or as much power as Decisioning Studio Pro, but it still represents incredible capability to drive uplift for customers, especially if they're not using experiment optimization in various ways already today.

And so our vision for the future of decisioning is one where we have multiple price points as well as different pairings of expert services on top of that in order to drive varying levels of performance optimization by taking advantage of other complexities that exist in the more advanced forms of the underlying reinforcement learning model.

And a big part of the development road map for Decisioning Studio since the acquisition, of course, in addition to integrating it into the Braze data platform and into the Braze dashboard has been the build-out of Decisioning Studio Go, which is a deployment at a completely new price point with higher levels of accessibility around the customer base. And so we're excited to be able to have both ends of that spectrum available to customers relatively soon.

You're going to hear more about that at Forge, as I mentioned. And that's going to allow for the opportunity for those high use case uplifts that we mentioned in the part of the customer base for whom that is the right performance ROI optimization for them and then to be able to introduce decisioning as a concept to the entire customer base very quickly through Decisioning Studio Go.

Operator

Next, we'll hear from Brian Peterson with Raymond James.

Brian Peterson

So Bill, I wanted to understand maybe more qualitatively on the uptick in AI adoption. Is there anything that you can share in terms of what types of customers, what industry, larger, smaller that are leaning into some of this AI adoption and what may still be on the come?

William Magnuson

Yes. So we're seeing -- I think, in general, larger teams are adopting Operator in more cases at higher rates because of the fact that their build processes are already quite complex. However, what we're seeing in the trend line on that is that Operator is trending toward universal adoption. We certainly have run into a number of organizations either in different geographies that are a little bit more reticent to adopt AI quickly or large enterprises that might have AI adoption consoles or other sorts of heavier weight processes.

But once people start to get a taste for it, they're really running at it. And so I think that we're -- within the next quarter or 2, we're just going to be talking about Operator, something that everyone is using and everyone is using at high rates. Within Agent Console, those are places where we're doing the work of getting customers into hackathons, building community around that, getting them to bring ideas to life, doing the education. And we're starting to see those efforts compound.

Definitely, the kind of blockers that are in front of people to be able to get new use cases scaled and into production, they vary a lot from company to company. Some of them, it's cost concerns. Other places, it's access to data. In other places, it might be brand and kind of brand controls and things like that, really handing over that autonomy to be able to produce new content. But as we are rapidly iterating with customers that are building and they're doing it with us, we're getting that customer feedback back.

The road map is moving really fast. We are able to build simultaneously with capabilities like Agent Console and Content Optimizer and Decisioning Studio Go with Operator involved as well. So as we get new feedback in and as we build new features, Operator becomes aware of those features immediately and is able to help customers adopt them more quickly. And so we're seeing a great feedback loop around that. It is still -- there are -- these are new concepts for a lot of people.

And so it is still taking time. And in some cases, we're going customer by customer to train them on these capabilities. But man, when you see people's eyes light up as they get to bring an idea that they've had for 2 years, we just had a customer last week sent us an effusive note because they've had an idea sitting on the shelf for literally a decade, and they were able to build it in Agent Console and do it in just a few days, and it's driving a completely new campaign strategy for them.

And so being able to see example after example like that has been really rewarding, I think, for the whole Braze team and has been an important catalyst around the Braze community, and we're really excited to see what Forge brings to continue to provide another boost to that adoption.

Brian Peterson

Great. Yes, that will be great to hear about that out in Vegas, Bill. But maybe just a follow-up. I know you've had a transition from some of the customer success revenue from subscription to professional services. Can you remind us how big was that impact? And any help on trying to kind of frame the growth rates over the next few quarters for ProServ?

Pankaj Malik

Thanks for your question. Yes, I'd expect that the professional services contribution is going to range between 9% to 10% moving forward. We continue to see the migration of our customers. We still have them legging out of the legacy pricing and packaging into our new packages. We're about 50% through our customer base in the migration.

I'd expect about 80% of the remaining to migrate into the new packages over the next 6 quarters. But also, as Bill indicated, some of the demand that you're seeing for pro services is a result of the AI adoption as customers start to hit more premium inboxes. There is the AI deliverability and cyber risks. And so there is a continued demand for AI services.

Operator

Our next question will come from Parker Lane with Stifel.

J. Lane

Bill, you talked about having really great diversity in the upsell motions of the business and higher DB&E characteristics or DBNR characteristics in the customers leaning into AI. Looking at total DBNR of 110%, I think that was consistent sequentially. How is that informing what you think that figure can look like going forward? Do you expect some of these new capabilities to help you remain at that level? Is there an opportunity to expand the corporate rate even higher than that?

William Magnuson

They quickly got themselves into full deliverability trouble, and we had to pair our deliverability services with them to ensure that they were actually -- that they were able to get their reputation back into a good place. And I think it's a great example where kind of driving into this more naively or with a more limited capability set is going to allow you to trigger messages or to get them sent.

But for you to really accomplish your customer engagement goals is a more advanced set of requirements. And I think that we're obviously seeing more and more customers that are demanding that in the right ways. And there's always going to be a build versus buy conversation in marketing tech. There always has been, there always will be.

But I think we feel really good about the offering that we're providing, the flexibility with which it can be implemented and wielded by organizations regardless of kind of where they are on that spectrum of how much they want to build versus how much they want to build on top of smart infrastructure. And Braze will provide -- we provide services across that spectrum. We always have.

And I think that the conversation that we're seeing around build versus buy right now is it's a little bit elevated from the past, but not by much. And for every one example that I have where people are chasing their vibe coding dreams, we've got 10 more for whom Braze is their AI bet. And we're excited to see that opportunity, and that's where we're orienting our go-to-market.

Operator

There are no more questions at this time. I'd now like to turn the call over to Bill for closing remarks.

William Magnuson

We're really excited to see you all in a few weeks at Forge. We've got a lot more to share with our customer community. And I thank you for joining us for today's earnings call, and we'll see you all later.

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Mission Produce (AVO) Fiscal Q3 2026 Earnings Call: Synergies Rise Above $30M

Wed, 09 Sep 2026 14:30:46 +0000

Key Takeaways

Fiscal Q3 2026 revenue increased 26% year over year to $450 million, while avocado volume rose 38% following the Calavo acquisition and growth in Mission Produce’s legacy business.
Adjusted EBITDA was $32.4 million, broadly flat versus $32.6 million a year earlier and above the company’s $28 million to $32 million guidance range.
Mission Produce reported a GAAP net loss of $6.5 million, or $0.08 per diluted share, reflecting acquisition-related costs, purchase accounting effects and higher interest expense. Adjusted net income was $15 million, or $0.18 per diluted share.
Management raised its annualized Calavo synergy estimate from at least $25 million to more than $30 million, primarily due to additional SG&A savings and network efficiencies.
The company reaffirmed second-half adjusted EBITDA guidance of $84 million to $88 million and expects fiscal Q4 adjusted EBITDA of $52 million to $55 million.
Management expects owned Peruvian farms to produce 120 million to 130 million pounds of exportable avocados this season, up from 105 million pounds last season, with more sales weighted toward Q4.

Key Financial Data

Metric	Fiscal Q3 2026	Year-over-year comparison	Key context
Revenue	$450 million	Up 26%	Higher avocado volume, including Calavo
Avocado volume	253 million pounds	Up 38%	Calavo contribution and higher legacy Mission volume
Average avocado selling price	—	Down 9%	Higher industry supply environment
Gross profit	$44.7 million	Down from $45.1 million	Lower International Farming selling prices offset Calavo’s contribution
Gross margin	9.9%	Down 270 basis points	Included integration costs and purchase accounting adjustments
GAAP net loss attributable to Mission Produce	$6.5 million	—	Equal to a loss of $0.08 per diluted share
Adjusted net income	$15 million	Down from $18.2 million	Adjusted EPS was $0.18 versus $0.26
Adjusted EBITDA	$32.4 million	Down from $32.6 million	Above company guidance of $28 million to $32 million
Cash and cash equivalents	$47.1 million	As of July 31	—
Total long-term debt	Approximately $400.3 million	As of July 31	Includes current portion and net debt issuance costs
Nine-month operating cash flow	Negative $25.9 million	Versus positive $21.4 million	Lower income and working-capital requirements
Nine-month capital expenditures	$32 million	Down from $39.8 million	Full-year spending remains projected at approximately $45 million

Business and Operating Performance

Marketing and Distribution

Segment sales increased to $414.3 million from $344.1 million, driven by higher avocado volumes from Calavo and the legacy Mission business. Lower average selling prices partly offset the increase.

Segment adjusted EBITDA rose to $24.7 million from $20 million. Mission Produce said California and Peru became more meaningful supply sources during Q3, improving the origin mix and supporting a sequential recovery in per-unit margins from Q2.

U.S. retail avocado volume grew approximately 9% year over year even as average retail prices increased approximately 15% sequentially. Management said U.S. consumption was above 10 pounds per capita year to date, 12% higher than last year. Legacy Mission’s estimated U.S. retail market share increased by approximately 60 basis points year over year.

Calavo Integration and Synergies

Management increased the annualized synergy estimate to more than $30 million from at least $25 million. Identified opportunities include SG&A reductions, distribution-center optimization, freight, sourcing, packaging, testing and vendor spending.

Mission Produce has begun moving fruit across the combined network, reducing reliance on higher-cost external sources and improving inventory positioning. It also discontinued operations at Calavo’s Temecula facility.

Management expects a small synergy contribution in Q4, with a more meaningful impact throughout fiscal 2027.

International Farming

International Farming sales were $45.8 million, compared with $49 million a year earlier. Segment adjusted EBITDA declined to $7.6 million from $12.1 million because of lower average avocado selling prices, although management said sales returns were stronger than expected during the quarter.

Approximately 53 million pounds of the projected 120 million to 130 million pounds of exportable Peruvian avocado production had been sold through the end of Q3. Management expects a larger portion of the crop to be sold in Q4.

Prepared Foods and Blueberries

Prepared Foods generated $15.5 million in post-acquisition sales and $0.2 million in adjusted EBITDA. The results cover only the post-acquisition portion of Q3 and are not a full-quarter run rate. Management’s near-term priorities are customer service, operating consistency and throughput.

Blueberry sales increased to $5.4 million from $4.5 million, while adjusted EBITDA was negative $0.1 million versus positive $0.5 million. Most blueberry sales and profitability are concentrated in fiscal Q4 and Q1.

Management Guidance

Mission Produce reaffirmed second-half adjusted EBITDA guidance of $84 million to $88 million. After generating $32.4 million in Q3, management expects fiscal Q4 adjusted EBITDA of $52 million to $55 million.

The anticipated sequential increase is expected to reflect:

A greater concentration of sales from company-owned Peruvian avocado production.
The seasonal increase in blueberry activity.
A full quarter of Calavo results.
Improved avocado margin dynamics.
An initial, limited contribution from integration synergies.

Management maintained fiscal 2026 capital expenditure guidance of approximately $45 million, including planned spending associated with the legacy Calavo business.

Risks and Key Watch Items

Average avocado selling prices were 9% lower year over year, and management expects the higher-volume industry environment to continue affecting pricing.
Transaction advisory and integration costs totaled $12.6 million in Q3. Additional costs are expected as facility, technology, organizational and process changes proceed.
Interest expense increased to $5.1 million from $2.4 million because of acquisition financing, while total long-term debt stood at approximately $400.3 million.
International Farming results remain highly seasonal and can shift between quarters based on harvest timing, vessel schedules, destination-market pricing and customer sales timing.
The Calavo integration remains at an early stage, and management emphasized the need to preserve customer service and business continuity while implementing changes.

Analyst Q&A Highlights

Management said the higher synergy estimate resulted from detailed post-closing work that identified incremental transportation savings, Mexican packing-house efficiencies and additional SG&A opportunities that were not fully visible during due diligence.

On Peru, management said the harvest was approximately one week from completion, providing strong visibility into production, destinations and fruit allocations. Q4 should also benefit from a greater contribution from higher-yielding, lower-cost farms.

Regarding market share, management said the combined Mission-Calavo platform offers more packing capacity, fruit availability and customer coverage. The company has experienced only minimal customer overlap-related dis-synergies so far and believes the platform can support meaningful market-share gains between 2027 and 2030 without additional acquisitions.

For Prepared Foods, management highlighted manufacturing capacity, combined customer relationships and Mission Produce’s global sourcing network as longer-term opportunities. The company is evaluating how existing facilities and its multi-country footprint could support future expansion.

Full Earnings Call Transcript

Complete Earnings Call Transcript

Management Remarks

Operator

Good afternoon, and welcome to the Mission Produce Fiscal Third Quarter 2026 Conference Call. [Operator Instructions] Please also note today's event is being recorded. At this time, I'd like to turn the call over to Andrew Pearson, Vice President of Investor Relations and Strategy for Mission Produce. Sir, please go ahead.

Andrew Pearson

Thank you, and good afternoon. Today's presentation will be hosted by John Pawlowski, President and Chief Executive Officer, and Bryan Giles, Chief Financial Officer. The comments during today's call contain forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts are considered forward-looking statements. These statements are based on management's current expectations and beliefs as well as a number of assumptions concerning future events.

Such forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from the results discussed in the forward-looking statements. Some of these risks and uncertainties are identified and discussed in the company's filings with the SEC. We'll also refer to certain non-GAAP financial measures. Please refer to the tables included in the earnings release, which can be found on our investor relations website, investors.missionproduce.com, for reconciliations of non-GAAP financial measures to their most directly comparable GAAP measures. I would now like to turn the call over to John.

John Pawlowski

Thank you, Andrew, and good afternoon, everyone. Our third quarter results demonstrate the strength of our platform and the team's focus on delivering results. Adjusted EBITDA of $32.4 million exceeded the high end of our expectations, supported by solid marketing and distribution performance, stronger than forecast results from our International Farming team, and early progress on the integration of Calavo. This was an extremely important quarter for Mission. It was our first reporting period following the completion of the acquisition, and it provided an early look at the capabilities of the combined organization. While we are still in the initial stages of integrating, the progress to date reinforces our confidence in the strategic and financial merits of the combination. I want to start with the avocado category because the strength of consumer demand provides important context for both our results as well as the opportunity ahead.

Last quarter, we discussed how a historically high supply, low price environment brought new households and consumption occasions into the category. This follows a historical pattern in which lower prices expand the consumer base and support sustained demand as pricing normalizes. That dynamic started to materialize in the third quarter. U.S. retail avocado volume grew approximately 9% year over year, even as the average retail price increased approximately 15% sequentially. Furthermore, U.S. avocado consumption remains at record levels in '26, trending above 10 pounds per capita year to date, 12% higher than last year, while household penetration has increased approximately 50 basis points year-to-date compared to last year. This is an encouraging progression from what we discussed last quarter. The low price environment helped introduce more consumers and occasions to the category, and volume yet remained strong as prices recovered.

This supports our view that the category expansion we saw in the first half is creating larger and more durable demand for the future. Avocados have evolved into an important staple for consumers. The category aligns with lasting preferences around fresh food, nutrition, convenience, and value, while the product's versatility supports consumption across multiple meals and occasions. Those qualities provide a strong foundation for continued category growth, both in the United States as well as in international markets that remain at relatively earlier stages of development. Our job is to translate those category tailwinds into profitable growth. Year-to-date, for Mission's legacy business, we increased our estimated U.S. retail market share by approximately 60 basis points from last year, reflecting deeper customer relationships and our ability to reliably support programs through changing supply conditions. Importantly, market share is a key measure of whether we are winning, but we will not pursue it at any cost.

Volume and per-unit margin must work together. Our objective is to deepen category leadership while maintaining the commercial discipline required to translate growth into stronger earnings and cash flow. During the quarter, we sold approximately 253 million pounds of avocados, an increase of 38% from last year, reflecting the addition of Calavo and higher legacy Mission volume. As California and Peru became more meaningful sources, our origin mix improved from Q2, supporting both customer continuity and a sequential recovery in per-unit margins. This improvement is a great example of the value our multi-origin sourcing model brings. In the second quarter, delayed California and Peru harvests temporarily limited that flexibility, but in Q3, our teams were better able to balance fruit from Mexico, California, and Peru, matching available sizes with customer demand, and directing the product toward the markets and programs where it could create the greatest value. Turning to Calavo, our first several months of ownership have reinforced our original investment thesis.

The combination expands our customer reach, sourcing flexibility, Mexican and California packing capacity, as well as participation in our Prepared Foods category. It provides more ways to serve customers, more flexibility to align fruit and sizing with demand, and more opportunities to remove costs from the overall supply chain. We are also bringing together two organizations with complementary strengths. Mission contributes a global sourcing and distribution platform, vertically integrated farming operations, category management capabilities, and established international infrastructure. Calavo adds customer relationships, additional North American sourcing and packing capabilities, and an established position in the value-added Prepared Foods space. For customers, the opportunity is to create a more reliable and capable supply partner. The combined company has more fruit, more facilities, and more options for responding when supply conditions change.

Over time, we believe this should help us improve our fulfillment, increase network utilization, reduce unnecessary handling and external sourcing costs, and ultimately provide customers with a broader set of products and services. At the time of the transition announcement, we identified at least $25 million of annualized cost synergies achievable within 18 months of close, with meaningful upside potential. Following our integration work so far, we are increasing that estimate to more than $30 million, primarily reflecting higher-than-anticipated SG&A savings and network efficiencies. We are already moving fruit across the combined network, reducing reliance on higher-cost external sources and improving our inventory positioning. We also discontinued operations at the Calavo Temecula facility and are advancing broader distribution, freight, technology, procurement, and organizational initiatives. The real measure of integration is not simply whether an action has been initiated. It is whether that action ultimately produces sustainable savings, better customer service, and stronger operating performance.

We are applying that standard to the work underway and remain focused on maintaining business continuity as we make changes. We expect synergies to begin contributing to financial results in Q4 and build more meaningfully throughout fiscal 2027. We recognize that integration requires disciplined execution across many functions, and we will continue to update you on our progress. Prepared Foods is an important part of the strategic opportunity. It extends Mission into convenient, value-added avocado products and gives us an established platform which allows us to participate in a broader avocado category. The business operates differently from Fresh Avocados, with different pricing structures, inventory requirements, as well as manufacturing considerations, but it is closely connected to our core sourcing expertise and customer relationships.

Our immediate focus in Prepared Foods is straightforward: Maintain customer service, improve operating consistency and throughput, and build a solid foundation for profitable growth. Over time, we believe Mission sourcing capabilities and customer reach can complement the Calavo team's manufacturing expertise and product portfolio. We look forward to discussing this opportunity in greater detail at our upcoming Investor Day. Within the International Farming segment, third quarter performance exceeded our expectations, supported by stronger average sales returns. We expect exportable production from our own Peru farms of 120 to 130 million pounds for the harvest season, compared with 105 million pounds last season, with a greater portion of this year's crop expected to be sold in the fourth quarter. Our vertically integrated farming operations remain an important differentiator.

They provide greater visibility into supply and quality, support customer programs during key seasonal windows, and give us the flexibility to allocate fruit across both North America and Europe, as well as Asia and other markets based on customer demand and relative returns. We expect our blueberry harvest to begin contributing more meaningfully as we move into its seasonally stronger quarters. Newer acreage continues to mature, and we remain focused on improving yields, per-unit costs, and returns from the infrastructure we have built in Peru. To close out the year, our priorities are straightforward: Protect profitable marketplace momentum, deliver the seasonal Peru and blueberry contribution, integrate Calavo thoughtfully, convert identified synergies into measurable financial results, and remain disciplined in the use of our capital. We are reaffirming our second-half outlook with a meaningful seasonal increase expected in the fourth quarter.

Bryan will provide the financial details and the principal drivers supporting that outlook. There is considerable work in front of us, but we exited Q3 with a larger category, stronger market positions, a broader and more capable operating platform, and increased visibility into the value available from the Calavo integration. Next month, we will host our Investor Day in New York. We will provide a more complete view of the company we are building, how each part of the platform fits together, the priorities that will drive our next phase, and the financial framework we will use to measure our progress moving forward. I want to thank the Mission and Calavo teams for their focus and commitment during an important period of change. I also want to thank our growers, customers, and partner for their continued trust. With that, I will turn the call over to Bryan.

Bryan Giles

Thank you, John, and good afternoon to everyone on the call. Fiscal '26 third quarter revenue totaled $450 million, an increase of 26% from the prior year period. Avocado volume increased 38%, reflecting the inclusion of Calavo and higher legacy Mission volume. Average per unit avocado sales prices were 9% lower versus the prior year, consistent with the higher industry supply environment we've discussed throughout the year. Gross profit was $44.7 million compared with $45.1 million last year, while gross margin decreased 270 basis points to 9.9%. Lower average selling prices reduced International Farming gross profit, while Marketing and Distribution benefited from Calavo's post-acquisition contribution, partially offset by integration-related costs and purchase accounting adjustments. SG&A expense, excluding transaction advisory and integration costs, was $31.6 million, compared with $24 million last year, primarily reflecting the addition of Calavo's cost structure.

Transaction advisory and integration costs were $12.6 million and included third-party legal and advisory fees, severance and retention expenses, and other acquisition and integration costs. Third quarter GAAP results also included $5.2 million of acquired inventory step-up amortization, $1.5 million of acquired intangible amortization, and $6.1 million of financing, tax, and supply chain optimization expenses associated with the transaction and integration. The inventory step-up increased cost of sales as the acquired inventory was sold and is temporary in nature, while the intangible amortization increased SG&A.

Net loss attributable to Mission Produce was $6.5 million, or negative $0.08 per diluted share, including transaction and integration costs, purchase accounting effects, and higher interest expense related to the acquisition. Adjusted net income was $15 million, or $0.18 per diluted share, compared with $18.2 million, or $0.26 per diluted share last year. Adjusted EBITDA was $32.4 million, compared with $32.6 million last year, and exceeded the high end of our $28 million to $32 million guidance range. The outperformance primarily reflected stronger than anticipated International Farming results and solid performance from Calavo during the post-acquisition period. Marketing and Distribution segment sales were $414.3 million compared to $344.1 million last year.

The increase is driven by higher avocado volumes sold, both from the Calavo contribution and the legacy Mission business, partially offset by lower average selling prices. Segment adjusted EBITDA was $24.7 million compared to $20 million last year. The increase primarily reflects higher gross margin attributed to the inclusion of Calavo's post-acquisition results. Last quarter, we discussed the temporary fruit size imbalance in April and the difficulty of operating in a predominantly single-origin sourcing environment. Those conditions improved as California and Peru became more meaningful parts of the Q3 supply mix, reporting sequential improvement in per unit margins from Q2. Prepared Foods is now a separate reportable segment following the Calavo acquisition. For the post-acquisition period, the segment generated sales of $15.5 million and adjusted EBITDA of $0.2 million.

Because Q3 includes only the post-acquisition period, these results should not be viewed as a full-quarter run rate. Our near-term focus is operating consistency, service, and throughput, and we expect to discuss the segment's attractive longer-term opportunity at our Investor Day. International Farming segment sales were $45.8 million compared with $49 million last year. Third-party sales were $14.8 million, and affiliated sales to Marketing and Distribution were $31 million. Segment adjusted EBITDA was $7.6 million compared with $12.1 million last year. Year-over-year decline primarily reflects lower average avocado sales prices. However, adjusted EBITDA results exceeded our expectations as average sales returns were stronger than we expected during the quarter.

As discussed last quarter, sales from our owned Peruvian production are weighted toward Q4 this year. We expect exportable production of approximately 120 to 130 million pounds, compared with 105 million pounds last season, of which approximately 53 million pounds has been sold through at the end of Q3. International Farming remains highly seasonal, with the majority of annual adjusted EBITDA generated in the third and fourth quarters. The allocation between periods can shift based on harvest timing, vessel schedules, destination market pricing, and customer sales timing. That dynamic is central to the expected sequential increase in consolidated adjusted EBITDA in Q4. Blueberry sales were $5.4 million compared with $4.5 million last year, while segment-adjusted EBITDA was negative $0.1 million compared with positive $0.5 million last year. Most sales and profitability for this segment are concentrated in the fourth and first quarters.

As John noted, we are increasing our annualized synergy estimate from at least $25 million to more than $30 million. The increase primarily reflects higher-than-anticipated SG&A cost savings and network efficiencies identified since closing. The broader opportunity includes organizational costs, distribution center optimization, freight, sourcing, packaging, testing, and vendor expenditures. We expect synergies to start contributing in Q4 and build more meaningfully throughout fiscal 2027. We incurred $12.6 million of transaction advisory and integration costs in Q3 and expect additional integration costs as facility, technology, organizational and process changes are implemented. These costs will vary by quarter based on the timing of the underlying actions. Cash and cash equivalents were $47.1 million at July 31st.

Total long-term debt, including the current portion and net debt issuance costs, was approximately $400.3 million at July 31st. Interest expense increased to $5.1 million from $2.4 million last year, primarily due to the incremental debt used to fund the transaction. Net cash used in operating activities was $25.9 million through the first nine months, compared with cash provided of $21.4 million last year, primarily reflecting lower income, driven in part by transaction advisory and integration costs, and working capital requirements. We expect a meaningful seasonal improvement in Q4 as the Peru avocado crop is sold through and blueberry activity increases. Capital expenditures were $32 million through the first nine months, compared with $39.8 million last year. For full year fiscal 2026, we continue to expect spend of approximately $45 million, inclusive of planned spending associated with the legacy Calavo business. During the first nine months of our fiscal year, we repurchased $9.4 million of Mission common stock.

Our near-term capital allocation priorities remain focused on integration support, maintaining appropriate liquidity, reducing debt, investing selectively in high return opportunities, and returning capital to shareholders through share repurchases when appropriate. Turning to our outlook, we are reaffirming the second-half adjusted EBITDA range of $84 to $88 million provided last quarter. With third quarter adjusted EBITDA of $32.4 million, we expect fourth quarter adjusted EBITDA of $52 to $55 million, including a full-quarter of Calavo. The sequential increase is expected to be driven by a greater concentration of sales from our owned Peruvian crop, the seasonal ramp in blueberries, a full-quarter of Calavo, and improved avocado margin dynamics. We also expect a small amount of synergies to begin contributing in Q4, building more meaningfully through fiscal 2027. Our focus is on delivering the fourth quarter plan, converting integration actions into measurable savings, generating cash, and reducing leverage over time.

That concludes our prepared remarks. Operator, please open the call for questions.

Operator

[Operator Instructions] Our first question is from Mark Smith with Lake Street Capital.

Question-and-Answer Session

Mark Smith

Hi, guys. I wanted to dig in first a little bit more on the annualized synergy target. Now, more than $30 million up from $25 million. Bryan, I know you talked a little bit about this, but just what specifically kind of drove this upside as we look at SG&A headcount, network logistics efficiencies, procurement, et cetera. I would love to just get more details on kind of that delta.

John Pawlowski

Hey, Mark, this is John. Good to hear your voice. We're going to plan on getting a lot more depth and coverage on this when we're together in New York in a couple of weeks here. So looking forward to seeing you there. But in regards to where we're at today, really it came down to the fact that the two organizations over the first five to eight weeks of working together started to really kind of put rubber to the road in regards to where the opportunities were, finding incremental transportation synergies, finding opportunities that the way we were co-operating our facilities in our Mexican packhouses, right? Just things that we weren't really able to get into the proverbial weeds on when we were doing due diligence.

But once we really opened those doors and started to have detailed conversations in regards to where things could come together, we started to see things in the $100,000, $200,000, et cetera range. And adding all of that up specifically around some of our operating efficiencies that we saw, some additional SG&A opportunities as we looked across our network, understanding exactly how our boards came together in regards to thinking about the way two public companies operate. The numbers started to add up fairly quickly, and we feel confident that moving from that $25 million to $30 million is the right thing to do for now.

Mark Smith

Perfect. And then just looking at Peru avocado production here, you guys have sold, it looks like moved less than half of that already. Just kind of one more insight into kind of where your confidence comes from just on moving this remaining volume at acceptable margins, just given kind of what sounds like still an oversupplied market.

John Pawlowski

Yes. Well, a couple of things. Number one, we had probably the best year in regards to productivity and total output out of our Peruvian farms that we've ever had. So -- we are incredibly proud of the work that's been done by the teams and the farming organizations down there to ensure regardless of condition, regardless of what was going on with the rest of the industry, we produced. When we saw the rest of the Peruvian market moving their estimates southward, we maintained and/or moved our estimates northward.

So we felt really good about how we competed from a productivity standpoint. And then secondly, we spent a lot of time over the last 18 to 24 months ensuring that we had a very good quality network in regards to where we could sell that fruit. We spent significant time building and looking at opportunities all over Europe, all over North America, even into South America. And the extensive network that we had built, which is really built on top of what even as extensive as we were 1.5 years ago, we added a significant number of capabilities, particularly in Southern Europe that we didn't have just a year ago today.

We sold a record number of containers into an outlet that maybe 2 years ago, we had 0 sales into. It's public knowledge. I think we were the #1 importer of Peruvian avocados into Europe during this season. So we had an excellent team effort in making sure we have the right number and quality of sources to move that fruit. And then on top of that, we're sitting here in September at this particular time, and we know where our programs are. We know what we've been able to execute against those -- all those things together lead us to the confidence that we have in our fourth quarter.

Bryan Giles

Mark, I'd add one other thing on kind of the lift that we're seeing. Everything John said about volume and price markets, I think, is accurate. Also, it's probably worth sharing that just because of the way the mix of fruit that came off the trees balanced out, a lot of our lower-yielding farms, we saw some disparity between yields on our different farms this year. And the fruit that sold through in our Q3 tended to be higher-cost-basis fruit because a lot more of it came from the lower-yielding farms whereas Q4 we're leaning more heavily into our higher-yielding farms this year so that's going to help give us a little bit of a lift in the fourth quarter as well.

Operator

Our next question is from Gerry Sweeney with Roth Capital Partners.

Gerard Sweeney

I'm going to start with international just because that's where you guys ended up. But obviously fourth quarter is going to be the bigger quarter as you guided towards. I'm just curious with the fruit, is this picked and how much visibility you have on it? I imagine it's probably off the trees and moving through packing at this point, so pretty solid visibility. Is that a fair assumption?

John Pawlowski

That's a very fair assumption. We are approximately 1 week away from being fully wrapped up with that harvest. So all of the numbers that we're putting out there in regards to our productivity and our yields is, I don't want to say 100% in pocket, but pretty much in pocket. And in regards to where that fruit is heading, we have very good visibility into all of the outlets and all the allocations that have been completed in regards to distribution of that fruit over the next three to four weeks.

Gerard Sweeney

Got it. And then also, you touched upon it in the last questions with Mark. 120 to 130 million pounds step-up from last year. I know Mother Nature can be fickle from year to year. I'm just curious, how much of that jump was good weather versus operating improvements at the farms, if you could break that out.

John Pawlowski

Pooran Sharma

Congrats on the results. Maybe just to start it off. Yes, sure thing. Just to start it off here. Wanted to understand a little bit more on the volume expectations for 4Q. I know in the release, and I think in the prepared comments, you had alluded to industry volumes growing at roughly 10% in 4Q. But I'm just trying to think about how much volume contribution came from Calavo in 2Q.

Now, it was 38% year-over-year growth. But if you kind of think that in your growth, legacy Mission, for example, matched industry growth of about 5% to 10% in 3Q, it would yield to about 20 million pounds or so of Calavo. And so when you think about 10% growth in Q4, is it more like 220 million pounds, when you think about the additional from Calavo? If you could maybe either help me with how to think about Calavo contribution from 3Q or how to maybe think about total aggregate volume growth for 4Q?

Bryan Giles

Pooran, when I think about it, you look at the amount of volume we saw in Q3, certainly we saw growth within our legacy business. We also saw growth from just the addition of Calavo into the fold. And that was for a two-month window, not a three-month window. It's difficult to pinpoint precise numbers because really from the day the deal closed, we started operating as one unit from a sales and sourcing standpoint. We still have different systems where we're collecting data, but there's so much collaboration and cross-selling activity that's taking place at this point that it's difficult to pinpoint a number, like a revenue or a volume number on one of the units. What I will say as we look at Q4 is that we think the industry volumes are going to be at about a 10% growth rate. And I think that was the intent as we're providing industry outlook not customer specific outlook.

So yeah, in theory, if we're growing with the industry and it was Mission standalone, we would be at 10%. We're not picking up the Calavo, the impact of the Calavo growth right in there. That's not what we intended to do with that guideline or that guidance. It was really just more about understanding what the market conditions were that we were going to be operating in, which is a higher volume environment that we were in a year ago, which is going to have some impact on the pricing environment that we're operating in.

Pooran Sharma

Completely. No, I appreciate that. And that is helpful, just kind of delineating that. I guess as my follow-up here, and I know you're thinking about integration here and good kind of questions on the progress of that maybe shifting to something that might be on the back burner a bit but prepared foods, obviously, first quarter under the belt, with not a full-quarter, but wanted to just get your sense on biggest areas of opportunity in this business. And as your integration progresses what do you think those buckets are? Is it more manufacturing utilization, sourcing? Is it customer penetration? Any sort of color with this business would help.

John Pawlowski

Yeah, sure, Pooran. This is John. You know, much more to come as we get into the next couple quarters on this business and we continue to learn more. But I guess as an initial stab, the excitement around the Prepared Foods business is well-deserved in regards to the opportunity ahead for Mission Produce longer term. The Calavo team and the leaders of that organization who come over and are helping lead that organization internally here have done an outstanding job of building capabilities and customers and relationships and have been able to really kind of drive a name in the industry for quality supply around processed avocados and particularly around the guacamole area.

Now, since we've owned it and since we've become partners in that strategy process, we've seen some opportunities already. First of all, the capacity in that facility that is currently in Mexico more than likely needs to be addressed in regards to our outlook in regards to where that business can go. We're having conversations around what that means, how that could look, what the optionality is around our existing network, our network in regards to our global footprint, our capabilities in multiple countries of origin gives us a lot more optionality than Calavo standalone had in that space.

We've tied our customer networks together in regards to bringing all the sales organizations into a room and said, how do we work together? How do we provide each other opportunities? We've already seen doors opening based on those conversations in the first four or five weeks of being together in that space. And then third, much more longer term, is the global outlook in that business, right? There's things that we have access to in regards to relationships and operating footprint that I don't think the Calavo team had really been considering longer term in regards to the global nature of where that business can go. Those are just some highlights and some things that I'm seeing as being truly differentiators in regards to the way we've run this business over the last 15 years and what we could do over the next 5 to 10 if we pull that together the way I think we can.

Operator

Thank you. Ladies and gentlemen, at this time, I'm showing no further questions. This does conclude today's conference call. We do thank you for attending. You may now disconnect your lines.

Find out more

ABM Industries Q3 2026 Earnings Call: EPS and Cash Flow Outlook Raised

Wed, 09 Sep 2026 14:30:45 +0000

Key Takeaways

ABM Industries reported record fiscal Q3 2026 revenue of slightly more than $2.3 billion, up 4.2% year over year, including 2.1% organic growth and a 2.1% acquisition contribution.
Adjusted diluted EPS increased 27% to $1.04, while adjusted EBITDA rose 11% to $139.6 million. Segment operating margin improved 40 basis points sequentially to 7.7%.
Year-to-date free cash flow reached $199.6 million, up from $42.4 million a year earlier. ABM raised its reported full-year free cash flow outlook by $25 million to approximately $210 million.
Semiconductor, microgrid and data center operations generated nearly $775 million of revenue during the first nine months, with 26% organic growth and approximately 40% growth including WGNSTAR.
Management raised the midpoint of its fiscal 2026 adjusted EPS guidance to a range of $3.95-$4.10. Organic revenue growth remains projected at 3%-4%, toward the upper end.
Technical Solutions faced approximately $15 million of project deferrals in Q3. Management said almost all of the delayed activity should move into Q4, with a smaller portion expected in fiscal Q1 2027.

Key Financial Data

Metric	Fiscal Q3 2026	Change / context
Revenue	Slightly above $2.3 billion	Up 4.2% year over year
Organic revenue growth	2.1%	Acquisition contribution was also 2.1%
Net income	$49.7 million	Up 19% from $41.8 million
Diluted EPS	$0.84	Up from $0.67
Adjusted net income	$61.5 million	Up 19% from $51.7 million
Adjusted diluted EPS	$1.04	Up 27% from $0.82
Adjusted EBITDA	$139.6 million	Up 11% year over year
Segment operating margin	7.7%	Up 40 basis points sequentially; broadly flat year over year
Q3 operating cash flow	$146.8 million	Supported by working capital management and ERP stabilization
Q3 free cash flow	$128.4 million	—
Nine-month free cash flow	$199.6 million	Up from $42.4 million
Total indebtedness	$1.8 billion	Includes $22 million of standby letters of credit
Debt / pro forma adjusted EBITDA	2.9x	Below 3x one quarter earlier than planned
Available liquidity	$606 million	Includes $110 million of cash and equivalents

Business and Operating Performance

Business & Industry: Revenue declined 2.6% due to the exit of a large UK client and other client exits, particularly on the West Coast. Operating profit increased to $75 million, while margin expanded 30 basis points to 7.4% as cost actions and operating improvements offset lower revenue.

Aviation: Revenue grew 12% to $328.1 million, supported by healthy passenger demand and the Heathrow contract ramp. Operating margin declined to 5.6% from 6.8% as airline customers sought cost relief in response to higher jet fuel costs. Airports now account for approximately 60% of Aviation revenue.

Manufacturing & Distribution: Revenue rose 18% to $481 million, comprising 8% organic growth and 10% growth from WGNSTAR. Operating profit increased to $40.5 million, but margin declined to 8.4% from 8.9%. Excluding incremental WGNSTAR amortization, margin was 9.2%.

Education: Revenue edged higher to $235.8 million. Operating profit rose 9% to $23 million, and margin expanded 70 basis points to 9.7%, driven by labor efficiency and effective escalation management.

Technical Solutions: Revenue increased 4% to $259.9 million, including 2% organic growth. Strong HVAC and battery energy storage activity was partly offset by microgrid project delays. Operating profit increased to $21.5 million, with margin improving to 8.3% from 7.8%.

Semiconductor, microgrid and data center businesses now represent more than 11% of ABM revenue and carry a double-digit blended operating margin. Semiconductor revenue grew 65% organically during the first nine months and more than doubled including nearly two quarters of WGNSTAR. Microgrid revenue increased 17% organically, while data center revenue grew 8% organically.

ABM also expects to finalize a joint-venture contract to provide a microgrid or primary backup power system for the Army Corps of Engineers. ABM’s portion is valued at approximately $20 million, with execution expected in calendar 2027.

Management Guidance

Adjusted EPS: $3.95-$4.10 for fiscal 2026, with the midpoint raised following Q3 performance.
Organic revenue growth: 3%-4%, with management continuing to expect performance toward the upper end.
Total revenue growth: Expected at the high end of the 4%-5% range, including approximately one percentage point from WGNSTAR.
Segment operating margin: 7.7%-7.8% for fiscal 2026. Management expects Q4 margin to be meaningfully above this range and indicated it could exceed 8%.
Normalized free cash flow: Approximately $285 million before transformation and integration costs, the final RavenVolt earn-out and any incremental restructuring.
Reported free cash flow: Approximately $210 million, up from the prior forecast of $185 million.
Interest expense: Approximately $110 million.
Normalized tax rate: 29%-30%, before discrete items.

Management expects Technical Solutions to deliver double-digit organic growth in Q4 as deferred microgrid projects proceed. For fiscal 2027, the company expects Business & Industry to return to organic growth around midyear, Manufacturing & Distribution and Technical Solutions to sustain strong growth, and Education to produce low-single-digit organic growth.

Risks and Areas to Watch

Technical Solutions remains exposed to quarterly volatility from project timing. Q3 delays were caused by a client’s decision to prioritize other capital projects.
Business & Industry continues to face pressure from client exits, work-from-home trends and aggressive competitor pricing in Northern California.
Higher jet fuel costs are pressuring airline economics and Aviation margins, although management said the effect appears to be stabilizing.
WGNSTAR-related intangible amortization is weighing on Manufacturing & Distribution margins. ABM allocated approximately $12 million of intangible amortization to fiscal 2026.
Interest expense increased by $4.2 million year over year to $29.5 million in Q3 because of higher average debt following the WGNSTAR acquisition.
Management remains mindful of broader economic uncertainty despite describing most end markets as healthy.

Analyst Q&A Highlights

Management said the data center pipeline is now a multiple of its level a year earlier, with co-location operators representing the main near-term target. ABM expects data center growth to become healthy double-digit growth over time, although no formal forecast was provided.
Roughly 15%-20% of the high-growth revenue discussed is project-based. ABM aims to convert more completed projects into recurring maintenance contracts and longer-term customer relationships.
WGNSTAR is tracking above ABM’s previous annualized revenue guidance of $120 million-$130 million. Management also cited two or three early cross-selling wins across the combined semiconductor customer base.
ABM said its stronger cash outlook primarily reflects improved collections, working capital execution and increasing use of capabilities from its stabilized ERP system.
Management suggested that an Aviation mix of approximately 70% airports and 30% airlines in three to five years would be favorable, but emphasized that this was directional rather than a formal target.

Full Earnings Call Transcript

Complete Earnings Call Transcript

Management Remarks

Operator

Greetings. Welcome to ABM Industries Third Quarter 2026 Earnings Call. [Operator Instructions] Please note that this conference is being recorded.

At this time, I'll turn the conference over to Paul Goldberg, Senior Vice President, Investor Relations. Thank you. You may now begin.

Paul Goldberg

Good morning, everyone, and welcome to ABM's Third Quarter 2026 Earnings Call. My name is Paul Goldberg, and I'm the Senior Vice President of Investor Relations at ABM. With me today are Scott Salmirs, our President and Chief Executive Officer; and David Orr, our Executive Vice President and Chief Financial Officer.

Please note that earlier this morning, we issued our press release announcing our third quarter 2026 financial results and outlook. A copy of that release and an accompanying slide presentation can be found on our website, abm.com. After Scott and David's prepared remarks, we will host a Q&A session.

But before we begin, I would like to remind you that our call and presentation today contains predictions, estimates and other forward-looking statements. Our use of the words estimate, expect and similar expressions are intended to identify these statements, and they represent our current judgment of what the future holds. While we believe them to be reasonable, these statements are inherently subject to risks and uncertainties that could cause our actual results to differ materially. These factors are described in a slide that accompanies our presentation as well as our filings with the SEC.

During the course of this call, certain non-GAAP financial information will be presented. A reconciliation of historical non-GAAP numbers to GAAP financial measures is available at the end of the presentation and on the company's website under the Investor tab.

With that, I would like to now turn the call over to Scott.

Scott Salmirs

Good morning, everyone, and thank you for joining us. We had a strong third quarter, particularly when you consider some of the puts and takes across the business. We delivered record quarterly revenue, 27% adjusted EPS growth and exceptional year-to-date cash flow, despite project timing in Technical Solutions and the anticipated impact of client exits in B&I. I think the quarter demonstrates both the resilience of our portfolio and our ability to execute operationally even when individual parts of the business don't move in a straight line.

On the revenue side, most of the business performed largely as we expected. Aviation and Manufacturing & Distribution continued to deliver strong growth. Education performed as expected, while B&I reflected the client exits we have discussed over the last several quarters. Technical Solutions was the one area where revenue came in below our expectations, driven by certain project deferrals from an important client. Based on our discussions with that client, we believe this is principally a timing issue rather than a change in the underlying demand environment, and we expect a meaningful portion of that activity to move into the fourth quarter.

What I'm particularly pleased with this quarter is our execution on profitability and cash flow. The cost actions we've been driving throughout the year, combined with disciplined working capital management, resulted in 27% adjusted EPS growth, 40 basis points of sequential segment margin improvement and an increase of over $150 million in year-to-date free cash flow.

Cash generation has historically been an important strength of ABM. Following the disruption associated with our ERP implementation, we've been very focused on restoring our performance, and the progress is increasingly visible in our results. Given our performance through the first 9 months, we are raising our full year free cash flow outlook.

I want to spend a few minutes on the part of the ABM story that I think is becoming increasingly important. Our position in semiconductor, microgrids and data centers. Because some of these businesses are project-oriented and can be lumpy quarter-to-quarter, I think the year-to-date numbers provide the best perspective. Through the first 9 months, these businesses generated nearly $775 million of revenue, growing 26% organically and approximately 40% when including WGNSTAR. Together, they now represent more than 11% of ABM's revenue and carry a double-digit blended operating margin. So these businesses have become meaningful within ABM, and we believe they have significant runway ahead.

In semiconductor, we made a strategic decision several years ago to invest ahead of what we believe would be a significant expansion of advanced manufacturing capacity. We invested in industry expertise, developed relationships with many of the leading manufacturers and established a strong position supporting semiconductor facilities. WGNSTAR significantly expands that opportunity.

One way to think about it is to picture the fab as the bull's eye in the semiconductor facility. Historically, ABM has operated around the bull's eye, providing a broad range of services. With WGNSTAR, we now have the highly specialized technical capabilities to operate inside the bull's eye as well. That significantly expands our addressable opportunity and allows us to provide a much broader range of services to semiconductor clients. The results so far have been really encouraging. Semiconductor revenue grew 65% organically during the first 9 months and more than doubled when including almost 2 quarters of WGNSTAR, and we are still early in realizing the opportunities across the combined client portfolio.

In microgrids, including battery energy storage systems, we have approximately quadrupled the sides of the business since entering the market in 2022. Through the first 9 months, revenue grew 17% organically. The underlying demand drivers remain compelling as clients increasingly invest in power resiliency and redundancy. We're also focused on broadening the client base and increasing the recurring component of the business over time.

To highlight our progress on diversification, in the coming days, we expect to finalize a contract to build a microgrid or primary backup power for the Army Corps of Engineers as part of a joint venture with a strategic partner. The total value to ABM is approximately $20 million, and we expect the project will be executed in calendar 2027.

And finally, data centers. Year-to-date, revenue grew 8% organically, but we believe the opportunity ahead is considerably larger than what is reflected in that current growth rate. Our pipeline and backlog continue to build, including work with many co-location customers, and we expect a meaningful portion of that activity to convert into revenue fiscal 2027 and into 2028.

Taken together, these businesses represent an important evolution in ABM's portfolio. We have a large, resilient core business that generates significant cash flow, while at the same time building meaningful positions in markets benefiting from powerful long-term investment trends. We believe that combination can contribute meaningfully to ABM's growth and margin profile over time.

Let me step back and briefly talk about what we are seeing across our markets as we move into the fourth quarter. With the Business & Industry, the trends we discussed last quarter remain largely intact. And Northeast continues to be our strongest commercial real estate market, while the West Coast, particularly Northern California, remains challenging. We continue to be disciplined in how we pursue and retain business. Our objective isn't simply to maximize revenue. We want client relationships where we see a credible path to attractive returns over time. Looking ahead, we expect B&I to return to organic growth around the middle of fiscal 2027 as we lap the large U.K. client exit we've previously discussed.

In Manufacturing & Distribution, the environment remains very constructive. Technology continues to lead the way, particularly semiconductor, and we're also seeing healthy activity in e-commerce, pharma and broader industrial manufacturing. Based on what we see today, we believe M&D is positioned to sustain strong organic growth into fiscal 2027 and beyond.

In Aviation, passenger demand remains healthy. The near-term issue is pressure on airline economics from higher jet fuel costs, which is creating some pressure on our margins. We have incorporated that into our outlook and are actively working to mitigate the impact. And at the same time, our deliberate shift towards airports continues to improve the long-term profile of the business. Airports now represent approximately 60% of the Aviation revenue and provide greater consistency, broader cross-selling opportunities and more stable economics.

Education continues to be a consistent cash-generative business. The team is executing extremely well, and we expect low single-digit organic growth as we move into fiscal 2027.

And finally, in Technical Solutions, the underlying market fundamentals across energy resiliency, data centers and HVAC remains strong. As I mentioned earlier, Q3 was affected by certain project deferrals of an important client. These delays were not driven by interest rates, supply chain constraints or permitting challenges. The client made a decision to prioritize other capital projects during the quarter. We are now executing on many of those deferred projects, which should translate into significant sequential improvement in ATS revenue, operating profit and margin in Q4. More broadly, given the demand we continue to see across ATS, we expect another year of strong growth in fiscal 2027.

So as we enter the fourth quarter, I will leave you with 3 things. First, the majority of our end markets remain healthy. And where we do have pressure, we understand the issues and are actively managing them. Second, our operational execution continues to improve. Margins increased sequentially, cash flow has strengthened considerably, and the cost actions we've been taking are showing up in our results. And third, semiconductor, microgrids and data centers are becoming increasingly meaningful contributors to ABM, and we believe they have substantial runway ahead. We are raising the midpoint of our adjusted EPS outlook and raising our full year free cash flow outlook based on our strong third quarter results and our confidence in delivering in the fourth quarter. There's still work to do, but we feel good about the position we're in and the foundation we are building as we head into fiscal 2027.

And with that, I'll turn it over to David.

David Orr

Thanks, Scott, and good morning, everyone. Let's start on Slide 7. Revenue grew 4.2% year-over-year to an all-time quarterly record of slightly above $2.3 billion, driven by 2.1% organic growth and a 2.1% contribution from acquisitions, primarily WGNSTAR. Organic growth was especially strong in Aviation and M&D, which grew 12% and 8%, respectively. Education was up slightly, while Technical Solutions posted organic growth of 2%, reflecting project timing, which I'll discuss shortly. B&I declined 3% as expected. I'll get into the segment details in a few minutes.

Turning to Slide 8. As Scott mentioned, we delivered a strong earnings quarter. Net income increased 19% to $49.7 million or $0.84 per diluted share compared to $41.8 million or $0.67 per diluted share in the prior year. Adjusted net income was $61.5 million or $1.04 per diluted share versus $51.7 million or $0.82 per diluted share last year, reflecting increases of 19% and 27%, respectively. These significant year-over-year increases primarily reflect higher segment operating profit, lower tax expense and reduced ongoing corporate costs, partially offset by higher interest expense. Per share measures were further benefited from share repurchase activities completed earlier in the year.

Adjusted EBITDA increased $13.8 million or 11% over the prior year to $139.6 million, driven by higher segment operating profit and lower corporate costs. Segment operating margin increased 40 basis points sequentially to 7.7%. On a year-over-year basis, the segment margin was essentially flat as operational efficiencies in B&I, M&D and Education were offset by anticipated pressures in Aviation and higher amortization expense related to the WGNSTAR acquisition. Excluding acquisition-related amortization, margin would have been 7.8%.

Now let's turn to segment performance, beginning with Slide 9. B&I revenue declined 2.6% in the third quarter, as expected, driven by the Q2 exit of a large U.K.-based client and the impact of certain other client exits, particularly on the West Coast. We expect revenue trends to be similar in Q4, so we anticipate continued incremental margin improvement as our operational actions take further hold. Operating profit increased to $75 million and margin expanded 30 basis points year-over-year to 7.4% compared to $73.8 million and 7.1% in the prior year period. These improvements primarily reflect cost actions and operational improvements, along with the benefit of lapping certain lower-margin contracts entered into in the third quarter of last year.

Aviation grew 12% to $328.1 million, supported by healthy travel demand and the continued ramp of our Heathrow contract. Operating profit was $18.4 million with a margin of 5.6% compared to $19.7 million and 6.8% last year. Profit and margins were pressured by airline clients who are reacting to elevated fuel costs by seeking cost relief from their service providers. We factor this into our outlook and are actively managing the pressure through operational efficiencies.

Turning to Slide 10. M&D generated $481 million in revenue, an 18% increase year-over-year, including organic growth of 8% and 10% growth from the WGNSTAR acquisition. The strong organic growth was driven by continued client expansions across the segment. Operating profit was $40.5 million with a margin of 8.4% compared to $36.4 million and 8.9% last year.

On a year-over-year basis, the margin change primarily reflects ongoing investments in sales and industry expertise talent to support our long-term growth strategy as well as nearly $4 million in incremental amortization expense connected with the WGNSTAR acquisition. Excluding incremental amortization, margin was 9.2%, which we view as a solid base from which to expand as we outgrow the amortization and continue to cross-sell higher value solutions to our semiconductor and technology clients.

Education revenue rose slightly to $235.8 million and delivered excellent operating performance in the quarter, which is the seasonally strongest for profit and margin. Operating profit increased 9% to $23 million, and margin expanded 70 basis points to 9.7%. This improvement was driven by enhanced labor efficiency and effective escalation management.

Technical Solutions third quarter revenue was $259.9 million, up 4% year-over-year, including 2% organic growth and 2% from acquisitions. Organic growth reflected strong HVAC and battery energy storage system activity, partially offset by certain project delays in our microgrid business, driven by an important client. These delays were compounded by a difficult comparison against a very strong third quarter last year. Operating profit was $21.5 million with margin at 8.3% compared to $19.4 million and 7.8% last year. The increase in operating profit and margin was mainly driven by positive service mix, partially offset by impacts in our microgrid business due to project delays.

Looking to the fourth quarter, we expect significant sequential increases in revenue, operating profit and margin on higher microgrid activity as projects that shifted out of the third quarter move forward. As we discussed earlier in the year, the back half of the fiscal year and specifically the fourth quarter has historically been the strongest operating quarter of the year for Technical Solutions. This year will be no different.

Now turning to Slide 11. We ended the quarter with total indebtedness of $1.8 billion, including $22 million in standby letters of credit. Our total debt to pro forma adjusted EBITDA ratio was 2.9x. We achieved our goal of leverage being below 3x a quarter earlier than originally planned, reflecting strong sequential progress, driven by our robust cash flow.

We expect to drive leverage even lower by year-end. Available liquidity stood at $606 million, including $110 million in cash and cash equivalents. During the quarter, we closed on a $300 million accounts receivable facility. This diversifies our funding sources and reduces our marginal cost of borrowing relative to our existing revolving credit facility and also represents a meaningful enhancement to our overall capital structure.

As Scott mentioned, we had a very strong cash generation quarter, which has long been a hallmark of ABM. Third quarter cash from operations was $146.8 million, and free cash flow was $128.4 million. For the first 9 months, cash from operations was $275 million, and free cash flow was $199.6 million versus cash from operations of $101 million and free cash flow of $42.4 million in the prior year period. This represents an improvement of over $150 million in free cash flow during the first 9 months, driven by strong working capital management and ERP stabilization. As a result of our progress on cash generation year-to-date, we're raising our full year free cash flow expectations, which I'll discuss in a moment.

Interest expense in the quarter was $29.5 million, up $4.2 million from last year, reflecting larger average debt balances driven by our WGNSTAR acquisition. This was partially offset at the net income level and lower tax expense, which was $4.1 million below last year, reflecting certain discrete tax benefits recognized in the quarter.

Turning to our fiscal 2026 outlook on Slide 12. As Scott noted, we're encouraged by the relative health of our end markets while remaining mindful of the broader economic uncertainty. As such, we're raising the midpoint of our fiscal 2026 adjusted EPS range, which is now expected to be $3.95 to $4.10. This raise reflects our strong third quarter performance and our confidence delivering on our fourth quarter expectations.

As a reminder, our full year organic revenue growth outlook is 3% to 4%, and we continue to expect to be toward the higher end of that range. Aviation, M&D and Technical Solutions are expected to grow above that range, while B&I and Education are projected to be below that range. The WGNSTAR acquisition is expected to deliver approximately 1 point of additional revenue growth, bringing total growth to the high end of our 4% to 5% range.

We're modestly updating our segment operating margin outlook to 7.7% to 7.8% for fiscal 2026, reflecting year-to-date performance and slightly higher intangible amortization for WGNSTAR, which, in aggregate, accounts for 10 basis points of operating profit margin impact for the full year. That said, fourth quarter margin is projected to be meaningfully above the high end of that range, reflecting the anticipated seasonal improvements in ATS mix and the continued benefit of our operational actions across the portfolio.

Our forecast for interest expense remains at approximately $110 million and our normalized tax rate before any discrete items, including the possible extension of the work opportunity tax credit program, is still expected to be 29% to 30%.

As I mentioned earlier, we're encouraged by our progress generating cash and are raising our full year expectations. We now expect normalized free cash flow of approximately $285 million in fiscal 2026 before the impact of transformation and integration costs, final RavenVolt earn-out and any incremental restructuring.

On a reported basis, free cash flow is expected to be approximately $210 million versus our prior forecast of $185 million, a $25 million improvement that reflects the strong working capital performance we've delivered through the first 9 months of the year. I also want to take a moment to recognize the efforts of our operators and our finance and treasury teams who drove outstanding third quarter cash flow. These results are a product of discipline and focus on the fundamentals of working capital management.

With that, Scott, I'll turn it back to you for closing remarks.

Scott Salmirs

Thanks, David. Let me close with a couple of thoughts. We feel good about where ABM stands today. Our core business remains resilient. Cash flow has improved significantly, and we are making progress on margins and operating efficiency. At the same time, the investments we've made in semiconductor, microgrids and data centers have created meaningful growth platforms in markets where we believe demand will remain strong for years.

As we move towards fiscal 2027, our priorities are straightforward. Finish this year strong, execute on the opportunities already in front of us, continue improving margins and cash flow and allocate capital with discipline.

And finally, I want to thank our team. More than 100,000 people show up every day and deliver for our clients. Ultimately, the results we are discussing today come from their execution, expertise and the trust they build with our clients.

We look forward to sharing our fiscal 2027 outlook when we report fourth quarter results.

With that, we'll open up the line for questions.

Operator

[Operator Instructions] And our first question is from the line of Tim Mulrooney with William Blair.

Yes. I guess first question, I would like to go back to Slide 6 and your discussion of your opportunities in technology. And in particular, I wanted to focus on the data center panel. So in my view, I mean, that's an area where there's a tremendous amount of growth or build-out that's going to occur over the next handful of years. From your perspective, Scott, maybe 2 questions. One is, have you been bidding for business for data centers that are kind of under construction? Or what is the cadence on contract, your pursuit of contracts and when they get awarded?

And then secondly, taking up your analogy of the bull's eye and the target and everything, is quality uptime kind of, in some sense, your path to getting inside the bull's eye of the more significant data center projects? And if that's the case, can you expand that geographically organically? Or is this the case where you're going to be looking for maybe similar service companies targeted -- in targeted geographies?

Scott Salmirs

Scott Salmirs

Yes, we're really positive on our pricing approach. We have -- for medium-sized large contracts, we have a pricing council that goes through and we have hurdle rates that you have to hit. So that's been super helpful in terms of discipline escalations, really important part of our mix on pricing. We have to go out there every year and get wage escalations, and you know that's always been a historic strong point for ABM even in times when there was significant labor pressure. So it's a muscle strength we've built. So we don't think there's anything dynamic happening in the market that's going to hurt us from a pricing standpoint. If anything, I think we've just gotten stronger and disciplined year-over-year after year. So we feel really good about that.

Marc Riddick

Great. And then shifting gears over to Aviation. I really appreciated the commentary as far as the airport airline and what's going on with the airlines. Maybe talk a little bit about that mix shift that you've accomplished over the years and sort of maybe where you see that maybe settling out? What sort of a reasonable -- I mean we're at 60-40, I guess, now with airports and airlines. Maybe you could talk a little bit about what might be a reasonable target or a view and maybe the kind of time frame that you might have in mind there?

Scott Salmirs

Yes. It's kind of hard to predict, to be honest with you. I know our focus is on that. And if it landed 3 to 5 years from now, it's 70-30, I think we'd all be happy with that. And I think that's -- it's not necessarily even a reflection that we think the airlines are going to be weaker. I think there's going to be so much infrastructure going on in airports.

I think there's going to be an opportunity as airports upgrade around the country that they're going to want more enhanced services, and they're going to want the kind of service that we perform at LaGuardia, which we've talked about, where we're kind -- an integrated approach. So 70-30 is not necessarily scientific. It's just kind of a sentiment that we're thinking over time, but there's a lot that can happen in that industry. But we love the way we've been heading.

Scott Salmirs

Well, thanks, everybody, for joining in. I hope you have a happy fall. And everyone's back to work now, summer's over, and we will see you in Q4 with our results and our full year guide for '27. But thanks, everybody.

Operator

Thank you. This will conclude today's [Audio Gap].

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Destination XL (DXLG) Q2 Fiscal 2026 Earnings Call: EBITDA Rises as Sales Decline Narrows

Wed, 09 Sep 2026 14:30:44 +0000

Key Takeaways

Net sales declined 3.4% year over year to $111.6 million, while comparable sales fell 3.5%. Monthly comparable sales improved sequentially from -5.7% in May to -2.8% in June and -1.9% in July.
Adjusted EBITDA increased to $7.7 million, or 6.9% of sales, from $4.7 million a year earlier. Adjusted EPS rose to $0.05 from $0.01.
Gross margin increased 270 basis points to 47.9%, primarily due to a $4.6 million IEPA tariff refund. Excluding the refund, merchandise margin would have been approximately 70 basis points lower year over year.
Store traffic remained DXL’s largest operating challenge. Strong conversion and dollars per transaction partly offset the pressure, while direct-channel conversion benefited from app and website improvements.
DXL ended the quarter with $20.1 million in cash and investments, no debt, and $61.7 million of excess availability.
The board withdrew its previous support for the proposed Full Beauty merger and unanimously recommended that shareholders vote against the share issuance proposal, citing Full Beauty’s deteriorating performance, higher debt and potential dilution.

Key Financial Data

Metric	Q2 Fiscal 2026	Year-over-year comparison / commentary
Net sales	$111.6 million	Down 3.4%
Comparable sales	-3.5%	Best comparable-sales result in the past three years, according to management
Store comparable sales	-4.3%	Traffic remained the primary constraint
Direct comparable sales	-1.6%	Conversion improved through app and site enhancements
Adjusted EBITDA	$7.7 million	Up from $4.7 million
Adjusted EBITDA margin	6.9%	Benefited from the tariff refund
Adjusted EPS	$0.05	Up from $0.01
Gross margin	47.9%	Up 270 basis points, primarily due to the $4.6 million refund
SG&A expense	41.0% of sales	Advertising was 6.1% of sales
Cash and investments	$20.1 million	No debt; $61.7 million of excess availability

Business and Operating Performance

DXL reported continued sequential improvement in comparable-sales trends, but store traffic remained weak. Management said conversion and dollars per transaction remained strong, helping offset lower visits. Customer surveys attributed softer traffic to weight-loss journeys, changing spending priorities and delayed apparel purchases.

The direct business performed better than stores. Paid search, paid social and programmatic marketing supported demand, while faster site performance and app improvements lifted conversion. DXL is balancing spending between new-customer acquisition and reengaging repeat or lapsed customers, though management acknowledged that acquisition and reactivation remain below its desired pace.

The company’s “Fit for Growth” strategy centers on four priorities: strengthening fit authority, expanding private brands, increasing brand awareness and acquiring new customers. FitMap has scanned more than 150,000 customers. Management said scanned customers showed stronger conversion, higher average order value, more visits and lower return rates than non-scanned customers.

Private-brand penetration continued to increase. Year-to-date demand for ThermaChill products rose 56% from the prior year. DXL is also emphasizing Harbor Bay as an opening-price-point brand and using more targeted, product-specific promotions rather than broad discounting.

Brand awareness among DXL’s core demographic of consumers aged 35 to 64 with household income above $100,000 increased from 40% to 49% over seven months. The company is reallocating, rather than increasing, its advertising budget toward a more balanced marketing funnel, including YouTube and programmatic tests.

Management Outlook

Management said it sees signs that a return to sales growth is approaching, while emphasizing that traffic and customer acquisition remain the central challenges.

DXL is reviewing its store portfolio to improve sales per square foot and four-wall profitability. Store rationalization is expected to have limited impact in fiscal 2026 but, according to management, should reduce occupancy and store operating costs beginning in 2027 and beyond.

The company is also preserving working capital and pausing nonessential cash uses. Required technology and distribution-center investments will continue, but some software upgrades may be deferred until comparable-sales trends become more stable.

Risks and Areas to Watch

Store traffic remains DXL’s most significant operating challenge, despite improving monthly comparable-sales trends.
New-customer acquisition and reactivation are running below management’s preferred pace.
GLP-1 medication adoption may delay apparel purchases while customers transition between sizes. Management said many surveyed users intend to return to DXL after reaching a stable size.
Excluding the tariff refund, merchandise margin would have declined approximately 70 basis points due to higher markdowns on slower-moving seasonal products and increased shipping costs from fuel surcharges.
The Full Beauty merger presents increased financial and dilution risks under its current terms, according to DXL’s board.

Analyst Q&A Highlights

Management said three stores are expected to close during fiscal 2026. A few dozen leases will come up for renewal in the following year, but DXL stressed that these locations will be evaluated individually and are not all closure candidates. The company will focus on markets where sales can potentially transfer to a nearby DXL store.

On capital spending, management said most investment is directed toward technology upgrades and the distribution center, with a smaller amount allocated to stores. DXL may delay upgrades that are not immediately required to preserve cash until comparable-sales trends stabilize.

Full Earnings Call Transcript

Complete Earnings Call Transcript

Management Remarks

Operator

Thank you. Good day, everyone, and welcome to Destination XL Group, Inc.'s conference call to discuss our second quarter fiscal 2026 financial results. Today's call is being recorded. At this time, I would like to turn the call over to Ms. Shelly Mokas, Vice President of Financial Reporting and SEC Compliance at DXL. Please go ahead, Shelly.

Shelly Mokas

Thank you, Operator, and good morning, everyone. We appreciate your joining us on Destination XL Group's second quarter fiscal 2026 earnings call. Joining me today are Lionel Conacher, our Interim Chief Executive Officer, Peter Stratton, our Chief Financial Officer, and Jimmy Olsen, our new Chief Growth Officer. During today's call, we will reference certain non-GAAP financial measures that we believe provide useful supplemental information regarding our performance. Please refer to our earnings release, which was filed this morning and is available on our investor relations website for additional information and reconciliation of those measures. Today's discussion will also include forward-looking statements regarding the company's strategic initiatives, marketing strategies, store rationalization work, expectations for comparable sales, the share, update regarding the merger, and other expectations for fiscal 2026. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our current expectations.

Additional information regarding those risks and uncertainties is included in the company's filings with the Securities and Exchange Commission. With that, I will turn the call over to our Interim CEO, Lionel Conacher. Lionel?

Lionel Conacher

Thank you, Shelly, and good morning, everyone. I'm honored to join today's call as DXL's Interim Chief Executive Officer at an important time for the company. I want to begin by recognizing Harvey Cantor for his leadership and contributions to DXL over more than 7 years as CEO. Harvey helped strengthen DXL's position as the leading specialty retailer in men's big and tall, and on behalf of the Board of Directors and the entire management team, I want to thank Harvey for his service and wish him well in retirement. Just a few words about myself. I've been involved with DXL as the director since 2018 and have served as Chairman since 2020. During my time with the DXL, I have developed a deep appreciation for the company, its people, and most importantly, the big and tall customer.

We have a strong brand, a loyal customer base, a clear understanding of our customers' priorities. The differentiated leadership position that we have established in this underserved market gives us a strong foundation on which to build, grounded in our commitment to serving the big and tall customer. Our priorities from here are straightforward. We are focused on increasing traffic and revenue, strengthening customer engagement, improving profitability, and advancing strategic initiatives that can support long-term growth. The second quarter earnings result we reported today are a testament to progress we are already making in these efforts. Our business continues to improve, and we see clear signs that a resumption in sales growth is imminent. Q2 sales performance was consistent with the progress we reported in the first quarter, which is a significant improvement over our prior year's results.

I'm incredibly excited about the opportunities ahead for DXL and proud to be speaking with you all about our momentum today. Before we dive into the quarter, I'd like to introduce Jimmy Olsen, who has worked with DXL in a consulting role for the past 12 months and recently joined us full-time as Chief Growth Officer. Jimmy comes to DXL with a deep background in retail strategy, brand elevation, and scaling omnichannel platforms through marketing, merchandising, and product development. This newly created role of Chief Growth Officer brings together the customer-facing levers of the business, and Jimmy's perspective will be instrumental as we execute against the traffic, assortment, promotional, and store experience opportunities in front of us. Jimmy has held leadership positions at a number of blue chip retailers, including Walmart, American Eagle, Tommy John, Todd Snyder, and The Gap. On behalf of the DXL Board of Directors, I am thrilled to welcome Jimmy to DXL. You will hear directly from Jimmy for a deeper dive into our growth priorities and initiatives.

To frame up the balance of today's remarks, in just a moment, I'm going to turn the call over to Peter to give you an update on our second quarter performance, sales trends, margin, and liquidity. After that, Jimmy's going to talk about our go-forward strategy and priorities before I come back to close things out. With that, I'm going to ask Peter to give you an update on our financial results. Peter?

Peter Stratton

Thank you, Lionel, and good morning, everyone. Our second quarter sales were generally in line with our expectations and remain consistent with the year-over-year improvement in trends that we saw in Q1. Net sales were $111.6 million, down 3.4% from last year. And our adjusted EBITDA was $7.7 million or 6.9% of sales compared with $4.7 million last year, while adjusted earnings per share was $0.05 compared with last year's $0.01 result. Comparable sales were down 3.5% for the quarter, with stores down 4.3%, and our direct business down 1.6%. Monthly comps increased sequentially from negative 5.7% in May to negative 2.8% in June and then negative 1.9% in July. Store traffic remains our most significant challenge, although we continue to be encouraged by strong conversion in dollars per transaction, which helped offset some of that traffic pressure.

In direct, we saw improvement in conversion driven by enhancements to the app and overall site experience, and we also benefited from solid performance and clearance product, primarily through the direct channel. More broadly, the direct business generated demand through paid search, paid social, and programmatic marketing, while ongoing improvements in app performance, site experience, and speed supported better conversion. We continue to evaluate our marketing allocation carefully to strike the right balance between attracting new customers, where we have seen acquisition rate increases since the fourth quarter, and reengaging repeat and lapsed customers where spending remains more cautious. Encouragingly, when new customers discover DXL, they continue to respond well to our assortment, fit, and value proposition. Based on customer surveys and related insights, the overall slowdown in customer traffic appears to reflect a combination of weight loss journeys, shifting spending priorities, and delayed purchasing decisions. Importantly, we believe the underlying affinity for the DXL experience remains strong. Although we still have meaningful work ahead, we are encouraged by the improvement in the quarter and confident that our turnaround efforts are beginning to gain traction.

Our merchandising efforts remain focused on sharpening value, strengthening private brands, and improving inventory flow to better align with current demand. We are leaning further into private brands, particularly Harbor Bay as an opening price point and value driver, while continuing to improve around storytelling, around quality, fit, and value across channels. Our creative and messaging have become more focused on essentials, cost per wear, and trusted fit, reinforcing our position with a more value-conscious customer. We are also rebalancing the promotional calendar toward higher margin and higher inventory risk categories so that promotions can help drive demand while protecting profitability and reducing future inventory exposure. Another topic that I'd like to touch on quickly is IEPA tariff refunds. Towards the end of the first quarter, we submitted a claim to the U.S. Customs and Border Protection online portal, and I'm pleased to report that we received a refund of $4.6 million during the second quarter. Which benefited merchandise margin and improved adjusted EBITDA versus plan.

Gross margin, inclusive of occupancy costs, was 47.9%, up 270 basis points to last year, primarily driven by this refund. Excluding the tariff refund, merchandise margin would have been approximately 70 basis points worse than last year, primarily due to a higher markdown rate to move through slower-moving seasonal product and increased shipping costs due to fuel surcharges. Occupancy costs were flat in dollars, but the leverage versus last year due to lower sales. Selling general and administrative expenses were 41% of sales with advertising expense coming in at 6.1% of sales, generally in line with last year. We continue to look very carefully at SG&A across the organization, reducing corporate expenses where appropriate, and rationalizing our store base over the next several years as leases expire or kick-out rates become available. The punchline here is we need to improve our return on assets. Targeting stores that have a high probability of transferring volume to another store allows us to make the total store portfolio more productive.

In certain markets, we believe there are opportunities to rationalize high occupancy stores and redirect customers to other stores in the market. The store rationalization work will have limited impact in 2026, but it is expected to reduce occupancy and store operating costs beginning in 2027 and beyond. This is a multi-year project that should improve sales per square foot and four-wall profit over time. I'll close with an update on the continued strength of our balance sheet. We ended Q2 with $20.1 million of cash and investments on hand, no debt, and excess availability of $61.7 million. Most importantly, our balance sheet gives us flexibility. Our inventory levels are clean and stable, inventory turnover is strong, and clearance levels are in line with our 10% targets.

Preserving working capital remains a priority, and we have paused all nonessential uses of cash while funding only the most important and required initiatives for the business. These targeted growth initiatives are already bearing fruit, as evidenced by this quarter's comparable sales result of negative 3.5%, the strongest we have delivered in the past 3 years. I'd now like to turn it over to Jimmy to talk more about those initiatives and elaborate on our marketing and merchandising strategies.

Unknown Speaker

Thank you, Peter, and good morning, everyone. I'm excited to join DXL and to be leading our growth agenda across merchandising, marketing, direct, and stores. The second quarter reinforced both the strength of the DXL proposition and the work still ahead to drive more traffic, sharpen product storytelling, and create stronger reasons for customers to shop with us. I want to organize my comments on today's call around the internal growth strategy we are calling Fit for Growth. In the simplest terms, this strategy consists of four strategic pillars. Supercharging our fit authority, fueling growth in our private brands, building our brand awareness and go-to-market strategy, and lastly, driving new customer acquisition. Our first priority is supercharging our fit authority. This is the foundation of what makes DXL different, and it starts with the initiative that has positioned DXL at the leading edge of fit centricity, FitMap.

We've now scanned more than 150,000 customers, and our most recent 12-month cohort shows scanned customers spending more than they did before. For scanning with stronger conversions, higher AOV, increased visits, and a meaningfully lower return rate than non-scan customers. Scan penetration, simply getting more of our customer file measured, remains our single largest lever inside this program. Fit authority is also the right lens for how we're addressing a genuine structural shift in our customer with GLP-1 medication adoption. Based on our customer surveys, a meaningful portion of our customer base is currently using GLP-1 medications, indicated while they are on their weight loss journey, they stopped buying apparel altogether for a period. But a majority tell us that they intend to come back to DXL once they reach a stable size. We believe being the authority on fit means staying with this customer through that transition, not just at a single point in time. And we're building a specific communication journey tied to FitMap scan segments to do exactly that.

Our second priority is fueling growth in our private brands. Private brand penetration continues to grow year over year. Our ThermaChill franchise, which is a new product development technology built into our tech pants, shorts, and button-down shirt, is one of our cleanest growth bets inside this priority. ThermaChill features dual temperature regulation to keep you cool when it's hot outside and warmer when it cools down. Our year-to-date demand for ThermaChill product grew 56% over last year. Proof that when we invest ad spend in marketing behind a private brand franchise that's genuinely working, it scales. We also continue to see that targeted product-specific promotions outperform broad discounting.

That discipline is protecting merchandise margin, even as we work through a softer traffic environment, and it's a direct extension of what fueling private brand growth actually means in practice, winning through product and value, not through the depth of the discount. Our third priority is building our brand awareness and evolving our go-to-market strategy. As we continue to evolve our marketing investment from lower funnel spend toward mid and upper funnel tactics, we're running tests in select markets to get in front of him where he consumes media. Our brand awareness remains below the category average, and the current marketing mix has been heavily weighted toward bottom of funnel conversion. We are reallocating, not adding to, the advertising budget over time to support a more balanced funnel, including incremental testing in YouTube and programmatic channels. We're already seeing early proof points. Awareness in our core demographic of 35- to 64-year-olds with household incomes above $100,000 has moved from 40% to 49% in 7 months. Priority is also where our AI discoverability work sets.

Through a focused effort on generative and answer engine optimization, we've moved our Trustpilot sentiment score from 1.5 to 4.4, a concrete, inexpensive proof point that the go-to-market investment behind a GenTech and AI-initiated search is paying off before the larger infrastructure is even fully built. Our fourth priority is driving new customer acquisition. I want to be direct and transparent with you that this is the priority most exposed by this quarter's traffic mess. We are behind the pace we'd like on both new customer acquisitions and reactivation right now. This is why priorities 1 through 3 matter so much. Fit authority and FitMap give customers a differentiated reason to choose us and stay. Expanding private label lets us deliver more value, helping attract new customers and grow our base. Brand awareness is what actually gets a new or lapsed customer to notice us in the first place. Acquisition doesn't happen in isolation. It's the output of the other three priorities working together, and it's the priority we're most focused on moving over the balance of the year.

Before I turn the call back over to Lionel, I want to leave you with this one thread. Traffic and customer acquisition is the challenge underlying essentially everything I just described, and this Fit for Growth strategy is our coordinated response. Not four separate initiatives, but one solution viewed through four distinct lenses. I'd like to thank Lionel and the Board of Directors for this opportunity. I'm so excited to be working on solutions that are going to move the needle for DXL and the big and tall customer we are proud to serve.

Lionel Conacher

Thanks, Jimmy. Before we open the line for questions, I want to provide a brief update on the status of our proposed merger with Full Beauty. September 2, DXL filed an updated preliminary proxy statement with respect to the merger. As detailed in this filing, conditions have changed since we first entered into the merger agreement in December. Causing Full Beauty's operating performance, financial results, and balance sheet positioning to deteriorate. Our board takes its fiduciary duties to our stockholders seriously and to that end has continued to evaluate the merger in light of these developments. Based on this evaluation, the board determined that the merger is no longer in the best interest of DXL and its stockholders. Accordingly, the board has withdrawn its prior recommendation in favor of the merger and now unanimously recommends that stockholders vote against the issuance proposal. There were several factors that contributed to this decision.

The increasingly challenging consumer environment since 2025 of December. Full Beauty's continuing decline in operating performance and financial results, including lower than expected net sales, earnings, EBITDA, and cash flow. The corresponding heightened risk that Full Beauty will not achieve its projections for the current fiscal year, their increased level of indebtedness, concerns regarding the potential negative equity value, and the substantial economic dilution that our stockholders would experience if the merger were consummated on its current terms. In terms of next steps in this process, we are currently awaiting SEC review of the amended preliminary proxy statement. Once we receive SEC clearance. We will file and mail definitive proxy materials to all stockholders eligible to vote at the special meeting, which will be held in a 20- to 25-day window following the definitive proxy filing. The proxy statement can be found on the landing page of our investor webpage at investor.dxl.com. We encourage stockholders to read the proxy statement carefully and in its entirety.

Beyond that, we are not commenting further on the merger at this time. We ask that you keep your questions on today's call focused on second quarter operational and financial performance. In closing, as you just heard, we're taking focused steps to advance the strategic priorities we believe can meaningfully strengthen the business over time. Three of the most important are FitMap, our application of AI, and our work to better understand GLP-1 related customer behavior. What connects these priorities is that each reflects a meaningful shift in how our customer shops, how he discovers product, and how we need to evolve to serve him more effectively. Together, these are strategic growth levers that we believe can improve customer engagement and sharpen our competitive position and create more durable long-term value. We have a differentiated position in an underserved market, a powerful relationship with a big and tall customer, and a team that understands how to serve him.

The actions we are taking to strengthen the business, drive growth, and improve profitability are beginning to translate into encouraging improvements in our performance, and our fortress balance sheet provides us with a strong underlying foundation for the growth engine we are building. And confident in our ability to capture the meaningful value creation opportunities ahead. With that, operator, we will now take questions.

Operator

Thank you. [Operator Instructions] Our first question comes from Joseph Midkiff of 226B Capital Partners. Your line is open.

Unknown Speaker

Hey, good morning, guys, and thanks for the updates today. There was mention of reviewing store base as leases come due, particularly in markets with multiple locations. I was curious if we could clarify, um, how many leases would be coming up for renewal in total over the next 24 months and how many or what percentage of those might be potential candidates for closure or consolidation.

Peter Stratton

Sure, I'll take that one. This is Peter. So, you know, we've been spending a fair amount of time taking a look at the portfolio. And, you know, as I mentioned in my remarks, we need to make our assets more productive. So, in instances where we have more than one store in a market that we believe we can eliminate a store, drive that volume to the nearby sister store, it improves our return on assets, and that's really the big focus. For this year there's a handful of stores that are closing, I want to say 3 stores this year. Um, next year, the stores that are coming up for uh lease and renewal, Um, there's gonna be a few dozen that that are coming up. Now, those are not all closing.

We are going to be looking at those on a case-by-case basis. Um, and we'll be developing those plans really over the next 6 months to figure out how much more will be closing. But ultimately, it's about improving our sales per square foot in the existing portfolio and making sure that we can get the most return out of those assets.

Unknown Speaker

Fantastic. Thank you so much. Excited to hear about the return on asset focus there. If I could follow up, you mentioned as well the potential for the potential for pausing any cash investments that can be deferred. Is that something that you could quantify the impacts of or speak at all to what specifically – what areas specifically have been targeted for pausing or removing?

Peter Stratton

So the um, the majority of our capital spend this year is in our technology, um, upgrades and improvements, our distribution center, um, and and there's a a a small amount in in stores. Um, the majority of that is going to be in uh distribution and and in technology. So, you know, we are, we have a number of projects going on right now to make sure we're staying current with the latest releases of all of our software platforms. But in some cases, we're going to try to push those out a little further. You know, when our vendors start taking platforms to end of life and we're required to upgrade, well, those are the situations that we're going to have to deal with, but we're trying to avoid any upgrades that will burn cash until we see more stability in our comp trends in the near future.

Unknown Speaker

Well, awesome. Thanks, guys. I appreciate the tone of the call shifting to a realization of what's happening in the business, and I'll jump back in the queue. Thanks again, guys.

Operator

Thank you. I show no further questions at this time. I'd like to turn it back to Lionel Conacher for closing remarks.

Lionel Conacher

Thank you, Operator, and thank you, everybody, for listening in today, and we appreciate your interest in DXL. And with that, we'll close out the meeting. Thank you.

Operator

This concludes today's conference call. Thank you for participating, and you may now disconnect.

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OpenAI Enterprise Revenue Accelerates; Why Luna Claims to Be Cheaper Than Chinese Open-Source Models

Andy Chen — Wed, 09 Sep 2026 14:30:02 +0000

TradingKey - OpenAI Chief Financial Officer Sarah Friar stated that the company's enterprise business is becoming a key engine for revenue growth, according to Reuters. From June to July, OpenAI's enterprise revenue grew by 32%, outpacing the 20% growth rate of the company's overall annualized revenue during the same period.

This shift indicates that enterprise customers' demand for purchasing and deploying generative AI is accelerating. Friar noted that by mid-year, OpenAI's enterprise and consumer revenues were roughly split evenly, reaching a structural mix target ahead of schedule that the company had originally aimed to achieve by year-end.

Enterprise Revenue Accelerates as OpenAI's Business Focus Shifts Toward Balance

OpenAI has long relied on consumer businesses such as ChatGPT subscriptions to build its revenue base, but enterprise clients are growing even faster.

Friar disclosed that the enterprise and consumer businesses were approaching parity by mid-year, reflecting that enterprise AI applications are moving from pilot stages toward larger-scale actual deployment. For OpenAI, this not only means more diversified revenue sources, but also indicates that its business model is becoming more deeply embedded in enterprise software, R&D, customer service, and automated workflows.

Enterprise clients care less about model capabilities themselves and more about whether a model can achieve a sustainable balance among cost, stability, and business return. This has also become the core battlefield in the competition between OpenAI and open-source models.

Luna Focuses on Low Cost, Targeting High-Frequency Enterprise Deployments

In terms of cost competition, Friar specifically highlighted OpenAI's low-cost model, Luna. She stated that if enterprises deploy Luna in the cloud and compare it with Chinese open-source models such as Zhipu AI's GLM 5.3, OpenAI's solution is "cheaper."

It should be noted that this statement is a public assertion by OpenAI management and does not disclose specific workloads, cloud provider quotes, or complete cost calculation methodologies; therefore, it cannot be directly equated to a universal conclusion across all enterprise scenarios.

However, this statement reveals a shift in the competitive dynamics of AI models: while open-source models typically do not charge model licensing fees, enterprises choosing self-deployment or deployment via cloud providers still bear costs for compute power, operations and maintenance, model fine-tuning, security management, and system integration. By contrast, the advantage of managed model services lies in more standardized usage and a cost structure that is easier to budget and manage.

AI Price War Shifts From "Unit Price" to "Total Deployment Cost"

As enterprise customers increasingly focus on AI return on investment, competition among model providers is no longer limited to the price per million tokens, but extends to overall deployment costs, engineering efficiency, and business outcomes.

Friar's statements also indicate that OpenAI is seeking to use low-cost models to compete for high-volume, high-frequency, and standardized enterprise application scenarios, while addressing complex reasoning and high-value tasks with higher-capability models. For enterprise customers, what really needs to be compared is not a single model's price quote, but the total cost of ownership comprised of model capabilities, call volumes, cloud resources, O&M investment, and business output.

Currently, OpenAI's enterprise revenue growth is outpacing its overall revenue growth, with its enterprise and consumer businesses approaching parity ahead of schedule, indicating that the commercial gravity of generative AI is shifting toward the enterprise segment. Cost competition between Luna and Chinese open-source models also signifies that the global large model market is further shifting from a capability race to a contest over deployment efficiency and return on investment.

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ServiceTitan (TTAN) Fiscal Q2 2027 Earnings Call: Revenue Up 21%, Max Prioritized

Wed, 09 Sep 2026 14:20:56 +0000

Key Takeaways

Fiscal Q2 2027 revenue increased 21% year over year to $292.8 million. Platform revenue rose 22% to $284.5 million.
Non-GAAP operating income reached $44.4 million, representing a 15.2% margin and a 310-basis-point year-over-year improvement. Free cash flow rose 47% to a quarterly record of $50.5 million.
GTV increased 17% to $26.8 billion. Management said growth was about 200 basis points below recent quarters on a normalized basis, mainly because of lower job growth among existing customers.
ServiceTitan is prioritizing Max and its AI-powered software factory over expansion into new trades. The company expects to finish FY2027 with more than 700 enrolled Max locations.
Management expects FY2027 revenue of $1.139 billion to $1.144 billion and non-GAAP operating income of $152 million to $154 million.
The shift toward Max is expected to create a $4 million to $5 million near-term revenue headwind across subscription and professional services revenue during the remainder of FY2027.

Core Financial Results

Metric	Fiscal Q2 2027	Change / Commentary
Total revenue	$292.8 million	Up 21% year over year
Subscription revenue	$212.4 million	Up 22% year over year
Usage revenue	$72.1 million	Up 24% year over year
Platform revenue	$284.5 million	Up 22% year over year
Professional services and other revenue	$8.3 million	—
GTV	$26.8 billion	Up 17% year over year
Net dollar retention	Above 110%	Quarterly result
Non-GAAP platform gross margin	81.1%	Up 40 basis points year over year
Non-GAAP total gross margin	74.6%	Up 20 basis points year over year
Non-GAAP operating income	$44.4 million	15.2% margin; up 310 basis points year over year
Free cash flow	$50.5 million	Up 47% year over year
Year-to-date free cash flow	$40.9 million	Up from $12 million a year earlier

Management now expects FY2027 incremental margins of 33%. It also said a 25% annual incremental margin should represent a floor rather than a target going forward.

Business and Operating Performance

Max is becoming the center of ServiceTitan’s product and investment strategy. The platform now includes more than 30 native agentic capabilities, including demand orchestration, advanced SMS recovery, AI coaching and scorecards, and live escalations.

The company exceeded its fiscal Q2 enrollment goal and now expects more than 700 Max locations by fiscal year-end. At full contract ramp, management said Max approximately doubles subscription revenue relative to a customer’s prior spending and produces an average platform earn rate slightly above 2%.

ServiceTitan also began broader go-to-market efforts for virtual agents in May. Virtual-agent revenue and call volume each more than doubled sequentially during Q2. Voice and SMS are priced separately and contribute to usage revenue based on calls, outcomes or text messages.

To fund greater investment in Max and internal AI, ServiceTitan is delaying planned expansion into new commercial trades and broader residential exterior categories. The company will remain focused on existing commercial trades—including mechanical, electrical, plumbing and landscaping—and residential roofing. Management clarified that investments in existing commercial, construction and roofing offerings are not being reduced.

GTV growth moderated as customer lead volumes grew more slowly during May and June before stabilizing in July. The pressure was broad-based but particularly notable among HVAC-focused customers. Commercial remained a meaningful contributor to GTV growth, although its growth rate was slightly lower than in Q1.

Management Guidance

Period	Revenue Guidance	Non-GAAP Operating Income Guidance
Fiscal Q3 2027	$285 million–$287 million	$29 million–$30 million
Full-year fiscal 2027	$1.139 billion–$1.144 billion	$152 million–$154 million

Management incorporated Q2’s more moderate GTV growth into its second-half forecast rather than assuming July’s stabilization would continue. The Q3 outlook also accounts for one fewer business day.

The changing mix toward Max is expected to reduce subscription revenue by $2 million to $3 million over the remainder of FY2027 because Max billing typically begins after the first contract quarter and ramps over roughly the first year. Waiving onboarding fees for existing customers transitioning to Max is expected to reduce professional services revenue by another approximately $2 million.

Risks and Watch Items

Lower lead volume and job growth among existing customers weighed on Q2 GTV, with management lacking clear visibility into the underlying cause of consumer behavior.
Fintech revenue grew but at a slower rate than in recent periods because of more moderate GTV growth.
Max requires substantial change management. Current demand from customers ready for a full Max deployment exceeds ServiceTitan’s implementation capacity.
The company does not plan meaningful implementation staffing increases. It is relying on faster, lower-effort onboarding to support growth while maintaining service quality.
Accelerating Max adoption creates near-term revenue-recognition delays and lowers professional services revenue and gross margin.
Expansion into additional trades has been deferred, although management described this as a sequencing decision rather than a permanent change.

Analyst Q&A Highlights

GTV outlook: Management said weaker May and June lead volumes stabilized in July, but it conservatively carried Q2’s aggregate GTV trend into the rest of the fiscal year. It did not assume that July represented a sustained rebound.

Why Max is being prioritized: Management cited stronger revenue growth and operating efficiency among Max customers, higher expected customer lifetime value and strong demand from both existing customers and selected new logos. ServiceTitan has started leading with Max for new customers in residential in-home trades.

Scaling implementations: Management expects Max onboarding time and effort to decline as the product matures, similar to the historical progression of ServiceTitan’s core platform. The company views efficient onboarding as the principal constraint on near-term scaling.

Max packaging: ServiceTitan plans smaller entry packages for customers not ready for a full transformation. These may focus initially on demand orchestration or field operations, with meaningful subscription uplift but below that of a full Max deployment.

Virtual-agent adoption: Growth is balanced between first-time adopters and customers replacing competing solutions. Customers often begin with overflow and after-hours calls before expanding virtual agents to handle more volume.

Fiscal Q4 growth pattern: Management said the implied improvement from Q3 primarily reflects the comparison created by one fewer business day in Q3. It also expects some Max revenue to begin contributing in Q4.

Full Earnings Call Transcript

Complete Earnings Call Transcript

Management Remarks

Operator

Thank you for standing by, and welcome to ServiceTitan's Second Quarter Fiscal Year 2027 Earnings Conference Call. [Operator Instructions] I would now like to hand the call over to Jason Rechel, Vice President, Investor Relations. Please go ahead.

Jason Rechel

Thank you, operator, and welcome, everyone, to ServiceTitan's Fiscal Second Quarter 2027 Earnings Conference Call. With me are ServiceTitan's Co-Founder and CEO, Ara Mahdessian; Co-Founder and President, Vahe Kuzoyan; and CFO, Dave Sherry. During today's call, we'll review our fiscal second quarter 2027 results. We will also discuss our guidance for the third fiscal quarter and full fiscal year 2027.

Before we get started, we want to draw your attention to the safe harbor statement included in today's press release and emphasize that information discussed on this call, including our guidance, is based on information as of today only and contains forward-looking statements that involve risks, uncertainties and assumptions.

All statements other than statements of historical fact could be deemed to be forward-looking. Forward-looking statements reflect our views as of today only, and except as required by law, we undertake no obligation to update or revise these forward-looking statements. Please take a look at our filings with the SEC for a discussion of the factors that could cause our results to differ.

We also want to point out that we present non-GAAP measures in addition to and not as a substitute for financial measures prepared in accordance with generally accepted accounting principles. Definitions of these non-GAAP financial measures, along with reconciliations to our GAAP financial measures are included in our earnings release, which we furnished with the SEC and is available on our website at investors.servicetitan.com. Unless otherwise stated, all references on this call to platform gross margin, total gross margin, operating income, operating margin, free cash flow and related growth rates are on a non-GAAP basis.

Finally, we've posted an updated investor presentation that can be found on the Investor Relations website at investors.servicetitan.com, along with a replay of this call. And with that, let me turn the call over to Ara. Ara?

Ara Mahdessian

Thank you, Jason, and thank you for joining us. I'm excited to share that our strong momentum delivering the Agentic operating system for the trades resulted in 21% year-over-year revenue growth and record free cash flow this quarter. Over the course of the year, it has become increasingly obvious that delivering this Agentic operating system to our customers and leveraging AI to further enhance our own organizational velocity are once-in-a-lifetime opportunities to execute against.

As a result, we've broadened the scope of our investments in both Max and the software factory in absolute dollars and also relative to our expectations at the beginning of the year. We now believe that focusing on our existing trades and accelerating our shift towards Max will allow us to unlock the full potential of our business in the years ahead.

Vahe will share more about our Max execution. Dave will discuss the financial implications of this mix shift, and I'm excited to lead with the outcomes that our customers are realizing with Max today. Our vision since founding ServiceTitan has been to transform the lives of hard-working contractors by helping them grow revenue and increase margins. From day 1, we imagined the world where technicians focused on serving customers in the field, leaders focused on business outcomes and ServiceTitan increasingly handle the operational complexity in between. The outcomes our customers are now seeing with Max and our organizational readiness to lean into this success gives me even more clarity into our forward trajectory.

As many of you know, we introduced Max as a pilot program at Pantheon last September, where Stacy Anapol was sitting in the audience. Stacy, the Co-owner and President of Delponte Plumbing & Heating, saw immediate potential in Max. She saw an operating system with a singular company brain connected to every piece of context in her business and armed with the ability to take action on key workflows in our operation, one that could automate and optimize our business generated demand, booked appointments, sold work, managed payroll and inventory and more, allowing her team to handle far more volume with the same headcount.

Delponte has been in business for nearly 50 years and first implemented ServiceTitan in 2023 when Stacy took over as President. The initial goal was straightforward to build a better company for their customers, their employees and the future of the business. I'm glad to share that Delponte's results have been extraordinary so far. Stacy's revenue grew more than 35% year-over-year during Q1 2026 and more than 45% year-over-year in the second quarter of 2026, accelerating as the quarter went on.

With Max, Delponte generated more calls, booked more appointments and closed more sales with higher average tickets. But what impressed me most wasn't the revenue growth. It was what the operating model allowed them to do next. Delponte launched a new vertical entirely around recurring service. In just 3 months, they've already served 400 customers, all without adding a single back-office employee. Delponte's technician to admin ratio improved from 2:1 in 2025 to 3:1 in 2026, materially improving profitability. Whereas technicians often work long hours during peak season to serve every customer and the office is typically overextended, technicians averaged only 45 hours per week and office morale has never been stronger.

As I said last quarter, the power that Max unlocks means work that used to require a group of people manually coordinating an operation is now orchestrated by the system itself with humans and AI agents working together, each doing what they do best. Delponte is proving something we believe from the beginning. When routine coordination is handled automatically, leaders spend less time coordinating work and more time coaching people, serving customers and growing the business.

We see this as just the beginning and are excited to announce the next big wave of innovation at Pantheon in October. We are focused on leveraging the Max platform and our massive proprietary data set, expanding ecosystem, brand leadership and distribution across more than 10,000 high-performing contractors to bring the magic of end-to-end automation to life.

Before I conclude, I want to take a moment to thank Ross Biestman for building ServiceTitan into the business we are today. We announced earlier that after leading us from less than $30 million in ARR to over $1 billion of annualized run rate revenue, Ross has decided to step away from an operating role, but not before closing through Pantheon in Q3 as our CRO and then serving as an adviser through the end of the fiscal year to ensure a smooth transition.

Ross, I am grateful for your leadership and your friendship over the past 9 years. Being the leader that you are, you've also built a bench of exceptional leaders and a world-class go-to-market machine. Rikus Pretorius has served as our SVP of Worldwide Sales and Ross's right-hand for over 7 years. We have great confidence that we have the right sales leadership team to lead us forward as Rikus steps into the CRO role beginning in Q4. Now let's hear more from my co-Founder, Vahe.

Vahe Kuzoyan

Thanks, Ara. Max has become the foundation for our future. And while I don't want to steal too much of our thunder for Pantheon next month, I'd like to dive right into the progress we made during the second quarter. Our North Star has always been to deliver transformational customer outcomes. Max customers continue to overperform their peers across key funnel metrics and are creating tangible business value. Max customers are generating more leads, converting those leads at a higher booking rate and completing work at a higher average ticket. They are doing this with improved operational ratios like what you heard from Delponte to deliver a faster and more efficient rate of growth relative to peers.

We now have over 30 Agentic capabilities native within Max to power enhanced automation, including Q2 introductions like demand orchestration, advanced session SMS recovery, AI coaching and scorecards and live escalations. Due to the strength of these customer outcomes, we are growing Max more quickly than we had previously expected. We doubled the number of locations enrolled in Max during our fiscal Q1 to just over 100, and we expect it to again double that number during Q2.

As a result of strong execution with existing customers and progress selling to select new customers for the first time, we exceeded our goal during Q2, and we now expect to end this fiscal year with over 700 enrolled Max locations. In addition to Max, we began to put our full go-to-market efforts behind another pillar of our AI monetization strategy, virtual agents in May. The differentiation of our natively integrated platform is proving out, particularly with our SMS agent capabilities now native alongside voice.

During Q2, we launched voice and SMS features like speed to lead, technician notifications and both inbound and outbound capabilities, each converged within our AI-powered demand generation and capability optimization platform. While virtual agents remain early overall, during Q2, our revenue and call volume each more than doubled sequentially. And when it comes to our organizational velocity, our vision to build a software factory is increasingly taking shape.

At its core, we envision that the software factory will be the growth engine behind our platform. It will touch everything we build and everything our customers experience, improving the platform, the pace of feature introductions and how we sell and market ServiceTitan. We're creating a self-reinforcing loop where software perpetually learns and improves based on actual customer behavior to build faster and more efficiently than we ever could have previously.

As Ara mentioned, it is in concert with the results we see today that we are increasing the share of our investments on AI and software factory. We believe that increasing our focus on Max and AI will maximize the long-term value of ServiceTitan because we now have even greater resources to be invested in and running together towards the most important opportunity we have ahead of us.

For example, we have advanced our investments in Max to include more agentic capabilities for field and office. Technicians are the backbone of the trade businesses, and we are continuing to make even larger investments in the capabilities we give to them from AI proposals to voice-based solutions.

Our multiyear growth markets like commercial and roofing remain important initiatives for us as we work towards becoming the market standard over time. To enable increased investments in and attention on Max, during Q2, we elected to tighten our focus on existing commercial trades like mechanical, electrical, plumbing and landscaping and residential roofing rather than the planned expansion of our offering to new trades within commercial or broader residential exteriors categories.

We expect this focus on existing trades to allow us to execute on existing investments while also accelerating our shift towards Max and internal AI, addressing what we believe to be our most important opportunity today. Dave will discuss the mix shift implications of this trade-off shortly. I am excited to speak to Pantheon about the compelling new outcomes that our customers will be able to achieve with AI. On to you, Dave.

Dave Sherry

Thanks, Vahe. Today, I will run through our Q2 financial results and provide an update to our guidance for full fiscal year 2027. For more detailed financial results, please refer to our press release issued earlier today. Q2 gross transaction volume, or GTV, was $26.8 billion, up 17% year-over-year. Normalized for business days and weather, which were roughly offsetting, GTV growth of 17% was about 200 basis points below recent quarters, primarily due to lower job growth by existing customers.

Our customers' lead volume grew at a more moderate seasonal pace during May and June compared to prior years before stabilizing July, which was consistent with HARDI data. This was evident across the broad set of trades in the markets that we serve, and it was particularly true for our HVAC-focused customers.

Looking forward, we have adjusted our second half forecast to reflect the more moderate GTV growth we saw during Q2, of course, accounting for 1 fewer business day in Q3. Given the momentum and growing importance of Max, before getting into Q2 financials, I'd like to outline how we expect Max to impact our P&L over time.

Specifically, I want to provide some color in 4 key areas. First, in terms of addressable customers, today, Max is primarily available for residential customers in the trades we call in-home, principally plumbing, HVAC, electrical and garage.

As we said at this time last year, this grouping of customers represents our largest group of customers based on GTV, though not a majority. Second, in terms of subscription uplift we see from our customers that enroll in Max. As we've noted before, at full contract ramp, subscription revenue roughly doubles relative to prior spend, driving an average platform earn rate just north of 2%.

Now we realize that not all of our residential in-home customers are ready to fully transform their businesses yet. We expect to launch packages that will be on-ramps to Max over time, which we expect to have meaningful uplift in subscription revenue run rate, though not quite at the same level as full Max deployment. We will provide more specifics as these packages launch. Third, we recognize revenue slightly differently for our core platform compared to our upsell products like Max and Pro.

For the core subscription, we recognize revenue ratably over the term of the contract. For upsell, we recognize revenue as billed. Because Max requires such substantial change management, we typically do not bill for the first quarter of a contract and then ramp to full contract value through the first year or so. The momentum in Max as well as our decision to focus our investments here and in existing trades has led to a higher proportion of new deals coming from Max.

We expect this change in composition and the timing difference of revenue recognition between core and upsell to be between a $2 million and $3 million subscription revenue headwind over the remainder of the fiscal year. Finally, given both the required process change and the expected customer lifetime value increase for Max, we have elected not to charge existing customers an onboarding fee for the transition to Max. We expect the mix shift to Max to lower professional services revenue by roughly an additional $2 million over the remainder of this fiscal year, which, of course, also flows through to professional services gross margin.

Now shifting to Q2 financials. Q2 total revenue of $292.8 million grew 21% year-over-year. Subscription revenue of $212.4 million grew 22% year-over-year. Usage revenue grew 24% year-over-year to $72.1 million. Fintech revenue grew well, though slightly below recent periods due to more moderate GTV growth.

Beyond Fintech, ecosystem and virtual agent revenue continue to perform well with virtual agent revenue more than doubling quarter-over-quarter. We continue to believe AI monetization will lead usage revenue to grow more quickly than GTV in FY '27. Total platform revenue for Q2, the sum of subscription and usage revenue grew 22% year-over-year to $284.5 million. Q2 professional services and other revenue was $8.3 million. Net dollar retention was greater than 110% for the quarter. Q2 platform gross margin was 81.1%, up 40 basis points year-over-year. Total gross margin for Q2 was 74.6%, up 20 basis points year-over-year. We continue to optimize for unit economics within our business.

Q2 operating income of $44.4 million resulted in operating margin of 15.2%, an improvement of 310 basis points year-over-year. The fact that we can deliver such strong margins in a quarter with modest GTV growth gives us increased conviction in the higher operating leverage of the business moving forward.

As such, we now expect that 25% incremental margins will represent a floor each year rather than a target moving forward. And in this fiscal year, FY '27, we now expect incremental margins of 33% Q2 free cash flow was $50.5 million, up 47% year-over-year. Year-to-date free cash flow of $40.9 million is up from $12 million over the same period a year ago. We remain focused on free cash flow conversion and expect that free cash flow conversion will remain consistently high again during this fiscal year as we saw last year.

Now shifting to formal guidance. For the third quarter, we expect total revenue in the range of $285 million to $287 million. We expect to generate operating income in the range of $29 million to $30 million. For the full fiscal year 2027, we expect total revenue in the range of $1.139 billion to $1.144 billion. We expect to generate operating income in the range of $152 million to $154 million.

We believe that our focused investments in existing growth markets and Max position ServiceTitan for even higher quality, more efficient long-term growth. We're very excited to talk about the future of the trades during Pantheon this quarter. We're hosting thousands of customers and partners. And while we're not hosting a formal investor event this year, we do hope to see many of you there.

With that, I'll turn the call back to the operator for Q&A. Operator?

Operator

[Operator Instructions] Our first question comes from the line of DJ Hynes of Canaccord.

Question-and-Answer Session

David Hynes

Dave, so you said lead volumes stabilized in July after softer growth in May and June. What have you seen since quarter end? And Q2 represented maybe a temporary moderation versus kind of a new GTV run rate?

Dave Sherry

DJ, why don't I do a quick deep dive on the GTV overall and give you some clarity there. I think first, let me go to business days. Because July 4 fell on a Saturday this year, there was an observed holiday on Friday, July 3. In the past, observed holidays have performed like normal business days, which is what we expect to come in the quarter. Instead, July 3 was closer to a weekend day, creating less benefit than the 150 bps we had planned.

Second, in terms of weather, it was a summer -- it was a warm summer, though roughly consistent with last year. And upon reviewing the results for the quarter, we do believe that the early start of the cooling season in April did pull a portion of Q2 GTV into Q1, creating a small headwind.

Operator

Our next question comes from the line of Tyler Radke of Citi.

Tyler Radke

I wonder if we could just spend a little bit of time again on the dynamics that you saw in the quarter. And just curious if you saw divergence between different trades in terms of the order volumes and GTV performance? And is that perhaps informing any of your views on allocating resources away from expanding into additional trades?

Dave Sherry

Thanks, Tyler. I'll say in terms of the decomposition of the GTV and how it performed relative to one another, this lead volume piece was particularly notable in HVAC. But broadly, commercial continues to be a meaningful driver of GTV growth. In this quarter and all quarters since we've been public. A slightly lower rate in Q2 than in Q1, but it continues to be a meaningful driver of our growth.

Residential, our customers continue to grow nicely. But as I noted in my prepared remarks, we did see an impact on lead volumes and job growth, particularly around HVAC in the quarter.

Operator

Our next question comes from the line of Nick Altmann of BTIG.

Nicholas Altmann

I wanted to circle back to some of the new on-ramps for Max. It basically sounds like there's maybe more of an a la carte kind of way to purchase Max versus buying the entire suite. And my question is, how does that ultimately change the growth curve for Max? Because on the positive side, it does sound like it could lead to a greater volume of customers. I imagine they can implement and ramp faster and see that ASP uplift with the obvious trade-off being the ASP side of the equation.

So just any commentary on how those new on-ramps ultimately kind of change the growth trajectory of Max in your perspective, if at all?

Dave Sherry

Operator

Our next question comes from the line of Joe Vruwink of Baird.

Joseph Vruwink

Just going back to the focus on existing trades. When I think about some of the rooftops in a commercial practice, they tend to span into like an adjacency, maybe construction, where adding the new capabilities would help create kind of the comprehensive offering that helps you land at the beginning.

Has the thinking about this changed at all? Or is the go-to-market just going to be much more targeted in commercial where maybe this dynamic doesn't matter as much?

Ara Mahdessian

Yes. I think it's important that we clarify exactly what we mean by this narrowing of the aperture and what it is and what it isn't. It is not taking resource away from roofing or commercial and construction. And for us, as we've been discussing, construction is an absolutely integral part of winning in commercial. So that dynamic is not changing. We don't expect that investments in either of those to be reduced by any measure. The discussion here is entirely about the incremental investments that would have otherwise gone to new trades that we are not in. So everything about what we've said about commercial and construction in the past still holds.

Operator

Our next question comes from the line of Andrew Sherman of TD Cowen.

Andrew Sherman

Okay. Dave, I wanted to come back to the lead volumes impacts in Q2. Do you think there's some AI impact there as customers have moved searches to other platforms? Why was it more acute to HVAC? And can Max actually help to offset those impacts if that's -- if this is what's going on with the lead agents that are in Max?

Dave Sherry

So we don't have super clarity on what's driving the lead volume. What we will say is that it's pretty broad-based when you look at the trades and our peers reporting the period. And so I don't think it's specific to us and our customers. So I will say it may be something there, but I don't think right now it's something specific to our customer base. In terms of Max, I'll let the founder speak to that in a second, but we do think there's an opportunity for our customers to be at the forefront of how consumers interact with AI.

Ara Mahdessian

Second, beyond ensuring we deliver what we say, if you step back and look at our track record, an average quarterly beat versus the midpoint of our guidance has been in sort of the $9 million to $10 million range with the primary source of variance coming from GTV and a bit from professional services.

In this quarter -- in quarters where our beats have been larger, we've been pretty transparent that the usage revenue has been the primary driver, generally driven by GTV outperformance and that we expect there to be quarters where the inverse happens, which is exactly what happened in Q2.

Finally, had Q2 GTV been in our normal expected range and had the business day benefit materialized as we expected, you'd have seen roughly another $1.5 million to $2 million or so in Fintech revenue, which would have put the performance exactly in line with our normal performance versus our guidance. We continue to prioritize the consistency of this track record, and we have rolled forward the GTV trends we saw in Q2 into the back half of the year. To ensure that we're able to deliver on a consistent cadence with you all.

Operator

Thank you. I would now like to turn the conference back to Ara Mahdessian for closing remarks. Sir?

Ara Mahdessian

Thank you, Luke, and thank you, everyone, for joining us today. I just want to close by thanking all the Titans around the world who show up every day to make our customers successful. Pantheon is our most exciting time of the year. We're excited to host thousands of customers, partners and hopefully, many of you for the future of the Agentic operating system for the trades.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.

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Chewy (CHWY) Q2 FY2026 Earnings Call: Sales Rise 7.3%, Guidance Narrowed

Wed, 09 Sep 2026 14:20:47 +0000

Key Takeaways

Chewy’s Q2 FY2026 net sales rose 7.3% year over year to $3.33 billion, at the high end of company guidance. Organic net sales increased 5.7%, excluding SmartPack and Modern Animal.
Adjusted EBITDA reached $227 million, with a 6.8% margin versus company guidance of 6.3% to 6.4%. Management said substantially all of the outperformance came from timing-related and discrete benefits.
Active customers increased 3.8% to 21.7 million. Autoship sales grew 9.3% to $2.8 billion and represented 84.6% of total net sales.
Chewy narrowed FY2026 organic sales growth guidance to 5.5%–6.3% and raised the low end of adjusted EBITDA margin guidance, taking the range to 6.7%–6.8%.
Management is not assuming a meaningful consumer recovery for the rest of FY2026. Its outlook instead depends on market-share gains, customer growth, Autoship engagement, health services and operating efficiencies.
Chewy expects AI initiatives to generate low tens of millions of dollars in FY2026 cost savings and scale to approximately $50 million on an annualized basis in FY2027.

Core Financial Data

Metric	Q2 FY2026 result	Change or context
Net sales	$3.33 billion	Up 7.3% year over year
Organic net sales	—	Up 5.7%, excluding SmartPack and Modern Animal
Active customers	21.7 million	Up 3.8%; 208,000 sequential net additions
Net sales per active customer	$602	Up 1.9% reported; up 3.8% on a normalized basis
Autoship sales	$2.8 billion	Up 9.3%; 84.6% of net sales
Gross margin	30.4%	Flat year over year; up 30 basis points sequentially
Adjusted EBITDA	$227 million	Adjusted EBITDA margin of 6.8%
Non-GAAP SG&A	$612 million	18.4% of sales versus 19.1% a year earlier
Advertising and marketing	$215 million	6.5% of sales, essentially flat year over year
Adjusted net income	$149 million	Adjusted diluted EPS of $0.36
Free cash flow	$90 million	Versus $106 million a year earlier; management attributed the decline to timing
Cash, equivalents and marketable securities	$612 million	More than $1 billion of total available liquidity

Chewy repurchased 9.9 million shares for $200 million during the quarter. After employee equity issuance, weighted-average diluted shares outstanding declined 2% sequentially.

Business and Operating Performance

Chewy continued to gain market share despite a pressured pet market. Management said the company was outperforming the broader category by roughly two to three times.

Consumables grew at a mid-single-digit rate while the broader market was described as broadly flat. Core food and medication spending remained relatively stable, but treats and toppers faced greater pressure as customers reduced discretionary purchases. Hard goods delivered mid-teens growth, supported by assortment and merchandising improvements.

Chewy Health remained a major growth driver. Chewy Vet Care’s clinic portfolio generated triple-digit revenue growth, while Modern Animal performed ahead of management’s initial expectations. Pet Health and Specialty Products also posted strong organic growth.

Fresh and frozen products delivered triple-digit unit growth. The company’s pharmacy and exotic-animal business recorded its seventh consecutive quarter of mid-double-digit year-over-year sales growth.

Sponsored advertising continued to support gross margin through higher impressions and generally stable pricing. Management also cited a favorable shift toward higher-margin health categories.

Chewy is deploying AI across customer service, pharmacy and veterinary care. Its customer-facing AI assistant is resolving approximately 30% of chats through self-service for common requests such as order tracking, returns, Autoship and account management. More than 50% of company volume currently flows through automated facilities.

Management Guidance

Guidance metric	Updated outlook
FY2026 net sales	$13.46 billion–$13.57 billion
FY2026 reported sales growth	6.8%–7.7%
FY2026 organic sales growth	5.5%–6.3%
FY2026 adjusted EBITDA margin	6.7%–6.8%
FY2026 adjusted EBITDA at midpoint	Approximately $912 million
Q3 FY2026 net sales	$3.323 billion–$3.358 billion
Q3 reported sales growth	6.6%–7.7%
Q3 organic sales growth	5.3%–6.2%
Q3 adjusted EBITDA margin	6.6%–6.7%
Q3 adjusted diluted EPS	Approximately $0.39

Management narrowed the organic growth range because operating trends stabilized and the more severe downside scenario used in its previous guidance became less likely. SmartPack and Modern Animal are also contributing more than previously assumed.

The midpoint of the sales outlook assumes no meaningful improvement in consumer conditions. The high end requires a better market backdrop, stronger company execution or both, while the low end assumes renewed deterioration.

For FY2026, Chewy also expects approximately 410 million weighted-average diluted shares, net interest expense of $10 million–$15 million, capital expenditures equal to 1.5%–2% of net sales and an effective tax rate of 24%–26%.

Risks and Points to Watch

Consumer pressure continues to affect discretionary purchases and premiumization, particularly treats, toppers and some hard goods.
Management expects little contribution from pricing and does not assume a broader pet-market recovery during the remainder of FY2026.
Approximately $10 million of Q2 upside came from timing benefits, including tariff refunds and rebates, while more than $5 million came from discrete items. These benefits do not represent the underlying margin run rate.
Gross margin is expected to decline sequentially in Q3, although management expects modest year-over-year expansion in both Q3 and Q4.
Fuel is expected to create a mid-single-digit-million-dollar headwind over the balance of the year.
Modern Animal is expected to remain a modest drag on the adjusted EBITDA margin.
AI savings may offset wage inflation and other cost pressures or be reinvested in growth, rather than flowing entirely to the bottom line.

Analyst Q&A Highlights

Management said pressure within consumables is concentrated in more discretionary products such as treats and toppers. Customers continue to prioritize core food, medication and health-oriented supplements.

Modern Animal had roughly 100,000 customers when acquired, and Chewy previously estimated that 40%–50% could be new to its ecosystem. Those potential customer additions are not currently included in the company’s forecast. Management expects healthy conversion to Autoship but said integration remains the priority in Q3.

Chewy plans to introduce a redesigned Chewy Plus program with broader health benefits intended to increase cross-category engagement. The company also expects higher advertising and marketing activity in the second half, weighted more heavily toward Q3.

Management expressed high confidence in AI-driven productivity gains but cautioned investors against mechanically adding the projected savings to the FY2026 margin trajectory. Chewy continues to target a long-term adjusted EBITDA margin above 10%, with automation, AI and lower variable costs serving as key drivers.

Full Earnings Call Transcript

Complete Earnings Call Transcript

Management Remarks

Operator

Hello, everyone. Thank you for joining us, and welcome to the Chewy Second Quarter earnings call. [Operator Instructions]

I will now hand the conference over to Lee Horowitz, Head of Investor Relations and Strategic Finance. Lee, please go ahead.

Lee Horowitz

Thank you for joining us on the call today to discuss our second quarter results for fiscal year 2026. Joining me today are Chewy's CEO, Sumit Singh; and CFO, Chris Deppe. Our earnings release, which was filed with the SEC earlier today, has been posted to the Investor Relations section of our website. In addition to the earnings release, the presentation summarizing our results is also available on our website at investor.cree.com.

On our call today, we will be making forward-looking statements, including statements concerning Chewy's financial results and performance, industry trends, strategic initiatives, share repurchase program and the environment in which we operate. Such statements are considered forward-looking statements under the Private Securities Litigation Reform Act of 1995. These statements involve certain risks, uncertainties and other factors that could cause actual results to differ materially from our forward-looking statements.

We encourage you to review our SEC filings, including the section titled Risk Factors in our most recent Form 10-K for a discussion of these risks. Reported results should not be considered an indication of future performance. Forward-looking statements on this call are based on information available to us as of today's date. We assume no obligation to update any forward-looking statements, except as required by law. During this call, we will discuss certain non-GAAP financial measures. Reconciliation of these non-GAAP items to the most directly comparable GAAP financial measures are provided on our Investor Relations website and in our earnings release. These non-GAAP measures are not intended as a substitute for GAAP results.

Additionally, unless otherwise stated, all comparisons discussed on today's call will be against the comparable period for fiscal year 2025. And finally, this call in its entirety is being webcast on our Investor Relations website. A replay of the audio webcast will be available on our Investor Relations website shortly.

And with that, I'd like to turn the call over to Sumit.

Sumit Singh

Thank you, Lee, and good morning, everyone. Chewy delivered strong results in the second quarter, continuing to gain share and expand profitability. Our performance underscores the strength of our business model and disciplined execution. Our recurring revenue base supports durable sales, while our expanding ecosystem and the growing contribution from Chewy Health drives structural wallet share gains. Together, these advantages position us to outperform in the current environment. Our earnings algorithm also provides the capacity to continue investing for long-term growth.

During the second quarter, while we did not see a meaningful recovery in the more pressured consumer backdrop for the pet market, importantly, however, we did not see further deterioration. The environment has broadly stabilized to the trends we observed exiting the first quarter. And against this backdrop, Chewy continues to outperform the broader pet category by roughly 2 to 3x and we continue to generate compelling growth across both scaled areas of our business and newer strategic growth platforms.

Chewy Vet Care continues to scale in line with the economic framework we outlined at our recent investor event with our total clinic portfolio, again delivering triple-digit revenue growth in the second quarter. Meanwhile, our fresh and frozen portfolio is meaningfully outpacing the broader category, delivering triple-digit unit growth. And our in Pharma and Exotic business delivered its seventh consecutive quarter of mid-double-digit year-over-year sales growth.

Taken together, this momentum demonstrates the breadth of growth opportunities across the CE ecosystem and our ability to capitalize on them without relying solely on a recovery in the broader pet market. We delivered Q2 total Enterprise net sales at the high end of our guidance range of $3.33 billion, representing 7.3% year-over-year growth. Excluding the impact of SmartPack and modern animal, Q2 organic net sales increased 5.7% year-over-year, driven by active customer growth, NSPAC expansion and ongoing market share gains.

We ended the quarter with 21.7 million active customers, up 3.8% year-over-year, while net sales per active customer increased to $602. Autoship customer sales once again outpaced overall company growth, increasing 9.3% and representing 84.6% of total net sales in the quarter, further reinforcing the predictability, durability and recurring nature of our revenue base.

Importantly, our customer funnel remains healthy. We continue to add customers, improve retention, reactivate lapsed customers and deepen engagement across the Chewy ecosystem. These dynamics support our ability to continue gaining share within the pet industry.

Now turning to profitability. Q2 adjusted EBITDA margin reached 6.8%. While the upside relative to our expectation was largely driven by timing and discrete benefits, the underlying business continued to deliver substantial year-over-year margin expansion. Our sponsored ads portfolio continues to scale through robust impressions growth, while generally stable pricing despite rapidly expanding supply reflects a healthy underlying auction ecosystem.

Our retail product mix continues to shift towards high-margin categories, such as health and we continue to lower our variable cost to serve through automation, scale, operating discipline and increasingly AI-enabled productivity. Importantly, our strengthening earnings profile also gives us the flexibility to reinvest in the business. Where we see opportunities with compelling returns, we will continue to deploy capital behind initiatives that can accelerate growth while maintaining the operating discipline that has driven our margin expansion up until this point.

Turning to Chewy Health. We remain highly encouraged by the progress across our health ecosystem. Chewy Vet care continues to demonstrate strong customer satisfaction, attractive veterinarian productivity and retention, compelling 4-wall economics and importantly, the ability to drive incremental engagement across the broader ecosystem. We are also making strong progress integrating modern animal, which performed ahead of our expectations in the quarter. These early results reinforce our conviction in the strategic combination of modern animal and Chewy Vet Care.

Together, the 2 businesses provide greater scale, complementary capabilities, attractive unit economics and differentiated telehealth offerings. Collectively, these trends create a powerful foundation from which to expand our veterinary platform, improve access to care and connect more customers with the broader Chewy Health ecosystem, providing meaningful runway for future growth.

Furthermore, while 2026 is intended to be a foundational year for SmartPack as we strengthen the businesses core operating drivers and position it for durable growth, our early progress has been encouraging. SmartPack performed ahead of our expectations, reinforcing our conviction in the opportunity ahead. The early performance of both businesses reinforces our confidence in our ability to use Chewy scale and capabilities to improve acquired assets and generate compelling returns as we expand the power of the Chewy platform.

Now turning to Ai. Our AI strategy continues to progress from capability development towards scaled deployment and measurable financial impact. In Q2, we made strong progress deploying AI across 3 areas, improving the customer experience, increasing team member productivity and structurally lowering our cost to serve.

On the customer side, we recently launched Kai our AI-powered assistant to a select group of customers in the mobile app. Early results are encouraging with approximately 30% of chats resolved through self-service across common needs such as orders, returns, auto ship and account management. To keep true to our Chewy spirit, customers who prefer or require human support are seamlessly connected to a care team member within seconds. At the same time, we are deploying AI-enabled tools across customer care, pharmacy and Chewy Vet Care to reduce manual work and improve productivity.

In Customer care, we launched agent-facing AI capabilities, which are helping transform customer signals into intelligent insights, reducing burden on agents and increasing team member productivity. In Pharmacy, AI is helping automate data extraction and validation while improving review consistency. In Vet Care, at select Chewy Vet Care locations, we launched our AI-powered capability called Cali, which is supporting appointment confirmations, scheduling and routine follow-ups while reflecting Chewy's brand voice and customers first tone.

These initiatives are beginning to translate into tangible financial benefits. We continue to expect AI-related initiatives to generate low tens of millions of dollars of cost savings in fiscal 2026 and scaling to approximately $50 million on an annualized basis in fiscal 2027. Importantly, we view these benefits as another durable lever within our earnings model. As these capabilities scale, they should help us improve productivity, lower our variable cost to serve and create additional flexibility to reinvest behind attractive growth opportunities.

Before I turn the call over to Chris, let me briefly address our outlook. Three months ago, we reset our expectations to reflect a more cautious consumer environment. Since then, the trends underlying that outlook have broadly stabilized. We are not assuming a meaningful consumer recovery for the balance of this fiscal year. Instead, our confidence remains grounded in what we can control: gaining share, growing and retaining customers, scaling health and driving structural efficiencies across the business.

At the same time, Modern animal and SmartPack are collectively contributing above the levels contemplated within our prior outlook, and our profitability performance continues to demonstrate the structural improvements underlying our earnings algorithm. Chewy remains well positioned to gain share profitability, grow earnings and free cash flow and build the capabilities that will drive long-term shareholder value.

With that, I will turn it over to Chris.

Chris Deppe

Thank you, Sumit, and thank you all for joining us today. Q2 performance demonstrates the strength and consistency of Chewy's execution across the business, with total enterprise net sales at the high end of our guidance range and adjusted EBITDA margin exceeding our expectations. Let me start with our financial and customer performance. Second quarter net sales reached $3.33 billion, representing 7.3% year-over-year growth. Excluding SmartPack and Modern Animal, organic net sales increased 5.7% year-over-year, consistent with the midpoint of our prior expectations. Both acquired businesses performed ahead of the assumptions embedded in the prior outlook, which I will address in more detail when I discuss our updated guidance.

Organic growth in the quarter was supported by continued active customer growth, higher NSPAC and ongoing market share gains. We ended the quarter with 21.7 million active customers, representing 3.8% year-over-year growth and 208,000 sequential net additions. This included 43,000 unique customers who have transacted with SmartPack since the acquisition and are now reflected in our active customer count.

Autoship customer sales reached $2.8 billion, increasing 9.3% year-over-year and representing 84.6% of total net sales. Autoship continues to grow faster than the overall business reinforcing the durability, predictability and recurring nature of Chewy's revenue base. NSPAC reached $602. On a reported basis, NSPAC increased 1.9% year-over-year, and on a normalized basis, accounting for the extra week in the prior year comparable period, NSPAC increased 3.8%. NSPAC growth continues to benefit from customer cohort maturation, increasing engagement across health and pharmacy and broader cross-category adoption.

These drivers were partially offset by continued pressure on discretionary attachment and premiumization. Pressure on premiumization and discretionary spending materialized broadly in line with our expectations during the quarter. affecting both the consumables and hard goods categories. As we discussed last quarter, purchasing behavior within consumables is influenced by both premiumization and discretionary attachment. In the second quarter, treat sales slowed more sharply than growth in core food, reflecting moderation in discretionary purchases and the broader macroeconomic pressures we have been describing.

Importantly, Chewy continues to gain meaningful share across categories. Industry data suggests that the broader consumables market is broadly flat year-over-year, making Chewy's mid-single-digit growth, a healthy level of outperformance. Similarly, our mid-teens hard goods growth substantially outpaced the broader market, reflecting the benefits of the assortment and merchandising improvements we have made over the past year despite continued pressure on discretionary spending. .

Finally, Pet Health and Specialty Products delivered strong organic growth, underscoring the momentum across our expanding suite of health-related offerings for pet parents.

Turning to profitability. Adjusted EBITDA reached $227 million in the quarter, representing a 6.8% adjusted EBITDA margin above our guidance of 6.3% to 6.4%. Second quarter gross margin was 30.4%, flat year-over-year and up 30 basis points sequentially. As a reminder, the year-over-year comparison was against certain nonrecurring MAP-related pricing and other benefits realized in the second quarter of fiscal 2025.

Gross margin exceeded expectations, supported by continued growth in sponsored ads and disciplined promotional activity. However, approximately $10 million of the upside reflected timing-related benefits, primarily tariff refunds that were received earlier than anticipated as well as certain rebate benefits that shifted in the second half into the second quarter. The quarter also included more than $5 million of discrete benefits related to gift card breakage, inventory adjustments and certain vendor-funded merchandising activity. While these items benefited second quarter results, they are not indicative of our underlying margin run rate.

Taken together, these timing-related and discrete items accounted for essentially all of the adjusted EBITDA outperformance relative to expectations. Even excluding these benefits, adjusted EBITDA margin expansion remained very healthy and gross margin expanded year-over-year after normalizing for nonrecurring items in both periods. As these timing benefits normalize, we expect gross margin to decline modestly on a sequential basis in Q3. We broadly consistent with the seasonality we experienced last year.

As a reminder, we continue to expect fuel to represent a mid-single-digit million dollar headwind through the balance of the year. Even with these factors and normal second half seasonality, we continue to expect full year gross margin expansion, although at a more moderate pace than we delivered in fiscal 2025. Please note that my discussion of SG&A excludes share-based compensation expense and related taxes as well as transaction and integration-related costs.

Second quarter non-GAAP SG&A was $612 million or 18.4% of net sales compared with 19.1% in the prior year period. We delivered 70 basis points of year-over-year SG&A leverage reflecting improved fulfillment center utilization, lower variable cost to serve, disciplined headcount management and continued productivity gains across the organization. Lower variable cost to serve remains the largest contributor to SG&A leverage. As our automated facilities continue to scale and utilization improves, we are leveraging the fixed cost infrastructure embedded within the network while also reducing variable costs through automation, process improvements and AI-enabled tools. We continue to expect SG&A leverage in the second half to remain broadly consistent with what we delivered during the first half.

Advertising and marketing expense was $215 million or 6.5% of net sales, essentially flat year-over-year as a percentage of sales. We continue to allocate spend towards channels and customer cohorts where we see attractive acquisition economics and long-term value, supporting healthy active customer growth while maintaining disciplined returns. Looking ahead, we expect to increase advertising and marketing activity in the second half relative to Q2, with spending more heavily weighted towards Q3 than Q4. This cadence reflects attractive opportunities we are seeing to invest and brand awareness ahead of the holiday season, which we expect to support customer engagement during peak and beyond.

Q2 adjusted net income was $149 million, translating into adjusted diluted earnings per share of $0.36. As discussed, the majority of the upside relative to our guidance reflected timing and other nonrecurring gross margin benefits. At the same time, the underlying margin performance continued to benefit from the structural SG&A leverage and operating efficiencies I described earlier. Modern animal was included in these results and as expected, represented a modest drag to adjusted EBITDA margin in the quarter.

Let me close the discussion of second quarter results with cash flow and capital allocation. Free cash flow for the quarter was $90 million compared with $106 million in the prior year period. This reflected $137 million of net cash provided by operating activities and $48 million of capital expenditures. Note that while free cash flow was down year-over-year, this was entirely timing related, and we continue to expect full year free cash flow through of roughly 80%. We ended the quarter with $612 million of cash, cash equivalents and marketable securities and over $1 billion of total available liquidity.

During the quarter, we completed the acquisition of Modern Animal for $400 million, raised $600 million through our inaugural term loan issuance and deployed $200 million towards share repurchases. We repurchased 9.9 million shares during the quarter. After accounting for shares issued in the Chewy employee equity programs, these repurchases resulted in a 2% sequential reduction in weighted average diluted shares outstanding this quarter. Chewy's capital allocation framework remains unchanged. We will continue to invest behind strategic priorities where we see attractive returns, maintain a conservative and flexible balance sheet and return excess capital to shareholders. Within that framework, we continue to believe that Chewy's shares are undervalued at current levels. Repurchases, therefore, remain an attractive use of capital, and we expect to remain opportunistic in our activity.

Based on our performance through the first half and the increased visibility we now have, let me move to the outlook for the balance of the year. As I discussed, while we continue to see modest pressure on discretionary attachment and premiumization, in line with what we discussed last quarter, importantly, trends have not deteriorated further relative to the assumptions embedded in our prior outlook. This increased visibility into the operating environment, combined with the consistency of Chewy's market share gains, gives us confidence to narrow the full year organic net sales growth range.

In our view, the downside scenario underpinning the prior low end of guidance, which assumed a more meaningful weakening of the end market has become less likely. Additionally, SmartPack and Modern Animal are performing ahead of initial expectations as we progress with the integration, leading us to raise our forecast for their contributions. For fiscal year 2026, we now expect total net sales of $13.46 billion to $13.57 billion, representing a year-over-year growth of 6.8% to 7.7% including organic net sales growth of 5.5% to 6.3%. The performance of our core business in the quarter supports our continued expectation to deliver near the midpoint of the updated sales guidance.

Importantly, the midpoint does not assume any meaningful improvement in the consumer environment, but consistency at the levels we have seen for the last several months. Consistent with the prior outlook, the high end of the range contemplates either an improvement in the market backdrop, stronger execution against our plan or a combination of both. Conversely, the low end assumes some renewed deterioration in the operating environment, although less pronounced in the downsize scenario embedded in the prior guidance.

Now turning to profitability guidance. As mentioned previously, while we delivered strong underlying performance in the second quarter, essentially all of the upside relative to expectations reflect the timing related and discrete items. That said, reflecting the strength of our underlying performance year-to-date, including the continued scaling of AI initiatives, we are raising the low end of full year fiscal 2026 adjusted EBITDA margin guidance by 10 basis points and narrowing the range to 6.7% to 6.8% from 6.6% to 6.8%. This outlook reflects our continued confidence in the underlying earnings profile of the business and our ability to deliver substantial year-over-year margin expansion.

At the midpoint, this implies over 100 basis points of year-over-year adjusted EBITDA margin expansion and $912 million of adjusted EBITDA for fiscal 2026. Consistent with our comments last quarter, this guidance includes a modest margin rate drag for Modern Animal. For the third quarter of fiscal 2026, we expect net sales of $3.323 billion to $3.358 billion, representing reported year-over-year growth of 6.6% to 7.7% and organic net sales growth of 5.3% to 6.2%. This outlook reflects the same operating assumptions embedded in the full year guidance I just described.

For the third quarter, we expect adjusted EBITDA margin of 6.6% to 6.7%, representing roughly 85 basis points of year-over-year expansion at the midpoint. We also expect adjusted diluted earnings per share of around $0.39. Finally, for the full year, we now expect share-based compensation expense, including related taxes, to remain broadly flat to last year, weighted average diluted shares outstanding of approximately 410 million shares, net interest expense of $10 million to $15 million; capital expenditures of 1.5% to 2% of net sales and an effective tax rate of 24% to 26%.

In closing, Chewy's Q2 results reinforce our confidence in the underlying health and earnings power of the business. We continue to gain share, grow our recurring customer base and expand profitability through structural improvements across the organization. Our updated outlook reflects increased visibility into the balance of the year and continued confidence in our ability to deliver profitable growth.

With that, I will turn the call back over to Sumit for closing remarks.

Sumit Singh

Thank you, Chris. To close, the key takeaway from the quarter is that Chewy continues to grow customers, gain share and expand earnings even in a pet market that remains under pressure. We are growing both sides of the customer equation, the number of customers we serve and the amount that they spend with Chewy, while Autoship continues to reinforce the recurring and durable nature of our revenue base. At the same time, our earnings profile continues to strengthen. We are driving greater efficiency across the business, scaling higher-margin growth areas such as health and sponsored ads and beginning to realize tangible productivity benefits from AI and automation. .

We are particularly encouraged by the progress across Chewy Health, including the early performance of Modern Animal and the continued scaling of Chewy Vet Care. As these businesses grow, we believe they can deepen customer engagement expand wallet share and become an increasingly meaningful contributor to Chewy's long-term growth and earnings power. Importantly, our outlook does not depend on a meaningful recovery in the broader pet category. We remain focused on the things we can control, serving customers exceptionally well. gaining share, scaling our strategic growth platforms and continuing to improve the efficiency of the business.

Taken together, we believe these capabilities position Chewy to compound earnings and free cash flow over time while continuing to invest behind attractive growth opportunities and create durable long-term shareholder value. Thank you to every Chewy team member for their continued dedication and to our customers for their trust.

Operator, we are now ready to take your questions.

Operator

[Operator Instructions] Your first question comes from the line of Steven Forbes with Guggenheim.

Question-and-Answer Session

Steven Forbes

Sumit, you mentioned the sort of the moderation in treat sales during the quarter, I guess, at a more accelerated pace than consumables. Is there a way to frame up for the group here on sort of what percentage of consumables is treats or what you would consider to be more discretionary, and then any particular pockets within treats that are more notable in terms of what you're seeing from a consumer behavioral standpoint?

Sumit Singh

Thanks, Steve. I'll stay away from precisely defining the penetration of trades within the business, but candidly, what you're hearing is essentially discretionary doesn't just mean supplies. And I think that's the matter point. that currently consumers are continuing to spend pretty -- at a pretty normal level on their core food, meds and the engagement through Autoship remains very strong and healthy with Chewy.

And from a discretionary part of consumables, it's the treats and the toppers. If you look at an average consumer, an average consumer with experiment with over 10 types of treates across a variety of treat categories might be soft, might be hard, might be choose, might be jerky, dental, premium, rehydrated, raw, freeze-dried and these all come at different price points and different consumption patterns relative to the households that we serve.

Some go on Autoship, some don't go on Autoship, some go on Autoship and come off. So there is a dynamic behavior that customers follow as it comes to what we consider the discretionary part of consumables, which is if you're allocating a budget from a household perspective, you prioritize core food, you prioritize meds, you prioritize categories like supplements, which are health and wellness oriented and then everything else falls a little bit more towards the discretionary side. right?

And so within that, what I would also then categorize perhaps to answer the next type of question is like we interpret the relative growth rates as consumers prioritizing discretionary hard goods over essential consumables, right? And so the 2 businesses are being influenced by different underlying factors. Consumables remains our largest and most mature category and Autoship fuels it with large penetration towards dog and a very healthy penetration towards cat.

Hard goods is a bit of a different story, and that's more of the work that we've done to bring to the category and drive the category towards double-digit growth over the last couple of years that we've been candid in talking about, right? So the growth primarily reflects improved execution and outsized share capture given that we've materially expanded the breadth and relevance of our assortment that has improved our ability to serve customer needs and capture demand in that category.

So there's a lot going on under the categories here, but I think the main takeaway is there are certain types of these merged classes that are a bit more -- consumers are viewing them as a bit more discretionary and for everything that is based in core business plus the newer parts of the businesses that might be fresh food, that might be, which is actually a growing TAM might be our health-related categories or in the large and strong equine business that we're building, very healthy growth rates there.

Steven Forbes

Helpful. And then just a quick follow-up. I don't know if it's possible for you to frame up how you expect the Modern Animal acquisition to impact net adds during the 3Q, given the SmartPack impact during the second quarter, and then any early comments on how the conversion of those customers to the Chewy Autoship platform is trending? I don't know whether in absolute or just relative to expectations?

Sumit Singh

Yes, both good questions. So we haven't yet sized the -- so we've sized the impact to net adds. I think we gave you a preview when we bought the asset, and we said they have roughly 100,000 customers, and we expect roughly 40% of that or in the 40% to 50% range to be net new to Chewy. We're continuing the integration. So once we are ready to sort of disclose that, we will build that in presently, when we are giving you forecasting, it is not including the Modern Animal net adds. So you should view our guidance as organic growth in the business. And when we do disclose it, we will come back and share the specifics just like we did with SmartPack this time.

In terms of conversion of customers to Autoship, we expect that to be super healthy. We're in the process of integration. The acquisition closed a couple of months ago. So our focus in the back half of the year, particularly Q3 is on integration. Trends are the initial inputs that we had forecasted are performing better than our initial forecast, which is why the commentary on the strengthening part of the business that you heard on the call, but we expect Autoship platform trending to be high. There is no reason to believe that this would not translate much like a Chewy customer or normal Chewy base does.

Operator

Your next question comes from the line of Nathan Feather with Morgan Stanley.

Nathaniel Feather

Given some of the pressure you've seen in organic growth from the weaker macro, I guess, how are you thinking about balancing margin expansion with potentially the ability to lean in a little bit more to reaccelerate growth. And you noted in the script that you have flexibility to reinvest in the business. Can you touch on the key areas you believe you can lean deeper in here.

Sumit Singh

Yes. I think it's a prudent question at this time. I'll keep my remarks -- I'll elaborate on this. And so just expect me to share my thinking a bit out loud. So I think you should think about it 2 ways. One, the question is sort of like, hey, how much would you consider investing to accelerate revenue growth? And then the second part is, I guess, what levers do we have available to accelerate sales growth, right? And so investment is not always a part of our consideration and planning at Chewy when we are planning for sales growth. We believe we have credible levers in front of us where we can self-fund/drive growth at very healthy ROIs.

So those -- if I take you down the list on the top of my mind, a, we remain enthusiastic about Chewy Plus and we expect to introduce a refreshed program design very shortly into the market. You heard me talk about aligning and arriving at a strong product market fit. And we believe that the redesigned offering will strengthen consumer value proposition and deliver that compelling product market fit that I've been talking about for the last one quarter or so.

Number two, we continue to identify attractive opportunities to deploy marketing dollars and bring more customers into the Chewy funnel, right? And so when you look at our performance in Q2, right, primarily a few weeks of effort where we pushed a deliberate investment decision rather than accept a deterioration in marketing efficiency. So for Q2, we leaned in a bit and we did not tolerate any deterioration in marketing efficiency and our targeting conversion CRM and app capabilities are the areas that we essentially lean then on and that continued to improve -- they continue to improve, those capabilities and they're supported more efficient acquisition of high-quality customers for us in Q2, which we expect to repeat going into Q3.

You also heard on the earnings call that we said we expect to lean in a bit and invest in brand building that we believe is a prudent investment in front of the holidays, but it also sets up importantly, 2027 in a very strong way. This is a playbook that we're borrowing from the end of 2024 in the way that we entered 2025 and we're taking some learnings from that playbook and deploying it in the back half of 2026.

And then lastly, I would say, we're also moving with urgency to bring some unique products and experiences designed to deepen engagement, increase attachment across additional categories and compound NSPAC to market in the back half of this year. right? So you should expect us to have some incremental conversations with you about some net new launches as we play through Q3, right?

So that's how you should think about the levers that we have and the mind share on where we're putting that mind share to drive accelerated growth. In terms of investment levels, we've not yet determined the appropriate levels of reinvestment for 2027 as that work remains part of our '27 planning process, right? And you can expect that any decision will be grounded in attractive long-term returns and calibrated against our broader earnings and margin objectives, right?

But I will leave you with this thought. Look at fiscal '25 and '26 out -- '25 results and '26 outlook. Incremental margins reflect several moving pieces, right? They have structured -- we have structural margin drivers that we've articulated for some time, and we continue to deliver across those as expected. We have the costs associated with bringing new fulfillment capacity online, balanced with ongoing efficiencies across the organization, including our contribution from AI initiatives.

So we've got a really healthy playbook that we can deploy against while keeping highly disciplined and trying to self-fund a bunch of our investments leaving ourselves the room and the capability to drive accelerated growth without taking away from the algorithm that we've shared with you.

Nathaniel Feather

Great. That was really helpful. Just 1 small follow-up there. On the Chewy Plus redesign, I guess, how take through what the learnings have been from that program to date and where you feel you can drive some income improvements to increase adoption?

Sumit Singh

Yes. So we really like the program so far. It's helped us drive -- it helped us learn the boundaries of sales, customer penetration and profitability guardrails, which were important to learn. At one level beneath that, it's helped us understand specific cohort interaction, cohort behavior, maturity curves of cohorts given that we played the program through for roughly 5 quarters now. And that's, in our opinion, a good amount of learning. And what we found was, through the voice of the customer, the customers have loved the same sort of Chewy forward customer-centric principles that we've leaned in with trying to maximize the value that they extract from the platform, the convenience that they have, the loyalty features that we bring forward.

At the same time, we heard that while customers really appreciate the components that we've brought forward, they would appreciate it even more if we connected the broad offerings that make Chewy the ecosystem of choice to bring those offerings to them, right? And so I'm hinting towards the program design evolving to include a multitude of health benefits that then drive the customer to interact across a variety of our businesses in new and existing and therefore, deepen their engagement.

So if I were to design a marketing tagline and I'm not a marketing copywriter, I'd say, meet the new Chewy Plus, cheaper, better, more care integrated, right? And that's a terrible copy, but that's why I'm not a marketing copy writer. But you should expect us to listen to customers and go out and really position the program to gain scale and drive the attachment and the incrementality in sales stronger than what we are seeing today. So we're excited without really disturbing the margin kind of contribution profile of that particular program. So that's how we're thinking about it. More to come in Q3.

Operator

Your next question comes from the line of Dylan Carden with William Blair.

Dylan Carden

Appreciate it. Curious if you can help us understand sort of the pet industry stabilization commentary as it relates to pricing units at household formation. And particularly sort of how you're envisioning pricing to trend in your guide into the back half?

Sumit Singh

Sure. I can take the first part. Chris will take the second part. There's a lot here in what's going on within the pet industry. I would say broadly when we entered Q1, we started noticing some signs. You'd heard me comment at some of the conferences around hey, the industry, we're not essentially baking in a rebound coming into '26, but we were expecting that rebound in '25. The stability that we were expecting coming into Q1 started deteriorating a bit in the April -- late March, April time frame, which is what you heard us comment on our Q1 earnings call, and we reset our guidance at that particular point, right?

So we said, hey, we're not essentially baking in a rebound of sales growth at this particular point. We don't expect pricing inputs to materially change. What that means is we don't expect pricing to be a benefit -- net benefit in '26, but we also don't expect the promotionality environment to be irrational, which is, by the way, what we are continuing to see for the most part. There are sort of peaks and valleys in some promo -- in some months, but for the most part, the environment is relatively stable.

And then underneath of that, we'd said to you that, hey, dog seems to be worsening, cat seems to be strengthening. So for the most part, those inputs that I talked about have continued as we've played through Q2. Importantly, however, the inputs of traffic, right, have stable/strengthened towards Chewy and online continues to pull share from the overall industry. And so the secular tailwind plus the value prop that we're bringing to the table allows us to continue to aggregate share, albeit in the slightly more pressured consumer industry, right, in the consumer pet -- consumables pet world.

So that's kind of how we're projecting. So you heard in our comments, stable. We're not baking in a rebound. We believe we have the ability to continue to drive and outperform the market in the back half, and then you just heard me take you through a series of levers and a broad thinking on the fact that we are not sitting idle as we move into 2026, regardless of what the macro does. Chris?

Chris Deppe

Yes. Just to reiterate the thing about how we set guidance. We updated our outlook, and it does not assume any recovery as Sumit noted, or any improvement in consumer behavior the trends we've seen have been broadly consistent with what we saw exiting Q1, and we view that moving forward. Within that backdrop, our outlook reflects continued execution against the drivers that we can control, which is active customer growth, retention and reactivation, Autoship engagement, cross-category adoption, health care growth, market share gains. And so we expect to grow meaningfully ahead of the category without needing that external recovery.

We do believe we have a greater visibility into the range of outcomes. The stability and trends allowed us to remove the more severe downside scenario that we contemplated last quarter, allowing us to narrow that organic growth range. For us, the high end would require either some better market backdrop, stronger execution against our initiatives or some combination of those 2 and the low end reflects a bit more pressure consumer than we're seeing today, but not as bad as what we expected in the prior original outlook that we gave you last quarter.

From a pricing standpoint, just to reiterate what Sumit said, we are operating in a very low price environment, and we're not seeing any benefit there, which we have factored into our guidance. As Sumit noted, we're not seeing deflation in the category, just not meaningful pricing contribution to sales growth.

Dylan Carden

Excellent. And as a follow-up, Sumit, you've been very helpful in kind of thinking to the agent side of all of this. Any update on sort of AI chat product discovery and now that you've got perhaps half a year in from when this really kind of started taking off, how your platform is integrated with that? Is it headwind as the business become more reliant on Autoship. Anything kind of update there would be helpful.

Sumit Singh

It's -- we think of it as a net hit, and Dylan, as -- and I've continued to maintain that point of view, including writing about it pretty publicly a few months ago. On agentic surfaces, we continue to lead with product innovation. We're following those metrics closely, and we're pleased with Chewy's position in terms of search aggregation and search demand traffic driving towards Chewy. Secondly, on our surfaces and evolving consumer behavior in terms of product discovery, it's one of the unique products that I mentioned on my remarks a bit earlier when responding to Nathan in terms of the unique products that we're bringing to life that is very much on the back of our minds to offer customers a net new way of interacting with Chewy and deepening their engagement. So I won't give the details over here. But broadly speaking, we will continue to innovate behind this new technology and utilize it to improve experience and drive deeper customer engagement while making sure that as the aggregation shifts upwards to agentic surfaces, Chewy is positioned to lead and capture an outsized portion of that demand.

Operator

Your next question comes from the line of Doug Anmuth with JPMorgan Chase.

Douglas Anmuth

Sumit, I just wanted to go back to some of your margin and cost-related comments. I guess, first, just what kind of confidence do you have just around the AI-driven efficiencies that you talked about, the low tens of millions, I think, in fiscal '26 then with $50 million plus in '27. And then perhaps more importantly, even how do you think about the headroom in lowering cost to serve going forward just on a multiyear basis?

Sumit Singh

Yes. So high confidence. Let's start with answers first. High confidence in our AI-driven efficiency, both the framework as well as the results that we are seeing flow through into the P&L. We expect -- and we're just getting started. The update that I provided this morning on our customer-facing AI assistant named CAI. We are still less than 10% or 15% of our traffic is exposed to that. And it's been in the market less than a month. but we accelerated that deployment from Q3 to Q2. When we lowered the sales guidance -- as you recall, we had to have enough confidence in our own ability to essentially absorb all of that profit impact and overdrive to profitability in the back half and some part of that is us pulling in the initiatives that were slated to launch in the back half especially those where we had high confidence.

And so this is one of them where we're seeing a very high customer take rate. And now it's about scaling our capability to open up the coverage radius to both customers as well as use cases. Other examples that I provided to you around building customer-facing -- internal team member facing agents, whether that's deployed in the pharmacy fulfillment space, which is allowing us to lower our cost to serve in pharmacy, which is durable. And so we don't expect these to essentially -- these are structurally lowering the fulfillment costs that it takes us to essentially pick, pack and ship and order to you. And so that's very durable.

Same thing in customer service. Our agents interact with a multitude of softwares and spend time in looking for answers and building that coherence, particularly for agents that are net new in a way that we help them ramp up and therefore not suffer the productivity dilution. The internal tools that we're launching are rapidly allowing us to essentially level those net new agents and their performance much closer to our experienced agents and therefore embed that productivity and lower the cost to serve structurally.

So hopefully, that kind of gives you a sense for why we don't just believe that these are in experiment mode. We believe these can be embedded. And as the scale, right, it sort of compounds the earnings that you've heard us say, to the -- or educate you on the range of $50 million.

Now I do want to clarify one thing, right? As investors look to '27, it would not be appropriate to mechanically layer the growing contribution on AI or from AI on top of our fiscal '26 margin trajectory, right? We view AI as an increasingly important component of our broader productivity agenda. and it gives us greater confidence in our ability to deliver against those financial objectives. However, these efficiencies will also help offset the normal cost pressures, right? So whether that's wage inflation or other trends in the industry, so they will help us offset the normal cost pressures, and we may reinvest some of these funds to drive attractive growth opportunities.

So net-net, we view AI as a powerful enabler of continued margin progression not as a stand-alone pool of savings that will flow directly into the bottom line. So I think both sides of the equation just have to be sort of appropriately understood. In terms of headroom that we see in lowering cost to serve, I can provide a quick point, Chris is nodding at me, he's going to take this one.

Chris Deppe

Yes, absolutely. Doug, we feel strongly about our multiyear outlook and road map to lower verbal cost to serve Sumit talked about some of the AI initiatives. We also have continued automation. We're north of 50% of our volume flowing through automated states, and we'll continue to grow that over time. And so we have a robust road map there to continue to lower our variable cost to serve and deliver SG&A leverage in the P&L.

Yes. So obviously, when we took a customer-facing project that -- a product that essentially offers a parallel capability that we've been known to deliver through our exceptional human service agents. You can expect that the bar that this product has to meet is exceptionally high. And so that's the first design principle that from a service bar standpoint in terms of being crew to brand and tone, it has to be spot on. And so in terms of success parameters and dimensions, that is built into it. In terms of customer impact and experience, how it will evolve.

So I talked about expanding coverage use cases, right? So today, CAI is -- if you're in the beta, you're welcome to try this. If not, you will be pulled into beta because we're expanding the program quite rapidly. It is addressing what we believe are the top contact drivers, right? Where is my stuff, where is my order, shipment status, I need help with Autoship management, those type of customer inquiries. We've also embedded automated returns and refunds, which is powered by our deep study and knowledge of machine learning in the background into CAI. And so these are multiple agents that sit under an orchestrator that essentially allow us to direct customer traffic to bring back the appropriate response and self-help.

It is particularly suited to consumers that are propensed towards self-help. These are younger cohorts that continue to become a large portion of our consumer base right? The Gen Zs and the alphas are less inclined to pick up the phone and call an agent. And so experiences like these not only keep the convenience right on top of mind, it meets them where they want to be met.

And then imagine in the future, we could essentially -- because we're building this in a multi-agent orchestration framework, you could essentially keep building agent capabilities and layering in to build more holistic solutions that then combine product recommendations and deepen customer engagement from a service interaction point of view, right? And we spent several quarters building the infrastructure and focusing on our data being right. So now we can essentially build these type of solutions on top. We believe we have a durable competitive advantage here because companies will take years to get to this point or they'll essentially have to go out and integrate through third-party providers where all of our solution is first-party built.

So we're quite excited about the journey of this. We can't wait for inference cost to continue to come down because, candidly, we -- I believe we can scale faster than right now how some of the cost is actually scaling. Overall, we're quite excited about this type of stuff.

CALI, same thing. These are outbound appointments, scheduling type of use cases that we're trying out with Cali, which is a voice agent. So we have both capabilities at this point. Cai is a chat-based capability and Cali's a voice-based capability. We're trying out with multiple different types of use cases.

Operator

This concludes today's call. Thank you for attending. You may now disconnect.

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Casey’s General Stores (CASY) Fiscal Q1 2027 Earnings Call: EPS Rises 28%

Wed, 09 Sep 2026 14:20:43 +0000

Casey’s General Stores (NASDAQ: CASY) reported strong fiscal Q1 2027 growth, supported by prepared food traffic, higher fuel margins and a larger store base. Diluted EPS increased 28% year over year, while EBITDA rose 17%.

Core Takeaways

Diluted EPS rose 28% to $7.37, net income increased 27% to $274 million, and EBITDA advanced 17% to $485 million.
Total revenue increased 24.3% to $5.68 billion, primarily reflecting higher inside sales and a 33% increase in the average retail fuel price to $3.99 per gallon.
Inside same-store sales grew 3.2%. Prepared food and dispensed beverage same-store sales increased 4.8%, driven mainly by traffic and minimal pricing.
Fuel margin reached $0.478 per gallon, up $0.068 year over year, while same-store gallons declined 0.3%. Management said Casey’s continued to gain fuel market share relative to the Mid-Continent region.
Total operating expenses increased 8%, including contributions from new stores, employee costs, credit card fees, insurance, repairs, maintenance and utilities.
Management remains on track to add 120 stores in fiscal 2027 and expects remodeled stores to begin providing a more meaningful offset to construction disruption around the fourth quarter.

Key Financial Data

Metric	Fiscal Q1 2027	Change / Commentary
Total revenue	$5.68 billion	Up 24.3% year over year
Net income	$274 million	Up 27%
Diluted EPS	$7.37	Up 28%
EBITDA	$485 million	Up 17%; up 40% on a two-year stack
Total gross profit	$1.24 billion	Up 11.4%
Inside sales	$1.78 billion	Up 5.6%
Inside same-store sales	+3.2%	Up 7.7% on a two-year stack
Inside gross margin	42.2%	Up 30 basis points
Prepared food and dispensed beverage sales	$493 million	Up 7.4%
Prepared food and dispensed beverage same-store sales	+4.8%	Up 10.7% on a two-year stack
Prepared food and dispensed beverage margin	59.3%	Up 130 basis points
Grocery and general merchandise sales	$1.28 billion	Up 4.9%
Grocery and general merchandise same-store sales	+2.7%	Up 6.5% on a two-year stack
Grocery and general merchandise margin	35.6%	Down 30 basis points due to a distribution-cost reclassification
Same-store fuel gallons	-0.3%	Up 1.4% on a two-year stack
Fuel margin	$0.478 per gallon	Up $0.068 year over year
Operating expenses	—	Up 8%, or $55.9 million
Operating cash flow	$384 million	Fiscal Q1 2027
Capital expenditures	$194 million	Increased partly due to store remodels
Free cash flow	$190 million	Down from $262 million a year earlier
Available liquidity	$1.4 billion	As of July 31, 2026
Credit facility debt-to-EBITDA	1.5x	As of July 31, 2026

Business and Operating Performance

Prepared food and dispensed beverages remained the main inside-sales driver. Transactions increased by more than 100 basis points and units rose nearly 4%. Whole-pizza units grew by nearly double digits, while management cited continued customer interest in value-oriented offerings and limited price increases.

The segment’s 59.3% gross margin benefited from cheese costs of $1.93 per pound, down 9% from $2.11 a year earlier. Lower cheese costs contributed approximately 45 basis points to margin, with an internal distribution-cost reclassification accounting for the rest of the year-over-year increase.

Grocery and general merchandise performance was mixed. Nicotine alternatives grew 47%, energy products rose 12%, and ready-to-drink cocktails increased by more than 30%. Beer, snacks and cigarettes remained under pressure. Casey’s is allocating more space to nicotine alternatives and expanding private-label products where national snack brands have raised prices.

Fuel gross profit increased 19.6%. Same-store gallons declined slightly, but management said remodeling disruption represented an approximately 50-basis-point headwind. Casey’s two-year same-store gallon growth was 1.4%, compared with an approximately 10% decline in the OPIS Mid-Continent region cited on the call.

Casey’s remodeled 24 additional acquired stores during the quarter after completing approximately 50 in fiscal 2026. Prepared food and dispensed beverage sales at remodeled stores have increased by approximately 30% versus the comparable pre-remodel period. Construction reduced inside same-store sales by about 25 basis points and same-store fuel gallons by about 50 basis points.

The company’s rewards platform now has more than 11 million members. Chicken wings remain available in 850 stores, with the next rollout scheduled to begin after the summer peak. Management said 38% of customers purchasing wings placed wing-only orders, while those customers increased their overall prepared-food purchase frequency by approximately 30%.

Management Guidance

Management plans to update annual guidance on the fiscal Q2 earnings call, after the company moves through its seasonally largest period.

August same-store volumes inside and outside the store were consistent with fiscal Q1 results and remained within annual guidance ranges. Fuel margin was in the low-$0.40-per-gallon range.

The company expects fiscal Q2 operating expense growth to be similar to fiscal Q1, partly because higher retail fuel prices increase credit card fees. Management continues to expect operating expenses to grow more slowly than EBITDA over the medium and long term.

Cheese costs are approximately 80% covered through early fiscal Q1 2028. Management expects a modest year-over-year margin benefit from cheese costs during each of the remaining three quarters of fiscal 2027.

Casey’s remains on track to add 120 stores during fiscal 2027. The company expects roughly half to come from new-to-industry construction and half from smaller acquisitions.

Risks and Watch Items

Fuel margins remained volatile during the quarter, moving between the $0.40 and $0.60-per-gallon ranges on different days as petroleum markets reacted to geopolitical headlines. August margins had moderated to the low-$0.40 range.

Store remodels require four to six weeks of disruption in some locations. Management does not expect the resulting sales lift to meaningfully offset construction headwinds in fiscal Q2 and likely not in fiscal Q3, with an inflection more likely around fiscal Q4.

Higher retail fuel prices are increasing credit card expenses. Wage-rate inflation, health insurance, utilities, and repairs and maintenance also contributed to operating expense growth.

Lower-income customers were somewhat more pressured than other income groups, although management said all three measured income cohorts generated positive growth. Beer, national-brand snacks and combustible cigarettes remain category headwinds.

Analyst Q&A Highlights

Fuel economics: Management described fiscal Q1 fuel margins as volatile but said the margin floor remained higher than before the Middle East conflict. Higher fuel prices led customers to buy fewer gallons per visit but make more trips, while shifting toward regular and higher-ethanol fuels that carry higher margins for Casey’s.
Remodel returns: Acquired stores were already relatively high-volume locations, including in prepared food. Management views the approximately 30% post-remodel prepared-food sales lift as encouraging and sees a long growth runway in Texas outside Dallas, Austin, San Antonio and Houston.
Competitive positioning: Casey’s reported no unusual promotional activity among convenience-store competitors. Its single-topping pizza is priced approximately $3 below national brands on average, and about half of its stores do not have a national pizza-chain competitor.
Expense trajectory: Of the 8% operating expense increase, management attributed roughly 2 percentage points to new units, about 1.5 points to same-store employee expenses and nearly 2 points to same-store credit card fees. Same-store labor hours were approximately flat.
M&A environment: Management said acquisition conditions remain favorable for buyers as smaller operators face pressure. Multiples have remained relatively stable, but lower seller EBITDA has reduced absolute purchase prices for some assets.

Full Earnings Call Transcript

Complete Earnings Call Transcript

Management Remarks

Operator

Good day, and thank you for standing by. Welcome to the First Quarter FY 2027 Casey's General Store Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Sam James, Senior Vice President of Finance and Investor Relations. Sir, please go ahead.

Samuel James

Good morning, and thank you for joining us to discuss the results of our first quarter ended July 31, 2026. My name is Sam James, Senior Vice President, Finance and Investor Relations. With me today are Darren Rebelez, Chairman, President and Chief Executive Officer; and Steve Bramlage, Chief Financial Officer.

Before we begin, I will remind you that certain statements made by us during this investor call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include any statements relating to the potential impact of the Fikes transaction expectations of future periods, possible or assumed future results of operations, financial conditions, liquidity and related sources or needs, the company's supply chain, business and integration strategies, plans and synergies, growth opportunities and performance at our stores.

There are a number of known and unknown risks, uncertainties and other factors that may cause our actual results to differ materially from any uncertainties or any future results expressed or implied by those forward-looking statements, including, but not limited to, the integration of the recent Pipes acquisition, our ability to execute our strategic plans or realize the synergies from the strategic plan, the impact and duration of conflicts in oil-producing regions and related governmental actions as well as other risks, uncertainties and factors which are described on our most recent annual report on Form 10-K, our quarterly reports on Form 10-Q as filed with the SEC and available on our website.

Any forward-looking statements made during this call reflect our current views as of today with respect to future events and Casey's disclaims any attention or obligation to update or revise forward-looking statements, whether as a result of new information, future events or otherwise. A reconciliation of non-GAAP to GAAP financial measures referenced in this call as well as a detailed breakdown of our operating expense increase for the first quarter can be found on our website at www.caseys.com under the Investor Relations link.

With that said, I'd like to turn the call over to Darren to discuss first quarter results. Darren?

Darren Rebelez

Thanks, Sam, and good morning, everyone. Before we go into further detail on our outstanding first quarter performance, I'd like to thank the entire Casey's team for their hard work during our 100 days of summer or for the excellent job they did serving our guests. I'm also about of the positive impact we're making on the communities we serve. As students said back-to-school, our annual path for classrooms giving an raised funds for grants that will support schools, students and teachers.

This year, with the help of our guests, team members and supplier partner, Coca-Cola, we raised over $1.8 million. This is a new record and reflects our shared commitment to invest in the future of the communities we call home. We're through the first quarter of our fiscal 2027 to 2029 3-year strategic plan that we laid out in June where we highlighted Casey's advantaged convenience QSR flywheel with our 3 lines of business under 1 operating cost structure. Our strong first quarter result is yet another proof point that our advantaged model is working as we continue to gain share, both inside and outside the store.

Now let's discuss the results from the quarter. Diluted EPS finished at $7.37 per share, up 28% from the prior year. Net income was $274 million, an increase of 27% from the prior year. The company generated $485 million of EBITDA, 17% higher than the prior year and up 40% on a 2-year stack business. Inside the store, prepared food and dispensed beverages remained strong. PF&DB transactions were up over 100 basis points, driving PF&DB units up nearly 4% versus the same period in the prior year as best continue to gravitate toward our abundant offering, compelling value and continued innovations such as our Bacon, Cheeseburger, pizza LTO.

Inside margin expansion was driven primarily by prepared food and dispensed beverage mix. In forecourt, the capabilities we developed over the past couple of years helped us navigate a volatile environment. Fuel margin was nearly $0.48 per gallon, while same-store gallons were roughly flat. One note on the quarter. As part of our integration of the Fiest acquisition, approximately 1% of our total store base have planned disruption associated with remodeling legacy [indiscernible] stores to Casey's. As a result, same-store sales, both inside and outside the store faced a slight headwind. Despite this, we still posted strong same-store results for the quarter and remained ahead of schedule our integration efforts. The stores have been already remodeled to Casey's in prior periods have performed exceptionally well and we expect to remodel [indiscernible] Setco stores throughout the fiscal year.

With that disclaimer out of the way, I'd like to now go over our results and share some of the details in each of the categories. inside same-store sales were up 3.2% for the quarter or 7.7% on a 2-year stack basis. Gross profit margin for the quarter was 42.2%, up 30 basis points from the prior year. For Person dispense fabrics by the way, as same-store sales were up 4.8% or 10.7% on a 2-year stack basis, with a gross profit margin of 59.3%. The majority of same-store sales growth was from traffic with minimal pricing. This was highlighted by great performance in whole pies with units up nearly double digits in the quarter.

Same-store grocery and general merchandise sales were up 2.7% or 6.5% on a 2-year stack basis with a gross profit margin of 35.6%. Energy dreams and nicotine alternatives continue to outperform the category with double-digit growth. The alcohol category, specifically Bayer, was a headwind during the quarter. On the fuel side, same-store gallons sold were down slightly at 0.3% but were positive 1.4% on a 2-year stack basis with a fuel margin of $0.478 per gallon. The Mid-Continent region saw an approximate 6% decline this quarter according to Opus fuel gallon sold data, indicating that our play is working and we continue to gain market share and drive guest traffic.

In the quarter, same-store operating expense, excluding credit card fees increased 5%. Steve will provide some of the specific puts and takes related to operating expense changes. But I'm extremely proud of our operations team to be able to meet the increased food demand without meaningfully increasing store labor hours as same-store round were roughly flat for the quarter.

I'd now like to turn the call over to Steve to discuss the financial results from the first quarter. Steve?

Stephen Bramlage

Thank you, Darren, and good morning. Before I begin, I also want to share my appreciation for our team members' hard work executing a plan during our busy summer months. It takes the entire organization's buy and to be able to generate such strong results, which are not easy to achieve. Our total revenue for the quarter was $5.68 billion. That's an increase of $1.11 billion or 24.3% from the prior year due primarily to higher inside sales and a higher retail price of fuel. Higher fuel gallons also contributed. The results were favorably impacted by operating approximately 2% more stores on a year-over-year basis.

Total inside sales for the quarter were $1.78 billion, and that's an increase of $94 million or 5.6% from the prior year. For the quarter, prepared food and dispensed beverage sales rose by $34 million to $493 million, an increase of 7.4% and grocery and general merchandise sales increased by $60 million to $1.28 billion, an increase of 4.9%. And inside same-store sales had an approximate 25 basis point headwind from the Fikes construction. Retail fuel sales were up $991 million in the quarter as the average retail price of fuel rose 33% from $3 to $3.99 per gallon, and total gallons sold increased by 2.5%.

Same-store gallons sent an approximately 50 basis point headwind from the Fikes construction. We define gross profit as revenue less cost of goods sold, but excluding depreciation and amortization. Casey's had total gross profit of $1.24 billion in the quarter, an increase of $127 million or 11.4% from the prior year and up 29.7% on a 2-year stack basis. This is driven by both higher inside gross profit of $44.3 million or 6.3% as well as higher fuel gross profit of $73.4 million or 19.6%.

Inside gross profit margin was 42.2%, and that's up 30 basis points from a year ago. The increase is primarily due to mix shift and solid cost of this management. Also, during the first quarter, we made a modest change in accounting for inside cost of goods sold related to internal distribution costs that had no net impact on inside margin in the aggregate, but it did create a slight tailwind to the PF and DB margin and a slight headwind to the grocery and [indiscernible]. We believe this change better reflects the true cost of goods sold between the 2 categories.

Prepared food and dispensed beverage gross profit margin was 59.3%. That's up 130 basis points from prior year. Cheese was $1.93 per pound for the quarter compared to $2.11 per pound last year. It's a decrease of 9% or an approximate 45 basis points benefit to the margin, along with the aforementioned distribution cost reclass, these 2 items accounted for all of the margin change in the quarter. The grocery and general merchandise gross profit margin was 35.6%, a decrease of 30 basis points from the prior year, and that change is completely attributable to the distribution cost reclass. Fuel margin for the quarter was $0.478 per gallon, up $0.068 per gallon from the prior year and sequentially about $0.01 stronger than the fourth quarter of fiscal 2026 which reflected the beginning of the Middle East conflict and the related volatility in global petroleum markets.

Total operating expenses were up 8% or $55.9 million. Approximately 2% of the total operating expense increase was due to unit growth as we operated 64 more stores than the prior year. Same-store credit card fees added approximately 1.5% to the increase primarily due to the previously mentioned higher retail prices per gallon. Same-store employee expenses accounted for approximately 1% of the increase due primarily to increases in labor rates as same-store labor hours were roughly flat. Insurance, primarily same-store health care insurance was responsible for approximately 1% of the increase.

In addition, same-store repairs and maintenance and same-store utilities collectively made up approximately 1% of the increase. Net interest expense was $22.1 million in the quarter, that's down $4.8 million versus the prior year, which is primarily due to deleveraging associated with the Fikes transaction. Depreciation the quarter was $116 million. That's up $7 million versus the prior year, primarily due to operating more stores. The effective tax rate for the quarter was 21.1% compared to the prior year of 22.7%. That decrease was driven by an increase in tax benefits that were recognized on share-based awards.

Our financial flexibility remains excellent. On July 31, we had total available liquidity of $1.4 billion. Also, our credit facility debt-to-EBITDA ratio was 1.5x. For the quarter, net cash generated by operating activities of $384 million less purchases of property and equipment of $194 million resulted in the company generating $190 million in free cash flow compared to generating $262 million in the prior year. The decrease in free cash flow is due in large part to the planned increase in capital expenditures from the Seco store remodels. At the September meeting, the Board of Directors voted to maintain the quarterly dividend at $0.65 per share.

During the first quarter, we repurchased approximately $46 million in shares. While we're off to a great start to the year. Consistent with our past practice, we plan to update annual guidance on our second quarter earnings call, and we are through the seasonally largest time of the year. Our results for August were as follows: same-store volumes, both inside and outside the store were consistent with the first quarter results and within our annual guidance ranges. Fuel CPG is in the low $0.40 per gallon.

Current cheese costs are slightly favorable versus the prior year. We expect the second quarter operating expense increase to be similar to the first quarter, and that's partially driven by the increase in retail fuel prices as compared to the second quarter of fiscal 2026.

I'll now turn the call back over to Darren.

Darren Rebelez

Thanks, Steve. As we just wrapped up our first quarter into the new plan, I'm as excited as ever about our progress. Our food team is doing a tremendous job. [indiscernible] have continued their strong momentum in the quarter. Just are flocking to the Casey's Rewards platform as we're now over 11 million members. We believe our abundant and value-oriented food offering is not only a differentiator driving inside traffic but is also driving traffic to the pump. This, coupled with our fuel team doing an excellent job balancing fuel margin in gallons during an uncertain environment has yielded great results. This is our 3-legged business model in action.

During fiscal year 2026, we remodeled approximately 50 Setco stores to Casey's. In first quarter of fiscal year 2017, we've remodeled 24 more stores. We're extremely excited about the results we're seeing as the average PFDD list at the stores that were remodeled to Casey's has been approximately 30% versus the results of the same period prior to remodel. While we're busy with [indiscernible] conversions has not stopped us from continuing to grow the store base as we are on track to meet our 120 store unit goal for the fiscal year. Operational efficiency is another key pillar of the strategic plan.

As we discussed at Investor Day, we expanded our continuous improvement efforts to include both the store and the enterprise as a whole. We're off to a great start as the team has completed a number of initiatives with many more on track for completion during the fiscal year, both at the store and throughout the organization. Overall, I'm very proud of the team's execution of the plan. We look forward to building on the momentum we have going throughout the fiscal year and beyond.

We will now take your questions.

Operator

[Operator Instructions]

Our first question comes from the line of Edward Kelly with Wells Fargo.

Question-and-Answer Session

Edward Kelly

I wanted to start on fuel margins. I was hoping that you can maybe talk about the trend in fuel margin during Q1. I think you said you had a very strong start last quarter, which I think a lot of us kind of assume that maybe that was -- just curious what the rest of the quarter looked like. And then the underlying dynamics that drove that really robust Q4 performance and strong start.

Just curious as to the sustainability of those dynamics through the quarter, and then just lastly related to all this, as you think about your mid-40s sort of margin guide, anything you're seeing out there currently that sort of raises question about that at all? Maybe talk about breakevens as part of that.

Stephen Bramlage

This is Steve. I'll address the first. The first 1 on fuel margins during the course of the quarter. Yes, we certainly -- we did enter the beginning of the fiscal year in a good position, certainly given the experience that we had in the fourth quarter. But I would say, honestly, that the quarter was volt's always the word I would describe with fuel margins. There were days when it was in the 60s. There were days when it was in most days, it was in the 40s. And to some extent, depending on the headlines that you read about in the paper and social media, there would be a corresponding move and to margin over the next year or 2.

So I don't think it's possible to really drive a solid trend during the course of the quarter. The floor for sure was higher which is what we saw in the fourth quarter of last year because of the conflict that was unchanged, but it really moved around quite a bit based on headlines as we went through the quarter.

Operator

[Operator Instructions]

Our next question comes from the line of Greg Melich with Evercore ISI.

Gregory Melich

I'd love to follow up on sort of the trends you saw through the quarter, particularly with how much of the comp decel in grocery and prepared food might have been people getting squeezed in terms of cash they had filling up the gas tank at the same time, anything about that in the trends from -- since the quarter as well?

Darren Rebelez

Yes, Greg, this is Darren. I'll go ahead and take that one. Yes, I would say that the trends that we saw in first quarter were similar to what we've seen over the last several quarters. a couple of points. One is that the lower-income consumers are being slightly more impacted than the other income cohorts. If you look at our business, all 3 in the cohorts that we measure had positive growth in the quarter. So I'll caveat it with that. But I would say that been more of the impact we saw in the grocery and general merchandise side is really driven by category trends versus demographic trends.

And what I mean by that is you look at the 3 areas where we had some softness is beer, snacks and cigarettes. And those categories have all been challenged for different reasons. That's an industry-wide phenomenon. We're not immune to that. On the beer side, we were able to make up for a good part of that with our liquor business. ready-to-drink cocktails in particular, were up over 30% in the quarter. So we saw some good strength there, not enough to overcome the dragon beer.

Snacks, I think we talked about this before. We're seeing a lot of price action taken from the National brands, which has put some pressure on there, and 6 has been a multi-decade trend. On the other side, on grocery and general merchandise, real strength in Nick alternatives up 47% in the quarter. Energy continues to perform well at 12% and nonalcoholic beverages overall, were a strong contributor. So overall, I'd say the trends are what they are.

And then lastly, when I look at a 2-year stack basis, Grocery and General Merchandise up 6.5% in an environment like this, I think, is pretty solid performance.

Operator

[Operator Instructions]

Our next question. next question will come from the line of Tom Palmer with JPMorgan.

Thomas Palmer

I wanted to maybe just follow up on the CFCO commentary in terms of the remodels. You noted 25 basis point inside same-store sales headwind and 50 on the fuel side -- fuel gallons. How did this compare to kind of what you would see on past remodels? And then as we look out here over the next couple of quarters, should we be thinking about a similar kind of headwind? Or does like a lift from the remodeled stores start to more than offset, let's say, any headwind from the disruption during the remodels?n

Darren Rebelez

Yes. This is Darren. On the remodels, this is to be expected when we do heavy lifting. Why you didn't see this in the first quarter -- or fourth quarter of last year, was there is a cohort of stores that already had kitchens in them that we were able to convert in just a matter of days. So there's really very minimal impact to the performance of the business while those were being remodeled. -- this next tranche of stores that we started this quarter, this past quarter are impacted anywhere from 4 to 6 weeks. And so that puts a pretty significant drag.

They've not closed the entire time, but they're closed for a good part of it and then partially under construction part of it. So there's a lot of disruption that puts a drag. It is not anything different than what we would normally see in a remodel of other acquisitions. Probably the biggest difference is the [indiscernible] stores tend to be higher-volume stores versus others that we've acquired in the past. And so it has more of a disproportionate impact. And there's just more of them that we're remodeling.

I'd say it's kind of a wash just guess kind of playing an arbitrage game. But outside of that, I couldn't specifically point to any 1 state doing better or worse than the others. I mean, they always perform a little bit differently, but nothing that really jumps out that concerns me.

Stephen Bramlage

Yes. I think it's worth reinforcing it. If you just think about part of the strategic that Casey's has and then we tried to highlight at the Investor Day, right, the geographic footprint we have remains in some of the lowest cost of living parts of the country. And so broadly speaking, the money that our consumers earn goes further than it would certainly for consumers who are similarly situated on the coast, and we feel like that just accrues to our benefit, for sure. And I think that is a very fair statement for the vast majority of the communities that we serve and continue to serve.

Operator

[Operator Instructions]

Our next question comes from the line of Jacob Aiken-Phillips with Melius Research.

Unknown Analyst

This is Sam [indiscernible] on for Jacob. I was just wondering if you could zoom out a little and touch on M&A as a whole. Have you seen the industry change at all in the last several quarters? And then also, just wondering if you could remind us on philosophically just how you see M&A contributing to your 120 new unit growth target by the end of the fiscal year?

Stephen Bramlage

Yes, Sam, I'd say the M&A environment is still really good. And that's a reflection of the challenging environment that the industry finds itself in, particularly the small operators. And -- and so I would say it's changed. I'd say it's still consistent, they even gotten a little better from a buyer's perspective. And multiples have stayed relatively flat, but the EBITDA that's multiplied by as not. And the EBITDA, even with the higher fuel margins, tends to go backwards for the smaller operators.

So we find ourselves paying a lower absolute price for some of these assets, even though the multiples are about the same. And consistent with our guidance, every year, we go into that giving a number of stores we'll add in the fiscal year. This year, it's 120. We go into that, assuming half of that will come from new to entry builds half of that will come from the small deal M&A and that's exactly how we see it playing out this year, give or take a couple.

Operator

And I would now like to hand the conference back over to Darren Rebelez for closing remarks.

Darren Rebelez

All right. Thank you for taking time today to join us on the call. Before we go, I want to thank our team members once again for all their hard work this quarter. Have a great day. Thank you.

Operator

This concludes today's conference call. Thank you for participating, and you may now disconnect. Everyone, have a great day.

Find out more

Core & Main (CNM) Fiscal Q2 2026 Earnings Call: EBITDA Growth and Guidance Reaffirmed

Wed, 09 Sep 2026 14:20:38 +0000

Key Takeaways

Fiscal second-quarter net sales rose 2.5% year over year to approximately $2.1 billion, with volume, pricing and acquisitions each contributing positively.
Adjusted EBITDA increased about 3% to $274 million, while adjusted EBITDA margin expanded 10 basis points to 12.8% on disciplined cost management and SG&A leverage.
Adjusted diluted EPS increased 8% to $0.94, supported by adjusted net income growth and a lower diluted share count following substantial repurchases.
Data center-related activity nearly doubled year over year and reached a mid-single-digit share of total sales. Fire protection sales grew 14%, while treatment plant solutions posted another quarter of double-digit growth.
Core & Main reaffirmed fiscal 2026 guidance for net sales of $7.8 billion to $7.9 billion, adjusted EBITDA of $950 million to $980 million and operating cash flow conversion of 60% to 70%.
The company repurchased 3.7 million shares for $169 million during the quarter and said its M&A pipeline has accelerated, with several potential transactions advancing beyond the letter-of-intent stage.

Key Financial Data

Metric	Fiscal Q2 2026 result	Year-over-year change / commentary
Net sales	Approximately $2.1 billion	Up 2.5%
Gross margin	Approximately 26.7%	Similar to the prior year
SG&A	Approximately $301 million	Roughly flat; improved about 40 basis points as a percentage of sales
Adjusted EBITDA	$274 million	Up approximately 3% from $266 million
Adjusted EBITDA margin	12.8%	Up 10 basis points
Adjusted diluted EPS	$0.94	Up 8% from $0.87
Operating cash flow	$62 million	First-half operating cash flow totaled $144 million
Net debt	Approximately $2.2 billion	Net leverage of approximately 2.3x
Total liquidity	Approximately $1.5 billion	Included more than $300 million of cash
Quarterly share repurchases	$169 million	3.7 million shares repurchased

Business and Operating Performance

Municipal demand remained Core & Main’s most stable end market, growing in the low-single-digit range. Management cited consistent repair and replacement activity and funding from local water utility rates, supplemented by state and federal programs. The company highlighted the EPA’s estimate that U.S. drinking water, wastewater and stormwater systems require more than $1.2 trillion of investment over 20 years.

Treatment plant solutions delivered double-digit growth and represented a mid-single-digit percentage of total sales. Core & Main is expanding its specialty product offering, technical expertise and project support capabilities in this category.

Data center-related sales nearly doubled year over year, increasing from a low-single-digit to a mid-single-digit percentage of total company sales. Data centers reached a high-single-digit share of nonresidential sales. Management said opportunities extend beyond site infrastructure and fire protection to municipal water, wastewater and treatment capacity needed around large developments.

Fire protection sales increased 14%, driven by higher steel pricing, volume growth and market-share gains. Management attributed the gains to new locations, broader geographic coverage and the company’s relationships with contractors.

Smart utility sales increased approximately 1%, with a small pricing contribution and essentially flat volume. Management said large project start dates remain variable, but backlog is strong. The Miami-Dade project is expected to generate limited volume toward the end of fiscal 2026 before reaching its anticipated full run rate in 2027. The five-year implementation is expected to involve approximately 100,000 meters annually at full pace.

Residential lot development declined by a high-single-digit percentage in the quarter after a low-double-digit decline in the first quarter. Management expects easier comparisons in the second half but is not assuming an underlying market recovery.

Core & Main opened seven greenfield locations year to date and expects a record number of openings in fiscal 2026. Following quarter-end, it acquired Walker Industries, a Hawaii-based storm drainage products provider. Management said the M&A pipeline has accelerated over the past three to six months and includes bolt-on and larger strategic opportunities.

Management Guidance

Core & Main reaffirmed its fiscal 2026 outlook:

Guidance metric	Fiscal 2026 outlook
Net sales	$7.8 billion to $7.9 billion
Adjusted EBITDA	$950 million to $980 million
Operating cash flow conversion	60% to 70%

Management expects adjusted EBITDA margin to improve year over year in the second half, with most of the expansion anticipated in the fourth quarter. The company expects contributions from both gross margin and SG&A leverage, although project mix could affect the balance between them.

For residential lot development, management expects sales to be flat to slightly lower in the second half and down by a mid-single-digit percentage for the full year. This assumes underlying activity remains near current levels.

Management also expects M&A to contribute approximately 2 to 4 percentage points to sales growth over the long term, while noting that annual contributions may vary. Several transactions are currently in due diligence, which the company believes could support growth in 2027.

Risks and Areas to Watch

Residential development remains constrained by affordability concerns and higher interest rates.
Traditional light commercial and retail construction remains soft, leaving nonresidential performance increasingly dependent on data center activity.
Large smart utility and infrastructure projects can face variable start dates due to pilot programs, systems integration, weather and local execution requirements.
PVC pricing has stabilized, but management sees limited scope for increases until demand improves in PVC-intensive end markets.
Gross margin can fluctuate with seasonal mix, direct shipments and local project wins. Management expects lower branch costs and SG&A to partly offset less favorable project mix.
Municipalities may face capacity and administrative constraints when seeking available federal infrastructure funding.

Analyst Q&A Highlights

Management described municipal demand as stable and consistent, supported primarily by local utility funding and recurring repair and replacement needs. The expiration of ARPA funding was not characterized as a major slowdown risk because IIJA funds remain available at the state level, although local access depends on municipal resources and compliance capacity.

On data centers, management said cooling design changes the balance between water and electricity requirements but does not eliminate water infrastructure demand. Projects may require on-site treatment, nearby capacity expansion or public-private investment when existing municipal systems cannot meet demand.

Regarding gross margin, management emphasized that quarterly changes largely reflect project and seasonal mix rather than an isolated pricing issue. Lower-margin direct-ship projects generally require less branch support, helping offset the effect through lower SG&A.

Management said July and August showed improving momentum, supported by project wins, easier residential comparisons and more stable PVC pricing. It expects these factors to support stronger growth in the second half, while acknowledging that large-project shipment timing remains variable.

Full Earnings Call Transcript

Complete Earnings Call Transcript

Management Remarks

Operator

Hello, everyone. Thank you for joining us, and welcome to the Core & Main Q2 2026 Earnings Call. [Operator Instructions]

I will now hand the conference over to Landon Althoff, Vice President of Investor Relations. Landon, please go ahead.

Landon Althoff

Good morning, and thank you for joining us. I'm Landon Althoff, Vice President of Investor Relations at Core & Main. We appreciate your time to be with us today for Core & Main's Fiscal 2026 Second Quarter Earnings Call.

Joining me this morning are Mark Witkowski, our Chief Executive Officer; and Robyn Bradbury, our Chief Financial Officer. Brad Cowles, our President, is also with us and will be available for the question-and-answer portion of today's call. Mark will begin with a business update, highlighting our quarterly performance and the continued momentum across the business including large project opportunities, greenfield expansion and our M&A pipeline. Robyn will follow with a review of our financial results and outlook for fiscal 2026. We will then open the line for questions before Mark wraps up with closing remarks.

As a reminder, our press release, presentation materials and the statements made during today's call may include forward-looking statements. These are subject to various risks and uncertainties that could cause actual results to differ materially from our expectations. For more information, please refer to the cautionary statements included in our earnings release and our filings with the SEC.

We will also reference certain non-GAAP financial measures during today's discussion. We believe these metrics provide useful insight into the underlying performance of our business. Reconciliations to the most comparable GAAP measures are available in both our press release and the appendix of today's investor presentation.

Thank you again for your interest in Core & Main. I'll now turn the call over to our Chief Executive Officer, Mark Witkowski.

Mark Witkowski

Thanks, Landon, and good morning, everyone. Thank you for joining us today. During the second quarter, we delivered growth in sales, adjusted EBITDA and EPS with momentum building across the business. We see it in our healthy backlog, growing participation in large complex infrastructure projects and increased activity across our acquisition pipeline. Combined with our strong cash generation and balance sheet flexibility, Core & Main is well positioned to capitalize on the opportunities ahead, drive long-term growth and create value for shareholders.

Net sales in the second quarter were approximately $2.1 billion, up 2.5% compared with the prior year. Adjusted EBITDA grew approximately 3% to $274 million, while adjusted EBITDA margin expanded 10 basis points to 12.8%, reflecting disciplined cost management and meaningful SG&A leverage. Adjusted diluted EPS was $0.94, an increase of 8% over the prior year. These results reflect consistent execution throughout the business.

Growth in the quarter was driven by continued strength in treatment plant solutions and fire protection, along with a growing contribution from data center projects, which has nearly doubled year-over-year. Treatment plant, data center development and other large-scale infrastructure work increasingly draw on what differentiates Core & Main: deep local expertise, strong supplier relationships, and the technical and project support capabilities needed to execute reliably over the multiyear project cycles. As these projects become a more meaningful part of our growth profile, we continue investing in the capabilities and product breadth needed to capture the opportunity ahead.

We also continued to execute our long-term growth initiatives, expanded our footprint with new greenfield locations and advanced strategic opportunities across our M&A pipeline. Additionally, we put our strong cash generation and balance sheet flexibility to work and executed our second consecutive quarter of record open market share buybacks. Since our IPO, we have repurchased nearly 25% of the shares outstanding. Robyn will work through the details shortly, but these repurchases reflect our confidence in the long-term value of Core & Main and our disciplined, opportunistic approach to allocating capital where we believe returns are most attractive.

Turning to our end markets. Municipal demand continued to be a source of strength. The long-term need to repair, replace and expand critical water infrastructure remains significant and continues to support investment across the municipal end market. The EPA estimates the U.S. drinking water, wastewater and storm water systems require more than $1.2 trillion of investment over the next 20 years to replace, rehabilitate and expand aging infrastructure.

After decades of underinvestment and deferred maintenance, many water systems face increasing pressure to replace aging infrastructure before failures water loss and service disruptions become more frequent or costly. At the same time, municipalities are investing to improve water quality, comply with evolving regulatory requirements, expand treatment capacity, adopt smart utility technologies and support population-driven growth. These investments are essential, largely nondiscretionary, and supported by a diverse mix of state, local and federal funding sources. The vast majority of municipal water infrastructure spending is funded at the state and local level, which helps support consistent investment activity regardless of the federal funding environment.

While the pace and timing of individual projects may vary, the underlying need remains clear. Water infrastructure continues to be a critical priority for municipalities and utilities, supporting our confidence in the opportunities ahead.

Our treatment plant initiative delivered another quarter of strong double-digit growth and remains one of the most compelling growth opportunities within our municipal platform. Leveraging our deep municipal relationships, we continue to expand our product offering, technical expertise and project support capabilities to support a larger share of treatment plant projects. As a result, treatment plant projects have grown to a mid-single-digit percentage of our sales mix, with substantial opportunity for further expansion.

We are particularly focused on increasing our mix of higher-value specialty products, which deepen our involvement and expand the content we provide on each project. With significant runway ahead, we see meaningful opportunities to grow this business through both organic expansion and strategic acquisitions.

Within smart utility, we continue to see strong underlying demand and are winning projects across municipalities and utilities of all sizes. Recent wins reinforce our confidence in the business' growth trajectory, with a number of larger projects expected to continue over multiple periods as deployments ramp. We believe smart utility is well positioned to benefit from continued investment in system visibility, water loss reduction, billing accuracy and operational efficiency.

Within nonresidential construction, performance continued to vary across project types, but we saw encouraging strength across several key categories.

Fire protection delivered another strong quarter with sales increasing 14%. Growth was driven by higher volumes on continued share gains and higher steel pricing. Momentum remains strong across the business supported by our expanding geographic footprint, broad capabilities and a steady stream of project wins.

Data center development remains one of the most active areas of infrastructure investment today and continues to drive opportunities across multiple product categories. We support these projects from the earliest stages of site development, providing the water, wastewater and storm drainage infrastructure needed to prepare and serve these facilities. As construction progresses, we also provide the fire protection systems to support these critical assets. We continue to see a growing contribution from data center related activity across our business.

The impact extends beyond the data center itself. These large-scale developments often require municipalities and utilities to expand water and wastewater capacity, and can spur additional commercial and residential growth in surrounding communities. As a result, data center investments can create broader infrastructure demand over time.

Residential lot development remained challenged during the quarter, as expected, particularly in markets that benefited from strong development activity last year. While affordability concerns and higher interest rates continue to influence near-term activity, we expect comparisons to become considerably more favorable in the back half of the year.

Over the long term, the fundamentals remain strong. Population shifts, household formation and a structural housing shortage continue to support the need for additional residential development, giving us confidence in the long-term opportunity within this end market.

As we look ahead, we continue to build for the long term, expanding our large project capabilities, extending our geographic reach and advancing opportunities across our acquisition pipeline.

Geographic expansion remains an important part of our growth strategy. So far this year, we've opened 7 new greenfield locations, including 2 recent openings in attractive markets where we see opportunities to improve our customer proximity, expand our reach and gain share. We evaluate new locations based on market size, infrastructure demand, customer needs and our competitive position. While greenfield locations require investment and time to mature, they allow us to strengthen local relationships, expand service capabilities and build market density over time. We are on track to open a record number of greenfield locations this year, extending our national capabilities into new and underpenetrated markets.

Alongside our organic expansion efforts, we continue to see compelling opportunities to grow through M&A. Following quarter-end, we completed the acquisition of Walker Industries, a provider of storm drainage products in Hawaii. This acquisition broadens our product offering in the market, complements our existing operations and represents just one example of a growing number of larger opportunities ahead.

More broadly, our M&A pipeline has meaningfully accelerated. We continue to advance discussions across a range of opportunities, including acquisitions that expand our geographic footprint, broaden our product offering and capabilities, and strengthen our position in attractive end markets. These opportunities span a range of transaction sizes, from complementary bolt-on acquisitions to larger strategic transactions. Many of these businesses are seeking a long-term partner that can provide additional resources, expand product breadth and future growth opportunities while preserving the local relationships that have driven their success. For Core & Main, these acquisitions expand the solutions we can offer customers, help simplify increasingly complex projects, and create opportunities to deepen customer relationships and drive long-term growth.

Our customer-focused operating model, strong culture, long record of successful integrations and commitment to local market leadership continue to resonate with business owners, and we believe Core & Main remains uniquely positioned to be that partner. Supported by our strong balance sheet, ample liquidity and proven acquisition playbook, we remain well positioned to pursue opportunities that expand our capabilities, extend our geographic reach and create long-term value for shareholders.

With that, I'll turn it over to Robyn for the financial update.

Robyn Bradbury

Thanks, Mark, and good morning, everyone. I'll begin on Page 7 of the presentation with an overview of our second quarter results.

Net sales increased 2.5% to $2.1 billion, with volume, price and acquisitions each contributing positively. As Mark mentioned, municipal demand remained a key source of strength, supported by a broad range of activity across water and wastewater infrastructure. Within nonresidential, activity was led by data center construction, offset by ongoing softness in light commercial and retail. Residential lot development remained challenged against a tougher prior year comparison, in line with our expectations. Pricing was up slightly in the quarter as increases across much of our portfolio more than offset lower year-over-year PVC pricing.

Gross margin was approximately 26.7%, similar to the prior year, as benefits from our margin initiatives, including private label, were offset by normal shifts in project mix and a stabilizing price environment within certain product categories. Our private label and sourcing initiatives remain on track and continue to support our long-term margin objectives.

Total SG&A was approximately $301 million, roughly flat with the prior year period, while improving approximately 40 basis points as a percentage of sales. Notably, we held SG&A dollars flat while growing net sales 2.5% even as we continue to invest in greenfields, growth initiatives and acquisitions. This was enabled by disciplined cost management and executed savings initiatives that offset inflation and supported our strategic investments.

We delivered adjusted EBITDA growth of approximately 3% to $274 million, compared with $266 million in the prior year period. Strong SG&A leverage drove a 10 basis point increase in adjusted EBITDA margin to 12.8%. Adjusted diluted earnings per share increased 8% to $0.94, compared with $0.87 in the prior year, marking another quarter of strong per share earnings growth. The result reflects growth in adjusted net income and the benefit of a lower diluted share count resulting from our substantial share repurchase activity.

Turning to the balance sheet, cash flow and capital allocation. We ended the quarter with net debt of approximately $2.2 billion and net debt leverage of approximately 2.3x, within our target range. Total liquidity was approximately $1.5 billion, including over $300 million of cash, with the remainder primarily available under our ABL facility.

Operating cash flow was $62 million during the quarter and $144 million throughout the first half of the year. Our cash generation reflects disciplined working capital management and the strength of our asset-light business model. As is typical with the seasonality of our business, we expect the majority of our operating cash flow generation to occur during the second half of the fiscal year. Over the last 12 months, we've generated a free cash flow yield of 7.5% of our market capitalization. That's more than double the average of S&P 500 companies and meaningfully above specialty distribution peers.

During the quarter, we further strengthened our capital structure through refinancing transactions that extended our debt maturities and enhanced financial flexibility. These actions position us to support future growth opportunities while maintaining a strong and flexible balance sheet.

Our strong cash generation and balance sheet flexibility also allowed us to return significant capital to shareholders during the quarter. We deployed $169 million to repurchase 3.7 million shares, marking our second consecutive quarter of record open market repurchases. Including buybacks completed subsequent to quarter-end, we have now deployed nearly $270 million to repurchase approximately 5.7 million shares during fiscal 2026. Since our IPO, we have deployed nearly $2 billion to repurchase approximately 58 million shares, representing almost 25% of the shares outstanding at the time of our IPO.

This level of capital deployment reflects our ability to generate strong cash flow and our confidence in the long-term value of Core & Main. At the same time, our balance sheet and liquidity continue to provide substantial flexibility to invest organically, expand our greenfield footprint, pursue acquisitions and return capital to shareholders through opportunistic share repurchases.

Turning to our outlook. We are affirming our full year guidance for net sales of $7.8 billion to $7.9 billion, adjusted EBITDA of $950 million to $980 million and operating cash flow conversion of 60% to 70%. We remain confident in our ability to deliver our full year outlook.

Our second quarter results demonstrated the strength of our operating model, driving meaningful SG&A leverage, adjusted EBITDA margin expansion. Continued strength in fire protection, treatment plans, data centers, and record greenfield openings are increasing our visibility into demand and reinforcing that confidence. Backed by a strong balance sheet, substantial liquidity and consistent cash generation, we are well positioned to continue generating profitable growth while returning capital to shareholders through share repurchases over the short, medium and long term.

With that, we'll open the line for questions.

Operator

[Operator Instructions] Your first question is from the line of Brian Biros with Thompson Research Group.

Question-and-Answer Session

Brian Biros

Municipal, again called out as a source of strength. Can you maybe just talk a little bit more about the end market, kind of where we sit today? I know you provided some high-level details in the prepared remarks. But maybe if you could talk a little bit more direct to the quarter or even the near term. I think there may be some mixed views on that end market. Just how strong it really is or can continue to be. So maybe just talk about kind of what you're seeing in that segment on the ground would be helpful.

Robyn Bradbury

Yes, sure. I'll take that one, Brian. So I'll start talking about municipal. And I would say, overall, the market is definitely in line with what we expected and in line with what we've been seeing over the last couple of quarters. Municipal continues to be strong, stable, steady, kind of up in that low single digits range. Good funding sources, consistent repair and replacement activity. And that's an end market that we expect to be strong, stable as we go forward.

On nonresidential, it was kind of flattish to maybe up slightly a little bit in the quarter. Most project types within nonresidential are on the weaker side, especially that traditional or light commercial type of work, but it's really being uplifted by data center activity. And as you heard in our prepared remarks, we're seeing a lot of really good data center activity and a lot more projects for us there. So that's really what's helping hold nonresidential up.

And then residential continues to be more of the same. We saw that decline in the back half of 2025. It hasn't really moved up or down since that point in time. So it was down kind of high single digits or so in the quarter. Those comps for us do get easier in the back half of the year as we anniversary the decline in last year. So expect that the residential market would be flattish to down slightly in the back half of the year and residential would be down kind of mid-single digits for the full year.

Brian Biros

Got it. Helpful. And then second question for me, on the fire protection share gains there, can you talk more about that? I guess, just how are you measuring kind of what counts as a share gain? Who do you think are taking share from large competitors or mom-and-pops? And I guess what's kind of triggering that customer to switch to the Core & Main offering?

Mark Witkowski

Yes, Brian. This is Mark. I'll take that one. We've been really pleased with the performance of our fire protection product line here over the last, I'd say, 12 to 18 months. It's definitely been supported by increases in steel pricing that we've laid out. So that's been a portion of the strong growth. But definitely from a volume perspective, they're seeing the same kind of softness across the construction of the rest of the businesses, but seeing a lot of really good share gains really across the board.

We have had some white space in the fire protection area. So we've added some really good locations here over the last couple of years that are benefiting from share gains. And I'd say beyond that, we've been a very consistent, kind of reliable partner to our contractors that we do work with there, and believe we've been taking share really from, I'd say, various other competitors across the board of all sizes. So that team is really firing on all cylinders right now. They're just doing a great job. So real pleased with the performance there.

Operator

Your next question comes from the line of Matthew Bouley with Barclays.

Matthew Bouley

I wanted to touch on the overall guide for the year. It's obviously unchanged. Question is really just around some of the moving pieces in that. It seems like in the quarter maybe you got a little bit of positive price. On the other hand, at least the gross margin was a little bit lighter than our own model. So maybe if you can kind of dive into those couple of pieces. Is the gross margin coming in any lower than you guys expected internally? And kind of what would be some of the offsets within the overall guide there?

Robyn Bradbury

Sure, Matt. So you're right, the guide is unchanged. Everything is coming in line with our expectations. The market is really in line with what we expected. EBITDA is in line with what we expected. Margins are down from the first quarter, which can happen. We can see variability from quarter-to-quarter. But we really made up for that on the SG&A.

So we look into like the second half of the guide, we expect our EBITDA rate to be positive year-over-year. Expect that to be mostly driven by the fourth quarter, but do expect for the full year to get a little bit of improvement in gross margin and a little bit in SG&A to meet that guide. And overall, we're confident in our gross margins being supportive and our SG&A being supportive in meeting that EBITDA guidance for the year.

Matthew Bouley

Okay. Got it. That's helpful. And then secondly, just diving into the smart utilities and the meters business. I mean it looked like, at least in the commentary, that you may have had some positive price there. I wasn't sure if the volumes had actually pulled back a little bit in that business. So maybe you can kind of -- if there's anything there around large project timing, or just kind of your broader visibility into how the smart utilities business may play out here into how you're expecting the second half of the year in that segment.

Bradford Cowles

Matt, this is Brad. I'll take this one. There was a little bit of price, but volume was essentially flat. It didn't go backwards at all. So it was kind of -- netted out to about that plus 1% for the quarter.

We see in that business pretty good fundamental flow on our -- think of the business we've got as an installed base across a growing list of municipalities as our smart utility initiative has had tremendous success, particularly in the recent years, we've got a pretty good installed base. And that installed base is performing well. It's delivering kind of that groundswell of flow.

We are winning an increasing number, as we've talked about, of really large and exciting smart utility projects that are of significant size and complexity. And I think with that definitely comes some challenges getting some of these projects started. The early phases of these large projects have a lot of variability in the timing, pilot phases, all sorts of interesting challenges to overcome. And so we are seeing a little bit of a large project start timing impact here that's keeping us kind of in that flat range on top of that great run rate business.

But we have a tremendous backlog. We do continue to win some projects medium, large that are going to give us some exciting execution, we think, starting in latter in the year into 2027 for sure.

Operator

Your next question comes from the line of Matt Johnson with UBS.

Matthew Johnson

I guess my first question is on pricing. I know last quarter, PVC pricing was, I think, a bigger topic, but it sounds like a lot of those price announcements from earlier this year didn't really stick. I guess, could you guys just kind of give us an update on what you saw in terms of municipal PVC pipe pricing through the quarter, your expectations into the back half? And then also, I guess, kind of similar to that but different is just on HDPE pricing, what you've seen there given the similar disruption in the resin costs?

Bradford Cowles

Yes. This is Brad again. I'll take that. Just kind of what I'm seeing from the field, we -- there were a lot of price signaling when we talked at the last quarter that prices might go up. And we were -- we didn't have full confidence in that. We weren't seeing in this particular end market the likelihood of that price sticking. That's why we weren't overly excited about changing anything with respect to PVC price.

On the bright side, we're encouraged that PVC pricing has kind of stabilized and been in a pretty flattish mode as opposed to its continual decline that we've been living through for the last period. So that part of it has been pretty good. But we have just seen an inability, I guess, of the market, given where it's at, to support any pricing increases.

So net, we continue to remain steady with pricing on PVC, and we see it kind of sitting there for the time being. We don't really have any indication until demand really picks up in those end markets that are heavy PVC consumers that that's likely to change. And on HDPE, I'll hand it over to Mark.

Mark Witkowski

Yes, Matt, I'll cover the HDPE. We've got 2 different pipe categories there that utilize that kind of product. There's corrugated HDPE that goes into the storm drainage market and then there's feasible HDPE that's used across various different applications.

I would tell you on the corrugated HDPE storm drainage side, I'd say that pricing in that area has been relatively steady. On the fusible HDPE side, that's a little bit more of a commodity-type product. It's a very small percentage, ultimately, of what we sell. But that has seen some spikes recently. The disruption in the Middle East definitely impacted resin. That product typically follows some of those resin spikes. So we've seen some increases there with pricing in that category. A little bit of a mixed bag just depending on the nature of that application.

Matthew Johnson

That's great. Appreciate that color. Then I guess if I could just follow up on the meters business. Is there any update you guys could give or have just on the status of the Miami-Dade contract and when that could begin shipping? And just any additional color on kind of the timing or magnitude of some of these additional large project wins you guys talked about?

I guess also just bigger picture, I guess, as you guys mix towards more of these large projects moving forward in the meters business, is there any sort of margin impact we should think about there as you guys take on some of those additional services?

Bradford Cowles

Yes, I'll take that one. Let me see if I can unpack all of that. Starting with Miami-Dade. That's the largest project we think there's ever been in this space, and we're excited to be a part of it. That said, it probably exemplifies the amount of pilot work and prework that has to be done before that project really hits its stride.

We're anticipating -- in fact, we're in the middle right now of a number of small pilot stages that are going to start to ramp up. We think we'll see some Miami-Dade volume move towards the end of the year. It will be a relatively small percentage of the overall project, somewhere between 5% and 10%, I would estimate. And then we fully expect by 2027 for that to hit its full run rate.

It's about a 5-year project implementation. So that's -- it's a pretty strong number, 100,000 meters being installed and connected to the systems per year, is approximately what we would expect. So pretty significant volume, the most significant we've done. But with that, there's a lot of challenges and a lot of moving parts that we just continue to manage with our team there.

On the -- some other, just one mention I'll make. We were able to win a project with Connecticut Water that's a pretty substantial scale, and that's pretty exciting for us. We've become a really strong metering, smart utility player in our Northeast region, which is really paired up perfectly with our core waterworks distribution growth in the area. Again, that's a pretty substantial projects. So it's got a lot of work between here and the starting point of getting that really up and running. So that's pretty characteristic of what we're seeing, a nice win like that popping up every now and then and a number of smaller ones along the way.

And I think your final question was talk about pricing. The larger these projects, there can be a competitive nature there where you got to be at the right pricing, you got to partner with the best manufacturers to get the solution in place. But the solutions that we provide, which do extend into services and software and integrations and the like, those can carry some exciting margin profiles along with it that kind of tends to blend up, if you will, any volume effects that we might have on pricing in the project. So we see them as pretty much in line with the rest of our meter business, which is still kind of to the exciting side on the margin line.

Operator

Your next question comes from the line of Joe Ritchie with Goldman Sachs.

Aanvi Patodia

This is Aanvi on for Joe. I just wanted to follow up on the gross margin piece. I know you discussed it briefly in your prepared remarks as well. But I'm just trying to understand or like bridge into back half. Can you touch upon some of the puts and takes, be it product mix, end markets, even the pricing comments that you made? What would it really take to see a sequential or even a year-on-year expansion in the back half? And then what are some of the things, maybe private label, if you could size the benefit coming from that as well?

Robyn Bradbury

Yes, sure. So we had a really good gross margin in the first quarter. We always can expect fluctuations from quarter-to-quarter depending on seasonal mix, project mix and timing. The way that our gross margin works is it's very local and it's based on local project wins. And with some of that seasonal mix and project mix can come with some lower SG&A and some lower load for the branch and favorable EBITDA rate, which is what we saw in the quarter.

As we look into the back half of the year, we do expect EBITDA expansion, like I mentioned, in the back half of the year. Most of that driven by Q4. We expect overall EBITDA margin expansion and expect that to be driven a portion by gross margin and a portion by SG&A. We do have a kind of a tougher margin comp in Q3 versus Q4. So we'd see kind of more of a year-over-year margin benefit in Q4 versus Q3.

From an SG&A standpoint, as we start to see growth in the back half of the year, we'll be able to leverage that more. And so should see some good SG&A leverage in the back half of the year given our cost-out actions plus some growth that we can leverage in the back half.

Aanvi Patodia

Got it. That's helpful. And if I can just follow up on the M&A and the greenfield activity that you've seen, it was good to see the 7 greenfield locations opened year-to-date. I think from an M&A standpoint, like what would you call out as your key focal points today in terms of market, where you're seeing the attractive opportunities? And then how are you balancing some of this incremental buyback that you're doing against the M&A?

Mark Witkowski

Yes. I'll take that one. I think what's most exciting about our strategy that we have to grow this business is that we're fully capable, given our cash flow characteristics, of delivering on all 3 fronts there. So we continue to invest in the business organically. You've seen that through the greenfield additions there. We added 3 locations kind of western part of the U.S., 2 locations kind of in the Southeast area and then 2 up in Canada, where we continue to build out our presence in that market. So that's been really exciting growth for us.

I would say over the last 12 to 18 months, the M&A activity that we've seen in the market has just been pretty limited. We've been able to complete some M&A as you've seen despite just being limited opportunities. But we've seen that, I'd say, pick up pretty significantly here over the last 3 to 6 months, and I've been really excited about the opportunities that have come across our desks that our team sources from a proprietary standpoint and we've seen some other ones kind of come to market. So it's been exciting to see that activity pick up. We've advanced now several, I'd say, through the LOI stage. So we're making some really good progress there.

And I'd say the focus there continues to be what we've looked at historically, which is continued bolt-ons, right in line with kind of the core waterworks business and fire protection. And then we look for ways to continue to add complementary products and solutions to our offering that fit right with our existing customer base. So no change in focus there and really like what we're seeing. And given some of the actual M&A activity has been a little lighter that we've closed over the recent quarters, we've been able to do a lot of purchase activity in the market as well. So again, we've got all 3 of those opportunities, and we'll continue to look at it and deliver on that going forward.

Operator

Your next question is from David Manthey with Baird.

David Manthey

Good to hear on the M&A pipeline. And from what I'm hearing you say, Mark, it was just a -- for whatever reason, a lack of targets that were available and that has since started to free up. Am I hearing you right on that?

Mark Witkowski

Yes, that's exactly it, Dave. Yes.

David Manthey

Okay. Main question here is on the major commercial projects and data center. Can you size those for us just in terms of percentage of your sales that are going to some of these major projects? I assume data center is a low single digit, but could you just sort of frame what that is for you?

And then second, there's a lot of talk around water usage at these data centers. And I'm just wondering, from a Core & Main standpoint, as you're selling into these, does it matter if the data center is a traditional evaporative situation or if they're engineering that to be more of a closed loop or zero water system?

Bradford Cowles

Dave, this is Brad. I'll try to unpack all of that. First of all, on the size, we've said that the data centers, especially as they become such a widely dispersed phenomenon across the country, it plays so well into our strengths because we've got branches everywhere, as you know. They're all outstanding service providers and have great local relationships. And when a data center gets built in a place like Indiana, ultimately, the people that are putting the underground water utilities or treatment plant into the area are local, and we own those relationships.

And so as that has been occurring, we've seen our data center project run rate, as Mark said, we've doubled this quarter year-over-year, which is pretty exciting from my seat. That's taking it from, I would say, low single digit to the mid-single-digit range in terms of our total business. And what's exciting for me is we've talked about data center kind of making up for a lot of drag in the classic light commercial work that has been a mainstay for years, offices and retail and the like; the data center is now in the high single-digit range as a percentage of our nonresidential work.

So it's great for us. We're well positioned. It looks a lot like our core business. It's not significantly different from a technical perspective. It just requires an elevated level of service, and that's what we're really good at. So again, it's kind of a sweet spot, neat, sweet spot, and we're pretty excited about it.

As far as the types of demand, different data centers and their cooling approaches, almost all data centers have some mix of cooling that can be recirculated or there's a lot of HVAC component that still evaporates a lot of water. Regardless, they need water. And so sometimes the water volumes we're delivering are higher, sometimes they're lower. But it's always good and it always leads to a pretty material percentage of the project being underground water utility.

And then I think one of the biggest switches that can flip is whether the local municipality is already prepared or not to supply treated water to that data center or whether there needs to be some private investment in water treatment, either on-site or near-site or some other public-private coupling to kind of accelerate local water demand. So we're kind of excited about the first order effect of the data center itself. And then that second order effect is just increasing municipal water demand from that business and all the businesses that grow up around it.

David Manthey

That's helpful. And I guess, what we're seeing with electricity, it sounds like you're seeing a similar effect on the water side to sort of bring your own water as opposed to just tapping into the municipalities that you're seeing?

Bradford Cowles

That is what I'm saying, and it's an interesting comment because there's sort of a trade-off between how much electricity you have to spend cooling versus how much water you can evaporate to cool. So we kind of -- the data centers are trying to find those locations where they can get both, and they often cannot get both and get one or the other. And so more electricity for the closed-loop systems to refrigerate that water and move the heat. And if not, they need more water to evaporate. So it's kind of driving general municipal demand for energy and water whichever way you slice it.

Operator

Your next question comes from the line of Sam Reid with Wells Fargo.

Richard Reid

I wanted to dig a little bit deeper into resi. You mentioned on the call that the comps obviously get easier in the second half, which is great. Can you just decompose a little bit more what you're embedding specifically in the second half for resi relative to the high single-digit decline in the second quarter?

Robyn Bradbury

Sure, Sam. I'll take that one. So for resi, the way that the year is trending, it was down about low double digits in the first quarter. In the second quarter, it was down kind of high single digits. And then in the back half of the year when we anniversary the decline, we'd like it to be flat or maybe down slightly. So overall, that gets you to kind of a mid-single-digit down on residential.

But that doesn't assume residential gets any better or worse. It's been kind of bumping along at the same levels, and that's what we've got assumed in the overall guide. So that assumes kind of flattish overall market for full year.

Richard Reid

That's helpful, Robyn. And then switching gears here, there are some questions that we're getting on ARPA funding rolling off at the end of this year. So just curious your perspective on how much that was potentially benefiting the muni segment through 2026.

And then also, just any updated perspective on highway funding initiatives, mixed [indiscernible] there, but heard potentially some of that coming in light. So just curious any implications.

Mark Witkowski

Yes. Sam, I would tell you just in general on municipal funding, we definitely have heard some mixed messages in the market. I would just reiterate that the vast majority of the funding of the type of work that we do in the municipal area is funded through those local water municipalities and the rates they charge the consumers. And we've continued to see that as a positive from the standpoint of they continue to look to pass rate increases to help close the funding gap between the need for those municipalities to upgrade their systems and the funding they have available. So that overall kind of big, large pocket of funding continues to rise.

And then beyond that, there's been additional funding mechanisms at the state and federal level that have been supportive in the backdrop, ARPA funding being one of them. So that was helpful, I'd say, back several years ago, and that's obviously something that is coming off, but you've had the increase in the IIJA money that sits at that state level that's now been kind of fully allocated down to the states, but municipalities have just pulled a small portion of that to the local level.

So there's plenty of federal funding out there to go get. It becomes whether the municipalities have the capacity and resources to go through the requirements and regulations to go get that funding. So I don't see that as any kind of a risk or slowdown with that federal side of it, and we're really [indiscernible].

Operator

Your next question comes from the line of Anthony Pettinari with Citigroup.

Anthony Pettinari

On fire protection, I was wondering if it's possible to parse out the sales growth that you saw in the quarter between volume and price and given the strength in the category. Do you run into kind of tougher comps in the second half? I'm just wondering if you could talk about sort of the sustainability of the strength we've seen there.

Robyn Bradbury

Yes. And like mentioned earlier, we're really excited about the fire protection product line and the growth that we've had there. For the quarter, it was split between price and volume a little bit more weighted towards volume. A lot of that driven by share gain and performance and things like that. But there was about 2/3 of the growth or so that was pricing related, specifically related to steel pricing.

And then as we get into the back half of the year, the fire protection product line has been performing well for a while now, but I wouldn't say that the comps are meaningfully different. We do expect to see a good finish to the year for fire protection.

Anthony Pettinari

Great. That's very helpful. And then maybe just kind of a random one. With Canadian tariffs, do you see any impact on product price hikes or products across the border or just demand, like your Canadian branches like any potential impact there?

Mark Witkowski

Yes. No, thanks for the question. At this point, we don't see any major movement there. Our exposure in Canada as we sit here today is still pretty light relative to the overall business. But at this point, as we unpack all the tariffs and retaliatory tariffs there between the countries, we don't see any major implications of the [indiscernible] here today.

Operator

Your next question comes from the line of Mike Dahl with RBC Capital Markets.

Michael Dahl

Robyn, just to go back to the gross margin dynamic one more time, understanding there's OEs elements of mix that can produce differentials. I think your guidance or your comments that gross margin will still end up slightly for the full year would require you to be back in that 27-ish range in the back half, so up sequentially. But can you be a little more specific about some of the mix dynamics or other drivers that you see in the second half that would produce that slight uptick relative to what you just posted in 2Q?

Robyn Bradbury

Yes, sure. And it depends what we see in the back half of the year as far as project mix. And like I said, a lot of that is local, and kind of those local project wins will help drive some of that. But if we do see gross margins a little bit lower in the back half, then we would expect to see lower SG&A to come along with that.

But as far as the project mix, and like I said, we see -- we can see sequential declines from the first quarter to second quarter, some of that, given seasonality, there's projects that are more underground, there can be more direct ships, so there can be less demand on that local branch, less variable costs associated with that.

We also -- it is -- our underground business is more seasonal. So as you see quarters like the first quarter when we have areas like fire protection that's less seasonal, we've got more of a private label mix in there. So it can vary from quarter-to-quarter. But the good news is that if that gross margin is a little bit lower because of project mix, then we would expect the SG&A to be lower. And so that would help support the EBITDA margins overall.

Michael Dahl

Okay. Yes, that's helpful, understanding that if it really is just the mix dynamic, not necessarily getting squeezed on something idiosyncratic to gross margin.

The second question, I mean, just a little more near term, can you talk through kind of the growth how we exited the quarter and what you're seeing quarter-to-date? And obviously, you maintained the full year sales guide, but maybe a little more color on how 3Q is shaping up so far would be great.

Mark Witkowski

Yes, sure. I'll take that one. As we exited the second quarter, I'd say we felt really good with the momentum building, especially into July, and then August reflected that momentum as well. So that's what gave us those couple of points that we saw some good acceleration that was supportive of the bidding activity and the project wins that we were seeing. So that felt really good.

And as we talked about some of the comps on resi that's been a headwind for us, get a little easier. Now obviously, we're not expecting resi to get a lot better, but it helps to have a little softer comp in the back half, and allows a lot of the progress that we've made with many of our growth initiatives to shine more without that headwind. And that, coupled with the stability we've seen with PVC, has -- should put us in a good position to show some really good growth here in the second half.

Operator

Your next question is from the line of Keith Hughes with Truist.

Keith Hughes

How much did acquisitions add in the quarter? I know it's a small number, but what is it exactly?

Robyn Bradbury

It's a little less than 1 point, Keith. So we had 2.5% growth in the quarter, and we had volume price and acquisitions all contribute slightly to that 2.5% growth.

Keith Hughes

And you made some positive comments earlier in the call about potential deals in the pipe has been kind of a slow period here. Assuming you get a reasonable number of those, what kind of future growth would those represent to sales?

Mark Witkowski

Yes, Keith. We've laid out in terms of our long-term strategy we expect M&A to contribute in the kind of 2 to 4 points of growth range. And obviously, in the recent year or 2, we've been under that. So it's possible we could exceed that in any given year as activity picks up. But we generally expect it to be in that kind of 2 to 4 points of incremental sales growth just based on our long-term strategy.

And I tried to highlight that we've got several that kind of advance through that LOI stage, and we're in diligence now. So expecting a good finish to the year and should set us up for some really good growth in 2027.

Keith Hughes

Okay. Final question, you had talked at the beginning of the call that the -- it was about mid-single-digit growth coming from the treatment centers. Is data centers part of that, is that a separate number? I heard about high single digits of nonresi. I'm just trying to get the -- as a percentage of total sales, get it straight.

Robyn Bradbury

Yes. So Keith, treatment plant is kind of in the mid-single-digit percent of our overall sales, but it grew double digits in the quarter. So that's been performing really well. That's been an area that's been performing strong for us quarter-over-quarter.

Thank you for your continued interest in Core & Main. Operator, that concludes our call.

Operator

This concludes today's call. Thank you for attending. You may now disconnect.

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