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DATE

Thursday, September 4, 2025 at 5:00 p.m. ET

CALL PARTICIPANTS

Chief Executive Officer — Paul Stone

Chief Financial Officer — Jennifer Paul Young

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RISKS

Chief Financial Officer Jennifer Paul Young noted: “There has been some pricing that we’ve strategic pricing that we’ve done in ammo that we think has helped drive sales as well. So we’re feeling good about that. And then firearms, you know, we’ve talked a little bit about it before, but, you know, we do have a selection of firearms, and we do see a little bit of pressure in AUR in there.”

Gross margin in hunting, which includes firearms and ammunition, was negatively affected by category mix, with Jennifer Paul Young stating: “Mix was negatively affected just simply because of hunt. As well as camping being down on the quarter, and that’s one of our higher margin businesses.”

Jennifer Paul Young highlighted: “We have confidence in our second-half strategy to drive profitable sales despite the macroeconomic headwinds and potential margin pressure from higher tariffs.”

Net loss (GAAP) widened to $7.1 million, or negative $0.18 per diluted share, compared to $5.9 million, or negative $0.16 per diluted share in the same quarter last year.

TAKEAWAYS

Net Sales— $393.9 million, up 1.8% compared to the prior year.

Same-Store Sales— Increased 2.1%, marking the second consecutive quarter of positive comps with growth in every month.

Gross Margin— 32%, an 80 basis point improvement year-over-year, driven by higher overall product margins and increased fishing sales penetration, partially offset by lower hunting and ammo margins and elevated freight costs.

SG&A Expense— $97.2 million, or 33.1% of net sales, up from 32.7% last year due to investments in store labor and digital marketing.

Net Loss— $7.1 million GAAP net loss, or negative $0.18 per diluted share; adjusted net loss was $4.7 million, or negative $0.12 per diluted share.

Adjusted EBITDA— $8.3 million adjusted EBITDA, a 12.2% increase from $7.4 million in the second quarter of last year; Adjusted EBITDA margin improved by 20 basis points.

Total Inventory— $443.5 million, up from $363.4 million in the same period last year due to a strategic pull-forward to prepare for key hunting and fishing seasons; This represents the peak inventory position for the year.

Debt and Liquidity— Total debt at $195.1 million at the end of the quarter; total liquidity was $109.5 million at the end of the quarter after exercising a $20 million deferred draw on the term loan.

Ammunition Sales— Grew 10%, with average unit retail up in low single digits, supported by an everyday low price (EDLP) strategy and improved inventory in core calibers.

Firearms Unit Sales— Rose more than 4% while industry adjusted NICS checks declined 4.9%, indicating market share gains;

Hunting & Shooting Sports Department— Grew 4%, mainly from firearms, ammunition, and personal protection products.

Fishing Department— Fishing sales rose 10.9% and are up 20% on a two-year basis, reflecting increased participation and company focus.

Camping Department— Camping sales declined 10%, attributed to the elimination of certain slow-moving categories and lagging offsetting growth in other areas; new EDLP strategy introduced on core consumables and expanded YETI assortment observed with early positive reception.

Guidance Update— Full-year net sales outlook for FY2025 raised at the lower end to reflect flat growth (from down 1%), with the high end unchanged at up 3.5%; adjusted EBITDA guidance reiterated at $33 million to $45 million.

SUMMARY

Leadership stated that the quarter was marked by deliberate inventory positioning aimed at maximizing sell-through for the peak hunting and holiday seasons. Management highlighted strong firearms sales outpacing broader industry trends, with positive average order value and unit per transaction records set in the firearms category. There was a clear emphasis on category management, notably in fishing, hunting, and personal protection, as the company expands partnerships and product lines like TASER and Burna, as well as successfully implementing a localized merchandising and marketing approach in markets such as Alaska. Inventory and expense management remain central to delivering on strategic goals, supported by improved supply chain processes and tighter working capital discipline. The company reaffirmed its focus on finishing the year with inventory below FY2024 levels and generating positive free cash flow.

Paul Stone said, “Our firearms business once again outperformed the industry. While adjusted NICS checks declined 4.9% in the quarter, our unit sales increased more than 4%” directly evidencing market share capture in a contracting segment.

Jennifer Paul Young reiterated confidence in disciplined cost control: “We expect that Q2 will be our peak for reported debt balance as we sell down our inventory, generate improved EBITDA, and begin to pay down our debt.”

Paul Stone confirmed acceleration in August NICS performance, “We like how August looked. We really liked our NICS performance that we got back yesterday in August, so we saw an acceleration compared to what our Q2 performance looked like.”

Jennifer Paul Young explained the freight drag on gross margin: “The freight expense due to the inventory pull-forward resulted in an estimated 40 basis points drag on margin in the quarter.”

Paul Stone outlined the approach to store portfolio optimization: “we’ll continue to measure and to look at our nonproductive stores. And given an opportunity, we don’t think we’re in a position to where the store is going to meet the expectation, we’re coming up on the end of the lease, and we make a decision to potentially get out of that location.”

INDUSTRY GLOSSARY

NICS: National Instant Criminal Background Check System; used as a proxy for firearms industry activity in retail.

EDLP: Everyday Low Price; pricing strategy involving consistently low prices without frequent promotions.

BOPUS: Buy Online, Pick Up in Store; an omnichannel fulfillment model integrating e-commerce transactions with physical retail pickup.

MAP Pricing: Minimum Advertised Price; a policy set by manufacturers on the lowest price a retailer can publicly advertise a product.

UPT: Units Per Transaction; a retail metric that measures average items sold per transaction.

AOV: Average Order Value; average dollar amount spent by customers per transaction.

Full Conference Call Transcript

Paul Stone: Thank you, Riley, and good afternoon, everyone. Before we begin, I want to recognize our team of dedicated outfitters across the country. Each and every day, they deliver on our promise of great gear and exceptional service. I would also like to welcome our Chief Financial Officer, Jennifer Paul Young, who brings more than two decades of experience across both large-scale and specialty retail. She is a proven financial leader, and I look forward to partnering with her to further accelerate the transformation of our business. Turning now to our second quarter results. I’m encouraged by the strong progress our team continues to make as we advance our transformation strategy in the second quarter.

Despite ongoing consumer macroeconomic headwinds, we delivered our second consecutive quarter of comp store sales growth. Same-store sales were up 2.1% compared to last year, with positive comps achieved each month of the quarter. Importantly, this growth came even as June faced a difficult comparison due to last year’s pull-forward of sales in California ahead of the new firearm and ammunition taxes that took effect in July. Our efforts to localize merchandise assortments and geo-target our marketing are delivering strong early results. For example, in Alaska, sales in the second quarter grew by high single digits, reflecting how well these initiatives are resonating with customers.

Aligning our merchandising and marketing to local outdoor pursuits and solution selling is proving to be a critical unlock not only for driving growth but also for improving inventory productivity and efficiency. Our firearms business once again outperformed the industry. While adjusted NICS checks declined 4.9% in the quarter, our unit sales increased more than 4% versus last year, further evidence that we are capturing market share. Consistent with broader consumer trends, we did see some trade-down behavior, reflected in a 4% decline in average unit retail for firearms again this quarter. However, attachment remains strong as average order value continues to be at all-time highs.

In ammunition, our strategic shift to an everyday low price model on core ammo calibers and improved in-stock continues to resonate strongly with our customers. Ammunition sales grew 10% in the quarter, with average unit retail up in low single digits. We are also sharpening and investing in our firearm-related merchandise assortment to drive higher basket attachment and greater overall customer value. Looking now at our key categories. Driving our comp increase in the quarter was our hunting and shooting sports and fishing departments. Hunt and Shoot increased 4% in Q2, driven by firearms, ammo, and products related to personal protection. Fishing was up nearly 11% over last year and is up 20% on a two-year stack.

This is a category with expanding market participation and clear opportunities for us to capture additional share. We are well-positioned with our late-season fishing inventory to sell down and end the season strong with clean inventory. We were disappointed with Camping’s performance this quarter, as sales were down 10% compared to last year. As part of our ongoing transformation, we made a deliberate decision late last year to eliminate certain slow-moving categories that were tying up working capital. But we have not yet seen the level of offsetting growth we anticipated in other areas of the department.

To address this, we recently implemented an EDLP strategy on core consumables similar to what has been effective in ammunition, and we are confident this will strengthen the business over time. Additionally, we invested in compelling new assortments, most notably with YETI, and early results indicate that these additions are resonating with our customers. Our e-commerce business grew 3% over last year and continues to be a strength of our omnichannel retail strategy. Importantly, over 70% of online transactions were fulfilled through our buy online pick up in store (BOPUS) program, underscoring how e-commerce drives significant traffic and sales into our brick-and-mortar locations.

At the same time, our ship-to-home business remains strong, reflecting our ability to capture consumer demand well beyond our physical store footprint. With these dual strengths, we are uniquely positioned to gain market share as e-commerce continues to outpace traditional retail channels. The improvements we are seeing across the business are directly tied to our strategic focus, which remains centered on our four key priorities. One, inventory precision. Inventory readiness for the critical fall hunting season was foundational in Q2. In prior years, we were often late to the season. This year, we are ahead. Our inventory is healthier, our in-stock levels are stronger, and we have depth in our core products.

With Q2 representing our peak inventory build, we are now well-positioned to sell through as we move into the key fall hunting and holiday season. Two, local relevance. We continue to strengthen our role as a trusted local destination. This quarter, we launched our partnership with the United States Concealed Carry Association (USCCA) to provide in-store training and education. Their robust market-specific programs are a natural complement to our localization strategy. In addition, we are expanding in-store events that leverage the expertise of our outfitters, further strengthening our role as a trusted resource and deepening our connection to the communities we serve. Three, personal protection. This category continues to outpace our total company performance.

We have expanded the number of stores that carry the Burna product line, where we offer the customer a chance to try before you buy, leveraging our archery lanes and enclosed shooting pods. We also launched TASER, a well-known less-lethal brand, earlier this week in our top-performing personal protection stores. We will continue to lean into this category as we establish Sportsman’s Warehouse Holdings, Inc. as the authority in personal protection. Four, brand awareness. As a differentiated omnichannel retailer, we are strengthening brand recognition and trust. Our new “Adventure Like a Local” campaign underscores the expertise and authenticity that set Sportsman’s apart.

While our refined digital strategy is accelerating customer acquisition and positioning us for sustained long-term growth, despite ongoing consumer macroeconomic challenges, I remain confident in both our strategic plan and our team’s ability to deliver against it. Our competitive advantage is clear: out-local the big box retailers, out-assort the smaller specialty shops, providing customers with a differentiated combination of value, quality, breadth of selection, and personalized service rooted in the communities we serve. We remain disciplined in managing the levers within our control: variable cost, inventory productivity, and merchandise margins. As we advance our strategic initiatives, we are confident these efforts will drive sustainable sales growth, operating margin improvement, and debt reduction in 2025.

Finally, we continue to anticipate ending the year with lower total inventory than last year and generating positive free cash flow. I’ll now turn the call over to Jennifer.

Jennifer Paul Young: Thank you, Paul, and good afternoon, everyone. It’s great to be on the call and to be part of a very exciting transformation happening at Sportsman’s Warehouse Holdings, Inc. We delivered our second consecutive quarter of same-store sales growth in Q2, with comps up 2.1% year over year, representing an improvement from the first quarter trend. Net sales for the quarter were $393.9 million, an increase of 1.8% compared to the prior year. Our sales momentum from Q1 carried into the second quarter, led by strength in our hunting and shooting sports department, which grew 4%, and fishing, which increased 10.9% versus last year. These gains were partially offset by softer performance in other departments.

Gross margin for the quarter was 32%, an 80 basis point improvement versus Q2 last year. The increase was largely driven by improved overall product margins from healthier inventory and higher penetration of sales from our fishing department. This increase was partially offset by a mix shift to firearms and ammo, which has a lower gross margin, a lower penetration in camping, which carries a higher margin rate, and increased freight tied to our strategic pull-forward of inventory to be store-ready for our key hunting season. The freight expense due to the inventory pull-forward resulted in an estimated 40 basis points drag on margin in the quarter.

SG&A expenses were $97.2 million, or 33.1% of net sales, versus 32.7% in the prior year. The increase was driven by a reinvestment in our customer-facing areas of the business, including store labor and digital marketing to drive sales and omnichannel traffic. We will continue to closely manage our variable operating expenses to align with sales trends. Net loss for 2025 was $7.1 million, or negative $0.18 per diluted share, compared with a net loss of $5.9 million, or negative $0.16 per diluted share in the second quarter of last year.

Adjusted net loss in the quarter was $4.7 million, or negative $0.12 per diluted share, compared with an adjusted net loss of $5.3 million, or negative $0.14 per diluted share in the second quarter of last year. Adjusted EBITDA for the second quarter improved to $8.3 million, compared with adjusted EBITDA of $7.4 million in the second quarter of last year, an improvement of 20 basis points as a percentage of net sales. Now turning to inventory. As anticipated, total inventory at the end of Q2 was $443.5 million compared to $363.4 million in the same period last year.

As Paul noted earlier, this increase was a deliberate and strategic decision to ensure our stores are well-prepared and set on time for the key late summer and early fall hunting seasons. Our focus has been on building depth in core items that are seasonally and regionally relevant, faster churning, and supported by predictable customer demand. We believe our inventory remains healthy and of high quality, as evidenced by cleaner sell-through during the spring and summer seasons. Importantly, Q2 represents our peak inventory position for 2025. We expect a slight sell-down in our inventory in Q3 and remain confident in our ability to finish the year with total inventory below last year’s level.

Looking ahead, we are continuing to simplify our product assortment to drive efficiency in working capital and support margin improvement over time. With new systems, processes, and enhanced buying discipline, our goal is to be in season earlier, exit earlier, and achieve clean sell-throughs across categories, which will drive down the working capital investment needed for inventory. In regards to liquidity, during the second quarter, we exercised our $20 million deferred draw feature on our term loan to strengthen the balance sheet. We ended the second quarter with a total debt balance of $195.1 million and total liquidity of $109.5 million.

We expect that Q2 will be our peak for reported debt balance as we sell down our inventory, generate improved EBITDA, and begin to pay down our debt. Inventory efficiency and tight control of variable expenses will remain top priorities. Finally, let me speak to our update on full-year guidance. Our priorities for 2025 remain focused on the execution of our strategic priorities to profitably grow sales, improve margins, and closely manage our variable operating expenses. We have confidence in our second-half strategy to drive profitable sales despite the macroeconomic headwinds and potential margin pressure from higher tariffs.

For the full fiscal year 2025, we are raising the lower end of our net sales outlook to reflect flat growth versus our prior guide of down 1%, while maintaining the top end of our range at up 3.5%. We are reiterating our adjusted EBITDA guide to be between $33 and $45 million, driven by modest gross margin improvement and disciplined expense management. We are reiterating our capital expenditures target to be between $20 million and $25 million, primarily related to technology investments to improve store service and merchandising productivity, as well as our normal store maintenance.

We remain focused on growing sales, generating positive free cash flow for the year, paying down debt, and returning value to all of our stakeholders. I will now turn the call back to the operator to facilitate any questions.

Operator: Certainly. And as a reminder, ladies and gentlemen, if you have a question at this time, please press 11 on your telephone. Our first question comes from the line of Anna Glaessgen from B. Riley Securities. Your question, please.

Anna Glaessgen: Hey. Good afternoon, guys. Thanks for taking my question. First, I’d like to talk or start with the comp performance. Really nice to see another quarter of positive comp. Can you talk about the drivers of that? I know lapping out of stock has been a really key driver of outperforming the industry. As we think about that easing benefit into 2026, how should we think about the durability of that growth?

Paul Stone: Yes. And I’ll take it. I think just overall, the strategy that we put in place to start the year really aligned around hunting and shooting, fish, and personal protection. And that’s really where we’ve seen all of our strength. And at the same time, continued to invest our inventory dollars to be able to continue to see the momentum as we’ve seen it from Q1 to Q2 and even as we start Q3, good strong momentum in particular in firearms. So I look at it and think we’ve positioned ourselves extremely well with the strategy.

We’ve opportunities as we continue to work on our attached categories as we pulled small sub-categories out of the business that didn’t have the generality that we wanted and reinvest the working capital back into our strategic focus. Our key will be as we think about it and the merchants really in place and the team humming at this point, is putting ourselves in a position where we’ll continue to refine what our inventory mix is, the long tail that we have in our categories, and be able to reinvest that back into the strong and our top-performing items, which I still think we have opportunity there as we work through multiple seasons of buys as we go on.

And you know, I’ll reiterate that I think as we look at fish, and our performance overall in fish and our two-year stack, we’re not in a position where we’re lackadaisical there. We think that we have even more room to grow in fish. We comped last year a lot of high-end merchandise that we got out of, and we were able to see it pick up and the performance really be driven through units. And we think we even have more upside as we think about that.

So I would just wrap it up to say the entire strategy, we love where we’re at with hunt and shoot, in particular, where we are starting the month of August compared to last year and where our inventory position was for the hunting season. We feel really good with where fish will be. We think we’ll have another strong quarter of fish due to weather and what’s happening there. And then the newness of personal protection that we continue to add into the business, it’s really outperforming all of our other parts of the business today. That we have, I think, continued upside in that as we think about the back half of the year and starting next year.

Anna Glaessgen: Great. And then turning to the implied back half guide, it seems to be implying some escalating margin improvement while facing a little bit of more difficult comps in the back half. Can you talk a little bit about the margin drivers or puts and takes in the back half of the year?

Jennifer Paul Young: Yeah. Hi, Anna. This is Jennifer. Nice to meet you. If you think about the margin in the back half of the year, there’s a couple of things you need to keep in mind. As Paul was just mentioning, hunt continues to be a focus in the back half, and it does have lower margins than the rest of our business based on the firearms and the ammo, and those have been drivers. So those will be putting a mix component into margin in the back half.

And then also echoing where fish has actually been a beneficiary to margin in Q2 based on its rate and its penetration as that category falls off as we get more into the quarter, that will also have a mix shift on the margin. So as you think about margin and also keep in mind, as a retailer, Q4 is a very promotional time. These are just things to contemplate as you’re thinking about it.

Anna Glaessgen: Great. Thanks, guys. And welcome to the team.

Jennifer Paul Young: Thanks.

Operator: Thank you. And our next question comes from the line of Matt Koranda from ROTH Capital Partners. Your question, please.

Matt Koranda: Hey, guys. Thanks for taking the questions, and welcome, Jennifer. I guess maybe just taking a crack at the comp guide for the back half. I guess it implies, up against a little bit of tougher comps, so maybe a little bit of deceleration. But still positive for the back half. Any color on how demand trended through August? And just sort of how we feel about the setup into the back half in terms of comps?

Paul Stone: Yeah. Hey, Matt. We like how August looked. We really liked our NICS performance that we got back yesterday in August, so we saw an acceleration compared to what our Q2 performance looked like. So good position there, good start to Q3. We like the way it looks. I think we’ve shared with you before as we come into Q4, we’re clearly going to be in a position of comping apples to apples. And from a marketing standpoint, we’ll be digital to digital.

So I think Q3, we still have a little bit of a tailwind as we go through Q3 just based on the more productive ROAS measurement that we’re going to have as we close out Q3, but Q4 we’re going to be an apples to apples comparison with digital to digital is the way I would think about it. So we like the way August started out. And I think momentum as we think about right now, Q3.

Matt Koranda: Okay. Understood. And then maybe just, if you could break down the AOV trend a little bit more, I think it would be helpful. I know the strategy has been typically to kind of build a larger basket around a firearms purchase, typically to generate more accessories purchases. And so while you mentioned lower AUR in firearms, I think the AOVs have gone up. Maybe if you could just break that down a little bit, and how much room, I guess, more room for improvement do we have on that strategy? Have we capped out in terms of AOVs, or is there more room to run?

And I guess, is there AOV improvement built into the guidance for the back half of the year? Sorry. There’s a lot in there, but just figured it’d be helpful to break it all down.

Paul Stone: I think we’re just really getting started around what we can do about attachment and in particular in the firearms and getting loaded in with the inventory that we need and part of this working capital reinvestment out of some of these other sub-categories and our attached categories to put back into attaching to firearms or even to our ammo basket as we get those customers in that we’re in kind of mid-stages of getting that build out. Matt is the way that I would see it.

I will tell you, we’re extremely bullish on what we were able to do from an inventory position and be able to get our inventory aligned to start the queue and in comparison to where really we would have peaked last year in October or closer to October, missed a good portion of hunt, in particular, the western hunt. And just flex cells from the table. So I think your first question, there’s huge opportunity from an AOV standpoint and a UPT. The team has done a fantastic job. Don’t know the stores, converting and being able to increase the basket size.

And I think as we looked at last month, we continue to be above COVID marks there and all-time highs both on UPT and AOV. With an opportunity to be able to be more sharp in inventory to continue to grow that. So I think that’s part of the business that we continue to put a spotlight on and how do we invest more into it to be able to grow and to be able to help our overall mix as we’re growing firearms at the rate we are, Matt.

Matt Koranda: Okay. Appreciate all the detail. I’ll leave it there. Thank you.

Operator: Thank you. And our next question comes from the line of Ryan Sigdahl from Craig Hallum Capital Markets. Your question, please.

Ryan Sigdahl: Hey. Good afternoon. Wanted to stick on guns and the non-lethal. So impressive. You said accelerating NICS performance in August, but that trend has continued here. But you’re also simultaneously leaning in on the non-lethal TASERs, Burna, etcetera. I guess, are those two things related that the foot traffic is a similar customer, or is it really mixed assortment, store layout, all of the things that you can drive kind of growth in both?

Paul Stone: Yeah. I would think. The best way to say, we think it’s a new customer that is really looking at the less lethal. And we’ve looked at it and dive on it on the mix and who it’s bringing into the store. So we like what it’s doing as we think about it and how we’ve set the site up to really be able to start the process on the site and to be able to drive the folks to the store as well as in Burna’s case the way they’re able to message it with their influencers to get people to the store. So we like what’s happening there. We feel we’ve got a lot of upside.

We’ve just built out a larger subset of stores to be able to add inventory into a pretty big swath of store count as we get to the back half of the year. So I think we have an opportunity to continue to grow that. And I like the newness piece of it to where we continue to be able to add new partners. Taser coming in. They set the product right, they were able to align, get the product, empty boxes, point of sale, have it all wrapped, ready to go to the store to be able to set and do it very professionally.

So I like the way that’s shaping up and we continue, as I mentioned to Matt, I think the opportunity around personal protection is not only the non-lethal, but the lethal component of it as well, and then how we can really meet the customer where they want to be around the attachment of that in particular, from handguns and ammo that we saw great performance. Hunt was really driven as we look at it from a category breakdown from handguns and ammunition. Driving that piece of the business. And then as I think about accessory or the non-lethal, the personal protection, the newness is what drove that part of the business.

So it’s good to see the mixture that we have there.

Ryan Sigdahl: And then just as we shift over to store or the store calling. Yep. Sorry. So adding one store in Q3, as you’ve said, you know, before, I guess, how do you think about the portfolio of stores you have? I know there have been some that were, you know, right around four-wall breakeven-ish, but I think you even referred to them on life support in the past. But how do you think about adding stores, optimizing the existing stores you have? Just an update there would be helpful. Thanks.

Paul Stone: I just, you know, our real estate focus will continue to be around one, ensuring that we are paying down our debt before we get into a position of growth around those stores. And that’s the commitment that I’ve made and we’ve made as a company as we go out that we still think we have a lot of room within our current asset base we have to be able to sweat the assets to get the performance where we need to be and continue to be able to grow. I mean, we have a low unaided awareness in our 30-mile radius that we actually operate in.

So we think we have a ton of ups in the markets we actually are in. And to the earlier point of the question, I mean, we’ll continue to measure and to look at our nonproductive stores. And given an opportunity, we don’t think we’re in a position to where the store is going to meet the expectation, we’re coming up on the end of the lease, and we make a decision to potentially get out of that location. I think that’s been the direction we’ve shared over the last couple of years is we’ll continue to monitor the four-wall. We’ll do the right thing from a cash flow perspective as we look at it.

And we’ll make those decisions as we, in a lot of cases, some of our small sample size of stores that we have that we don’t like the way they’re performing and we’ll look at it as those leases come up.

Ryan Sigdahl: Thanks. Good luck, guys.

Operator: And our next question comes from the line of Justin Kleber from Baird. Your question, please.

Justin Kleber: Good afternoon, guys. And, Jennifer, welcome to the team. I was hoping if you could break down the comp in terms of transactions versus average ticket. Paul, you mentioned UPT. It seems like that’s higher, at least in the firearms category. But I’m curious if your comp transactions are also now tracking positive.

Paul Stone: I think there’s a couple of ways we can look at it. So we think of it from overall, and based on how, you know, 70% of our purchases start online and then end up in the stores that we feel good from a transactional count where that true BOPUS is living today and the performance of that. And continue to get strength there. And as we look at, you know, the overall of the company from a sales performance and where we actually tracked with e-com driven sales. So we outperformed there. So I think from a transactional account, we like the position we’re in.

And from a growth standpoint and then what it’s able to do, for the overall performance is kind of how I would share that. As we break it down. But I would say both AOV and UPT are up. And that’s it’s really saying what the team is working from a unit standpoint and being able to add the basket as we get there.

Justin Kleber: Yep. Okay. That makes sense and good to hear. You mentioned, Jennifer, the potential for some tariff-related margin pressure in the back half of the year. I’m curious if you could share what’s happening with pricing real-time in the stores as tariff impacts start to build. Maybe how much do you think retails might go up in the back half of the year? And what sort of unit elasticity you’re embedding into your outlook?

Jennifer Paul Young: Yeah. So thank you for the greetings. So you have kind of how we’re thinking about this is the merchants have really done a great job of getting ahead of this and working with our vendors so that we have visibility into cost increases that might be coming our way. We are fairly heavily reliant on MAP pricing, so we do have flexibility to offset some of those tariffs as they come in. And first, you saw the notifications today. There’s still so much uncertainty out there on tariffs that, you know, we wanted to make sure that we are mindful of them and that we’ve considered them in our back half guide.

But this, you know, cat’s still out on what’s actually going to happen with those.

Paul Stone: Yeah. And we continue to watch it. I think it’s what I would add to it is we’ve seen it, and a portion of our pull-forward that we had coming into the queue to be able to start is a strategic decision on inventory to be able to bring into as we started Q3. And from a timing standpoint, to ensure that we were not on the wrong side from a tariff early and to be able to position it to where we were able to bring it in. Bring it in prior to peak and then be able to kind of ride this thing down Q3 and Q4 from an inventory standpoint.

So I feel good with what the team has been able to do there and the low penetration that we have and, you know, private label right now at a 3% ish that we’re ringing. And the high percentage of MAP, as Jennifer said, I think this is positioned to be able to manage it as we go to the back half and in particular as we start ’26.

Justin Kleber: Okay. If I could sneak just one more in, that was just one more on gross margin. You mentioned that the 40 basis point of freight headwind, how did the mix pressure compare to that freight headwind?

Jennifer Paul Young: Yes. So if you look at our margin by category, all categories were up in margin with the exception of hunt. On a rate basis. Hunt is one of our lower margin categories. And due to firearms and ammunition, it did impact margin in a negative way from a mix perspective. So really, rates across the board were up. Mix was negatively affected just simply because of hunt. As well as camping being down on the quarter, and that’s one of our higher margin businesses. So the mix did not offset the higher rates. Really, all the improvement driven by rate.

Justin Kleber: Okay. Thank you both. Best of luck in the fall.

Operator: Thank you. And our next question comes from the line of Mark Smith from Lake Street. Your question, please.

Mark Smith: Hi, guys. First off, Jennifer, welcome. Second, I’ll apologize if you’ve hit some of these as I’ve been jumping between calls here. But I want to just hit on the inventory and inventory levels here. You know, if you can quantify or discuss maybe how much was bought ahead of tariffs, and if you it sounds like you feel like you’re kind of fully stocked maybe a little earlier this year moving into the hunting season and kind of fall. Compared to other years?

Jennifer Paul Young: Yeah. So the elevated level of inventory was a distinct strategic decision. The company had discovered that previously we’d been entering into the market after the seasons had already really kicked off and customers already had their gear. So this year, we’re bringing it in earlier, and that’s what you saw in the big bump, especially around fish and hunt. But then also that we’re going to clear out of it earlier. When the season starts to wind down, the customer has all their gear, so it makes sense for us to kind of just shift the inventory up closer. And since we did invest heavily in hunt and fish, you know, it paid off.

You know, Paul mentioned the comps on the call. On how those performed. So feeling it was the right strategy to move. As we move forward to the rest of the year, we will continue to kind of move through the inventory and still expect to be below last year’s level by the end of the year.

Mark Smith: Perfect. And then I did want to ask, you called out kind of margin in that hunt category being the only one kind of down percentage-wise. I’m curious just if you can give some insight into consumer behavior, you know, within hunt or within, you know, primarily firearm and ammo, are you seeing better sales momentum on promotion or lower-priced items? You know, in other words, do you have to be promotional to drive people, or is the consumer continuing to come out even at, we’ll call it, regular price levels?

Jennifer Paul Young: Yeah. So both firearms and ammo do have lower margins in the hunt category, and ammo did outperform the category in and of itself this year. So that really did put a lot of pressure on it from a mix perspective. There has been some pricing that we’ve strategic pricing that we’ve done in ammo that we think has helped drive sales as well. So we’re feeling good about that. And then firearms, you know, we’ve talked a little bit about it before, but, you know, we do have a selection of firearms, and we do see a little bit of pressure in AUR in there.

Paul Stone: Okay. I think the thing is, Mark, just to add to that, I mean, AUR is down about 4% and then units up 4.2% ish, so kind of offsetting each other there, but AUR under pressure, and I think we’ve mentioned that earlier.

Mark Smith: Okay. And the last I just wanted to ask, I know that it’s a very small segment, I think, for you guys. But just as we look at potentially increased demand for suppressors or even short barrel rifles with new tack laws and tax stamp going away in January. You know, is there an opportunity as we look at next calendar year to maybe increase sales or inventory in those products?

Paul Stone: Yeah. We’re definitely going to lean into both of the categories that you just mentioned there. But we think huge opportunity. And even as we work through the half of the year from a suppressors and working with our partners on how we look at that.

But I think we want to get in a position back half of the year where we’re able to get it shipped and take a little bit of that noise kind of waiting till the beginning of next year, but we think we have an opportunity in Q4 to be able to get and get it shipped directly to the home, not carry the working capital as we worked with our partners in doing that. And take advantage of what I think will be a hockey stick at year as we think of suppressor sales. In particular.

Mark Smith: Excellent. Thank you.

Operator: Thank you. This does conclude the question and answer session of today’s program. I’d like to hand the program back to Paul Stone for any further remarks.

Paul Stone: Thank you for joining the call today, and thank you to all of our passionate outfitters around the country for their commitment to Sportsman’s Warehouse Holdings, Inc. Together, we look forward to providing our customers with great gear and exceptional service. Thank you.

Operator: Thank you, ladies and gentlemen, for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day.

Image source: The Motley Fool.

DATE

Wednesday, Sept. 3, 2025, at 8 a.m. ET

CALL PARTICIPANTS

• Chief Executive Officer — Mary Ellen Coyne
• Chief Financial Officer — Mark Webb

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RISKS

• Mark Webb stated, “Gross margin (GAAP) was 68.4%, down about 210 basis points versus Q2 FY2024, primarily due to a higher mix of markdown sales and increased full-price promotional rates.” There was also an additional negative impact of approximately 50 basis points from tariffs in Q2 FY2025.
• Mark Webb reported, “Guidance for Q3 FY2025 assumes approximately $5 million of incremental impact from tariffs, net of vendor-negotiated offsets,” signaling total gross margin headwinds in the coming quarters if current tariff policies persist.
• Management indicated potential gross margin compression ahead, stating, “Gross margins are assumed to be down compared to last year, more than experienced in Q2, driven primarily by tariff pressure,” for Q3 FY2025.

TAKEAWAYS

• Total Company Sales— $154 million in total company sales for Q2 FY2025, representing a 0.8% decrease from Q2 FY2024.
• Total Company Comparable Sales— Down 1% for the second quarter of fiscal 2025, with sequential sales trend improvements each month.
• Store Sales— Increased by 0.4%, partially driven by three net new stores versus Q2 FY2024.
• Direct Sales— Accounted for about 46% of total sales and declined about 2% year over year.
• Gross Profit— Gross profit was $105 million, down approximately $4 million from Q2 FY2024.
• Gross Margin— 68.4%, a decline of roughly 210 basis points, primarily due to an increased mix of markdown sales, elevated promotional intensity, and 50 basis points of tariff-related pressure.
• SG&A Expenses— SG&A expenses were about $89 million, up from approximately $86 million in Q2 FY2024, attributed mainly to higher store, occupancy, shipping, non-recurring, and marketing costs, partially offset by lower management incentive accruals.
• Adjusted EBITDA— $25.6 million, down from $30.2 million in Q2 FY2024.
• Adjusted Net Income per Diluted Share— $0.81, down from $1.05 in Q2 FY2024; Share count was 15.3 million versus 15.1 million in Q2 FY2024.
• Free Cash Flow— $17 million of free cash flow was generated, with a closing cash balance of $46 million.
• Inventory Position— Ended about flat year over year, excluding tariffs; including tariffs, total reported inventory was up about 5% from Q2 FY2024.
• Share Repurchases— 68,000 shares repurchased for approximately $1 million; year-to-date repurchases totaled 255,000 shares for $4.5 million as of Q2 FY2025, with $20 million remaining authorized.
• Quarterly Dividend— $0.08 per share dividend paid on July 9, with approval for next dividend to be paid Oct. 1 to shareholders of record as of Sept. 17.
• Capital Expenditures— $3 million in capital expenditures, mainly for stores and ship-from-store capability rollout.
• Store Count— 247 stores at quarter-end versus 244 a year ago, following the closure of two stores and no new openings during the quarter; Two openings are planned for late Q3 FY2025, with full-year net new store guidance at one to five.
• Ship-from-Store Capability— Launched across all stores during July, designed to capture previously unfulfillable demand and support gross margins.
• Tariff Impact— Average sourcing tariff rates are now 20% for the largest countries and 50% for India, versus previous assumptions of 10% globally and 30% for China (as of Q3 FY2025); Quarterly incremental tariff impact is estimated at $5 million net of vendor offsets for Q3 FY2025, with annualized exposure around $20 million if conditions persist.
• Q3 2025 Outlook— Adjusted EBITDA guidance is $18 million to $22 million for Q3 FY2025, sales are expected to be flat to down low single digits, comps down low to mid-single digits, and gross margin decline in Q3 FY2025 is expected to be greater than in Q2 FY2025, primarily due to tariff pressure.
• Strategic Priorities— Management is focused on evolving product assortment for broader appeal, enhancing the customer journey through new marketing initiatives (including local television tests), and operational optimization, including technology upgrades and a new non-tender loyalty program launch planned for the back half of 2025.

SUMMARY

J. Jill (JILL -2.25%) management reported a modest revenue decline, with sequential sales trend improvement in Q2 FY2025, but significant gross margin compression in Q2 FY2025, resulting from elevated promotions and increased tariff exposure. Cash flow and share repurchases remained healthy, with capital expenditures invested in omnichannel capabilities and store productivity.

• The company finalized its Order Management System implementation and completed a full ship-from-store rollout, with management emphasizing operational agility and speed as key improvements from these projects.
• Marketing tests — including a local television campaign — demonstrated “tremendous impact,” prompting management to adjust the marketing mix toward more flexible, broad-reach channels aimed at new customer acquisition in the second half of FY2025.
• A new, non-tender customer loyalty program is expected to launch in the second half of the year to supplement the highly penetrated GACC credit card rewards audience and further expand the customer base.
• Despite cost headwinds, the company remains committed to shareholder returns via continued dividend payments, opportunistic share repurchases, and preservation of debt flexibility, with $20 million of repurchase authorization remaining as of Sept. 3, 2025, with funded debt at $70 million.

INDUSTRY GLOSSARY

• OMS (Order Management System): A technology platform used to manage and fulfill customer orders across various channels, improving inventory accuracy and fulfillment efficiency for omnichannel retailers.
• Ship-from-Store: A retail fulfillment capability allowing stores to fulfill and ship online orders directly to customers, expanding inventory availability and reducing lost sales from out-of-stock items online.
• GACC (J.Jill Credit Card Program): J.Jill’s proprietary credit card program, referenced as a key driver of customer loyalty and sales penetration.
• Non-Tender Loyalty Program: A customer rewards program that does not require a proprietary credit card, designed to attract and retain a wider customer segment beyond credit cardholders.

Full Conference Call Transcript

Mary Coyne: Good morning, everyone, and thank you for joining us today. With my first full quarter as CEO of J.Jill completed, I want to begin by thanking our team for their dedication and support. Since joining in May, I’ve had the opportunity to dive deeper into all aspects of our business, and I remain confident in the significant opportunities ahead, despite navigating some near-term challenges. In the second quarter, sales trends sequentially improved month over month, enabling us to deliver total sales down less than 1% and an adjusted EBITDA of $25.6 million.

Improved traffic, both online and in stores, supported this performance, as well as increased promotional activity, which we leveraged to better align inventory to sales trends as we entered the back half of the year. I am energized by what I see, having had 100 days to assess this business. We serve a growing and valuable demographic. We have a deep understanding of this customer segment and have therefore developed a loyal customer base. We operate with discipline, which has allowed us to consistently deliver high margins and generate significant free cash flow. We will continue to lean into these strengths and position the brand to drive long-term profitable growth.

To do this, we must expand our customer file, attracting a significant number of new customers, re-engaging those who have shopped with us before, and continuing to delight our existing loyal customer base. In the near term, we plan to move quickly but thoughtfully, testing new initiatives and leaning into those that work to deliver on our objectives, and widening the aperture of our focus to appeal to a broader audience. Concentrating on driving customer growth, we will execute immediately on three areas: one, evolving our product assortment; two, enhancing the customer journey; and three, improving the way we work.

With respect to product, we need to widen the appeal of our assortment to attract new customers while continuing to deliver newness that is relevant and versatile to fit her lifestyle. Our new Chief Merchandising Officer, Courtney O’Connor, has been partnering closely with Creative Director Elliot Staples and the Design Merchandising and Planning team to develop a compelling assortment for spring 2026, while making subtle refinements in the product assortments and presentations for fall and winter this year. We are going to focus on delivering a stronger, more cohesive product assortment moving forward, eliminating redundancy to incorporate new styles that serve more of the customer’s lifestyle needs to capture a greater share of her wardrobe.

As we make these enhancements, we will also be leaning into expansion opportunities in areas such as accessories, building on what is currently a small but highly scalable business. Moving to our second area of focus, enhancing the customer journey, we are evaluating ways to expand our reach to capture the full marketing funnel: top, middle, and bottom. We just recently completed a small test with television advertising, and for the back half of this year, we made adjustments to the marketing mix, enabling greater flexibility to engage a wider audience.

In addition, as we evaluate the right balance across our marketing channels, we have reshot certain imagery for the second half of the year that you will begin to see across digital media, catalogs, in stores, and online soon. We run highly profitable stores, which also serve as a great marketing vehicle for the brand. They allow us to tell our product story to both new and existing customers, and we are excited for our upcoming store openings later this fall. We are confident in our long-term goal to open 50 stores by the end of 2029.

As we execute on this objective, we are constantly evaluating opportunities for store locations focused on driving productivity, welcoming new customers, and increasing brand awareness. We know the opportunity that is in front of us, and it is one that our whole organization is rallying around. To support this, we are focused on improving the way we work, leaning into technology capabilities that will enable us to work smarter, faster, and more effectively. This includes building a strategic technology roadmap, incorporating opportunities for AI implementation in order to accelerate growth, gain efficiencies, and improve the customer experience.

We’re fostering a corporate culture that isn’t just about process improvement, but about the agility and urgency needed to capitalize on the opportunities ahead of us. The team did a great job in executing the implementation of Order Management System (OMS), and we are pleased to share that we launched the new ship-from-store capabilities well ahead of plan and in time for the fall and winter season launches. As we continue to evolve the brand and progress forward, we are in the office collaborating with one another. There’s a palpable energy across the organization.

In summary, I believe through the actions and strategies we are putting in place, we are addressing the right priorities, enabling us to build on the strengths of our proven operating model while capitalizing on the areas that will drive sustainable, profitable growth. With that said, we are continuing to operate in a very dynamic and uncertain environment, particularly as it relates to inflation and tariffs. In response, our team is leveraging our strong relationships with vendor partners and staying nimble and responsive as we navigate the evolving macro landscape. As we look toward 2026 and beyond, we are excited to write the next chapter, building a stronger, more agile business to deliver enhanced shareholder value.

I look forward to updating you on our progress. Now, I’ll turn it over to Mark for a detailed review of our financial performance.

Mark Webb: Thank you, Mary Ellen, and good morning, everyone. Following a challenging start to the second quarter, we were encouraged that sales trends stabilized and improved into June and July. We remained committed to our disciplines during the quarter, assessing slow-moving inventory units and taking action when necessary, resulting in improved end-of-quarter inventory levels compared to the end of Q1. We rolled out ship-from-store, our first omnichannel capability post-OMS Go Live, extending it to the entire fleet during the month of July. Our operating model continues to demonstrate its strength and resilience, generating $17 million of free cash flow in the quarter, resulting in end-of-quarter cash on the balance sheet of $46 million.

Now, let me provide more details on our second quarter results. Total company sales for the quarter were about $154 million, down 0.8% compared to Q2 2024. Total company comparable sales for the quarter were down 1%. Store sales for Q2 were up 0.4% compared to Q2 2024, driven by three net new stores in the quarter compared to last year. Direct sales, which represented about 46% of total sales in the quarter, were down about 2% compared to the second quarter of fiscal 2024. As mentioned, sales trends improved each month of the second quarter.

This was in part due to positive customer response to the summer sale in July, which helped clear markdown goods and end the quarter with clean inventories. Q2 total company gross profit was about $105 million, down about $4 million compared to Q2 2024. Q2 gross margin was 68.4%, down about 210 basis points versus Q2 2024, driven primarily by a higher mix of markdown sales and higher full-price promotional rates as we took action and successfully moved the liable inventory we carried into the quarter. Gross margin rate was also pressured by approximately 50 basis points related to tariffs. SG&A expenses for the quarter were about $89 million compared to approximately $86 million last year.

The increase was driven by higher store expenses, driven by net new stores and higher occupancy costs on lease renewals, higher shipping expenses, non-recurring costs, and higher marketing expenses, partially offset by lower management incentive accruals and OMS-related costs, which were slightly below last year at about $300,000 for the quarter. Adjusted EBITDA was $25.6 million in the quarter compared to $30.2 million in Q2 2024. Interest expense was $2.7 million in Q2 compared to $3.7 million last year. Adjusted net income per diluted share was $0.81 compared to $1.05 last year, which reflected an average weighted diluted share count of 15.3 million shares this year versus 15.1 million shares last year.

We repurchased 68,000 shares for approximately $1 million in the second quarter, bringing year-to-date repurchases to 255,000 shares for $4.5 million, resulting in approximately $0.01 benefit to reported second quarter adjusted diluted EPS. As of September 3, we have approximately $20 million remaining on the $25 million share repurchase authorization. We also paid our quarterly dividend of $0.08 per share on July 9, and as announced on August 27, our board approved payment of the Q3 dividend on October 1 to shareholders of record as of September 17. Please refer to today’s press release for reconciliations of non-GAAP financial measures to their most comparable GAAP financial measures.

Turning to cash flow, for the quarter, we generated about $19 million of cash from operations, resulting in ending cash of about $46 million. Looking at inventory, we successfully cleared excess inventory units during the quarter, ending the second quarter with inventories about flat to last year, excluding the incremental costs associated with tariffs, including the costs of tariffs in both on-hand and in-transit inventory. Total reported inventory is up about 5% compared to the end of the second quarter last year. Capital expenditures for the quarter were about $3 million compared to $2 million last year.

Investments were focused primarily on stores and the project to launch ship-from-store capabilities, which rolled out during the quarter and are now active in all stores across the fleet. We are excited to have this omni-capability enabled. It will help drive sales growth and support gross margins as previously unfulfillable demand is fulfilled. With respect to store count, we closed two stores during the second quarter. We did not open any new stores in the quarter, resulting in an end-of-quarter store count of 247 stores compared to 244 stores at the end of Q2 last year. Now, turning to our outlook.

Under the current global trade agreements, we now have more visibility to the impact of tariffs on our cost of goods sold and are working levers to mitigate the impact as much as possible. While there remains some uncertainty with how all of these actions by us and others across the industry will impact the U.S. consumer, we are providing certain guidance metrics for the third quarter of fiscal 2025, as detailed today in our press release. For the third quarter, we expect adjusted EBITDA to be in the range of $18 to $22 million.

This range assumes sales will be about flat to down low single digits for the quarter, and comps will be down in the low to mid-single digits. Gross margins are assumed to be down compared to last year, more than experienced in Q2, driven primarily by tariff pressure. With respect to tariffs, rates for our largest sourcing countries have landed on average around 20%, with India now at 50%. This compares to our prior assumption of 10% on all countries and 30% on China. Given these elevated rates, our guidance for the third quarter assumes approximately $5 million of incremental impact from tariffs, net of vendor-negotiated offsets.

We would assume a similar level going forward on a quarterly basis should current tariff policies remain in place. As Mary Ellen mentioned, we are working multiple levers to mitigate the impact as much as possible, including negotiating savings offsets with our vendors, adjusting on-order quantities, and strategically reviewing promotion and pricing strategies to drive higher average unit retails. With respect to capital expenditures for the year, we continue to expect spend of between $20 and $25 million. Regarding store count, we still expect to open between one and five net new stores this year, with two new stores planned to open toward the end of the third quarter.

As demonstrated year to date, the business continues to generate strong free cash flow, and we remain committed to our strategies to support total shareholder returns, which includes paying our dividend, repurchasing shares, and paying down debt. As previously mentioned, we announced our quarterly dividend of $0.08 per share payable on October 1 to shareholders of record on September 17. We have repurchased approximately 255,000 shares year to date, including the repurchase of 68,000 shares in Q2 for about $1 million. We will continue to opportunistically repurchase shares under the remaining $20 million of our $25 million authorization.

With funded debt currently sitting at $70 million on the balance sheet, with plenty of term remaining, we have ample flexibility and will continue to opportunistically evaluate refinancing options. Importantly, as Mary Ellen mentioned in her remarks, we are encouraged by the opportunities in front of us. We will continue to operate the business with discipline and are committed to making strategic investments this year to sharpen our brand voice through evolved and focused product assortments and a refined marketing approach to build our customer file and drive profitable growth. Thank you. I will now hand it back to the operator for questions.

Operator: Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. Your first question today comes from the line of Jonna Kim from TD Cowen. Your line is open.

Jonna Kim: Hi. Thank you for taking my question. Would love additional color around what drove the improvement in June and July. Mark, on tariffs, how should we think about sort of the annualized tariff impact next year as you mitigate some of the impact that you have this year? Would love additional color there. Thank you very much.

Mark Webb: Great. Thanks, Jonna. I’ll jump in and maybe also provide some color as needed. The performance in Q2 was really driven by clearance activities coming out of the sort of slowdown we saw at the end of Q1, beginning of Q2, and really committing to our discipline to drive markdowns and promos as necessary. We saw a good customer response to that, really good response to the sale in July. That was what was behind the trends that we saw in Q2. Underneath that, traffic improved a little bit, conversion improved a little bit, which is not uncommon with elevated levels of promotion and markdown at the end of Q2.

Tariffs, what we’ve indicated, Jonna, is that tariffs really net of vendor-negotiated offsets of about $5 million in Q3 we expect will roll forward for the most part in the quarters to come. I think there’s, without giving the specific answer, the annualized portion of the $5 million annualizing closer to $20 million. That’s probably the best math at this point. Of course, we’re working other levers around the on-order adjustments, as well as strategic pricing and promotions that over time may mitigate the absolute dollar amount of that tariff hit on a quarterly basis.

Jonna Kim: Got it. Just one question. In the second half, do you expect promotional level to be in line or elevated versus last year? Any thoughts there would be helpful. Thank you so much.

Mark Webb: Yeah, it’s a good question. I mean, the landscape from here forward somewhat changes from the landscape through the first half because now we’re in sort of the tariff part of the year. Our expectation is, as we mentioned previously, our unit receipts in the back half are bought down closer to the mid-single digits. The sort of supply side is adjusted. The expectation would be that our strategic pricing actions, as well as tighter promotions, help to offset some level of those tariffs. We stand ready.

In all honesty, the guidance range that we provided for Q3 assumes a range of outcomes with specific respect to the receptivity of the customer to those pricing actions that we’re taking, knowing that we’re not the only ones. That level of macro uncertainty is what’s sort of coloring the range of guidance, the low end being low receptivity to our pricing increases and the high end being a more receptive customer to the price increases.

Jonna Kim: Got it. Thank you.

Mark Webb: Thanks.

Operator: Your next question comes from a line of Corey Tarlowe from Jefferies. Your line is open.

Corey Tarlowe: Great. Thanks. Good morning. Mary Ellen, could you maybe talk a little bit about kind of 100 days into the business at this point, where you see opportunity for change, where you see opportunity to accelerate innovation, what’s working in the business, and then maybe other areas or trends you’ve seen quarter to date that you might want to shed some light on? Thanks so much.

Mary Coyne: Good morning, Corey. Yes, super excited after 100 days and having had a moment to assess the business. I’m very pleased to report that we are already seeing cultural shifts within the organization, ship-from-store being the most recent example where the team’s work together, greater sense of urgency and purpose, and delivered results well ahead of schedule. We are excited to see that in terms of the momentum and the team efforts here. As we look forward, our focus is on growing the customer file. That is truly what our goal is. There are three immediate areas of focus that we know we need to do that.

It’s the product, it’s the customer journey, and it’s the way we work that I just referenced. Changes and innovation that we’re working on right away are around marketing mix and attracting more customers. We know that we have an incredible demographic. She holds the largest wealth in this country. It’s a growing segment. She’s incredibly loyal to the brand she loves, and she wants to look more stylish today than ever. We are very excited that we have a base of a loyal customer, and the opportunity ahead of us immediately is to really think about the marketing mix that will add to that customer file.

In terms of what’s working right now, we are in the back half of this year making slight refinements to our presentations, both in-store and online, and to our assets that will be shared, both catalog and digital. The focus really is on 2026 and how we drive compelling assortments to attract this customer.

Corey Tarlowe: Great, thanks so much. Mark, could you maybe walk us through some of the puts and takes in margin? Obviously, tariffs was one that was already addressed and talked about, but are there any other considerations in the back half of this year? How do you see the path to kind of the high teens EBITDA margin continuing and sustaining over the long term? What do you think the key drivers are to get you there?

Mark Webb: Yeah, Corey, good questions. Look, I think in the back half of the year, the primary margin story comes down to tariffs. Part of that is the strategy that we’re deploying on the strategic pricing and selective pricing. The goal really is to offset the dollar amount of the tariffs versus trying to mark it up and maintain the rate. That carries with it, out of the gates, full receptivity to the pricing increases margin pressure. As I mentioned, we’re providing the closer-in outlook for Q3 that has a range of expectations around that receptivity. That’s the primary.

Underneath the covers, there are some opportunities to offset that through the level of promotions executed in the business, the fact that the inventories are bought, as I mentioned, down in the back half of the year, which we feel is a prudent way to position the inventories.

That is enabling us to continue to manage the business with the discipline of the operating model on display, still cash-generative, and allowing us to make these investments, which to your last question is really the path for us going forward to invest, as Mary Ellen said, in expanding the customer file, the breadth of the assortment, the appeal of the assortment, and the marketing mix is really the opportunity to drive profitable growth deliberately in the coming year, which will be the kind of the go-forward story to drive that performance back into the business.

In the meantime, we continue those investments and continue to generate the cash and distribute the cash in support of our TSR strategies, as evidenced by the dividend and the share repurchase activity to date.

Corey Tarlowe: Great, thanks so much, and best of luck.

Mark Webb: Thanks.

Jonna Kim: Thank you.

Operator: Again, if you’d like to ask a question, press star one on your telephone keypad. Your next question comes from the line of Janine Stichter from BTIG. Your line is open.

Janine Stichter: Hi. Good morning. Mary Ellen, I just wanted to get your thoughts on the state of your consumer. I know your consumer tends to be pretty headline sensitive, and they weren’t feeling great at the start of Q2. Outside of some of the noise you saw from promotions in Q2 that did drive sequential improvement, how is she feeling today?

Mary Coyne: Good morning, Janine. Thanks for the question. What we’re seeing is the consumer slowly return. We saw that, again, sequentially month over month in Q2, and we’re optimistic as we’re heading into Q3. I believe as the tariff noise has settled, we have seen our comeback into the business, which is very exciting for us.

Janine Stichter: Great. I just wanted to clarify around the back half promotional levels. Inventory is clean, but obviously, your consumer still is selective and price sensitive. Would you expect promotions to be up year over year in the back half, down, or is that still part of the range of outcomes you’re contemplating?

Mary Coyne: As Mark said earlier, that will really depend on the consumer acceptance with our brand as well as our peers of the price increases. The range that we’ve put out there, sort of the high end is she’s very accepting because we were strategic and thoughtful about where we increased prices. On the low end is that she is more resistant to the overall cost of purchases moving forward.

Janine Stichter: Great, thanks so much, and best of luck.

Mary Coyne: Thank you.

Operator: Your next question comes from the line of Marni Shapiro from The Retail Tracker. Your line is open.

Marni Shapiro: Hey, guys. Nice improvements here, at least in getting some traffic back in the stores. I’m curious if you could talk a little bit. You upgraded your POS systems. Will you, I guess, upgrade, modernize, change anything with inspired rewards? I think you have a pretty loyal customer, as far as I recall. Will you use that to sort of expand your base of customer? I just have one follow-up on that, if you wouldn’t mind.

Mary Coyne: Sure. Marni, yes, we are very happy to have POS and Order Management System (OMS) implementations behind us. The team is currently working on drafting a reward program that is non-tender because, as you know, right now, the GACC, our own credit card program, is highly penetrated to our sales and a very loyal audience. We do have many programs for them. As I said, the team is working on one that’s non-tender and one that we will have rolled out in the back half of the year.

Marni Shapiro: Fantastic. You said you were going to launch, you launched some TV or you were testing some television. I’m curious what your thoughts are on social media content in real-life events. I feel like your customers, when I’m in your stores, they’re all talking to each other. I’m curious what you think about those two aspects to grab people into your stores.

Mary Coyne: Great question. We are very clear that we need to get our message out to more people to drive awareness, all levels of the funnel. We would say particularly really looking at top and middle, as we’ve been converting very well on the bottom to grow the customer file. The television test was very small, and it was very local. It is super exciting for us because it did have a tremendous impact. As we look forward to changing the marketing mix, we will absolutely be looking to what you were talking, you know, more digital, more direct interaction. That mix going forward will be very different.

Honestly, we’ll be testing strategically in the back half of the year to really understand how we can free up some resources to really engage these new to brands and react, as opposed to focusing only on our existing file.

Marni Shapiro: Fantastic. Can I sneak in just one more? I don’t know if I’m projecting onto your stores, but in the last, I think, two weeks, even last week and a half, the stores already look different. They look cleaner. The front of the store looks different. I don’t want to say younger, maybe more modern, the way things are paired. Am I projecting onto it, or have you already made changes in the merchandising without changing the product?

Mary Coyne: Marni, I love this question. Yes, for the back half of the year, as we have said, because the product was already locked in, what we have done is change the presentation. Both in stores and online, and to your point, making it much easier for the customer to shop, cleaner color stories. Honestly, we’ve rethought what we’re doing in windows to make them more compelling. Yes, we are seeing a positive response so far. Very glad to hear that people are noticing. Thank you.

Marni Shapiro: Fantastic. Thanks, guys.

Operator: That concludes our question and answer session. I will now turn the call back over to Mary Ellen Coyne for some final closing remarks.

Mary Coyne: Thank you all for joining us today. We are focused and committed to executing on our objectives, and we look forward to speaking with you again on our next earnings call.

Operator: This concludes today’s conference call. Thank you for your participation, and you may now disconnect.

Image source: The Motley Fool.

Date

Tuesday, Sept. 2, 2025, at 8 a.m. ET

Call participants

• Chief Executive Officer — William Li
• Chief Financial Officer — Stanley Qu
• Investor Relations — Rui Chen

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Takeaways

• Vehicle deliveries— 72,056 smart EVs delivered in Q2 2025, representing 25.6% year-over-year growth.
• Revenue— Total revenue of RMB19 billion for Q2 2025, up 57.9% quarter over quarter.
• Vehicle sales— RMB16.1 billion in vehicle sales for Q2 2025, reflecting 2.9% year-over-year growth and a 62.3% quarter-over-quarter increase in vehicle sales revenue.
• Other sales— RMB2.9 billion for Q2 2025, a year-over-year growth of 62.6% and a 37.1% increase quarter over quarter.
• Vehicle gross margin— 10.3% vehicle margin.
• Overall gross margin— 10% overall gross margin.
• Non-GAAP operating loss— Adjusted loss from operations was RMB4 billion (non-GAAP), down 14% year over year and 32.1% quarter over quarter (adjusted, non-GAAP).
• Non-GAAP net loss— Adjusted net loss was RMB4.1 billion (non-GAAP), decreasing 9% year over year and 34.3% quarter over quarter (adjusted net loss, non-GAAP).
• Q3 delivery guidance— Management expects 87,000 to 91,000 deliveries, representing 40.7%-47.1% year-over-year growth.
• Q4 delivery target— The company targets average monthly deliveries of 50,000 units, for a quarterly target of 150,000 units across three brands.
• Q4 group vehicle gross margin target— Management expects 16%-17% group vehicle margin, with L90 and ES8 targeted at 20% each.
• R&D expenses— Non-GAAP R&D expense guided at RMB2 billion per quarter for Q3 and Q4.
• SG&A expenses— Non-GAAP SG&A guided to be within 10% of sales revenue in Q4.
• Non-GAAP breakeven guidance— The company expects group non-GAAP operating breakeven in Q4.
• Third-generation platform highlights— CEO Li cited high-voltage architecture, lightweight battery packs, and in-house smart driving chip as major contributors to cost and product efficiency.
• Production ramp— L90 supply chain capacity targeted at 15,000 units per month in October.
• No new model launches for remainder of 2025— Management said no additional model launches or deliveries are planned for the rest of the year, citing full production allocation to existing models.
• Firefly brand— Over 10,000 Firefly deliveries within three months, now the top-selling model in the high-end small bath market.
• Charging & swap network— 3,542 power swap stations and over 27,000 charging points deployed worldwide as of July 2025.

Summary

NIO(NIO 0.78%) reported a 57.9% sequential increase in total revenue, driven primarily by expanding vehicle deliveries and substantial contributions from other sales, including used vehicles, R&D services, and after-sales support. Management reaffirmed momentum with a delivery outlook of up to 91,000 units for Q3 and set aggressive Q4 production targets for the L90 and ES8 models. Cost optimization is being achieved through a revamped organizational structure and deployment of self-developed technology platforms, which underpin sequential improvement in operating and net losses on a non-GAAP basis. The company highlighted non-GAAP targets for Q4 vehicle margin (16%-17%) and brand-level margins (20% for key new models), together with breakeven guidance on a non-GAAP basis, supported by disciplined R&D and SG&A spending. Management outlined no further model launches in 2025, reallocating resources to maximize production output and market responsiveness.

• CEO Li emphasized, “Vehicle gross margin in Q4 is expected to be around 16% to 17% for the entire group to achieve breakeven,” confirming the margin focus embedded in model launches and supply chain management.
• CEO Li stated there is “no major impact” on margins due to exchange of prior offers for upgraded battery standardization.
• Management attributed margin and cost improvements to technology, including proprietary smart driving chips and a 900-volt architecture, that reduce BOM cost and enable aggressive pricing without eroding profitability.
• The self-developed chip NX9031 is positioned to offer chip performance “on par with four flagship chips in the industry,” according to CEO Li, yielding cost savings without disclosing per-unit figures.
• Supply and production capacity were cited as current constraints on further launches, with combined production capacity of all three brands in Q4 expected to be as high as 56,000 units a month to support demand.

Industry glossary

• BOM (Bill of Materials) cost: Total spend on raw materials and components directly attributable to manufacturing a finished product.
• Power swap: NIO’s proprietary technology/platform that enables drivers to exchange depleted EV batteries for fully charged ones at dedicated stations.
• High-voltage (900V) architecture: Vehicle electrical infrastructure designed to improve charging speed, energy efficiency, and support advanced vehicle functionality.
• NX9031: In-house smart driving chip developed and deployed by NIO for advanced autonomous and smart vehicle features.

Full Conference Call Transcript

William Li: Hello, everyone. Thank you for joining NIO’s 2025 Q2 earnings call. In Q2, the company delivered 72,056 smart EVs, up 25.6% year over year. The new brand refreshed four products to model year 2025, further enhancing its product competitiveness. With improved organizational efficiency and growing brand awareness, the Envoy brand is gaining momentum in the mainstream family market. And thanks to the clear product positioning and deep market insight into the high-end small car market, the Firefly has been well received by the target audience. The company delivered 21,017 vehicles in July and 31,305 in August.

The launch of the Envoy L90 in late July and the pre-launch of the new all-new ES8 in late August dropped strong market demand, boosted user confidence, and lifted overall sales. We expect total deliveries in Q3 to range from 87,000 to 91,000, representing a new high of 40.7% to 47.1% growth year over year. On the financial side, vehicle gross margin remained stable while other sales saw significant margin improvements. Moreover, the implementation of the cell business unit mechanism has begun to yield tangible cost reductions and efficiency gains. In Q2, the non-GAAP operating loss narrowed more than 30% quarter over quarter.

Since the start of deliveries in Q2, NIO ET9 has performed strongly in the executive flagship sedan market. Building on continuous R&D investments, NIO was the first to bring the in-house developed smart driving chip and full domain vehicle operating system on production models such as ET9 as well as the 2025 ET5, ET5T, ES6, and EC6. In late June, we rolled out the new world model across all new vehicles equipped with our proprietary smart driving chip.

Within just five months, this in-house developed chip enabled the mass release of functions and the seamless migration of core models and applications across five vehicle models, representing China’s and also the industry’s first full function delivery on a self-developed flagship smart driving chip. On August 21, NIO hosted the product and the technology launch of its core strategic model, the all-new ES8. As an all-around tech flagship SUV designed for the success of business, family, and individuals, the third-generation ES8 is an epitome of NIO’s tech innovation.

The all-new ES8 features original and distinctive design language, class-leading capping and storage space, premium features and comfort experience, flagship safety as well as smart driving and cabin experience ahead of its time. It is the most competitive model in the premium large zero SUV segment, receiving significant attention and recognition from both media and users. Pre-orders have started with test drives starting in mid-September followed by the official launch at NIO Day in late September and deliveries afterward.

On July 31, the Ambo L90, a game-changing product among large three-row family SUVs, was launched with ingenious space and comfort design, all-around smart safety, competitive pricing, and comprehensive charging and swapping services, the Almighty redefines the large zero SUV experience, making it a good fit for large families. The Envoy L90’s sales performance exceeds our expectations. In its first full delivery month, its deliveries reached a history high of 10,575. We are working closely with our supply chain partners for the ramp-up production capacity and keep pace with the strong market demand. L90’s strong market performance has also boosted Ango’s brand awareness and the demand for the L60.

In August, the L60’s order intake also hit a new high this year. As for Firefly, since deliveries begun over 10,000 Firefly has been delivered within just three months. It’s already the best-selling model in the high-end small bath market. Its novel design, flagship-level safety, and agile driving dynamics have been well received. Notably, in recent CIA SI test Firefly together with the ARMOR L60 achieved the highest safety rating ever. We are pleased to see the growing brand awareness is driving growing demand for Firefly.

In terms of product quality in June, MiO ET5 and ET5T ranked segment first in JD Power’s NEV IQF study, while the EC6 and ES6 ranked top two in the premium fab segment in J.D. Power’s NEV appeal study. With outstanding product quality, NIO has been the segment leader in J.D. Power’s quality study for seven consecutive years in 2019. As of now, the company operates 176 NIO Houses and four sixteen NIO Spaces as well as four fourteen Amo stores. On the service side, the company has three eighty-eight service centers and 68 delivery centers. Our sales and service network now operates efficiently and cohesively across all three brands earning recognition from our users.

Regarding charging and swapping, the company has 3,542 power swap stations worldwide, including over 1,000 stations on highways in China and has provided over 84,000,000 swaps to users. By July, the battery swap network had thoroughly covered the highways between major cities in China, connecting five fifty cities with three-minute swaps and eliminating users’ fringe anxieties on long trips. In August, we completed the power swap route along China’s iconic G318 Sichuan Hizhang Highway. NIO and Amo users now can drive their cars and swap all the way to the base camp of Mount Kumolama. Besides, the company has built over 27,000 superchargers and destination chargers. So far, NIO is the car company with the most chargers in China.

In Q2, NIO has entered a new cycle where its continuous investment in technology innovation, infrastructure, and the multi-brand strategy in the past decade begun to translate into market competitiveness. The strong sales momentum of the new All New ES8 and ARMOR L90 proves that our decade-long commitment to the fab roadmap with chargeable, swappable, and upgradable technologies can create user value beyond expectations, increasingly recognized and embraced by a growing base of users. We believe the all-new ES8 and L90 will drive the transition of the large rear wheel SUV market towards full electrification and boost the sales growth across other models.

At the same time with NIO’s continued efforts in the charging and swapping infrastructure, its power swap network now covers major highways and expands into more counties in China. As the network effect of power swap is becoming more evident, over time more users will experience and understand the unique benefits of the NIO Power Swap. Built on the company’s 12 full stack technological capabilities and the nationwide charging and swapping network, the three brands are reaching a broader user base. Starting in Q3, the multi-brand strategy will drive our sales growth and capture greater market shares across the various segments, helping to advance our mission of shaping a sustainable and brighter future.

Since the beginning of this year, the company has focused on systematically enhancing operational efficiency and execution, leading to significant improvement in both R and D as well as sales and service. With rising sales, improving gross margin and the more efficient cost of control, we expect to see a substantial improvement in the company’s financial performance paving the way for the next phase of rapid growth. Thank you for your support. With that, I will now turn the call over to Stanley for Q2’s financial details. Over to you Stanley.

Stanley Qu: Thank you, William. Let’s now review our key financial results for the 2025. Our total revenues reached RMB19 billion, increased 9% year over year and 57.9% quarter over quarter. Vehicle sales were RMB16.1 billion, up 2.9% year over year and 62.3% quarter over quarter. The year-over-year growth was mainly due to higher deliveries, partially offset by a lower average selling price from product mix changes. The quarter-over-quarter increase was mainly from higher deliveries. Other sales were RMB2.9 billion, grew by 62.6% year over year and 37.1% quarter over quarter.

The annual growth was driven by increased sales of used cars, technical R and D services, sales of parts and after-sales of vehicle services at Power Solutions, while the quarter-over-quarter increase was mainly due to the increase in revenues from used cars, technical R and D services, parts accessories and after sales vehicle services. Looking at margins, vehicle margin was 10.3% compared with 12.2% in Q2 last year and 10.2% last quarter. The year-over-year decline was mainly due to changes in product mix, partially offset by lower material cost per unit, while quarter-over-quarter vehicle margin remained stable. Overall gross margin was 10% versus 9.7% in Q2 last year and 7.6% last quarter.

The year-over-year gross margin stayed stable and the quarter-over-quarter increase was mainly attributable to positive mix effect driven by the increase in revenue from used cars and technical R and D services. Turning to OpEx. R and D expenses were RMB3 billion, decreased 6.6% year over year and 5.5% quarter over quarter. The decreases year over year and quarter over quarter was mainly driven by lower design and development costs from different development stages, with the year-over-year also reflecting reduced depreciation and amortization expenses. SG and A expenses were RMB4 billion, up 5.5% year over year and down 9.9% quarter over quarter.

The year-over-year increase was mainly driven by higher personnel costs, rental and related expenses associated with the expansion of sales and service network, partially offset by decreased sales and marketing activities. The quarter over quarter decrease was mainly due to the decrease in personnel costs and marketing and promotional expenses, primarily driven by the company’s comprehensive organizational optimization efforts in marketing and other supporting functions. Loss from operations was RMB4.9 billion, down 5.8% year over year and 23.5% quarter over quarter. Excluding share based compensation expenses and organizational optimization charges, adjusted loss from operation was RMB4 billion, representing a decrease of 14% year over year and 32.1% quarter over quarter.

Net loss was RMB5 billion, showing a decrease of 1% year over year and a decrease of 22% quarter over quarter. Excluding share based compensation expenses and organizational optimization charges, adjusted net loss was RMB4.1 billion, representing a decrease of 9% year over year and 34.3% quarter over quarter. That wraps up our prepared remarks. For more information and the details of our unaudited second quarter 2025 financial results, please refer to our earnings press release. Now I will turn the call over to the operator to start our Q and A session.

Operator: Your first question comes from Geoff Chung from Citi. Please go ahead.

Geoff Chung: Hi, this is Geoff from Citi. Thank you, Li Bin Zhong and Stanley Zhong and congratulate with the good result. My first question is about ES8 and L90’s capacity ramp up pace and the delivery target for the rest of the year. And due to the strong order backlog, can we expect December single month run rate for the group to hit 55,000 unit or above? This is my first question.

William Li: Thank you for the question. It’s true that with the launch of the Envoy L90 and also the new Audio ES8, we actually see a stronger market demand higher than what we’ve expected before the launch. In that case, we’ve been working closely with our supply chain partners to improve and enhance the production capacity throughout the value chain and also the supply chain. Our target is that in October the full supply chain capacity for the Envoy L90 can achieve and reach 15,000 units a month. And for the ES8 as the ramp up of production takes slightly longer, we hope that the full supply chain capacity can achieve 150,000 units in December.

With that by looking at both the demand and the supply availabilities and capacity, our Q4 target is to achieve an average of 50,000 units deliveries per month for all three brands, which means that in Q4 our quarterly delivery target combining all three brands is 150,000 units.

Geoff Chung: Thank you, Li Bin Zhong. So my second question is about the gross profit margin and whether fourth quarter can breakeven at the bottom line level. So if we look at the second quarter, our revenue up 58%, but our gross profit up more than 100% Q on Q. So could you give us more color on the second half vehicle GP margin trend and the non vehicle GP margin trend? And also to be specific, how do you see the L90 and the ES8 GP margin independently? Thank you very much.

William Li: Thank you for the question. I would like to walk you through our Q2 product margin. In terms of the vehicle margin in the second quarter of this year, it was 10.3%. As in the second quarter, we have conducted the model year upgrades on the ET5, ET5T, EC6 and ES6 as the product upgrades happened in the mid and late May. In that case among the 72,000 units we’ve delivered in Q2 only around 20% was contributed by the model year ’25 products. In that case the actual margin improvement contributed by this four models is not that significant in comparison to Q1.

And then in the third quarter as we have the full quarter deliveries for the model year 2025 products as well as the start of deliveries of the L90, which will further help improve the vehicle gross margin. And then in Q4 as William mentioned starting late September, we are going to start the deliveries of the ES8. We expect the vehicle margin to further grow. So Q4 also represents the first full quarter for the deliveries of both L90 and ES8. With that, we expect the Q4 vehicle gross margin to be around 16% to 17% for the entire group to be able to achieve breakeven.

As based on the decade long battery bus tech innovation, the in house developed of core parts and components as well as the continuous efforts in the cost of control and the savings on the supply side as well as the product cost structure, We achieved not only competitive product performance for the L90 and beyond ES8, but also a very competitive cost structure and the pricing point. With that in Q4 our gross margin target for the L90 and ES8 is 20%. In terms of the gross margin of other sales, it’s 8.2 in Q2 and it’s mainly contributed by two factors.

The first is regarding the revenues contributed by our existing users, including via our aftermarket services, our auto financing business as well as the narrowed loss on the power services. And the second factor is regarding the margin contributed by our technological service provided to our partners. With this two combined, we’ve achieved a good and positive gross margin on other sales in Q2. And in terms of the revenues or margin contributed by the technological services we provide to the partners as it is highly dependent on the product and the project stage, the actual revenues contributed may not be consistent from quarter to quarter.

In that case excluding that part, our expectation for the gross margin on other sales is to be breakeven or slightly with a slight loss quarter over quarter.

Geoff Chung: Thank you for the new guidance. Looking forward to the fourth quarter. Thank you.

Operator: Thank you. Your next question comes from Bin Wang from Deutsche Bank. Please go ahead.

Bin Wang: Thank you. I just want to ask for more detail about number four quarter breakeven. Number one is that what’s your R and D expense for number three and number four quarter? I think you actually guide close to billion in the number four quarter. Do you still maintain the same guidance for the number four quarter? And secondly, it’s the same for SG and A. Lastly, what’s the breakeven means? Do you breakeven in the OP level or net profit level? Is GAAP or non GAAP? Thank you very much for my question.

William Li: Thank you for the question. Regarding the breakeven target, our quarterly breakeven target is based on the non GAAP basis. And regarding the R and D and SG and A guidance, starting Q2 this year, we have conducted a series of measures combining our CPU mechanism to control our R and D expenses. Our principle is that without compromising on the major and the core R and D activities and also product planning, we will keep improving the R and D efficiency, which means that without compromising or affecting our major product planning and R and D, we will push for higher efficiencies in the R and D activities.

With that our target for the Q3 and the Q4 R and D expenses on the non-GAAP basis will be RMB2 billion per quarter. And in terms of the SG and A expenses also based on our CPU mechanism we’ve conducted measures to improve the overall SG and A efficiency. In the second quarter, our sales volume is at the magnitude of around 70,000 units. So the SG and A ratio to the sales revenue still accounts for a relatively high percentage. But as in Q3 and Q4, we grow our sales volume and also sales revenue, we expect the percentage of SG and A in the sales revenues to actually coming down to a more reasonable range.

But as in Q3, we’re planning several new product launches, there will also be corresponding marketing and go to market expenses. In that case, in Q3, we are still not able to achieve a breakeven on the SG and A expenses. But in Q4 the non GAAP target for the SG and A expenses will be within 10% of the sales revenue.

Bin Wang: Thank you, Womin.

Operator: Thank you. Your next question comes from Tim Hsiao from Morgan Stanley. Please go ahead.

Tim Hsiao: Hi. This is Tim from Morgan Stanley. Thanks for taking my question. So I have two questions. The first one is about the new model pipeline. Given the robust demand of L90 and ESD that occupied our capacity, well, the company adjust the launch schedule for the upcoming models. And we noticed that the NIO days, has notably moved forward to late September. Can management also share more insight into the updated model pipeline in the following quarters? That’s my first question. Thank you.

William Li: Thank you for the question. It’s true that at the moment we actually prioritize the production of the L90 and also the All new ES8 from the production capacity perspective. For the ARMOR brand, we even have to really give way to the L90 productions and compromising on the production of L60. So that it will find that our L60 users are also waiting up to pick up their cars. So right now we actually have four models with backlog order backlogs accumulated and the users will need to wait for the new car pickup including L90, Onu ES8, L60 and also Firefly.

And regarding the production capacity for the ARMOR product starting October, we expect the capacity to come back to a normal range, mainly supported and fueled by the production capacity of the battery. As in the past several months, we’ve been working closely with our battery partners to ramp up the production capacity. With that in Q4 for the ARMOR brand, we expect the full supply chain production capacity to be around 25,000 units a month. And regarding the new brand for the launch of all new ES8, we also have challenges regarding the supply of the brand new 102 kilowatt hour battery.

As the demand of the ES8 is actually stronger than we expected, then we at the beginning we underestimated the demand for the ES8 and also the volume assumption for the battery packs. We’ve been working closely also with the battery suppliers and partners to secure the supply of this new battery pack. With that in Q4, we expect the full supply chain capacity for the new brand can also achieve a 25,000 units monthly capacity. And regarding FarFly, we are also steadily increased its production and supply capacity. And in Q4, we expect the production capacity to ramp up to up to 6,000 units a month at its peak.

So it means that in Q4, the combined production capacity of all three brands will be as high as 56,000 units a month to be able to support our demand. As we have already dedicated our full capacity to the production of the existing models in the market, So for this year, we will not have any new models launched or delivered to the market. Previously, we’ve mentioned that we plan to also launch the L80 of the Ambu brand. But as now we have run out of all the capacities available, we actually have to decide to delay the deliveries of this new model.

But in terms of the launch or the go to market cadence for the L80, that’s to be decided. In addition to the onboard L80, next year in the coming quarters, we also have another two new models coming under the new brand to also two large SUVs. One is the ES9 as many of the users and the public already know about it and also ES7, a large five seater SUV model. As for the New Day this year, as it is happening in September, the protagonist of this event will be definitely the all new ES8.

Tim Hsiao: Thank you, Lian. My second question is about the pricing strategy and also just a quick follow-up on the margin side. Because we noticed that both the L90 and the new ES8 have launched with aggressive pricing strategies. So I just want to know that will this pricing strategy be extended to all the upcoming models under both brands? And if that’s the case, how should we think about NIO’s gross profit margin trajectory into next year? What would be a more sustainable and ideal equal margin level once all the new models are upgraded next year? That’s my second question. Thank you.

William Li: Thank you for the question. For the entire company as we’ve also previously mentioned for the long term our group level product margin is actually 20%. That’s our target. More specifically on the gross margin by brand for the new brand our target is to achieve 20% vehicle gross margin and even target a higher margin of 25%. And for Anvil, no lower than 15% for the long term and for Firefly around 10%.

For the ES8 and the L90 newly launched this year as well as the new models coming up next year, we also have this we’ll also contribute to this target as at the product definition and design stage we have already prepared for an aggressive pricing strategy and our cost structure can also support such strategy to be able to achieve more competitive pricing of our products without compromising on the product competitiveness itself. This is actually driven and enabled by our decade-long tech innovation, technology accumulation, in house developed parts and systems and also stringent cost control.

Operator: Your question comes from Jing Cheng from CICC. Please go ahead.

Jing Cheng: Thank you for taking my questions. My first question is still about our L90 and also ES8. So we have already seen that these two new models have already demonstrated our enhanced product capability and also very competitive pricing still with a very solid gross profit margin. So besides previously Stanley has already told us of the technology and also the platform upgrades. Could you share more about the underlying successful experience about these two new models such as our changes on maybe supply chain, maybe the dealers networks? This is my first question.

William Li: Regarding the overall product competitiveness on the third generation, it is actually getting stronger and better. And this also allows for more competitive product competitiveness as well as the cost structure. And as we’ve mentioned, this is enabled by our continuous tech innovation. Let’s say the 900 volt high voltage architecture, this platform actually allows for more integrated and a lightweight design that’s not only in the powertrain system as well as the high voltage architecture throughout the vehicle to be able to achieve high performance and the lightweight design. Such lightweight design also allows for improved cost structure and also experience competitiveness.

For example, on the ES8 and also L90 we’ve achieved a huge frunk and also trunk space, such huge storage space is also enabled by the high integration level of our architecture and systems. And another example is regarding the smart technologies, the digital architecture. On the third generation, we adopted the innovative digital architecture with the central computing cluster plus the zonal controllers. This can help achieve a better cost as well as the mass performance and the management. Let me take e fuels as an example. Previously on other older models, there are physical fuse box, which is as heavy as 10 kilos per car and it can take up eight liters of space.

But with eFuse, we are able to integrate them into the master board that can actually manage the power supplies throughout the vehicle at a very detailed and precise level, but still contributing to the mass reduction and cost improvement. So this improvement in both cost structure as well as user experiences are enabled by the tech innovation. Another example is regarding our proprietary smart driving chip. Of course, we’ve made the major upfront investment in the chip development, but the performance of our in house developed smart driving chip NX9031 can achieve the performance that is on par with four flagship chips in the industry.

So R&D-wise, we made investment upfront yet BOM cost wise this smart driving chip can also achieve savings. And another thing is regarding the technology roadmap, mainly the chargeable, swappable and upgradeable technologies for our products. With this, we are able to select the most suitable and optimal battery packs, including its capacity and the size for our users. For example, for some of our peers and competitors, they actually needed to strike a balance between the battery cost and also the battery range. Then they choose the LFP as the chemical system and they make a battery pack of around 90 or 100 kilowatt-hour capacity.

But with that the battery pack is actually very big and heavy. If you look at our battery packs for the Envoy L90, put a 85 kilowatt hour battery inside and for the ES8, a 102-kilowatt-hour battery inside. They can achieve the driving range and performance on par with those peers. But in terms of the mass, the 80 fiveone is only around 400 kilos and the 102 kilowatt hour battery pack is only around 500 kilos. So it is actually around 200 kilos lighter than many of our peers’ solutions. This is also another mass and cost optimizations enabled by our chargeable swappable and upgradable tech solutions.

And in terms of a competitive product in both cost as well as the user experience, I think three things will define the competitiveness of a product. The first is regarding the technology roadmap, the second is regarding the product planning and the third is regarding the product definition itself. And our past practice and experiences prove that our technology roadmap, including our multi-brand strategy, our chargeable, swappable, upgradable solutions, our full stack tech capabilities develop in house as well as our product planning are in general in the right direction. Yet when it comes to the product definition, we did have some lessons learned from the previous generations and platforms.

With that on the third generation with our all new ES8 and L90, we not only draw the best practices from the industry and peers, but also make corrections from within to be able to achieve a better product performance and the success with ES8 and L90 as it is actually drawing the effort of our competitive technology roadmap, reasonable product planning as well as more precise product definition and the market insights that can fit for the users’ needs in the Chinese market. And in terms of the supply chain, this is also playing a very important role in achieving the long term competitiveness of our product cost structure by establishing a win cooperation with our partners.

And in the past one or two years, we’ve also made adjustments to our supply chain and the partner strategy. In general, we look for the partners who believe in the roadmap technology decisions of the company as well as believe in the long term potentials of the company. And we work closely with these partners to jointly define the cost of targets and all types of targets. So for the existing products and also the coming platforms, we will also adopt this principle in our nomination and the sourcing strategy to be able to work with our partners closely.

Stanley Qu: Thank you, Tianjin.

Operator: Thank you. Your next question comes from Ming-Hsun Lee from Bank of America. Please go ahead.

Ming-Hsun Lee: Thank you, Wei Lin, and congrats for the good results. I also have two questions. So my first question is, could you confirm your new model pipeline for 2026? Can I confirm there will be at least five new car, which include ES6, ES7, ES9, L80 and also the second model under the Firefly brand?

William Li: Regarding our product strategy for 2026, as we’ve mentioned, we will focus on three large SUV models for the Envoy and also the new brand. Regarding the ET5, ET5T, ES6 and ES6, as this year we have just upgraded these four models to the model year 2025. For next year, we don’t have major plans to upgrade or facelift these four models. As on the model year 2025, we’ve already upgraded interior, exterior, the smart system is also upgraded to the latest C. S platform with both upgrade in the smart driving chip as well as the operating system. And recently we have also announced to make 100 kilowatt hour battery as a standard configuration on these four models.

We believe that with all these changes the competitiveness of these four models will continue to be strong in the coming quarters. Of course, it doesn’t mean that we will make zero changes to this model. We will still roll out some product calendars as this year earlier this year we have released the Champion Edition for the five and the six series and in the coming year we will also have such special versions and additions for these models. And also for the Firefly brand, we don’t have a plan for the second model next year.

Ming-Hsun Lee: Thank you, William. And my second question is regarding to the operating expense control. So in 2026, what level do we expect for your R and D expense per quarter? Do you think you can maintain around RMB2 billion non GAAP R and D expense per quarter? And also, could you guide your latest CapEx plan for 2025 and 2026? Thank you.

William Li: Regarding the R and D expenses, starting this year we’ve made major efforts based on the CPU mechanism improving our R and D efficiencies and the overall ROI of our R and D activities and investment. For the next year, our quarterly R and D expense non GAAP will be around RMB2 billion to RMB2.5 billion per quarter. That is a reasonable range for us to also maintain our long term competitiveness from the technology perspective. The major liabilities comes from the new model development as we believe that the investment for the foundational level R and D activities and technologies are mostly finished.

And also regarding the CapEx as we haven’t started the operational target discussion and the setting for the next year, I may not have a very clear or precise outlook regarding the CapEx for 2026, but I can share with you two principles we have. The first is regarding the power swap network. In general, we still hope to leverage as much as possible the Huffman’s resources and for the Power Swap network construction. And regarding the R and D CapEx and it’s well, regarding the CapEx on the product, it’s mainly dependent on the overall R and D cadence and also go to market strategies of the new models.

Overall speaking for next year, we hope the CapEx can be similar to the level of this year or if possible achieve even better results next year. But as I’ve emphasized, it’s highly dependent on the overall launch cadence and also R and D cadence of the new models.

Operator: Thank you. Your next question comes from Paul Gong from UBS. Please go ahead.

Paul Gong: Thanks William for taking my question. My first question is regarding the impact of the 100 kilowatt hours of the battery that you are going to adopt across new brands. Can you share with us the financial impacts of this strategy? Definitely, we can see that the competitiveness of the vehicles are getting enhanced because of this 100 kilowatt hours of the battery. But what would be the incremental costs on your front? Thank you. This is my first question.

William Li: Thank you for the question. When we announced the policy changes on the 100-kilowatt-hour battery pack, we’ve already introduced the potential impact or implications on the financials of the product. As when we launched the model year 2025 product, we offered a series of special offers and discounts to our users together with the products. And this time when we make the 100-kilowatt-hour battery standard configuration of the five and the six series, we actually withdraw many of these offers we provided at the launch of the product. And in exchange, we offer the 100-kilowatt-hour battery as a standard configuration.

So from the transactional perspective, there is no major change from the users perspective as well as from the vehicle margin perspective, there is also no major impact. And another impact is more on the sales and the upper funnel of our sales leads for the five and six series after announcing the change on the 100 kilowatt hour battery. We actually observed increases in the upper funnel incoming leads. Of course, this is a newly launched policy in terms of the long term implication, we will still need some time to observe, but overall impact is more positive than negative.

Paul Gong: Okay. So my second question is regarding the impact of switching to your self developed chips. Just now I think William mentioned that it is saving cost and it is also depending on the volume because of the fixed cost versus the volume. So can you give us some color that, for example, if you are delivering 20,000 per month with a new self developed chip, what would be the cost saving on the per car basis If this volume is coming to 50,000 per month, what would be the positive impacts from the cost saving angle due to the switching of the self developed chips? Just want to have the better estimate and sensitivity on that. Thank you.

William Li: Thank you for the question. Regarding the chip R and D expenses and investment as we actually recognize that in our immediate financials and the P and Ls, so it’s actual cost of savings per unit is not really closely tied in the actual volume we sell or actual number of the pieces we sell. As in terms of the production of these chips, we purchased the wafers directly from our chip manufacturing partners. So in that case, cost of saving per unit through the in house developed chip is not tied into the delivery volumes we achieve.

But in comparison to the chip solution we used on the second generation products, achieving the same level of computing performance, the cost is actually more advantageous and competitive with our own solution. And even on the third generation in comparison to the industry flagship smart driving chips, we still have a cost advantage and the competitiveness with our in house solution. But here I will not elaborate on the specific savings achieved per piece.

Paul Gong: Okay, I understood. That is very helpful. Thank you.

Operator: Thank you. Your next question comes from Yuqian Ding from HSBC. Please go ahead.

Yuqian Ding: Thank you, team. The first question would be more exploration on the pricing side. So ES8, L90 attractive pricing, good volume traction. So how does management would evaluate the potential internal cannibalization to the existing portfolio such as ES6 or L60 and the potential splash impact into next year’s new model pipeline?

William Li: As we’ve mentioned, the pricing of strategy for a product is highly dependent on the market competition, the cost structure of the product as well as the volume and the pricing sensitivity of the product in the segment. For the L90 as we’ve mentioned with its launch actually it has helped boosted the sales volume of L60. Right now even for the L60 users they will have to wait for the new cars deliveries and pickup. Actually in August, we even achieved a new high for the order intake of L60 for this year. So the overall impact from L90 on L60 is positive.

Regarding And the all new ES8, as we’ve also mentioned, we have now made the 100 kilowatt hour battery as standard configuration on the five and six series. So the attractive pricing of ES8 is helping boost the brand awareness of the new brand, which can also introduce more attention to the five and the six series. So with this logical and clear pricing system set up for the brand, we believe that the overall impact will also be positive on the new brand. Maybe at the beginning, our fellow will struggle with how to allocate their focuses at the time across different products.

But for the long term, we believe that the impact of these two models and the new models will be positive across the brands and the products. And also as we see strong demand for the Onui S8 and L90, we have also observed the successful product or great product great large three row battery electric SUV models launched not only by NIO, but also by our competitors who used to have only with products in the market. So with all these large three row SUVs coming to the market, we also observed a market trend in the first half of this year.

The growth rate of BAB segment increased by 39% year over year and for RIBS that’s only 14%. If we consider about the sales volume in July and August for the BAF and the RAV respectively, I believe that the growth rate of the BAF will be even faster than that of RAV. In that case, are observing growing competitiveness of the products in the mid and the mid large battery electric SUV segments as this is more well received and also evident to the public.

This is why we say that the golden era of the large fair role battery electric SUV is arriving as with more mature user mindset and also stronger competitiveness of the product, the market is shifting towards that direction. This will also help the long term competitiveness and the popularity of our existing SUV models including ES6 and L60.

Stanley Qu: Thank you, Richard.

Yuqian Ding: Yes, got it. Thank you. The second question is a little bit more exploration on OpEx side. You touched upon the innovation redesign and R and D commitment. So could you give us a little bit more quantification and breakdown in terms of the OpEx cuts target, if there is any? Or just breakdown the cost optimization initiatives seeing a little bit more details? Thank you.

William Li: Thank you for the question. As we’ve introduced towards the Q4 non GAAP breakeven target, our overall principle is that for the R and D expenses without compromising on the major R and D activities and also long term competitiveness, we would like to control the quarterly R and D expenses to be within RMB2 billion for this year and for SG and A ratio to the sales revenue around 10% this year. That’s our target for this year towards the quarterly breakeven.

And for the long term, as we’ve also mentioned, for the year of 2026, our R and D expenses will be around RMB2 billion to RMB2.5 billion per quarter depending on the product go to market and also development cadence. And as for the SG and A expenses, we would like to continue to achieve higher efficiency and utilization of expenses. That’s the overall principle.

Stanley Qu: Thank you, Yuxin.

William Li: Thank you.

Operator: Thank you. Your next question comes from Tina Hou from Goldman Sachs. Please go ahead.

Tina Hou: Thanks management for taking my question. Just a very quick one. So in the longer term, how should we think about the stabilized sales volume of L90 as well as ES8 on a like average monthly basis? Thank you.

William Li: Thank you for the question. As the automotive industry here in China is highly competitive and if you look at the sales trend of the smart electric vehicles, you seldom see any new model that can capture a very stable market share and very major trend or popularity in the market for a very long time. In that case, it’s also difficult for us to really share with you a clear outlook regarding what the stabilized sales volume of the ES8 and L90 will be for the long term. But definitely, we set ourselves a higher target and we will also try the best.

Starting this year for the new and ARMOR brand, we also started to build up the team capabilities by implementing a completely new sales and marketing paradigm. We hope that through this new sales and marketing paradigm, it can actually help us to maintain and capture the market share of our new models as soon as possible to prolong their impact and influence in the market and also to stabilize their winnable and satisfying sales volume in the market against the fierce competition as long as possible.

But as we have just implemented this paradigm and it will also take time for us to understand if it is truly helping us with the stabilization of these two great models ES8 and L90. But overall, we hope that this can achieve a good result that is satisfying to the market, investors and also our users.

Operator: Thank you, William.

Rui Chen: Thank you. As there are no further questions now, I’d like to turn the call back over to the company for closing remarks.

Rui Chen: Thank you again for joining us today. If you have any further questions, please feel free to contact NIO’s Investor Relations team through the contact information on the website. This concludes the conference call. You may now disconnect your lines. Thank you.

Image source: The Motley Fool.

Date

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

Call participants

Chairman and Chief Executive Officer — Efraim Grinberg

Executive Vice President and Chief Financial Officer — Sallie DeMarsilis

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Risks

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

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

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

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

Takeaways

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Summary

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

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

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

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

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

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

Industry glossary

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

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

Full Conference Call Transcript

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Efraim Grinberg: Certainly. Absolutely.

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

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

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

Hamed Khorsand: Okay. Very good. Thank you.

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

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

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

Image source: The Motley Fool.

Date

Thursday, August 21, 2025 at 8:30 a.m. ET

Call participants

Chief Executive Officer — Tim Danker

Chief Financial Officer — Ryan Clement

Executive, Health Care Services — Bob Grant

Executive, Technology/Operations — Bill Grant

Investor Relations — Matt Gunter

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Takeaways

Consolidated revenue— $1.53 billion in revenue for fiscal 2025 (period ended June 30, 2025), representing 15.5% growth over fiscal 2024.

Adjusted EBITDA— $126 million in adjusted EBITDA for fiscal 2025, with an adjusted EBITDA margin of 8%, up 8% from the prior year.

Health care services revenue— $743 million for fiscal 2025, growing approximately 55% year over year.

Health care services adjusted EBITDA— $25 million in adjusted EBITDA for fiscal 2025; margin rose to 5.5% in the fourth quarter.

Senior segment revenue— $600 million for fiscal 2025, with adjusted EBITDA of $162 million; EBITDA margin in the senior segment up 200 basis points in fiscal 2025 compared to 2024.

Medicare Advantage policies approved— 593,000 approved Medicare Advantage policies for fiscal 2025, representing a 5% decline from fiscal 2024.

Agent productivity— 24% increase in policies per agent in fiscal 2025 over fiscal 2024.

Life division revenue— $173 million for fiscal 2025, growing 10% over fiscal 2024; adjusted EBITDA of $27 million for fiscal 2025, a 32% increase in adjusted EBITDA for the Life segment and margin improvement of more than 250 basis points compared to fiscal 2024.

SelectRx membership— 31% year-over-year membership growth for fiscal 2025; 2,500 new members added in the fourth quarter.

Revenue to customer acquisition cost ratio— The revenue to customer acquisition cost ratio expanded from 1.7x to 6.1x over the past three years.

Technology and AI impact— 7.5 million calls routed through automation and over 300,000 health care services interactions powered by AI; agent enrollment time reduced by 25% in fiscal 2025, and health assessment time reduced by 30%.

Fiscal 2026 revenue guidance— $1.65 billion to $1.75 billion in revenue for fiscal 2026 (approximately 11% year-over-year growth at the midpoint).

Fiscal 2026 adjusted EBITDA guidance— Adjusted EBITDA guidance of $120 million to $150 million for fiscal 2026, implying around 7% midpoint growth.

Health care services fiscal 2026 outlook— Health care services revenue is expected to grow approximately 20% in fiscal 2026; adjusted EBITDA is projected to exceed $50 million for fiscal 2026.

Cash flow— Operating cash flow is expected to be positive for fiscal 2026 and on an annual go-forward basis.

First quarter fiscal 2026 guidance— Forecasting a consolidated adjusted EBITDA loss of $25 million to $30 million in the first quarter of fiscal 2026 due to SAP dynamics and AEP hiring.

Capital structure improvements— October securitization and February preferred equity offering cited as actions that reduced overall cost of capital and increased operational flexibility.

Select Patient Management and Select Medical— Not expected to contribute meaningful EBITDA in fiscal 2026, but described as potential future growth drivers.

Summary

SelectQuote(SLQT 36.07%) delivered double-digit growth in consolidated revenue and single-digit growth in adjusted EBITDA for fiscal 2025, with results heavily supported by rapid expansion in its health care services segment. Management emphasized improved efficiency, capitalizing on technological advancements and automation to drive down variable costs and accelerate customer acquisition. Operating cash flow is expected to turn positive in fiscal 2026, reflecting a shift toward more consistent and sustainable free cash generation. The company outlined stable or growing profitability in its core lines, while taking a measured approach to agent hiring and policy growth in the senior segment to optimize margins. Near-term headwinds are expected for EBITDA margins due to the business mix, but these are planned and aligned with higher near-term cash generation priorities.

CEO Danker said, “we plan for a flatter year in Medicare Advantage submissions through our senior distribution business in fiscal 2026” as the company balances growth and cash flow focus.

AI and automation initiatives are credited with tangible gains in customer service speed, with specific examples including “25% reductions in enrollment time” and “more than 300,000 unique health care services interactions” processed.

CFO Clement said, “we anticipate generating positive operating cash flow in fiscal 2026 promising consistent cash flow positivity for the foreseeable future.”

Management does not expect Select Patient Management or Select Medical to generate material EBITDA in fiscal 2026, but describes ongoing investment as crucial to long-term value creation.

Cost of capital was meaningfully reduced through recent financial transactions, with additional actions planned to further improve the company’s leverage profile and funding flexibility.

Industry glossary

AEP: Annual Enrollment Period—a specific window when Medicare beneficiaries may enroll in or change Medicare Advantage and prescription drug plans.

SEP: Special Enrollment Period—periods outside of standard enrollment allowing for Medicare plan changes due to qualifying life events.

Commission receivable: Future policy commissions contractually due to the company over a multi-year period, recorded as a receivable asset on the balance sheet.

SelectRx: SelectQuote’s in-house prescription drug delivery platform targeting senior and other health care consumers.

Revenue to CAC ratio: A metric comparing total revenue generated to aggregate customer acquisition cost, highlighting efficiency of marketing and sales strategies.

Full Conference Call Transcript

Operator: Welcome to SelectQuote’s Fourth Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed with the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. It’s now my pleasure to introduce Matt Gunter. SelectQuote Investor Relations. Mr. Gunter, you may begin the conference.

Matt Gunter: Thank you, and good morning, everyone. Welcome to SelectQuote’s fiscal fourth quarter earnings call. Before we begin our call, I would like to mention that on our website, we have provided a slide presentation to help guide our discussion. After today’s call, a replay will also be available on our website. Joining me from the company, I have our Chief Executive Officer, Tim Danker and Chief Financial Officer, Ryan Clement. Following Tim and Ryan’s comments today, we will have a question and answer session. As referenced on slide two, during this call, we will be discussing some non-GAAP financial measures.

The most directly comparable GAAP financial measures and a reconciliation of the differences between the GAAP and non-GAAP financial measures are available in our earnings release and investor presentation on our website. And finally, a reminder that certain statements made today may be forward-looking statements. These statements are made based upon management’s current expectations and beliefs concerning future events impacting the company, and therefore involve a number of uncertainties and risks. Including but not limited to those described in our earnings release, annual report on Form 10-Ks for the period ended 06/30/2025, and other filings with the SEC.

Therefore, the actual results of operations or financial condition of the company could differ materially from those expressed or implied in our forward-looking statements. And with that, I’d like to turn the call over to our Chief Executive Officer, Tim Danker. Tim?

Tim Danker: Thank you, Matt, and thanks to everyone on the call. Today, I will start with a review of fiscal 2025. Which will be brief given the drivers of another successful year. Have been consistent with the recent past. I’ll then provide additional color on the unique environment we saw this past quarter. I’ll then spend the bulk of my time on what we’re planning for the years ahead. Additionally, I’ll contextualize the near-term strategic goals for SelectQuote relative to the broad market opportunity we’ve spoken to in the past. So with that as the outline, let me begin on Slide three. With an overview of our performance highlights for fiscal 2025.

We ended the year with consolidated revenue of $1.5 billion which grew 16% compared to a year ago. As we’ve noted all year, the top line increase has been a function of the rapid growth of our health care services business, and SelectRx. Full year health care services revenue grew by approximately 55% to nearly three-quarters of a billion dollars. This is an incredible result in just a four-year history for the business. Our senior Medicare Advantage business performed very well against a challenging market backdrop for the industry.

With significant plan changes by carriers this season, as well as new SEP parameters for beneficiary eligibility, American seniors relied on SelectQuote and our agents who advise and help find the best plans to fit their individual needs. We’re most proud of how our model and agents performed under pressure. Where we drove another year of record agent productivity up 24% and ultimately drove above target EBITDA margins for the third straight year. On a consolidated basis, SelectQuote drove $126 million of adjusted EBITDA which represents an EBITDA margin of 8%. Margins were relatively in line with last year’s result, despite adding $264 million, an incremental revenue from our lower margin health care services business.

In short, we’re very proud of what the team accomplished this year, and how we are set up for the future. If we turn to slide four, let me put those accomplishments in more detail. We have presented these metrics in the past, and I want to highlight them one more time to emphasize the consistency we have achieved our senior Medicare business. As you remember, we reset our strategic priorities back in 2022, And since then, our focus on profitability and repeatability has been paramount. We’re very pleased with the efficiency gains we’ve been able to yield in the senior business.

We’ve become more efficient in the throughput of how policyholders are assisted via our year-round agent model, and our ever-expanding use of technology. We’ve become steadily efficient in how our services are marketed, in which leads we pursue in a given season or intra-season. It is also important to note that these decisions are rooted in the north star driving profitability and cash flow. As a result, Sunflip Senior has been able to drive near record margins in each of the last three years, despite wide variations in Medicare selling environments from one season to the next.

And finally, SelectQuote continues to leverage our information and connectivity advantage within health care which you can see in our revenue to CAC ratios. We are increasingly able to help more beneficiaries caregivers, and payers by offering a wider set of health care solutions. Best of all, the model is well aligned when our stakeholders do well, SelectQuote and our shareholders do well. The revenue to cap ratio, which includes both our senior and health care services revenues is how we track the reach of our model. Over the past three years, we’ve expanded our revenue to customer acquisition cost ratio from 1.7 times to 6.1 times.

We’re excited about the year ahead for health care services and believe we are in the early innings of how we can leverage our information advantage, technology, distribution to connect more services between those receiving care and those that provide it. We’re immensely proud of the ways our differentiated model and approach to health care serves such a wide breadth of Americans. But we’re equally excited about the implications for our company’s return and cash flow. Before I get to that, on slide five, let’s review the highlights of our year in health care services primarily driven by SelectRx. As I’ve noted, it was another strong year of growth with revenue of $743 million.

Most importantly, we made meaningful progress on the scale and profitability of the business despite concurrent investments and our new state-of-the-art distribution facility in Olathe, Kansas. We ended the fiscal year with adjusted EBITDA of $25 million which is up significantly year over year but still small from a margin perspective relative to what we believe is ultimately possible. The best representation of that operating leverage potential is the difference in growth between our revenues and membership in fiscal 2025. As noted, revenues grew nearly 55% over the last year, while our membership grew roughly 31%. As we mentioned last quarter, we believe this year has been a pivotal one in terms of scale of membership.

To be clear, we believe there is significant growth capacity for new members on the platform. Especially with the addition of our state-of-the-art Kansas distribution facility which significantly increases our potential capacity. With that said, expect to see increased margin and cash flow contribution in fiscal 2026 from SelectRX as scale from seasoned members continues to drive results. It is clear that a revenue base nearing three-quarters of a billion dollars is a significant asset and one that we are very focused on leveraging in 2026 and beyond. If we turn to slide six, let me quickly review our strategic vision for SelectQuote. As a broader connector within the health care ecosystem.

Today, we have clearly driven scale in both our senior Medicare Advantage and SelectRx businesses. More importantly, we have operated these businesses with a growing track record of profitability, and have done so in a range of market environments, for both Medicare Advantage and prescription drugs. As we’ve noted in the past, we believe SelectQuote’s ultimate value is as a holistic solution provider across the $5 trillion US health care market. While there is a significant growth and value creation for shareholders in this endeavor, we also note that our integrated model can be a solution for what has historically been a very inefficient system.

The information we harness, connectivity we create as an intermediary in the health care ecosystem, is tangibly valuable in a wide number of ways. Americans get better in more tailored care based on individual needs. Payer expenses are reduced because patients have better treatment adherence, which leads to better health outcomes. And, ultimately, the broader health care system benefits because Americans are directed to payers, and caregivers that create the best and most efficient patient results. This is particularly important given the traditionally underserved communities we serve which few more rural, lower income, and with more chronic conditions than the general population. This alignment across patients, payers, caregivers, taxpayers, and shareholders why we believe we are just getting started.

In what is ultimately a very value-enhancing opportunity in health care. Today, our challenge is not how to grow. As evidenced by the rapid adoption of our SelectRX platform. But instead, it’s how we balance growth while simultaneously generating a growing stream of sustainable cash flows. This is a good problem to have. We believe our current revenue to CAC ratio of 6.1 x is a compelling proof point in our ability to address the much broader health care market regions, including health care select, and Select patient management. That brings me to slide seven where I’d like to provide additional detail on our evergreen work to drive operational and cash efficiency.

First, I’ll emphasize that SelectQuote has been using technology and computing power to automate tasks and optimize decision-making since our founding forty years ago. That has not changed and it never will. We are highlighting it here given we see AI as critical to our goal to become a comprehensive health care services platform and we believe SelectQuote has a significant head start versus the competition. In our view, the reasons automation and technology are so important are threefold. First, technology is foundational to SelectQuote. And we know that our customers and partners get a higher level of service quality and reliability because of it. Second, our technology is dynamic and has the flexibility to solve for different market environments.

The evidence is in the stability of our financial results, relative to the different Medicare Advantage markets, we have operated through the past three years. Third and most pertinent in today’s SelectQuote technology represents a fixed investment that could be scaled efficiently. Put another way, our technology has been part of SelectQuote since the beginning. It’s not something that we are initiating with the advent of AI. In fact, AI will only amplify our tech-enabled model. The power of that leverage is evident in the efficiency metrics I shared for senior, well as the metrics at the bottom of this page.

Buckwood has routed over 7.5 million calls through intelligent automation, and AI has powered more than 300,000 unique health care services interactions. Technology is critical in organizing and optimizing those customer touch points, and to do so at our high level of customer service is a significant feat. But we are not just a volume processor. Enrollment time has improved by 25% over the past year. Our technology also makes a difference in the lives of our customers. Most importantly, through better health care service fit, and process efficiency. Our technology has also reduced the time in our health needs assessment calls with customers by 30%.

Most importantly, our technology is critical to our ongoing strategy to drive scaled revenues across the ecosystem which results in compounding and sustainable cash flows. Which brings me to Slide eight, Historically, we’ve talked a lot about the growth in profitability of our senior and health care services segment separately. But we created this view to highlight an emerging attribute of our diversified platform that we believe is underappreciated. As you know, the cash flows for our senior business are different than our health care services business. The diversity of that mix is a valuable input for how we manage the business and ultimately drive value for shareholders.

Specifically, health care services revenues and EBITDA are effectively immediate from a cash perspective whereas our Medicare Advantage revenues accrue over the life of a policy as it renews year after year. As our health care services business has continued to scale, it provides us better optionality how we think about capital allocation from one season to the next. We believe and we’ve heard from shareholders, that a sustainable and growing base of cash flow is important. In fiscal 2026, we believe our differentiated ability to accelerate cash flow generation through business mix is the right strategy to drive shareholder value. For context, we know that Medicare Advantage currently is and will remain in flux for fiscal 2026.

This has been well documented in the results of carrier partners, and others in the industry over the past few earning cycles. As I discussed earlier, we’ve demonstrated our ability to deliver attractive returns in our senior business over the past three years through three very different Medicare selling seasons. That said, the scale of our health care services platform now gives us strategic optionality that we didn’t have before. In the year ahead, as we continue to balance cash flow production with growth, we plan for a flatter year in Medicare Advantage submissions, through our senior distribution business.

To be clear, we believe growth in MA is a choice, we’ve built a nimble engine that is primed for growth at short notice. We remain highly confident in our view that 20% plus EBITDA margins are achievable for the segment driven by our technology and agent-led model. On the last point I’ll make, Ryan will elaborate on, is that while our fiscal 2026 forecast shows a dampening effect on EBITDA margins, because of the higher mix of SelectRx it is important for analyst investors to recognize the opposite will be true with regard to cash flow generation.

In fact, we expect FICO to be operating cash flow generative in fiscal 2026 and much of that will be driven by our view that health care services EBITDA will grow and will exceed $50 million. As we’ve noted in our strategic redesign, our focus is to prioritize cash flow and profitability. We’re excited about the overall business’ embedded cash flow potential, given our commissions receivable balance of approximately $1 billion and our growing health care services business. Which is approaching $1 billion in annual recurring revenue, with an improving margin profile.

We believe the decision to drive incremental cash flow will pay significant dividends and how we can compound and deploy that cash flow for more profitable growth and shareholder value in the future. The range of ways that can unlock the value is broad, from future growth in MA and new health care service offerings to continuing to lower our cost of capital. I’ll turn the call over to Ryan to detail our financials, but I’ll conclude by saying Blackwood has never been better positioned to harvest the gains of our strategy we are today. Brian?

Ryan Clement: Thanks, Tim. On slide nine, I’ll start with our fiscal 2025 results. As Tim noted, it was another successful year across the organization. With both revenue and EBITDA beating our original guidance set last September. SelectQuote grew revenue 15.5% to $1.53 billion. Our full year adjusted EBITDA totaled $126 million which grew 8% compared to a year ago. For the full year, our adjusted EBITDA margin was relatively stable which we view very positively considering the majority of our revenue growth was generated by our lower margin but increasingly profitable and cash generative health care services segment. Let’s shift to slide 10 to review our senior segment. Where full year revenue totaled $600 million and adjusted EBITDA totaled $162 million.

As we noted earlier in the year, our agent-led model performed extremely well in a unique season. With policy features in flux and a significant number of planned cancellations by carrier, we delivered strong results during the season with an agent force that was approximately 26% smaller than in fiscal 2024. We are most proud of the operating efficiency exhibited over the year with this smaller agent workforce. Our revenues were only 8% lower and more importantly, we drove EBITDA margins that were about 200 basis points higher which ultimately drove similar EBITDA dollars compared to 2024. Turning to slide 11. Let me detail our production and LTV metrics.

For the full year, we approved MA policies totaled 593,000 compared to 625,000 in fiscal 2024. The 5% decline was the strategic agent staffing choice, but we drove 24% more policies per agent compared to last year. That agent efficiency combined with lower marketing expense for policy were the key drivers of our margin expansion for the year. In the fourth quarter, our senior segment produced 85,000 approved MA policies down 20% year over year due to the lower agent headcount and the changes to the SEP. LTV for full year 2025 was $884 per policy. Which is 3% lower compared to 2024. As we mentioned previously, the decline was primarily a function of commission mix and timing.

LTV for the August ’37 was 1% lower compared to 2024. Which was in line with our expectations. On slide 12, let’s move to our health care services results. We continue to see strong demand for our SelectRX platform, where year-end members grew 31% compared to fiscal 2024. In the fourth quarter, we grew membership by additional 2,500. As a reminder, we believe there is significant runway to broaden this important and valuable service for both our Senior Medicare Advantage customers and for all Americans with the need for reliable and convenient prescription drug delivery. While the addressable market for our SelectRx is massive, our business and shareholders can also benefit through the ability to drive higher cash conversion.

You can begin to see the impact of our focus on efficiency and refined member targeting in the charts on the right side of the slide. In the fourth quarter, we drove $12 million of adjusted EBITDA in health care services. Which represents a margin of 5.5% which on a year over year basis compares to a quarter where we effectively broke even for this segment. I’ll share more on our outlook for health care services in a moment. But as Tim noted, it’s an exciting time at SelectQuote to have an additional growth engine to not just drive revenue, but increasingly contribute to our profit and cash flow. Moving to Slide 13.

Our Life division also performed well in the year and the quarter. Revenues grew 10% for the full year to total $173 million. The fourth quarter was even stronger with growth of 14%, driven predominantly by our final expense product. As a result, segment grew adjusted EBITDA by an impressive 32% for the year to $27 million which represents a 15% margin or more than 250 basis points higher compared to fiscal 2024. This was particularly welcome given the attractive cash flow dynamics of this segment. On Slide 14, I’ll be brief regarding our ongoing priority to improve SelectQuote’s of capital and leverage profile. Here, we outline what we’ve accomplished over the past calendar year.

But we do not have any specific update over the past quarter we would simply reiterate that the improving cash efficiency of our model is an increasingly important driver to optimize our balance sheet. The October securitization and the February preferred equity offering significantly improved our operational flexibility and did so at a lower overall cost of capital. We believe the structure can be further improved and expect future transactions will lead to extended maturity, increased operating flexibility, and a lower cost of capital. We look forward to sharing more regarding this initiative as we believe a lower cost of funding will be a more readily apparent part of SelectQuote’s value creation for shareholders.

Turning to Slide 15, we are excited to introduce our fiscal 2026 guidance. As we’ve talked about extensively, SelectQuote has built an MA engine that is prime for growth when the market allows and we have a rapidly growing and increasingly cash generative health care services business. Overall, we are managing both businesses to drive increasing cash flow which will generate long-term value for our shareholders. We expect revenue in the range of $1.65 billion to $1.75 billion which represents year over year growth of approximately 11% at the midpoint. This range assumes relatively flat senior policy value for the year based on our ongoing strategy to balance current period EBITDA with cash flow generation.

Similarly, our agent productivity was exceptional this past season, and our 2026 forecast assumes a reversion to a more historical average productivity level as we onboard new agent. This measured year for senior will be offset by continued strong growth in health care services. Where we expect revenue growth of around 20%. Moving to adjusted EBITDA. We expect to end the year in the range of $120 million to $150 million which represents year over year growth of 7% at the midpoint. While we expect margins from our senior segment to come down slightly from the mid to high 20s that we could deliver over the past few years, we expect margins to remain attractive and to exceed 20%.

For the first quarter specifically, we expect approximately 10% of our annual senior production to come in the quarter given the SAP dynamics that Tim discussed, This coupled with additional AEP hiring is expected to lead to a consolidated adjusted EBITDA loss of around $25 million to $30 million for the first quarter. In health care services, we expect to generate more than $50 million in adjusted EBITDA for fiscal 2026 as we continue to focus client acquisition on the patient that benefit most from the service and have the best-suited economics.

From a margin perspective, we expect relatively flat sequential margins in the first quarter as we ramp investment in preparation for AUP enrollment and then modest sequential expansion as we move through the remainder of the year. Over the last few years, you’ve heard us speak to the incredible long-term value we within the health care services space. We believe the scale level of profitability we expect in 2026 for a business that will only be five years old demonstrates that value creation opportunity and is just the start of what we think is possible in the future. We also anticipate another strong year for our life division.

We expect double-digit revenue and EBITDA growth with a similar margin profile in the fiscal ’25. Finally, we anticipate generating positive operating cash flow in 2026. This is an important step for us, and we see a path toward meaningful cash flow generation in the years ahead. On an annual basis, we expect to be operating cash flow positive for the foreseeable future as we continue to transition to a comprehensive health care services platform. With that, I’ll turn the call over to the operator for Q&A.

Operator: At this time, I would like to remind everyone in order to ask a question, press star then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Ben Hendrix with RBC Capital Markets. Your line is open.

Ben Hendrix: Hey. Thanks, guys. Congratulations on the quarter. I appreciate the commentary on the healthcare services growth and it seems like you’ve seen impressive revenue growth member growth this year. I just wanna talk a little bit about margins in the commentary about, you know, the scaled margin as you see more seasoned SelectRx members. Maybe you can kinda talk about the path to your target margins and how you’re thinking about that. And as we get to a more scaled margin, how do the fixed and variable cost dynamics work? To get to kind of a target margin from a scaled member? Thanks.

Tim Danker: Hey. Good afternoon, Ben. This is Tim. Sam. Thanks for the question. Hey, Bob. Why don’t you cover the color on margin progression and the drivers, and then we’ll hand it over to Ryan. Thanks, Bob.

Bob Grant: Oh, that sounds great, Tim. And so on the margin progression, know, as we get larger, Ben, and continue to refine our business, have more tenured members, but also to the point you made later, really drive the variable cost down, you know, as we are scaled and can make more optimizations. I, you know, I would expect that to continue into the future and pretty meaningfully. Right? We are really, really excited about what we can do now that we’re at scale from both a you know, COGS perspective and, you know, just general buying. Due to the fact that we’re buying so many scripts now.

But then also on automation and streamlining and really taking the time to refine the operation through opening Kansas City and then ultimately retrofitting the other facilities that we have. We’ve got a lot of good findings. We’re rolling out a lot of new technology that we are incredibly excited about. What that’ll do and I think you’ve seen the power of what it already can do given the margin progression we’ve had. So we are very confident that we can get the margins to what we’ve shared and, you know, have a meaningful kind of path ahead of us to continue to enhance the cash flow dynamics of that really powerful business.

Ryan Clement: Yeah. And then I think, you know, obviously, as we ramp our membership associated with within McKinsey facility, we do see a path to margin enhancement. We hear it on the call earlier today, You know, we expect our first quarter to be relatively in line with what we had this most recent quarter that was, you know, five and a half percent, which we’re really pleased with. And then as the year progresses, we see modest margin expansion. There will be some investment as we prepare for the AUP season and onboarding new members. But, ultimately, we do expect the business will produce north of $50 million in EBITDA in fiscal 2026.

Ben Hendrix: Great. Thank you very much. And if I could just one follow-up. As we think about scaling up this business and getting more margin from the healthcare services seems like this could be a really powerful driver for, the securitization program. I wanted to just based on your conversations with the market and with lenders, is there any kind of, kinda catalytic level or more of either EBITDA comp contribution or margin from this business, you know, that could really kind of accelerate the securitization program. Thanks.

Ryan Clement: Yeah. That’s a great question. What I’d say is there’s not a, you know, a threshold, if you will, What I will say is the progression and the EBITDA generation is it’s obviously becoming significant. And that obviously opens up a number of different paths with respect to the capital structure. So securitization still very much a path, but also you know, as we generate more and more cash flow, which we do expect this coming year, we’ll be generating meaningful unlevered operating cash flow. We’ll be positive operating cash flow for fiscal 2026. And on an annual basis, on a go-forward basis, we would expect to be to see that grow sequentially in future periods.

So I do expect to be operating cash flow positive for the foreseeable future.

Ben Hendrix: Great. Thanks,

Operator: Your next question comes from the line of George Stottman with Craig Hallum. Your line is still open.

George Sutton: Thank you. I just wanted to go back a quarter. Your message, I think, coming out of the last quarter was you were refining the marketing. There was a notable caution I think, in how fast you were growing SelectRx. It sounds like you’re more optimistic now. Maybe you have found some solutions. Can you just walk through sort of the dynamics that have changed quarter over quarter? There?

Tim Danker: Yeah. On that, you know, this is different than a growth for my membership and revenue standpoint. And, George, where we were talking a little bit last quarter was that. Right? We are far more focused now on EBITDA growth and expansion and what I talked about kind of getting variable costs down and getting your cost of goods sold, you know, so cost your hard product down. And enhancing our margins. I would expect you know, the kind of membership, and we’re not commenting on it too much, but to grow at a lesser pace we’ve seen just given we grew so fast in that.

I’d also say that, you know, we’re not gonna have quite we’ll still have good healthy revenue growth, but not quite what we’ve seen in years past. Again, kind essentially going from zero to where we are today. So that’s a little bit of a clarification to what we were talking about last quarter. But I would expect our EBITDA to continue to progress materially grow given the opportunity we have in refinements. And just the deep partnership we have with a lot of our carriers now as far as the clinical services that we provide.

And, again, it’s really last quarter talking about membership growth, but we’ll have really healthy revenue growth of north of 20% like we talked about. Again, not to the degree of going from zero to what we’ve come to. Gotcha. I wonder if you could discuss the actual AEP hiring plans that you have and how significant you are using AI as part of the mechanism to serve more customers? You mentioned the 300,000 plus interactions.

Tim Danker: Yeah. George, let me start. This is Tim, and then Bob, you can comment on AI. I think, just kind of macro here, for the AEP season, you know, we are expecting an elevated level of planned disruption again this year, you know, some similarities to last year given where carriers are with respect to their kind of profitability get well plans. And so while we don’t have full visibility to what those plan designs are gonna look like just yet, Now we do expect, you know, further benefits pullbacks, plan terminations, Last year, that certainly you know, aided our front-end customer acquisition dynamics. Things like close rates and agent productivity.

From a retention perspective, certainly, you know, we given the level of disruption last year, we were really pleased with the outcome. We’ve had good experience there. We’re making incremental investments. We’ll be prepared. Bob, you wanna speak to the technology and AI point?

Bob Grant: Yeah. I mean, I think that, you know, the tech team on our end has done a really, really nice job of continuing to supplement our agents and drive more efficiency. It’s what we’ve chatted in the past that we use technology and AI to make simple interactions faster and more efficient and ultimately save our agents time. And then that’s the same on the health care services side. We will continue doing that. We are not in any you know, we don’t think anybody’s close to fully replacing the forty-five minute very, very high-powered conversations, right, that our agents have. And or complex interactions that our health care services business has.

But we’ve made a ton of progress in making them more efficient, which is why you’ve seen our productivity per agent continue to rise we’re confident we can continue to do that. As they said, we’re gonna continue to invest in the same way we have in the past in technology. And, you know, we are very hopeful that will continue to lead the time savings for our agents, which every minute is extremely precious to us. So we’ve seen 25% reductions in enrollment time, for our agents specifically. That’s not necessarily for our customer.

And we’ve also seen for less complex conversations as we touted, you know, Bill’s team have more than 300,000 interactions on the health care services side with just using AI standalone. Just one other question on select patient. Could you give us any details in terms of where you’re headed there? Kind of contribution you expect in ‘twenty six from that segment?

Tim Danker: Yeah. We’re continuing to make really, really good progress on select patient management and then select Medical, which is our telemedicine, practice as a whole. Right? There’s complexity there on carrier contracts and what we’re doing, but we were building that the right way. And we do think in the future, provide material value. In 2026, we don’t think it’ll scale right as quickly and provide you know, meaningful EBITDA this year. But, again, it is a huge path to our future. So we’re really excited about what we can do.

And I think we’ve proven our ability to scale businesses with you know, LHA and with SelectRx, we think that’s, you know, another door that’s a big opportunity for us given the fact that our clients a lot of them you know, don’t have access to quality care. They’re homebound, and they really need to virtually interact. And we think there’s a big gap in the marketplace today where there where that is.

George Sutton: Okay. Thanks, guys.

Operator: Before going to the next question, again, if you would like to ask a press star one on your telephone keypad. Your next question comes from the line of Matt McCann with Noble Capital Markets. Your line is open.

Patrick McCann: Hey. Thanks for taking my questions. I just wanted to piggyback really quickly on, on George’s question about the AI usage. I think, you know, you have the slide on that in this quarter. And I know that’s something that you have been using previously, trying to use technology to increase agent efficiency, But I was wondering if you could talk a little bit about to what extent there have been significant recent enhancements on that front and if you could provide any further details on maybe some examples of, you know, what new additions you’ve made to the agent process in terms of added technology and AI?

Tim Danker: Yeah. So we have made a ton of recent advancements, and that’s you know, when we say, for example, like, health care services side, that’s really an extension of our agents because that was work that they transfer over. And those interactions are brand new to us. Again, our technology team did an incredibly nice job with that. When you look also higher level, every step of the funnel we you to our enrollments and taking, you know, kind of the mundane work out of that and pushing that over to AI. Those are all big levers that we continue to enhance.

And what we really focus on is you know, let’s say right now we’re saving five minutes per enrollment. By using technology. Can we push that to six, seven, eight? And make those more complex enrollments? Because, again, every minute is extremely valuable to us. We think the same thing on the agent side. Right? Can we automate certain functions whether that’s gathering data, whether that’s, you know, gathering drug, those types of things, those are all big levers for us that we are continually trying and optimizing. And, you know, again, some don’t pan out, but mostly ours do. And we’ve been really, really, really proud of that.

I think too, I would love Bill to talk about how we’re using it on the retention side and, ultimately, the compliance kinda QA side because I think we’re using it as a big enhanced there too. Bill?

Bill Grant: Yeah. Sure. I mean, in terms of specific examples, I mean, we’ve really, really ramped up kind of our overall usage. We use it all the way through from you know, our initial recruiting process, our initial scoring now is based on AI in terms of understanding how we’re understanding applicants relative to their ability to produce for us. We use it a lot in our training process. In terms of our QA, and providing real-time coaching. So call listening as opposed to having to be kind of know, more retro. We can be proactive, and we can be real-time. And provide instant feedback.

We use it a lot in our reach recaptures and our basically, our ability to, look at our block of business and analyze it quickly and decide know, how we’re going to treat people and understanding, you know, what plans they’re on to try to you know, recapture them. We use it also in our plan scoring to help us decide, okay, are they on as it possibly can be? So you know, the right are we making sure our plan rank is accurate? really, kinda list goes on and on, but we’re using it more and more. It’s really, we think, having a compounding effect on our business.

Tim Danker: Great question. Sorry for the long the long but one final point. The proof is really in the results. If you look at all these things that Bob and Bill spoke to, you can see this evidence in our margins, you know, three consecutive years. Of EBITDA margins in senior, you know, in the mid to high twenties. You’re seeing this also ramp through our health care services business and our comments on you know, our confidence around, you know, creating diversified cash generative platform. We think we are finding through technology, with highly skilled human agents. Right? We’re getting the best of both worlds, data-driven, high touch, We’re doing it at scale.

And we think the results speak for themselves.

Patrick McCann: Great. I really appreciate that. And I’ll just ask one more regarding capital allocation. I was just wondering if you could say any more about how you’re thinking about how you know, your priorities in terms of additional balance sheet improvement versus maybe a potential acquisition or things that you know, anything you might do to expand your health care services platform and when it comes to, yeah, when it comes to capital allocation, what are your priorities there, and how do you think about the making expansions in health care services while you know, being able to continue to prioritize improving the balance sheet as well.

Tim Danker: Yeah. Great question, Pat. I’ll start and see if Ryan has additional comments. I mean, the immediate focus, you know, for the business, hopefully, it came through in our prepared remarks, is balancing. Right? Balancing growth in the underlying market opportunity was driving, you know, a strong cash generative business. We know that by driving a strong, cash flow business, that’s the key to a better balance sheet. As many other benefits you started to highlight. Some of those. Right? Optionality that we have from capital allocation, around future growth in MA to new health care service offerings, certainly to a better cost of capital.

So we’re gonna, in the near term, be very focused on you know, execution of this plan that we’ve outlined. Driving stronger cash flow. We certainly and Bob did a good job highlighting and the results have demonstrated what we’ve been able to do in SelectRX. The green shoots, and select patient management. So we see additional opportunity, on the horizon, but that’s really kind of our near-term focus. We think that we are proving that we can make a meaningful impact on health care that helps improve health outcomes. While also being, beneficial to the shareholder. Ryan, any additional comments you’d make from a capital allocation perspective?

Ryan Clement: No. No. I really think you laid it out well. The capital structure is our priority. We’re obviously see lots of opportunity to grow the health care services business. But we also see a lot of opportunity to improve the capital structure. Which really sets the stage for those subsequent actions and growth within health care services. And so the capital structure is the focus at the moment, but we are making great progress. And we feel great about the financial plan and the guidance we shared today. Expect to generate meaningful unlevered operating cash flow, which we think know, certainly, sets the stage for additional transactions to improve the balance sheet.

Patrick McCann: Great. Thanks. That’s it for me.

Operator: I will now turn the call back to Tim Denker, CEO, for closing remarks.

Tim Danker: Yeah. I wanna thank you all again for, taking time this morning. A very big thank you to our team here at SelectQuote. For a very successful fiscal 2025. We all should be very proud of what we’ve accomplished thus far. I’ll close the call with one piece of perspective. We’ve spoken over the past three years about the operational stability we’ve built into SelectQuote. Since our strategic reset in 2022. If that was an initial stage, I believe 2026, and the years ahead represent the realization of the model, we built on that foundation. It’s exciting time for the company. We appreciate your time and support. As we show you what SelectQuote can be. I wanna thank you again.

Have a great rest of your week.

Operator: Ladies and gentlemen, that concludes today’s call. You can disconnect. Thank you, and have a great day.

Image source: The Motley Fool.

Date

Thursday, August 14, 2025 at 11 a.m. ET

Call participants

Chief Executive Officer — Stephen Preston

Chief Financial Officer — Pierre Revolt

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Takeaways

Portfolio occupancy— 97.8%, up from approximately 96% in fiscal Q1 2025 (ended March 31, 2025), reflecting improved tenant stability.

Resolution of troubled assets— Nine out of twelve previously disclosed troubled properties resolved, with three sold (plus one post-quarter) for $11.8 million and over 89% recovery on original purchase price; five re-leased, recovering approximately 65% of aggregate prior rent on these nine assets.

Second-quarter acquisitions— Five properties acquired for $17.8 million at an average cash cap rate of 8.17%, with average economic yield of 9.35% and average annual escalators of approximately 2.4% for properties acquired.

Dispositions— Nine properties sold for $22.7 million; five occupied assets (average cash cap rate 6.75%, average lease term eight years) and four vacant properties (approximately 90% recovery of original purchase price).

Top tenant concentration— No single tenant accounts for more than 3.3% of Annualized Base Rent (ABR), indicating high portfolio diversification.

Total revenue— Total revenue was $17.6 million, up $1.3 million sequentially, driven by prior acquisitions and increased percentage rents.

Cash rents— $15.7 million, a $600,000 or 4% increase from the prior quarter, with $15.5 million base rent and $163,000 percentage rent.

General & Administrative (G&A) expenses— $3.3 million, which includes $1.1 million in non-recurring legal/investigation fees; adjusted cash G&A was $2 million, down $200,000 from fiscal Q1 2025.

Adjusted Funds From Operations (AFFO) per share— AFFO per share increased 2¢, or 6.7% quarter over quarter, to 32¢; dividend declared at 21.5¢ per share for a 66% payout ratio.

Leverage— Net debt to annualized adjusted EBITDAre was 5.5 times, a 0.2 turn improvement from fiscal Q1 2025; loan-to-value (LTV) slightly below 35% using a consensus-applied cap rate of 7.1%.

Liquidity position— Approximately $140 million available as of June 30, 2025, including $131.5 million in revolving credit facility capacity and $8.4 million in cash.

Interest rates— Term loan fully hedged to initial maturity at 4.96%; revolving credit facility effective rate 5.63% as of June 30.

Guidance revisions— Capital recycling plan raised the disposition target to $60 million–$75 million (midpoint $67.5 million) for the remainder of 2025, reduced the acquisition target to $110 million–$130 million (midpoint $120 million) for the full year 2025.

AFFO per share guidance— AFFO per share guidance range narrowed to $1.22–$1.24 for the year, unchanged at the midpoint of AFFO per share (non-GAAP) guidance for the year.

Capital markets flexibility— Revolving facility and term loan both offer two twelve-month extension options, with facility featuring a $200 million accordion feature.

Disclosure enhancements— Supplemental materials now include NAV breakdown, adjusted cash NOI, and expanded tenant data for top 60 tenants.

Cap rate environment— Expected acquisition cap rates near 7.5% in fiscal Q3 2025 (ending September 30, 2025); anticipated disposition cap rates expected to be 50–75 basis points lower than acquisitions for the remainder of the year.

Stephen Preston— “negligible credit loss and no material additions to our watch list.”

Historical leasing retention— Since the business was founded in February 2016, 47 lease expirations have occurred, with 40 renewals to the same tenant and three to new tenants, representing an over 90% renewal rate and a 104% recovery rate for new tenant leases since February 2016.

Mortgage loan receivables— Two loans made on recently sold assets at approximately 8% interest, providing yield and basis protection should issues arise.

Full-year cash G&A guidance— Management projects $8.8 million in full-year cash G&A, excluding non-recurring items, a $200,000 reduction from previous full-year guidance due to improved cash NOI and cost controls.

Summary

FrontView REIT(FVR 1.95%) reported sequential growth in revenue and AFFO per share, complemented by successful execution on previously troubled assets and refined capital allocation plans favoring higher dispositions over acquisitions. Management expects further portfolio optimization through disciplined capital recycling, while maintaining leverage within a five to six times net debt to annualized adjusted EBITDAre target for the remainder of the year. Expanded disclosures, including a top-60 tenant roster and detailed NAV components, were introduced to provide added transparency for investors.

Chief Financial Officer Pierre Revolt said, For fiscal Q3 and Q4 2025, “we can probably achieve between 30¢ and 32¢ of AFFO per share per quarter, and targeting 31¢ seems very reasonable.”

Stephen Preston, CEO, stated the executive team is now “complete and optimized to operate and scale our business,” referencing recent leadership changes.

“we’ll remain disciplined capital allocators, expanding our capital recycling program to deliver accretive financial and portfolio gains while maintaining a strong and flexible balance sheet,” CEO Stephen Preston said, outlining capital strategy for the remainder of the year.

Stephen Preston remains “active” with real estate assets described as liquid and desirable relative to current market implied cap rates.

Industry glossary

WALT: Weighted average lease term, a measure of portfolio lease duration reflecting the average remaining lease term weighted by rental income.

NOI: Net operating income, a property’s income from operations after deducting operating expenses but before interest and depreciation.

ABR: Annualized base rent, the total base rental revenue of the property portfolio projected over a twelve-month period.

Cap rate: Capitalization rate, the net operating income produced by a property divided by its acquisition cost or current market value, used to evaluate return.

EBITDAre: Earnings before interest, taxes, depreciation, amortization, and real estate gains/losses, tailored for real estate businesses.

AFFO: Adjusted funds from operations, a performance measure for REITs that adjusts funds from operations by excluding non-recurring items and capital expenditures.

Full Conference Call Transcript

Stephen Preston: Thank you, Pierre, and good morning, everyone. As a reminder, for our new investors, FrontView is a diversified, net lease REIT that primarily focuses on high visibility, frontage properties, typically with smaller box sizes, which are leased to household name tenants. As of June 30, our portfolio consisted of 319 properties, leased to 334 tenants, operating across 16 industries. Our portfolio maintains excellent diversification, with no tenant representing more than 3.3% of ABR. Before providing an update on our operations, I would like to formally welcome Pierre Revolt as our Chief Financial Officer.

Pierre brings extensive experience within REITs, having led corporate finance, investor relations, and capital markets for both public and private REITs, as well as being a former buy-side REIT investor. Pierre’s expertise will bolster FrontView’s financial strategy, including capital markets execution, balance sheet management, communications, and operational excellence. I am thrilled to have him on the team. With his addition, our executive team is complete and optimized to operate and scale our business. Turning to the portfolio, we ended the quarter with occupancy of 97.8%, up from approximately 96% last quarter. We made exceptional progress in a remarkably short time frame on the 12 previously disclosed properties with troubled tenancy. This is now resolved and behind us.

We sold three during the quarter of the 12 properties, and one post-quarter for $11.8 million, and over 89% recovery on the original purchase price. We released five properties for $687,000 in annualized base rent, with a WALTs of 10.8 years. By combining the value of the new leases with the reinvestment of disposed properties, we have already recovered approximately 65% of the aggregate prior rent from just these nine assets. Only three assets remain, with one under contract to sell, one with buyer interest, and one with national tenant interest.

The successful resolution highlights the strength of our underlying high-quality real estate, which is characterized by high visibility, frontage locations, appealing to various users, allowing us to retenant, repurpose, or sell assets in order to maximize value for each location. Outside of these assets, the tenants in our portfolio are performing as expected with negligible credit loss and no material additions to our watch list. During the second quarter, we acquired five properties for approximately $17.8 million and an average cash cap rate of 8.17%. The weighted average remaining lease term for these properties is approximately eleven years, with average annual escalators of approximately 2.4% and an economic yield of 9.35%.

From an industry perspective, we continue to add diversification, including adding financial, medical, discount retail, automotive, and logistics distribution. In terms of property dispositions, we sold nine properties for $22.7 million during the quarter. Five were occupied properties, generating proceeds of $11.6 million and an average cash cap rate of approximately 6.75%. These properties had an average weighted lease term of eight years. Our current target dispositions are assets with lower WALTs or less optimal concepts. Additionally, we sold four vacant properties during the quarter, recovering approximately 90% of the original purchase price, with these funds being redeployed into income-producing properties.

These asset sales demonstrate the continued desirability and liquidity of our real estate assets and highlight the meaningful spread between our implied cap rate of approximately 10% versus where our assets are transacting in the market. Looking at net investment, we were net sellers this quarter, and our net debt to annualized adjusted EBITDAR fell to 5.5 times, with an LTV of less than 40% using consensus estimates for NAV. As we look forward to the remainder of the year, we’ve adjusted our net capital deployment guidance.

On the capital front, we are increasing our capital recycling by raising our disposition guidance to $60 million to $75 million and reducing our acquisition target to a range of between $110 million and $130 million. On the acquisition front, we will remain selective, pursuing high visibility properties with strong credits and attractive valuations. Our pipeline of opportunities remains strong, and we believe we will be able to accelerate acquisitions if supported by our capital recycling plan or improved cost of capital. Going into the third quarter, we see cap rates trending around 7.5%.

On the disposition front, we have an active pipeline of assets with less optimal concepts and/or lower WALTs, where we currently anticipate that the cap rates should be 50 to 75 basis points lower than those in our acquisitions while improving key portfolio metrics, including WALTs and industry composition. In summary, we have a strong team of real estate and capital markets professionals in place to lead us forward, a high-quality portfolio of liquid real estate assets, and a pipeline of investments and dispositions that will further enhance our portfolio.

Finally, we are well-equipped with a strong balance sheet to execute on a pipeline of opportunities to accelerate external growth when there is an attractive spread to our cost of capital. With that, I’ll turn the call to Pierre to go through the quarterly numbers and guidance. Pierre,

Pierre Revolt: Thank you, Steve. I appreciate the warm introduction. It’s a privilege to join the FrontView team and contribute to enhancing the platform’s long-term value creation. Before diving into the quarterly update and guidance, I want to highlight a few new disclosures that we believe will be beneficial to shareholders. In our supplemental materials, we are providing more detailed information for both our investments and dispositions, a breakdown of our NAV components, and annualized adjusted cash NOI. Additionally, we have also expanded our tenant disclosures to include our top 60 tenants, offering greater insight into the portfolio. As Steve highlighted, it was a very positive quarter on several fronts, including accretive net capital deployment and portfolio performance.

Our cash rents in the second quarter were $15.7 million, which includes $15.5 million in base rent and $163,000 in percentage rent, an increase of $600,000 or 4% from last quarter, primarily driven by the acquisitions completed in the first quarter and increased percentage rents. Our total revenue increased $1.3 million sequentially to $17.6 million, which includes straight-line rent, other income, and other non-cash revenue. Our non-reimbursable property costs or leakage is $275,000 or approximately 1.8% of base rent. This includes some recoveries in expenses, and we’d expect normal leakage should be closer to $500,000 on a quarterly basis.

Turning to G&A, we reported $3.3 million in expenses this quarter, which included approximately $1.1 million in non-recurring costs, primarily related to one-time legal expenses pertaining to the former CFO investigation along with other non-recurring fees. Excluding non-recurring items, our G&A for the quarter was approximately $2.2 million compared to $2.8 million in Q1. Adjusted cash G&A for the quarter totaled $2 million, a reduction of roughly $200,000 from Q1. Looking ahead, we see full-year cash G&A excluding non-recurring charges to be approximately $8.8 million, lasting a $200,000 reduction from prior guidance to both the high and low end, driven mostly by improved cash NOI and lower cash G&A.

AFFO per share increased 2¢ or 6.7% quarter over quarter to 32¢. We declared a quarterly dividend of 21.5¢, representing a 66% payout ratio on AFFO per share. Turning to the balance sheet, we ended the quarter with $118.5 million drawn on our revolving credit facility and $200 million on our term loan. We currently have approximately $140 million of liquidity, comprised of $131.5 million revolver capacity and $8.4 million of cash on hand. In addition, our revolving credit facility includes a $200 million accordion feature, which we may elect to exercise at our discretion subject to customary conditions. Our $200 million term loan is fully hedged through initial maturity at a rate of 4.96%.

The revolving credit facility bears interest at a floating rate of adjusted one-month SOFR plus 1.2%, with an effective rate of 5.63% as of June 30. Both the revolver and the term loan include two twelve-month extension options subject to customary conditions, which can extend final maturity to 2029. From a leverage standpoint, we ended the quarter at 5.5 times net debt to annualized adjusted EBITDAre, a 0.2 turn reduction from Q1, primarily driven by increased disposition activity and lower operating costs. Our fixed charge coverage ratio remained strong at 3.3 times, and our balance sheet is conservatively positioned with LTV slightly below 35%, utilizing consensus applied cap rates of 7.1%.

With our revised net capital deployment guidance, we do not expect a meaningful increase in leverage, staying between five times and six times net debt to adjusted annualized EBITDAre. Turning to guidance, as Steve highlighted, we’re lowering the acquisition range to $110 million to $130 million, with the midpoint of $120 million, and raising our disposition range from $60 million to $75 million, with the midpoint of $67.5 million. At the midpoint, this represents a $15 million reduction in acquisitions and a $37.5 million increase in dispositions. While we continue to maintain an active pipeline on both fronts, this shift reflects a deliberate capital recycling strategy, observing liquidity, managing leverage, and enhancing portfolio quality.

Additionally, we’re narrowing our AFFO per share guidance range to $1.22 to $1.24, driven primarily by the revised capital allocation plan. Looking ahead, we remain focused on continually enhancing the portfolio and maintaining balance sheet discipline. Steve? Back to you for closing remarks.

Stephen Preston: Thanks, Pierre. As I mentioned earlier, we have the right team to execute, bringing both real estate and capital markets expertise. Our portfolio consists of high-quality, frontage real estate, in strong demand, allowing us to proactively manage and maximize value. We’ve enhanced our disclosure with a refreshed supplemental investor presentation, providing investors more relevant data. As we move into the second half, we’ll remain disciplined capital allocators, expanding our capital recycling program to deliver accretive financial and portfolio gains while maintaining a strong and flexible balance sheet. With that, I’ll turn the call back to the operator to begin Q&A. Operator?

Operator: Thank you very much. Ladies and gentlemen, we will now begin the question and answer session. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by the number two. If you are using a speakerphone, please make sure to lift your handset before pressing any keys. Please be reminded that we will only be taking one question and one follow-up per participant for today’s Q&A session. Your first question comes from the line of John Kilichowski from Wells Fargo. Please go ahead.

John Kilichowski: Hi. I’m Cheryl on for John. Good morning, and thank you for taking my question. You narrowed the AFFO per share guidance range, but the midpoint remains unchanged despite another reduction in net investment volume. Can you walk us through what gives you the confidence in holding the midpoint flat?

Pierre Revolt: Sure. I’ll take that one. Essentially, in the quarter, as you saw, the operations were pretty strong at 32¢. And so for the first half of the year, you know, we are at 62¢. And when we look at the resolutions on the 12 properties discussed before, performance of the existing tenants, we believe that for the back half of the year, we can probably do between, you know, between 30 to 32¢ a quarter, and targeting 31 seems very reasonable given what we see on the existing portfolio.

John Kilichowski: Okay. Thank you. That’s helpful. And one follow-up on the nine resolved properties of the 12. Should we expect any adjustments to bad debt guidance going forward, given the improved visibility on the leasing progress?

Pierre Revolt: Sure. I’ll take that as well. So on the bad debt guidance, we did not include it this quarter. It was essentially part of the original guide, which was reflecting those 12 properties. As Steve commented in on his remark that for the portfolio outside these 12 has had de minimis credit losses. So at this point, we’re just not providing an update on bad debt guidance. We think that for the remainder of this year, what we see is a very healthy portfolio, and we look forward to resolving the remaining three properties with the responses from Steve, and the portfolio is actually, you know, pretty healthy.

That’s why despite reducing our net capital deployment meaningfully, you can still produce a very strong quarter third or fourth, and that’s why we were able to increase the low end to $1.22.

John Kilichowski: Very helpful. Thank you.

Operator: Your next question comes from the line of Anthony Paolone from JPMorgan. Please go ahead.

Anthony Paolone: Thanks. Welcome, Pierre, and appreciate the incremental disclosure as well. First question is, as we think about acquisitions and dispositions over the balance of the year, how should we think about just the spread and cap rates between the two? I mean, you’re able to produce a positive spread in the quarter. I’m just wondering if that’s something you think can continue. And then also, any incremental color on the acquisitions in the quarter, you know, cap rates north of an eight and also bumps north of two, which is, you know, higher than what we’ll typically see in net lease. So just wondering kind of how you’re achieving those.

Pierre Revolt: Yeah. Sure. I’ll take that. Thank you. Yeah. No. We expect to see, as we mentioned earlier, you know, about a 50 to 75 basis point differential between where we’re selling assets and then where we’re transacting into the marketplace. And we expect that, hopefully, to continue throughout the year. You know, with respect to kind of what we’re buying, you know, we’re continuing to buy great assets with frontage from, you know, very motivated sellers. We achieve typically these outsized cap rates because, you know, we’re not typically competing with institutions in the space. And if you remember, we’ve got that fragmented market where the buyers are small and they’re unsophisticated.

You know, we’ve got great credit on these assets as well. They’re solid corporate credit, large operations with long-term operating businesses, and just to, you know, to echo a couple of examples of a few of the assets. So La-Z-Boy, you know, we bought that roughly at about a seven and a cap with about ten years left remaining. We bought a Strickland Brothers as an example, with fifteen years left at about a seven and a half cap rate. And a Range USA with about eighteen years left and eight cap rates. So these are all great assets, great corporate credits, and it’s just a testament to how we continue to be able to buy in at the marketplace.

And with respect to the escalators, you know, those are built into the leases, and, you know, we typically average about one to 2% across the portfolio. And it just so happened amongst this mix that the escalators, you know, came in a little bit higher. There were a couple of assets that we acquired that had more than sort of that average one to 2% built into their lease.

Anthony Paolone: Okay. Got it. Thanks. And then just one other one, just maybe more of a clarifying item in your NAV buildup in the supplemental. The NOI number is higher than the base rent number, and I guess I would have just intuitively assumed that would be flipped given sort of some normalized leakage. But just wondering, like, know, what I’m missing there.

Pierre Revolt: But, yeah, there’s other income as well that’s not part of the APR. There’s some interest income on loans that’s also not part of the ABR. And so that was it. It’s essentially just some of that net other income that was picked up in the NOI that’s outside of this round.

Anthony Paolone: I see. Okay. Thank you.

Operator: Your next question is from the line of Daniel Guglielmo from Capital One Securities. Please go ahead.

Daniel Guglielmo: Hi, everyone. Thank you for taking my questions. So as mentioned in the commentary, you all are in an elevated recycling mode. Execution. But shared prices change fast with the right strategy. So is there a certain share price level where you all would feel comfortable kind of flipping the switch and starting to become a more meaningful acquirer? Just curious how you all think about that math.

Pierre Revolt: Sure. So there’s actually a page in the investor presentation where we highlighted that if we were to get a positive spread on our acquisitions, I think that this platform could really grow. There’s not we have a robust pipeline for acquisitions, and our assets are sought after by several investors. And I think that the opportunity to accelerate is certainly on the table, but we want to achieve an attractive spread. So if you’re looking at a cap rate of roughly seven and a half percent, what Steve talked about in the call, you would want to make sure that whatever cost of capital is inside of that.

And that really is what’s driving where we’ll start to pivot more towards acquisitions. At this point, though, just given where our implied cap rate is, you know, cost of capital, I think the most prudent way to manage your balance sheet is to execute on this recycling plan. We’ve seen that work for some of our peers. I think that it could work for us just given the quality of our portfolio and maintaining leverage on the level is important.

Daniel Guglielmo: That’s really helpful. Thank you. And then a big part of the IPO pitch was the strength broker relationships and how those connections really helped funnel Frontage properties to you all. I know Randy was focused there in the co-CEO role. So can you just talk about how you all are continuing to foster those broker relationships with a slower acquisition cadence and then who’s taking on that kind of liaison role now?

Stephen Preston: Yeah. That’s good. Thanks. Let’s just start with, you know, that this is behind us too with respect to Randy and the CFO and with respect to the acquisition and dispositions, I think as we’ve mentioned before, you know, our team has been in place since the IPO and was really handling a bulk, if not almost all of the acquisitions since the IPO. So they are in place and ready to meet our guidance.

Daniel Guglielmo: Thanks. Appreciate it.

Operator: The next question is from the line of Ronald Kamdem from Morgan Stanley. Please go ahead.

Ronald Kamdem: Hey. Just staying on the investments a little bit. I think you said 7.5% on the cap rates. Maybe just talk a little bit more about is that just cap rate compression? Is there a mix? And then anytime we could sort of quantify the pipeline, is $50 million? Is it $100 million? Like, when you’re ready to ramp, just how big do you think you can get? Thanks.

Stephen Preston: Sure. You bet. You know, I would just say, you know, with respect to kind of that state of the acquisition market, you know, the market is fluid, you know, and as we had mentioned that we do expect cap rates sometime in Q3 somewhere in that 7.5% range. Inside a little bit from where we’ve been acquiring. And, you know, I think that’s a little bit of a testament to leverage being a little bit easier for buyers to obtain. Now a little bit less noise in the marketplace. So for some of these smaller properties from some of these smaller banks, but there is still an unbelievable amount of opportunity for us. We’ve got a strong pipeline.

And, you know, we can increase that pace of acquisition at any point in time. I think we had originally guided to, you know, roughly about $200 million for the year. You know, in ’24, we did over or about $100 million of acquisitions. And if we get that cost of capital back, we’ve got the team in place that I see no reason why we can’t meet or exceed that prior guidance.

Ronald Kamdem: Great. Helpful. And then just going back on the TenantHealth conversation, obviously, good progress on those 12 assets, and, you know, I can appreciate that. Bad debt is sort of de minimis outside of those. But just on a long-term basis, are you thinking about sort of the watch list and how things are trending? How should we think about what the long-term bad debt number we should be baking in?

Stephen Preston: Yes. So what I would say is really no material changes or everything, you know, is very healthy. You know, as we look to see going forward, you know, what I would highlight is that, you know, since we founded this business in February 2016, we have had 47 lease expirations. And only seven have expired with 40 renewing to the same tenant, three renewing to a new tenant at a 104% recovery rate, which is over a 90% renewal rate. So when we look forward, you know, we feel very good. And, you know, I’ll just, you know, leave you with one other sort of tidbit here.

You know, if the 12 were stabilized in 2025 that we’ve been talking about, you know, bad debt expense, you know, as Pierre mentioned, would be negligible. And, you know, we’d be looking at somewhere in the, you know, 25 basis point to maybe, you know, 50 on the high side. So I think we feel like this portfolio is humming. You know, it’s very strong right now. Performance is good. You know, collections are great, and, you know, we expect that’s going to be something that continues with this portfolio more in line with the historicals and not that anomaly we were just dealing with.

Ronald Kamdem: Thanks so much.

Operator: You bet. The last question comes from the line of Daniel Ginn from Bank of America. Please go ahead.

Daniel Ginn: Hi, thanks for taking my question. Could you provide a little bit more context behind the new mortgage loan receivables found in the balance sheet?

Stephen Preston: Yeah, sure. So what I would say is that’s not a business that we were in. We actually made two loans on two assets that we sold. And it’s a good way for us to achieve some good yield. We had about 8% interest rate baked into those. And we actually, of course, know those properties pretty well. So it’s a good way if something were to ever happen that we certainly don’t expect it to, that you get an asset back at a very good basis. So good way to get some extra income.

Daniel Ginn: Got it. Thanks for the color. And then just elaborate on your decision to expand your top 10 list by another 20 tenants to 60? Because I know it’s going to be pretty difficult to take that back in the future if needed. We got nothing to hide, but payroll taken. We love the extra disclosure.

Pierre Revolt: Yeah. I mean, look. I’ve noticed that for companies that have had issues with the cost of capital, transparency is helpful. And so I know that from history. And, like, my previous company used to disclose 100 tenants. And this top 60, when you actually looked at that list from 40 to 60, some really interesting tenants there. Like, you have a Starbucks. You have a couple other IGs. There’s a very high-quality tenant roster. And I think that added disclosure, I hope, will provide investors more confidence in terms of, you know, the quality of the tenant mix that supports these properties.

Daniel Ginn: Got it. Thank you very much.

Operator: Thank you very much. There are no further questions at this time. I would like to turn the call back over to Mr. Stephen Preston for closing comments. Sir, please go ahead.

Stephen Preston: Yes. Thank you. Thank you, everyone, for joining. We look forward to continuing to build from here. We’ve got a great team and a great portfolio. And a very conservative balance sheet. We will be at the Wells Fargo conference coming up September 8 and look forward to sitting down and visiting with anyone that would wish to do so. And that’s in New York. Be well, and be safe and healthy.

Operator: Ladies and gentlemen, this concludes today’s conference call. Thank you very much for your participation. You may now disconnect.

Image source: The Motley Fool.

DATE

Thursday, July 31, 2025, at 4:30 p.m. ET

CALL PARTICIPANTS

• Chief Executive Officer — Jason Les
• Chief Financial Officer — Colin Yee
• Executive Vice President, Corporate Development and Strategy — Jason Chung
• Vice President, Capital Markets and Investor Relations — Phil McPherson

For analyst commentary or quotes, please email [email protected]

TAKEAWAYS

• Total Revenue: $153 million total revenue for Q2 2025, a 5% decrease quarter over quarter, attributed to lower Bitcoin production as the global hash rate increased more rapidly than Riot’s own hash rate.
• Net Income: $219.5 million, or $0.65 per share (GAAP) for Q2 2025, reversing a net loss of $296.4 million, or $0.90 per share, from the previous quarter (GAAP, Q1 2025); the gain was mainly due to a $470.8 million mark-to-market upward adjustment from appreciation in Bitcoin price and marketable securities.
• Bitcoin Holdings: Over 19,000 Bitcoin and $330 million in cash on the balance sheet as of Q2 2025, reported as $2.4 billion in liquidity.
• Adjusted EBITDA: Non-GAAP adjusted EBITDA was $495.3 million for Q2 2025, compared to a non-GAAP adjusted EBITDA loss of $176.3 million in the prior quarter, including a $470.8 million unrealized Bitcoin gain.
• Bitcoin Production: 1,406 Bitcoin mined in Q2 2025, a slight decrease from 1,530 in the previous period (Q1 2025), reflecting a strategic shift to data center development.
• Self-Mining Hash Rate: Increased from 33.7 exahash to 35.4 exahash in Q2 2025, a 5% sequential growth in self-mining hash rate, while the global hash rate rose by 9% in the same period.
• Bitcoin Mining Gross Margin: 50%, up from 48% in the previous period, driven by higher average Bitcoin price.
• Direct Cost to Mine: $48,992 per Bitcoin for Q2 2025, with power costs of $37,767 (77% of total) and non-power costs of $11,225 (23%); Non-power costs increased due to a phase one Corsicana property tax bill.
• Hash Rate Utilization: Year-over-year hash rate utilization rose from 61% to 87%, indicating improved operational efficiency.
• Fourth Quarter 2025 Hash Rate Forecast: Guidance raised to 40 exahash for Q4 2025, representing approximately 26% year-over-year hash rate growth from 2024 to 2025, with an initial Q1 2026 forecast set at 45 exahash.
• Bitcoin Collateralized Financing: $200 million Bitcoin collateralized financing facility with Coinbase enabled reduced stock issuance and funded growth opportunities.
• Engineering Business Backlog: Record backlog of $118.7 million set the stage for future revenue, despite a 14% sequential revenue decline to $10.6 million due to timing of intercompany purchases.
• Data Center Segment Development: 858 acres now controlled at Corsicana, supporting conversion of power portfolio to higher-value data center use as customer demand allows.
• New Leadership: Hired Jonathan Gibbs as Chief Data Center Officer to lead strategic build-out and anchor data center leasing efforts.
• Recent Capital Expenditures: Purchase orders placed for 10 exahash of new MicroBT miners for Rockdale and Kentucky, funded by existing cash; portion to be deployed in 2026.
• Guidance on SG&A: Cash SG&A, excluding one-time litigation and advisory fees, was $29.5 million, at the low end of $30 million-$33 million quarterly run-rate guidance.

SUMMARY

The quarter featured a marked financial transformation as Riot(RIOT 4.85%) generated net income (GAAP) in Q2 2025 from a substantial mark-to-market benefit driven by Bitcoin price appreciation, in sharp contrast to the prior quarter’s net loss (GAAP, Q1 2025). The company increased its self-mining hash rate and hash rate utilization, reflecting underlying operational improvements amid intensifying global network competition. Data center development advanced as the company secured additional land and onboarded hyperscale leadership. A record engineering backlog of $118.7 million and a newly activated $200 million Bitcoin-collateralized facility reinforced liquidity and balanced the execution of new capital expenditures and strategic growth investments.

• Chief Data Center Officer Jonathan Gibbs was brought in to finalize the design framework and enable negotiations with a spectrum of potential data center tenants.
• Management stated that completion of the Corsicana data center’s basis of design is targeted for the end of Q3, a key milestone for securing initial leases.
• Jason Chung reported, “Non-cash charges, which are primarily comprised of stock-based compensation, are temporarily elevated at present, but will be meaningfully and dramatically reduced from mid-next year onwards,” with further guidance to be provided next quarter.
• Jason Les described the strategy as “monetizing megawatts,” emphasizing the transition from mining to data centers, with readiness to accelerate leasing as substantiated demand emerges.
• Riot is methodically investing in site and substation infrastructure, while management affirmed they will not build data center capacity on a speculative basis without lease commitments in place.
• The company views its strategic location near Dallas and Austin as key to capturing premium data center economics over less accessible markets.
• Riot’s summary guidance indicated approximately 26% year-over-year hash rate growth from 2024 to 2025, and approximately 10% year-over-year hash rate growth from 2025 to 2026, with no explicit mandate to maintain a fixed market share.
• Management stated that current fully permitted infrastructure and power arrangements insulate them from immediate risks associated with recent Texas utility policy developments.

INDUSTRY GLOSSARY

• Hash Rate: The total computational power deployed by miners to process transactions and secure the Bitcoin network, measured in exahash (EH/s).
• Basis of Design: The foundational document specifying technical and operational parameters for a data center; used as the starting point in tenant negotiations and site planning.
• Build to Suit: A data center development approach where facilities are constructed to the customized requirements of a specific tenant, generally after lease agreement execution.
• Hash Price: The average daily revenue a Bitcoin miner can expect to earn per unit of hash power, typically expressed as dollars per petahash per day.
• SG&A: Selling, General, and Administrative expenses; in this context, refers to recurring operating costs excluding one-time litigation or advisory fees and non-cash charges.
• Exahash: One quintillion (1018) hashes; a unit of computational power in Bitcoin mining.
• HODL: Industry term for holding, not selling, Bitcoin; refers here to management’s decisions regarding Bitcoin reserves liquidation versus retention.
• FEA: Facility Extension Agreement; a utility contract securing access to power at a site, particularly relevant for large-scale Bitcoin mining and data center developments.

Full Conference Call Transcript

Phil McPherson: Thank you, operator. Good afternoon, and welcome to Riot’s second quarter earnings conference call. My name is Phil McPherson, Vice President of Capital Markets and Investor Relations. Joining me on today’s call from Riot are Jason Les, CEO; Benjamin Yee, Executive Chairman; Colin Yee, CFO; and Jason Chung, Executive Vice President and Head of Corporate Development and Strategy. On the Riot Investor Relations website, you can find our second quarter earnings press release and accompanying earnings presentation, which are intended to supplement today’s prepared remarks and which include discussion of certain non-GAAP items.

Non-GAAP financial measures provided should not be considered as a substitute for or superior to measures of financial performance prepared in accordance with GAAP and are included as additional clarifying items to aid investors in further understanding the company’s second quarter performance. During today’s call, we will be making forward-looking statements regarding potential future events. These statements are based on management’s current expectations and assumptions and are subject to risks and uncertainties.

Actual results could materially differ due to factors discussed in today’s earnings press release and comments and responses made during today’s call and in the Risk Factors section of our Form 10-Ks and Forms 10-Q, including for the three months ended 06/30/2025, which will be filed later today, as well as other filings with the Securities and Exchange Commission. With that, I will turn the call over to Jason Les, CEO of Riot Platforms.

Jason Les: Thank you, Phil, and good afternoon, everyone. I’m excited to walk through the results of another strong quarter for Riot. Before we dive into second-quarter earnings, I’d like to share Riot’s strategic roadmap and provide some additional context to the development of our data center business and how we view all of our operations working together in a complementary manner. We are incredibly proud of the position that our company, Riot Platforms, is in today.

Over the last seven years, we have scaled incredibly, both in terms of our size and our capabilities, representing the culmination of years of hard work, long-term planning, and coordination, all with a view to taking ownership of our future and placing our destiny in our own hands. We have grown and evolved as a company, driven by our ability to develop world-class capabilities, including land and power procurement, Bitcoin mining at a globally significant scale, power management and trading at scale, engineering, manufacturing, and servicing critical electrical infrastructure, and significant access to global capital markets. Recently, we have added a new world-class capability.

With the hiring of Jonathan Gibbs, Riot’s Chief Data Center Officer, and other highly capable professionals from the traditional data center industry, we find ourselves at the beginning of another exciting chapter in Riot’s story. With this new capability, we are about to undergo the next step of our evolution as a company. With the ability to build and develop high-performance compute data centers, we will transform Riot by establishing a robust and scalable data center segment. Successful execution in this regard is Riot’s top priority, and we recognize the importance of clearly articulating our approach to investors and stakeholders.

To be clear, we are not pursuing a so-called pivot into AI HPC initiative with a view of doing a, quote, unquote, deal. Rather, we have added a new data center development capability which we will apply to as much of our power portfolio as possible, and which will transform our company in the years to come. This mindset informs all of our decisions, enabling us to capitalize on this exciting opportunity with discipline and foresight.

If I had to summarize our strategy into a simple elevator pitch, the pitch would be that Riot is in the business of monetizing megawatts, with a view to utilizing as much of our power portfolio as possible and maximizing the value of our megawatts over the long term. We will maximize the value of our operational assets, specifically optimizing our megawatts to use all available power. We have a great advantage with a portfolio of ready-for-service power, anchored by our operational flagship sites at Rockdale and Corsicana. These assets are not conceptual; they are active today, thanks to prior investments in Bitcoin mining infrastructure.

This enables more certain execution on our data center development initiative compared to a standalone traditional developer. Our Bitcoin mining capabilities have proven integral to this strategy, as they underpin our ready-for-service power portfolio. By utilizing our mining capabilities, we have put ourselves in the fortunate position we find ourselves in today, and we can secure new power sites by playing to our strengths, profitably managing risk, and simultaneously creating a sustainable cycle of growth. Given the attractive economics and higher valuation multiples associated with data center leases to high-quality tenants, converting as much of our power portfolio to data centers remains our preferred end use for those assets.

The pace of transition from Bitcoin mining to data centers will be influenced by customer demand trends, the availability of financing, and the general data center market. Our current efforts are laying a strong foundation for a pipeline of future transactions.

We have many advantages that have put us in an incredible position because we offer a unique combination of significant scale of readily available power in high-demand jurisdictions, a strong balance sheet underpinned by holding more than 19,000 Bitcoin and $330 million in cash, and with significant access to the capital markets, experienced hyperscale data center leadership, and development capability, scaled efficient Bitcoin mining revenues, generating hundreds of millions of dollars in revenues and cash flows annually, and battle-hardened experienced management and operations teams. With this framework, our mission is clear.

Riot will maximize value across our entire power portfolio, with a view to ensuring no stranded capacity, progressively shift power capacity towards data centers, strategically expand our power assets, utilizing Bitcoin mining where advantageous, and increase our shareholders’ exposure to value-accreting assets. We are strategically positioned at the convergence of surging compute demand and Bitcoin growth, offering compelling potential for shareholder value creation. Now turning to the second quarter. We continue to aggressively pursue further development of our data center business build-out and achieved a key milestone in our development plan. More specifically, we announced the hiring of Jonathan Gibbs as our Chief Data Center Officer.

As we searched for the right person to take leadership of this primary initiative for Riot, Jonathan’s name repeatedly came strongly recommended to us by a number of different industry parties. The market for data center talent is incredibly competitive, and professionals with Jonathan’s level of expertise are in very high demand. Jonathan’s decision to join Riot and lead our data center platform is a testament to the unique opportunity set available to Riot and our ability to succeed. We are incredibly excited to have someone of Jonathan’s caliber on board to drive our efforts. During the second quarter, we also continued to acquire additional land around our Corsicana site and now have a total footprint of 858 acres.

Adding additional land ensures that we can fully utilize the large-scale access to power that we have on-site without leaving any power stranded, and therefore, maximize the value for Riot, which we believe is the premier data center development opportunity in the country. We continue to see strong demand in the market, and we remain engaged in ongoing discussions with interested parties. With that said, in the second quarter, we also continued to make strong progress in our Bitcoin mining business, where we have made significant operational efficiency improvements that now place us among the most efficient operators in the industry, while also focusing on lower cost and maintaining a disciplined approach to capital allocation.

Riot has also maintained our strong balance sheet, a longstanding key pillar of our business, ending the second quarter with over 19,000 Bitcoin and $330 million in cash on our balance sheet, representing $2.4 billion in liquidity today. We continue to sell our monthly Bitcoin production in order to finance our ongoing operations while raising additional funds via a $200 million Bitcoin collateralized financing facility with Coinbase, allowing us to reduce issuance of stock through our ATM and fund our multiple growth opportunities, driving long-term shareholder value creation. I am proud of what we’ve been able to achieve in the second quarter.

These results and the financial and operational strength of the company will allow us to continue aggressively growing our data center business in a way that will maximize long-term value for our shareholders. I look forward to continuing to report on our progress throughout the rest of the year and beyond. With that, I would now like to turn the call over to Colin Yee, CFO of Riot Platforms, to present our second quarter financial update.

Colin Yee: Thank you, Jason. I am pleased to present Riot’s financial results for 2025. For ease of reference, we have highlighted key metrics on slide eight, which presents a snapshot of key financial and operating metrics for the second quarter. During the second quarter, Riot increased its self-mining hash rate from 33.7 exahash to 35.4 exahash, representing a 5% increase over the course of the quarter, while global hash rate rose by 9% in the same period.

Riot produced 1,406 Bitcoin in the second quarter, a slight decrease as compared to the 1,530 Bitcoin produced in the prior quarter, driven by the global network hash rate growing at a greater pace than Riot’s deployed hash rate given our shift in strategic focus to developing our data center business. Year to date for 2025, we have increased Bitcoin holdings per million fully diluted shares from 44.3 to 45.9, representing a Bitcoin yield of 3.7% through the period ended 06/30/2025.

For the second quarter, Riot reported total revenue of $153 million as compared to $161.4 million for the previous quarter, a 5% decrease quarter over quarter, primarily driven by lower Bitcoin production due to global hash rate increasing at a faster rate than our self-mining hash rate. Gross profit for the second quarter was $70.3 million as compared to gross profit of $73.6 million for the prior quarter. Gross margin in the second quarter equaled 46%, flat with the prior quarter. Net income for the second quarter was $219.5 million or $0.65 per share compared to a net loss of $296.4 million or $0.90 per share for the prior quarter.

This net income was primarily driven by mark-to-market adjustments due to the quarter-end appreciation of Bitcoin price and marketable securities totaling $477 million. As a reference, Bitcoin price at the end of the first quarter was $82,534, the price at the end of the second quarter was $107,174, resulting in a mark-to-market upward adjustment of $470.8 million for the quarter. Net income for the quarter also included a $158.1 million loss on contract settlement as part of the Rhodium acquisition, depreciation and amortization expense of $83.2 million, non-cash stock-based compensation expense of $30.1 million, and was positively impacted by the release of $26 million in restricted cash associated with the post-closing dispute settlement with Northern Data.

Non-GAAP adjusted EBITDA for the second quarter was $495.3 million as compared to non-GAAP adjusted EBITDA loss of $176.3 million for the prior quarter, which included $470.8 million in unrealized gain on Bitcoin held. Cash SG&A for the quarter was $45.8 million, including one-time litigation expenses of $14.3 million and advisory fees of $2 million. Excluding these one-time expenses, Riot’s cash SG&A expenses equaled $29.5 million, at the low end of our prior guidance of a run rate of $30 million to $33 million per quarter for 2025. For the second quarter, Bitcoin mining revenue totaled $140.9 million, in line with the prior quarter Bitcoin mining revenue of $142.9 million.

Bitcoin mining gross margin for the quarter was 50%, an increase from 48% in the prior quarter. This margin expansion was driven by higher Bitcoin price. Most notably, Riot’s year-over-year hash rate utilization increased from 61% to 87%, demonstrating our strategic focus on improving operations across all of our sites, even as we significantly scaled our operations and now positioning us among the most efficient operators in the industry. Direct cost to mine, excluding depreciation, in the second quarter was $48,992 per Bitcoin, of which power costs amounted to $37,767 per Bitcoin or 77% of total direct cost per Bitcoin.

Direct non-power costs, which include direct labor, miner insurance, miner and miner-related equipment repairs, land lease, property taxes, network costs, and other utility expenses, totaled $11,225 or 23% per Bitcoin mined, increasing quarter over quarter when direct non-power costs accounted for 18% of total costs. This increase was almost entirely attributed to the one-year anniversary of the completion of phase one construction at Corsicana and the resulting property tax bill assessment, which totaled $3.8 million for the quarter, adding an additional $2,650 per Bitcoin in direct non-power costs. We anticipate this cost will remain constant at $1.7 million per quarter going forward in our direct non-power costs.

Despite this increase in our direct cost of mine, gross profit per Bitcoin mined for the quarter remained in line with the prior quarter given the higher average price per Bitcoin seen in the second quarter. I would now like to turn the call over to Jason Chung, EVP of Corporate Development and Strategy.

Jason Chung: Thank you, Colin. As we continue to develop our data center business, we believe that providing greater clarity on our Bitcoin mining business on a standalone basis is important information for the market. On Page 11 of our second quarter earnings presentation, we have outlined the underlying run rate profitability of our Bitcoin mining business for 2025. The column outlined in the middle of the slide provides a step-by-step walkthrough of key profitability drivers for our Bitcoin mining business, ultimately culminating in run rate EBITDA for the quarter.

Top-line revenue drivers include the average global network hash rate, Riot’s average operating hash rate, average network hash price, and our total Bitcoin production for the quarter, which taken together, result in a reported second quarter Bitcoin mining revenue of $140.9 million. As highlighted on the prior slide, total direct cost per Bitcoin for the second quarter was $48,992, and when applied to the 1,426 Bitcoin we produced during the quarter, equates to our reported Bitcoin mining gross profit of $71 million or 50% on a gross profit margin basis.

In order to determine run rate cash SG&A for the quarter, we exclude from total SG&A the impact of non-cash charges, which are primarily comprised of stock-based compensation, cash SG&A related to our engineering business, and non-recurring expenses, which are primarily litigation and advisory related. Run rate EBITDA for our Bitcoin mining business for the second quarter equaled $45.6 million, representing a 32% margin. These results are based on the average network hash price for the second quarter of $51 per petahash per day, while hash price today is currently closer to $60 per petahash per day.

Our Bitcoin mining business demonstrates strong leverage to changes in hash price, and as an illustration, applying current hash price of approximately $60 per petahash per day to the second quarter results would have resulted in a 70% increase in our run rate EBITDA for the quarter. At the same time, we continue to focus on controlling and reducing costs. Non-cash charges, which are primarily comprised of stock-based compensation, are temporarily elevated at present, but will be meaningfully and dramatically reduced from mid-next year onwards, and we will provide more detailed guidance on the expected reduction in stock-based compensation in the next quarter.

As Colin previously mentioned, litigation expenses represent the bulk of our non-recurring cash expenses for the quarter, constituting $14.3 million out of the total $16.3 million. While litigation expenses can be difficult to forecast, we continue to work to reduce these expenses as well. For instance, our recent acquisition of Rhodium’s assets and settlement agreement during the quarter have eliminated litigation costs associated with this dispute.

It is important to keep in mind that these results are specific to our second quarter and that historically, the third quarter has been the period during which we have typically seen the greatest reduction in direct costs, and, therefore, the greatest increase in profitability, as that quarter is when we have typically been able to most fully employ our power strategy. I will now turn the call back over to Colin Yee to continue with the second quarter financial update.

Colin Yee: Thanks, Jason. Before diving into the financial results of our engineering business for the quarter, it would be helpful to discuss the underlying significant strategic benefits that this business brings to Riot. Our engineering business provides critical, long-lead-time items directly applicable to developing large-scale data center infrastructure. By directly controlling this business, we can ensure timely, cost-competitive availability of critical electrical components, representing a key competitive advantage in planning for ongoing development of both our Bitcoin mining and data center businesses at a time when other developers face supply constraints.

Further, through our acquisition of ESS Metron last year, the engineering business also brings added in-house expertise in commissioning, operating, and maintaining electrical infrastructure, allowing us to better maintain existing equipment, which reduces downtime and extends the life cycle of our equipment, which reduces additional CapEx spend. Direct savings to Riot on CapEx spend associated with ESS Metron since its acquisition in December 2021 already totals $18.5 million to date, and we anticipate additional ongoing cost savings well into the future. Now let’s dive into the financials. During the quarter, the engineering business achieved a record in order bookings, taking our backlog to $118.7 million and setting the stage for a strong 2025.

During the quarter, engineering revenue totaled $10.6 million, a 14% decrease relative to the prior quarter revenue of $13.9 million. Total revenue excludes $5 million of intercompany purchases made in the second quarter by Riot for CapEx. With that, I would now like to turn the call back over to Jason Les.

Jason Les: Thank you, Colin. As I discussed in my opening remarks, Riot’s strategy is to maximize the value of the megawatts that we currently have readily available. With the closing of the Rhodium asset acquisition during the second quarter, we now have access to an additional 125 megawatts of power capacity at our Rockdale facility. Following careful evaluation, we determined that the optimal use for this additional capacity in the immediate term is to upgrade it to support enhanced Bitcoin mining use. As such, we have recently entered into purchase orders for new miners to be deployed at both Rockdale and Kentucky.

In total, this order consists of 10 exahash of MicroBT’s most efficient miner, the M60S++, with an efficiency rating of 15.5 joules per terahash. At current hash prices, coupled with Riot’s low cost of energy, we anticipate a relatively quick payoff period on this purchase. Given the attractive economics and higher valuation multiples associated with data center leases to high-quality tenants, our long-term goal for this additional capacity is to transition it to data center use when appropriate. These capital expenditures are fully funded through year-end 2025 with Riot’s current cash on hand.

As a result of this increase in 2025 CapEx, we are raising Riot’s fourth quarter 2025 hash rate forecast from 38.4 exahash to 40 exahash, representing a year-over-year hash rate growth of 26%. A portion of the new miner order previously highlighted will be deployed during 2026, and as such, we are also providing an initial first quarter 2026 hash rate forecast of 45 exahash. This pace of hash rate growth is anticipated to allow Riot to maintain our approximate 4% share of the global Bitcoin network into 2026 while we continue to focus on the development of our data center business.

In January 2025, Riot formally announced our pivot to utilize the available 600 megawatts of power at Corsicana for data centers that serve high-performance computing. In just seven months, Riot has accomplished the following: One, engage Altman Solon to perform a comprehensive evaluation of the Corsicana site. Two, expanded our board to include key data center and infrastructure development expertise. Three, engage financial advisers to assist in our go-to-market strategy, financing, and strategic partnership exploration. Four, continued development of the 600 megawatt substation at Corsicana, with 400 megawatts on track for 2026, and the second 200 megawatts expected to come online in 2026.

Five, building internal expertise, recruited and hired Jonathan Gibbs as Chief Data Center Officer along with other veteran data center talent, and six, progressing on the basis of design for our data centers. All of these steps are being taken in a methodical, step-by-step manner in order to put us in the best position possible to secure a lease with a tenant and build a sustainable data center business. Further, when combined with our Bitcoin mining operations, and resulting ability to monetize power of land, as well as a strong balance sheet, we are well-positioned to expand our power portfolio further as attractive opportunities arise. Building a world-class data center team starts with the right leadership.

In June, Jonathan Gibbs joined Riot as our Chief Data Center Officer, bringing more than fifteen years of global experience leading end-to-end data center development and operations. Throughout his career, Jonathan has driven multiple aspects of leading-edge data center development, spanning capital planning, infrastructure delivery, operations, and customer engagement across North America, Europe, and Asia. Jonathan has led cross-functional teams responsible for design, construction, procurement, critical operation, ESG, EHS, and sales engineering, and has successfully led development of over one gigawatt of capacity, representing more than $17 billion in global investment. Most recently, he served as Executive Vice President of Product Delivery at Prime Data Centers, overseeing the execution of hyperscale and enterprise data centers across the United States.

Having the right expertise and experienced leadership in place is a critical step towards engaging potential data center tenants and negotiating leases from a position of credibility and strength. As highlighted on the prior slide, building internal expertise represents a key milestone in the ongoing development of our data center business. And with Jonathan now in position leading the team, we continue to aggressively push forward in completing our basis of design and ultimately securing a lease in a manner that maximizes value for Riot shareholders. We are excited to have Jonathan at the helm of our data center platform and look forward to sharing more of his team’s progress and vision in the quarters ahead.

Altman Solon’s feasibility study identified the footprint of our existing site as a potential complicating factor to fully utilizing the entire one gigawatt of power availability at Corsicana for data center use in a lowest development cost way due to the different density requirements in comparison to Bitcoin mining. We quickly moved to address this, and in May, we announced that Riot acquired a 355-acre parcel, expanding our available footprint for additional development. In July, Riot acquired a second 238-acre parcel adjacent to the previously announced 355-acre parcel, creating a 593-acre contiguous collection of land in close proximity to our existing site. Collectively, Riot now controls 858 acres of potential development area in Corsicana.

Our goal is to assemble a portfolio that ensures we have flexibility to accommodate any design specifications and requirements of potential tenants. We are frequently asked about our time-to-market strategy and the, quote, unquote, window of opportunity that we see. Our observation of market dynamics suggests that power availability will remain the key constraining factor to the explosive demand for data center development that we are witnessing, and that these dynamics will remain in place for many years to come. On page 20 of their earnings presentation, there are two charts.

The chart on the left-hand side of this slide demonstrates from 2008 to 2023, US on-grid energy demand growth was nearly flat, resulting in minimal investments in integrated infrastructure upgrades. Contrast that with projections of 2.2% compounded annual growth in demand for the next five years, representing a greater than 10x increase in annual demand relative to the prior fifteen-year period, and demonstrating a significant and growing gap between this increased demand and more limited growth in supply.

Concurrent to this growing gap in demand for power and relative to supply, timelines for pure power in key markets across the United States are significant, with analysts pointing to lead times in the Dallas and Austin markets, where our Corsicana and Rockdale sites are located, of thirty-six and forty-two months respectively. Riot’s fully permitted and readily available power located in important in-demand markets positions us to be in the right place at the right time to capitalize on these market dynamics to the benefit of our shareholders.

In closing, we have many advantages that have put us in an incredible position because we offer a unique combination of significant scale of readily available power capacity in key high-demand jurisdictions, experienced credible hyperscale data center leadership and development capability, strong balance sheet underpinned by more than 19,000 Bitcoin, and $330 million in cash and significant access to capital markets, large-scale efficient Bitcoin mining operations, generating hundreds of millions of dollars in revenues and cash flows, and battle-hardened and experienced management and operations team. With this framework, our mission is clear.

Riot will maximize value across our entire power portfolio with a view to ensuring full utilization of our available power capacity and pipeline, leaving no stranded capacity behind, aggressively shift power capacity towards data centers, strategically expand our power assets, utilizing Bitcoin mining where advantageous, and increase our shareholders’ exposure to value-accreting assets. We are strategically positioned at the confluence of surging compute demand and Bitcoin growth, offering compelling potential for shareholder value creation. We will now open the call up for questions. Operator?

Operator: Thank you. And wait for your name to be announced. To withdraw your question, simply press 11 again. Please stand by while we compile the Q&A roster. Now first question coming from the line of Greg Lewis with BTIG. Your line is now open.

Greg Lewis: Yes. Thank you, and good afternoon, and thank you for taking my questions. There’s definitely a lot to chew through on the HPC opportunity ahead for Riot. But I did want to ask about the decision. It was clearly a good quarter for generating Bitcoin, but clearly, from the action, we took that Bitcoin generation to really, you know, we sold that to monetize. Could you talk a little bit about that decision to do that and how you’re thinking about the HODL strategy, you know, in the back half of the year or even longer term?

Jason Chung: Thanks for the question, Greg. This is Jason Chung. Maybe I’ll take a stab at that one. So I think this quarter is an interesting representation of how we think about our financing strategy and the different levers available to us. And just looking at, you know, for the past quarter, the two levers that we exercised most heavily were sales of our Bitcoin production. The second was leaning into our Bitcoin stash to borrow and enter into the Coinbase facility for $200 million. The sale of Bitcoin production allows us to more than cover our operating costs and therefore frees up the additional capacity or minimizes our requirement to issue into the ATM.

And really allows us to focus any financing raise through that very specifically towards growth opportunities, which we believe are going to be value-accretive to our shareholders. And so I think that’s kind of how we think about thought about things for the quarter and probably a good reflection of how we currently think about things as well. As Bitcoin prices increase, that does give us additional room or comfort around our leverage levels and the ability to consider expanding the amount of financing we draw upon there as well.

So I think as we, you know, continue to see how Bitcoin prices evolve, you’ll see us continue to take advantage of different market conditions as we think about what’s optimal from a capital perspective for the quarter.

Greg Lewis: Okay. Super helpful. And then just, you know, realizing you’re probably limited in what you can say, maybe we can talk a little bit about what we’re seeing in the market in terms of, you know, the available power transactions or availability to electricity signing for with HPC. If you could kind of talk to the pricing dynamics, how things have been trending, I feel like more recently, it was kind of in the $120 megawatt range is some of the things that we’ve been hearing. Kind of curious if that’s kind of where you’re hearing the more is.

And then really the question I have is, as we think about sizing, is there a premium that you’re seeing in terms of having larger amounts of power available, i.e., you know, if we’re looking at a couple 100 megawatt power deal versus, say, a half gig plus, is there any kind of premium for that larger power deal just in thinking about how potential transaction could shake out?

Jason Les: Yeah, Greg. This is Jason Les now. I think at a high level, we’re seeing very robust demand in the data center market. Our view continues to be that what exists out there in terms of power and infrastructure is really not close to sufficient to meet what’s forecasted demand. And hyperscalers continuing to announce higher levels of CapEx budgets, they have serious demands for more data center capacity that really cannot be satisfied by new power that is expected to be available. What we see is the implications of the AI arms race being very clear here. There’s a trend for more compute demand, and that’s very clear.

So we believe demand is going to continue to be robust, and we are building a business here, building a platform to be able to serve it. As far as monthly rates go, I think there’s a lot of different components that go into what an ultimate lease might be, and it’s important to look at a deal like this as a sum of all of its parts, maybe instead of just, you know, a single metric. You’ll see a range of rental rates, and those will have somewhat of a correlation to the type of tenant that you’re getting.

There’s a bit of credit risk often built into what those monthly are, and you’ll see term and other components of these agreements. So I think it’s important to look at these in all of the parts that comprise them and not necessarily just what that monthly rate would be. It can be a range, and other components could enhance that deal or make that deal worse off from the perspective of the lessor. Now, as you, I think the last part of your question was, is there a premium for large-scale power? I don’t know if I can comment right now if there’s a premium for that power.

But what I can say is that there’s a premium of interest for large scales of power. So for tenants, everyone is massively scaling. Hyperscalers are looking to take down, you know, gigawatts and beyond now. And as everyone else increases their demands for compute, we’re now seeing new clouds taking down capacity at levels that hyperscalers once did, and now enterprise tenants taking down capacity at those significant levels as well. So what any long-term growth-oriented tenant is going to be thinking about is their pipeline for expanding. That having a solid prompt capacity over and over and over again with different providers.

What we see is customers who are interested in capacity available beyond just what their initial lease might be. So when you talk about a premium for capacity, that’s what we think about it. There’s a premium that is, in essence, garnering customer interest because they see an ability to expand beyond just what an additional phase of a development or lease might be. And that, we have found, is very helpful for having productive discussions.

Greg Lewis: Okay. Well, hey. Super helpful. Thank you for the time, gentlemen.

Operator: Thank you. Next question coming from the line of Nick Giles with B. Riley Securities. Your line is now open.

Nick Giles: Thank you, operator. Good afternoon, everyone. You know, I think it’s become clear that Riot’s not going to rush to get a deal done. So I want to commend you for your measured approach. But I think in recent months, forming a basis of design has been at the core of Riot’s efforts towards the data center side. And so I was wondering if you could provide any detail on what aspects of that document are clearly defined versus ones you may still be working on. I think factors that come to mind are cooling resources, redundancy, security, raw layout. Any color that you can add there would be great. Thank you.

Jason Les: Yeah. So first off, bringing an experienced data center executive like Jonathan Gibbs on board alongside other talent that’s been recruited with significant experience in data center development has aided us considerably in building this basis of design. Of course, it is this team’s, this data center team’s project and an objective to accomplish here. And this basis of design is very foundational to being able to go to market. What we’re putting together here is the technical strategy, design elements, that we can then take concrete to be able to discuss with potential customers, with potential tenants to ultimately arrive at a more customized design and then a lease.

So we see this as, you know, one of multiple milestones, but a very key milestone in progressing towards getting a lease here. We have been working at this quite a bit. Jonathan and his team have, rather, and there’s been significant progress made already. We expect that we will be able to complete this basis of design by the end of this quarter, by the end of the third quarter, that is. And I’ll be moving on to next steps in our data center strategy.

Nick Giles: Jason, thanks for all that color, and that reminds me. I want to congratulate Jonathan on his appointment. My second question was, you know, obviously, long lead times are a key determining factor in development timeline. So have you submitted any RFPs to contractors? I mean, how much is the tariff landscape ultimately playing into the timing of that? Thank you.

Jason Les: So first, for the critical infrastructure that’s needed to build this capacity, we have already secured. I’m referring to the 600 megawatts substation that’s being built that’s expanding the site to one gigawatt. We have already procured that equipment. That equipment is already arriving. That is going to take our Corsicana site to one gigawatt in 2026. So we are very well positioned on that critical equipment there. As far as other equipment goes, we are pretty confident in the steps that we’re taking to prepare for that. We are looking at long lead times for other equipment, but the timelines for these are not surprising to us. That’s kind of expected.

And the process of procuring these volume new items is already underway. And with Jonathan and team on board, we feel like we’re approaching this in a very strategic way. And ultimately, we don’t believe that the lead times for any equipment are going to impact our ability to secure a lease.

Nick Giles: Guys, thanks for the update. Keep up the good work.

Operator: Thank you. Our next question coming from the line of Darren Aftahi with ROTH Capital. Your line is now open.

Darren Aftahi: Hey, guys. Good afternoon. Thanks for taking my questions. Just following up on master site design timeframe. Being completed by the end of this quarter. Can you speak to the potential tenants that you’re engaged with? And, I guess, like, how critical is that master site design in terms of their willingness to kind of continue negotiating? Said another way, like, is that something that will accelerate negotiations for you? Are there folks that have already kind of parallel diligencing things they need while waiting for that master site design? Then my second question, on Rockdale, I know you’re upgrading some rigs there.

But can you just give us some general long-term thoughts on what that campus potentially could be used for other than Bitcoin mining and kind of where your head’s at? If you have too much to find now with Corsicana, that’s kind of back burner, or you could take things simultaneously and potentially market all your power as one campus. Thanks.

Jason Les: Yeah, Darren. So the first part of your question. So one thing I want to make clear is we are making the basis of design that we believe can serve a wide range of customers. It can serve hyperscale customers. It can serve enterprise customers or Neo Cloud customers. What we want to do is maximize our flexibility. I think that’s a theme you’ve heard us talk about on our earnings calls a couple of times now. Taking different actions, making moves in order to maximize the flexibility of our site, of our data center, and secure the best possible deal here.

And if you’re talking about engaging with serious counterparties, this is the type of information that they need you to come to the table with in order to advance discussions substantially. And that’s why we view the building out of this team here, especially led by Jonathan Gibbs and his onboarding, as very critical and a very important step we’ve made to building up this platform. I can’t comment on ongoing discussions. I would say that all types of customers are different, and maybe approach conversations in different ways and difference. Milestone in order to have a serious discussion to.

So, we look forward to sharing more about this with the market as it’s completed, and to keep being transparent and sharing our milestones and our roadmap to building out our platform here and ultimately securing a lease. With respect to Rockdale, our primary focus is scaling our data center business and maximizing the value of all of our power assets. Because of that, because of the economics that you can get with data center leases and how the market values that, data centers are the ultimate ideal use for us for all of our power capacity. What’s great about Riot is we have a lot of power capacity to work with.

Megawatts alone, which is our available capacity of Corsicana, that represents a very substantial data center campus in its own. At the same time, we are open to doing finding deals at Rockdale as well. I think what we’re just doing right now is prioritizing what we see as the best with. And as we get our data center platform off the ground and we continue to make more progress, then that makes all of our power assets, that positions all of our power assets in the pipeline for growth of the data center platform ultimately.

So you can think of our strategy as using Bitcoin mining at sites like Rockdale to monetize that power to ensure that no power is stranded and wasted, turning that into meaningful cash flows for the company, and then ultimately looking to transition that capacity to data center leases when the time is right.

Darren Aftahi: Thanks, Jason.

Operator: Thank you. Our next question coming from the line of Brett Knoblauch with Cantor Fitzgerald. Your line is now open.

Brett Knoblauch: Hey, guys. Thanks for taking my question. Maybe an update on the kind of your Bitcoin mining outlook. I know you guys kind of raised guidance for the end of this year, the first quarter as well, network cash has kind of been stubbornly continuing to go up. Maybe high level where do you see network hash going? Is there a level where you think maybe it kind of plateaus a bit? And I know you talked about being 4% share. Is that kind of like a goal that you guys want to maintain for the long term, or how should we think about that?

Jason Les: I think the 4% share is not a mandate that we have. That’s something that we see ourselves being in just based on the growth that we’ve outlined and kind of a near-term estimate of global network hash rate in the next six to twelve months. By no means are we intending to always maintain a certain percentage. But going back to the first part of your question, I think Bitcoin miners will face the same types of scaling challenges that data centers are. There’s very limited amounts of power, and from what I think we’re seeing and, or we’re excited about is data center customers are paying a lot more for that than Bitcoin miners ultimately would.

So while Bitcoin miners have other options for power, the data centers don’t. I think they will also be constrained in how they scale, which has the potential to have a positive impact on hash price in the future. And Riot? What we’re focusing on is maximizing the value across our power portfolio, trying to maximize the value of all of our megawatts, not stranding any capacity. So what we shared with the growth that we have going on in Kentucky and the hash rate growth that we have at Rockdale, those are moves in accordance with that strategy. And I think represent measured growth of our Bitcoin mining segment.

We’re looking at approximately 26% year-over-year growth, 2024 to 2025, and then approximately 10% growth from 2025 to 2026.

Brett Knoblauch: Awesome. That’s helpful. And then maybe just on the maybe Corsicana, I think a lot of the conversations we’ve had, you know, kind of suggest that it’s maybe one of, if not the best, you know, potential AI HPC data center sites out there. You guys getting kind of, like, similar feedback when you guys are looking at, you know, potential customers or kind of what to do with maybe the remaining 600 or full gig out there?

Jason Les: What we’re focused on launching this data center platform is building a strong foundation. We want to get off on the right foot here. And building that strong foundation means getting the right deal of what we can build the pipeline on top of from the start. Now that doesn’t mean that we need full of that 600 megawatts or sign a lease for all of that 600 megawatts, to build that first foundation. That first step to build that strong foundation. We are looking at this capacity and building it out as a phased approach. We see building this out in different segments, and, you know, we’ll be talking about that more in the future.

And the fact that the site has so much capacity means that, ultimately, there may be one tenant that wants all of that. I discussed an earlier question. The fact that there’s so much growth in one site is, we believe, very interesting to lots of customers out there who have, you know, a very robust demand forecast. So it’s to be determined how this is all segmented out. But we are approaching the market with a design that we believe can serve a wide range in the market, hyperscale, customers, enterprise customers, and neo cloud.

And what’s important to us is getting this off on a solid foundation to start, and then, you know, ultimately, like I stated together, there’s lots of room to grow here. And the potential to do a larger deal from there.

Brett Knoblauch: Awesome. Thank you. Really appreciate it.

Operator: Thank you. Our next question coming from the line of Paul Golding with Macquarie. Your line is now open.

Paul Golding: Thanks so much. I wanted to ask about, of course, we can and drill down to some of the infrastructure components. I noticed in the slide on 2025 CapEx, that there’s a waterline project expected to be completed in Q2 2026. And just overall looking at the substation development line item for Corsicana, was wondering if you could expand on any of the infrastructure components for Corsicana that are maybe factoring into the conversation still pending with potential tenant counterparties as opposed to these deals having been signed already. And, also, just to help us understand the extent to which water access has already been secured given the water retention pond that you have.

And the importance of that for HPC and AI liquid cooling. Thank you.

Jason Les: So starting on water, Paul, as you noted, we have a significant size retention pond that allows us to use a lot of the water that’s just naturally generated on-site. It’s Texas, but still gets a lot of rain. We have secured the plans and the approvals to build up a waterline. And that will ultimately that’s a part of giving us maximum flexibility to serve customer demands. What we’re seeing on the data center technology side is cooling technologies becoming more and more water efficient as time goes on. In order to be flexible, we didn’t want to bank on that. So we’re securing enough water that we believe would be ample for a full one gigawatt development.

If someone needed that amount of water in order to achieve the cooling strategies that they have or that they require. As far as the infrastructure for Corsicana, I think we are in a great position and probably have a considerable leg up on what other data center developers might be at this stage. We’ve already made the decision years ago, really, to be procuring this equipment. So it’s already coming in now. That’s significantly, I think, derisked the amount, I’m sorry, derisked the timeline to getting that power online. Also, combined with the fact that we have this approved already, we have the FEA for this already. It is all baked in and ready to go.

So that, I believe, puts us in a great position when we have conversations with tenants. Because this power is not theoretical. This power is impending certain steps happening. This power is coming in the next six months and scaling up from there.

Paul Golding: Great. Thanks. And maybe a follow-on to that. We’ve talked on the call around about price potential pricing in the marketplace, and premiums or premium for demand. You’ve spoken on the call about data center customer requirements and that’s factoring into this built concept. As you have these conversations, just wanted to verify, is the plan still or is what you’re pursuing still the option to construct the facility and the power infrastructure for these tenants in a yield on cost or build to suit scenario, or are you getting inbounds? Are you considering inbounds where someone else is building it, and leasing the power and the infrastructure? Thank you.

Jason Les: So our philosophy at Riot has been to maximize the value of our assets. And we believe that build to suit model is going to be the best way to maximize the value of our portfolio of assets, especially at Corsicana. That being said, we do not intend on building up the site beyond an initial stage without a lease. We’re not looking to build out a site on spec. We believe that by finalizing the design here, understanding what that is with customers, and then being able to take initial steps to get things off the ground, which we already have done. It’s building up a substation and open the water.

These could be foundational steps in the data center. Are willing to invest in order to get things moving off the ground and getting to the point of getting the lease. But we are not looking to build to suit a site on spec and take on all that risk without having a lease in hand.

Paul Golding: Great. Thanks, Jason.

Operator: Thank you. Our next question coming from the line of Reggie Smith with JP Morgan. Your line is now open.

Reggie Smith: Hey, Jason. Congrats on the quarter. I guess, I’d like to follow-up on the last question. And I appreciate you guys wanting to actually build to suit. I guess my question is if there’s more demand today for people just looking to buy power outright. So, like, if that were your strategy, do you think this plot or your capacity would have been sold now? If that makes sense. I’m trying to figure out, like, is the hang-up or the delay in a deal being done, the fact that there may be some haggling over whether, you know, a miner just sells power outright versus a build to suit type of situation. And I have one follow-up question. Thank you.

Jason Les: Yeah, Reggie. So we’re really, we believe what we have is incredibly valuable, and I think all the data that we’re seeing in the market on data center, least, validates that belief. So it’s important to us to maximize the value of that. If you’re talking about doing something like leasing powered land, yes. You know, there is a ton of demand for lease powered land. But the value that you can expect to extract from that is going to be, I think, pretty significantly mismatched with what I think investors are expecting from this type of data center opportunity.

With the assets that we have, with the balance sheet that we have, and now with the team that we have, we are in a great position to build a data center platform and be able to the value maximizing approach that we see with this build to suit model. We are open to anything that will maximize the value, so we’re not closed off to any type of discussion, but this is the avenue that we see as the best pursuit to look forward. It’s why we’re approaching things in this manner.

Reggie Smith: That makes sense. And if I could ask one more question, one of the points that we’ve talked about that we thought has distinguished you guys from other operators is that you’re located so close to Dallas and Austin. As you kind of assess or appraise your assets, how important is that distance from one of those cities in determining the attractiveness of partnering with a Riot versus someone else? Is there still a premium for location, I guess, is what I’m asking you?

Jason Les: Yeah. Reggie, the location is very important. Dallas is one of, is a tier-one data center market. It’s one of the most in-demand data center markets in the country. That’s why I think Corsicana is so valuable. You have the great connections, low latency, and ability to get and talent to that site relatively easily as opposed to more remote locations. For that reason, we think Rockdale is also an attractive site now.

Austin, San Antonio, those aren’t tier-one markets yet, but with the investments that we see in data center CapEx, with the revenue forecast for AI software, and the margins that AI software service providers are forecast to be able to get, we think that will change over time. So by having these two sites, both near one, of course, Canada near a major market today, and Rockdale near what I would say is an emerging up-and-coming market, I think makes those sites very attractive and allows them, because of those elements, allows them to command perhaps better economics than other projects out there.

Reggie Smith: Yeah. That’s what I assume. Glad to hear that. Thank you.

Operator: Thank you. Our next question coming from the line of Mike Grondahl with Northland Capital Markets.

Mike Grondahl: Hey. Thanks, guys. And congratulations on hiring Jonathan Gibbs. What would you say his top two priorities are this summer and fall?

Jason Les: So our number one priority is building this data center platform bar none. And I would break that down into two priorities on accomplishing that. One is building up the team. Jonathan is bringing the critical leadership to making that happen. We’ve added other individuals that are veterans of data center combined sign and development, are bringing more talent on as we speak. This is important because we want to build up our expertise. We want to build up our platform so it looks and feels and acts like a way a hyperscale enterprise and Neo Cloud customers expect. So that’s the number one priority.

I guess the second priority in parallel, I’m not ranking one of the other, is completing this basis of design, of course, you can. This will allow us to have more substantive discussions with potential tenants, allow us to advance the design further, work in different customer necessary, and really get the critical parts of negotiations happening. So two priorities, number one priority, building a data center platform. Two, building the team and building the big design.

Mike Grondahl: Got it. Hey. Thank you.

Operator: Thank you. Our next question coming from the line of Siban Gwenkola with Jones Trading. Your line is now open.

Siban Gwenkola: Hi, Jason, Colin, and Jason. Thanks for the question. How will the new requirements in Texas Senate Bill six, you know, such as, like, grid upgrade cost sharing, mandatory backup generation to curtailment obligation, so forth affect the cost structure and operations of your mining and your HPC activities at both Corsicana and Rockdale? Thank you.

Jason Les: So first important to note is that for both of these sites, we have FEAs already in place. So we do not expect to need to renegotiate these FBAs in any way as a result of this change or as a result of this new legislation. This legislation launches a lot of exploratory work and information gathering. That’s something that Riot, our very capable public policy team, our power team, and our industry partners are all very involved in. One of the parts of SB6 is looking at the four CP program, something that Riot participates in over to reduce our transmission charges. That program may see changes as the working groups from this legislation progress.

We hope and we’re working to ensure this doesn’t have too much of an impact on our transmission charges. Ultimately, there’s lots of different ideas of how the changes to that program could take place. So it’s really too early to speculate on that. As far as the other requirements go, I think that is probably going to impact new FEAs and new interconnection agreements more than it is us, but it’s something we’re staying very close to. And making sure that we’re good stewards of the grid. We’re good industry partners. And we’re doing what we can to support the grid and give them the data and the reliability they need.

Siban Gwenkola: Alright. Thank you.

Operator: Thank you. I’m showing no further questions at this time. I will now turn the call back over to Jason Les for any closing remarks.

Jason Les: Thank you, operator, and thank you, everyone, for joining us on our second quarter call. We look forward to updating you for the progress on our business on the third quarter call in October.

Operator: This concludes today’s conference. Thank you for your participation. You may now disconnect.

Image source: The Motley Fool.

DATE

Monday, July 28, 2025 at 5 p.m. ET

CALL PARTICIPANTS

• President & Chief Executive Officer — Anirudh Devgan
• Senior Vice President & Chief Financial Officer — John Wall
• Vice President, Investor Relations — Richard Gu

For analyst commentary, contact [email protected]

RISKS

• John Wall stated, we had to exclude a number of China bookings from our backlog by the end of fiscal Q2 2025 (period ended June 30, 2025) due to ongoing restrictions, which led to a temporarily lower backlog than would have otherwise been reported at the end of fiscal Q2 2025.
• Recurring revenue declined to 78% of total revenue, which management attributed to paused China ratable revenue, and increased upfront business in hardware and IP.
• Cadence(CDNS -1.26%) disclosed it will make a $141 million payment in fiscal Q3 2025 as part of the DOJ and BIS settlement regarding certain China transactions from 2015 to 2021, which totaled approximately $45 million over the six-year period.

TAKEAWAYS

• Total Revenue— $1.275 billion for fiscal Q2 2025 (period ended June 30, 2025), up 20% year over year, attributed to broad-based growth and AI-driven demand.
• Non-GAAP EPS— $1.65 for fiscal Q2 2025, rising 29% year over year, driven by robust design activity, customer demand, and strong execution.
• GAAP EPS— $0.59 for fiscal Q2 2025.
• Operating Margin— 42.8% on a non-GAAP basis and 19% on a GAAP basis for fiscal Q2 2025, demonstrating efficiency gains.
• Cash Position— $2.823 billion in cash and $2.5 billion in principal value of debt as of fiscal Q2 2025.
• Free Cash Flow Utilization— $175 million was used for share repurchases in fiscal Q2 2025. Cadence management projects using at least 50% of annual free cash flow on repurchases in 2025.
• Revenue Guidance (Full Year 2025)— Updated to a range of $5.21–$5.27 billion for fiscal 2025 (period ending Dec. 31, 2025), reflecting increased expectations over the prior outlook.
• GAAP EPS Guidance (Full Year 2025)— GAAP EPS is expected to be $3.97–$4.07 for fiscal 2025, including the impact from the settlement payment.
• Non-GAAP EPS Guidance (Full Year 2025)— Non-GAAP EPS is expected to be in the range of $6.85–$6.95 for fiscal 2025, also reflecting underlying demand strength.
• AI and Agentic Platform Adoption— Over 50% of advanced-node digital designs now utilize Cadence Cerebras as of fiscal Q2 2025, with Cadence Cerebras AI Studio launched and endorsed by customers such as Samsung and STMicroelectronics.
• IP Segment Performance— Achieved more than 25% year-over-year revenue growth in fiscal Q2 2025 (non-GAAP), driven by AI and HPC demand, including major wins for HBM4 solutions, and the launch of LPDDR6 memory IP.
• Hardware Business— Achieved record revenue (non-GAAP) for fiscal Q2 2025, attributed to strength in products like Palladium Z3 and Protium X3 platforms, and growth across AI, HPC, and automotive customers.
• System Design and Analysis Growth— Delivered 35% year-over-year revenue growth in fiscal Q2 2025 (non-GAAP), led by customer adoption of 3D IC technology, and the Allegro X PCB platform.
• China Revenue Mix— China constituted 9% of total revenue in fiscal Q2 2025, down from 11% in fiscal Q1 2025, offset by growth in other geographies.
• Settlement Disclosure— DOJ and BIS investigations into prior China transactions have been settled with a $141 million payment scheduled for fiscal Q3 2025, impacting revenue for approximately $45 million in transactions from 2015 to 2021.
• Tax Environment— The recently passed U.S. budget reconciliation legislation restored immediate R&D expensing in the U.S., reducing federal tax payments by approximately $140 million for fiscal 2025.
• Recurring Revenue Proportion— Recurring revenue was 78% in fiscal Q2 2025, a multi-year low, which management attributes to hardware and IP outperformance, and the pause in China revenue.
• Backlog Dynamics— Backlog was described as stronger than expected going into fiscal Q2 2025 despite China constraints, with soft bookings in China offset by growth elsewhere.
• Guidance for Q3 2025— Revenue is expected to be between $1.305–$1.335 billion and non-GAAP EPS between $1.75–$1.81, with GAAP EPS of $1.14–$1.20 and a GAAP operating margin of 32%–33% for fiscal Q3 2025.

SUMMARY

Strategic partnerships with customers such as SK Hynix, Analog Devices, and Taiwan Semiconductor Manufacturing were deepened through expanded product proliferation and certified flows, directly supporting technology leadership in advanced-node and 3D IC design. The settlement with U.S. authorities resolves multi-year China compliance matters, producing a one-time financial impact but removing a regulatory overhang from future operations.

• Management noted broad-based revenue and bookings growth, as well as a higher-than-expected backlog for fiscal Q2 2025, indicating improvement across all major segments and geographies despite China export noise. All financial measures discussed were non-GAAP unless otherwise specified.
• Management noted a continued shift in revenue mix, with hardware and IP growth now outpacing core ratable software, and recurring revenue expected to remain near 80% due to strength in upfront businesses.
• Anirudh Devgan outlined multi-cycle “AI super cycle” tailwinds, specifying that Cadence’s comprehensive platform approach enables customers to address escalating system complexity and productivity bottlenecks in both data center and physical AI deployments.
• Management stated they are raising the financial outlook for the year to 13% revenue growth and 16% EPS growth (non-GAAP) for 2025, citing heightened customer investment and multi-year proliferation of agentic AI and system design innovations.

INDUSTRY GLOSSARY

• Agentic AI: Artificial intelligence embedded into EDA tools as agents that autonomously optimize and perform complex semiconductor design tasks beyond single-step automation.
• HBM4: High Bandwidth Memory, fourth generation, used in advanced AI and HPC applications for significantly increased memory bandwidth.
• LPDDR6: Low-Power Double Data Rate 6, a next-generation memory interface standard optimized for performance and efficiency in mobile and AI devices.
• JEDI Platform: Cadence’s Joint Enterprise Data and AI platform that centralizes workflow data management, orchestration, and integration with AI agents for EDA customers.
• 3D IC/3.5D IC: Integrated circuit architectures utilizing multidimensional (layered or chiplet) integration to increase system performance and complexity beyond traditional planar scaling.
• PPA: Power, Performance, and Area; key metrics for evaluating the quality and efficiency of semiconductor design implementations.
• OBBBA: One Big Beautiful Bill Act; U.S. legislation restoring immediate expensing for R&D expenditures, impacting corporate tax obligations.

Full Conference Call Transcript

Richard Gu: Thank you, operator. I would like to welcome everyone to our second quarter of 2025 earnings conference call. I am joined today by Anirudh Devgan, President and Chief Executive Officer, and John Wall, Senior Vice President and Chief Financial Officer. The webcast of this call and a copy of today’s prepared remarks will be available on our website cadence.com. Today’s discussion will contain forward-looking statements, including our outlook on future business and operating results, as well as the impact of our DOJ and BIS settlements. Due to risks and uncertainties, actual results may differ materially from those projected or implied in today’s discussion.

For information on factors that could cause actual results to differ, please refer to our SEC filings, including our most recent forms 10-K and 10-Q, CFO commentary, and today’s earnings release. All forward-looking statements during this call are based on estimates and information available to us as of today, and we disclaim any obligation to update them. In addition, all financial measures discussed on this call are non-GAAP unless otherwise specified. The non-GAAP measures should not be considered in isolation from, or as a substitute for, GAAP results. Reconciliations of GAAP to non-GAAP measures are included in today’s earnings release. For the Q&A session today, we would ask that you observe a limit of one question only.

If time permits, you can re-queue additional questions. Now I will turn the call over to Anirudh.

Anirudh Devgan: Thank you, Richard. Good afternoon, everyone, and thank you for joining us today. Cadence Design Systems, Inc. delivered exceptional financial results for the second quarter of 2025, exceeding our Q2 revenue and EPS guidance, driven by ongoing broad-based strength across our AI-driven product portfolio. Bookings were stronger than expected, highlighting the strategic relevance of our AI-driven portfolio and the depth of our customer relationships. Demand for our technologies continues to grow, driven by customers embracing our products at scale, and we are raising our financial outlook for the year to 13% revenue growth and 16% EPS growth for 2025. John will provide more details on both our Q2 results and the updated outlook.

We continue executing to our intelligent system design strategy initiated in 2018, which remains a clear differentiator in a rapidly evolving landscape. Our early investment delivering to our vision of unified EDA, IP, 3D IC, PCB, and system analysis are paying off. These capabilities are enabling us to lead through the accelerating waves of the AI super cycle, from AI infrastructure build-out to physical AI in autonomous systems, to the emerging frontier of sciences AI. Customer R&D investments remain robust, particularly as AI drives exponential design complexity, such as in advanced node design and complex system architectures. And this is translating into broad-based demand across our portfolio.

Embedding agentic AI into our design platforms across core EDA, system design, and system simulation workflows enables the evolution from traditional tool-based flows to autonomous goal-driven agents. Our Cadence AI portfolio, powered by multiple autonomous silicon agents and built on our unified JEDI platform with NVIDIA accelerated compute, is delivering optimized design and massive efficiency gains for our customers. At Cadence Live 2025, we introduced the new Millennium M2000 AI supercomputer, featuring NVIDIA Blackwell, delivering AI-accelerated simulation at unprecedented speed and scale across engineering and science workloads. Its tightly co-optimized hardware, software, full system stack delivers up to 80x higher performance and up to 20x lower power versus traditional CPU-based systems.

Multiple customers provided endorsements, including Ascendant, MediaTek, and Treeline Biosciences. In Q2, we furthered our long-standing partnership with ADI through a broad proliferation of our core EDA software, including AI-driven Cadence Cerebras and Vericium solutions, as well as system software across PCB, advanced packaging, and system analysis. Also in Q2, we deepened our partnership with SK Hynix through a broad expansion of our EDA software, system software, and design IP solutions. And a major semiconductor company meaningfully expanded its relationship with Cadence in Q2 through a broad proliferation of our EDA, IP, and SDA portfolio.

We furthered our long-standing collaboration with TSMC to accelerate time to silicon for customer designs using 3D IC and advanced node technologies, such as TSMC’s A16 and N2P, through certified design flows, silicon-proven IP, and ongoing technology collaboration. We continued the strong momentum in our IP business, driven by product strength delivering more than 25% year-over-year growth in Q2 and a broadening silicon solutions portfolio. AI and HPC use cases spearheaded the strong demand for our IP offerings, with advanced technology such as HBM4 and 224G SerDes, matching key wins for scale-up and scale-out in the AI infrastructure space.

We built on our strategic collaboration with the emerging advanced foundry, as they awarded us a large deal in Q2 for our leading HBM4 solution. We introduced the industry’s first LPDDR6 memory IP, offering up to 50% higher performance to meet the growing memory and capacity needs of AI LLMs and agentic AI workloads. At Cadence Live 2025, we launched the Cadence Tensilica NeuroEdge 130 AI coprocessor to accelerate physical AI applications. And in Q2, a market-shaping wireless technology company selected Tensilica HiFi 5S as the standardized audio solution for its music and voice platforms. Our core EDA revenue further proliferation grew 16% year-over-year in Q2.

Of our digital full flow at the most advanced nodes continued, and more than 50% of advanced nodes designs using our implementation solutions are now using Cadence Cerebras. In Q2, we launched Cadence Cerebras AI Studio, the industry’s first agentic AI multi-block and multi-user SoC design platform. This technology delivering up to 20% PPA improvement while accelerating chip delivery time by 5 to 10x was endorsed by Samsung and ST Microelectronics at launch.

And Renesas successfully used our Pegasus physical verification solution to sign off an advanced node SoC after it demonstrated a significant throughput advantage. Our industry-leading Palladium Z3 and Protium X3 platforms accelerated their momentum, delivering outstanding results, with Q2 being the best revenue quarter ever for our hardware systems. Demand for hardware was strong and broad-based, driven by AI, HPC, and automotive customers. Our verification software suite that includes Vericium, Exalium, and Jasper, and leverages big data and AI to optimize verification workloads saw continued expansion with 27 new logos in Q2. Building upon thirty years of industry leadership, we launched the Virtuoso Studio 25.1 release, offering broad support for RF photonics, mixed signal, and advanced heterogeneous design.

Our leading SpectreX circuit simulator closed several deals with strong growth, while our fast-paced Spectre FX platform has now been adopted by the top three memory companies. Our system design and analysis business delivered another standout quarter with 35% year-over-year revenue growth. On the packaging front, there was strong customer uptake of our 3D IC technology, and top foundries and semi customers embraced our AI-driven advanced substrate router, which provides tremendous productivity benefit. Our AI-driven Allegro X PCB design platform saw continued proliferation as multiple aerospace and defense, hyperscale, and EV customers took advantage of the platform’s meaningful productivity and next-generation capabilities.

Our Clarity and Celsius solvers saw significant expansion at a major hyperscaler, and Clarity secured a key win at a marquee AI company, while our Reality data center digital twin drove strong growth at a top hyperscaler. Beta CAE technology integration with our CFD thermal and electromagnetics products were released, as Beta CAE solutions continued to score key competitive wins, particularly in the automotive segment. Finally, I am pleased to share that we have entered into a settlement with the US Department of Justice and the US Department of Commerce’s Bureau of Industry and Security that resolved the previously disclosed investigations into certain transactions with customers in China that occurred between 2015 and 2021.

The settlement represents a mutually acceptable path forward for all parties, and we believe it is in the best interest of our customers, partners, and shareholders. I want to emphasize that Cadence Design Systems, Inc. is deeply committed to the highest standards of compliance, and we have significantly enhanced our compliance processes over the last few years and continue to implement improvement measures to proactively address evolving trade restrictions. We remain focused on delivering for our customers and shareholders and executing the clear strategy we have laid out to drive innovation and enhanced value creation.

In summary, I am delighted with our Q2 results and the continued momentum across our broad and innovative portfolio. The AI-driven era presents tremendous opportunity, and the co-optimization of our comprehensive EDA and SDA portfolio with accelerated computing and GenAI uniquely positions us to deliver breakthrough solutions across a wide range of markets. Now I will turn it over to John to provide more details on the Q2 results and our updated 2025 outlook.

John Wall: Thanks, Anirudh. Good afternoon, everyone. I am pleased to report that Cadence Design Systems, Inc. delivered excellent results for 2025 with broad-based momentum across all of our businesses. Strength in other regions more than offset the impact of the export restrictions on China outlined in the BIS letter, dated May 23, which was later rescinded. Robust design activity and customer demand, coupled with our strong execution, drove 20% revenue growth and 29% non-GAAP EPS growth year-over-year for Q2. Here are some of the financial highlights from the second quarter, starting with the P&L. Total revenue was $1.275 billion. GAAP operating margin was 19%, and non-GAAP operating margin was 42.8%. GAAP EPS was 59¢, with non-GAAP EPS $1.65.

Next, turning to the balance sheet and cash flow. Cash balance at quarter-end was $2.823 billion, while the principal value of debt outstanding was $2.5 billion. Operating cash flow was $378 million. DSOs were fifty-one days, and we used $175 million to repurchase Cadence shares. Before I provide our updated outlook, I would like to share what is embedded. As Anirudh mentioned, I am pleased that we have reached a settlement with the DOJ and BIS, resolving previously disclosed investigations into certain China sales from 2015 to 2021, totaling approximately $45 million over the six-year period. As part of the agreements, we will make a payment of $141 million in our third fiscal quarter.

Please see our Form 8-Ks, which includes additional details regarding the terms of the agreements. On July 4, 2025, the One Big Beautiful Bill Act was enacted in The United States. This act includes the restoration of favorable tax treatment for certain business provisions, including the immediate expensing of United States research and development expenditures. We expect it to decrease Cadence’s United States federal tax payments for the remainder of fiscal 2025 by approximately $140 million. Our updated outlook includes the timing of the settlement penalty, the cash tax benefit of the OBBBA, and the usual assumption that export control regulations that exist today remain substantially similar for the remainder of the year.

Our updated outlook for 2025 is revenue in the range of $5.21 to $5.27 billion. GAAP operating margin in the range of 28.5 to 29.5%, non-GAAP operating margin in the range of 43.5 to 44.5%. GAAP EPS in the range of $3.97 to $4.07. Non-GAAP EPS in the range of $6.85 to $6.95. Operating cash flow in the range of $1.65 to $1.75 billion. And we expect to use at least 50% of our annual free cash flow to repurchase Cadence shares. With that in mind, for Q3, we expect revenue in the range of $1.305 billion to $1.335 billion.

GAAP operating margin in the range of 32 to 33%, non-GAAP operating margin in the range of 45 to 46%, GAAP EPS in the range of $1.14 to $1.20, and non-GAAP EPS in the range of $1.75 to $1.81. As usual, we published a CFO commentary document on the investor relations website, which includes our outlook for additional items, as well as further analysis and GAAP to non-GAAP reconciliations. In conclusion, I am pleased with our strong first-half results and the robust pipeline for the second half of the year. At the midpoint, we now expect revenue growth of 13% and non-GAAP operating margin of 44% for the year.

I would like to close by thanking our customers, partners, and our employees for their continued support. And with that, operator, we will now take questions.

Operator: Thank you. And at this time, I would like to remind everyone who wants to ask a question to please press star and then the number one on your telephone keypad. As a courtesy to all participants, we ask that you please limit yourself to one question, and we will pause for a moment to compile the Q&A roster. And our first question comes from the line of Joe Vruwink with Baird. Your line is open.

Joe Vruwink: Hi, great. Thank you for taking my question. I wanted to ask a question on physical AI. It seems like over the past quarter or so, many of your key development partners have had more to say around what they are doing with edge devices or even small language models, maybe as a means to enabling physical AI. Is this factoring into the booking strength you have seen recently? And is it maybe leading to more spend or different spend with Cadence Design Systems, Inc. just in terms of the tools that this is going to need versus what the initial build-out of AI infrastructure has meant?

Anirudh Devgan: Yeah, Joe. This is a great question. And overall, I am very pleased by our results and our performance. And the demand for our products, which is broad-based. Also, I think there is, first of all, I believe there is overall optimism in the benefits of AI for our customers. You know? Both from, you know, what they can, you know, their own product, and also how they can use AI internally. So, therefore, they are investing more in their innovation and given the critical nature of our products, more in Cadence Design Systems, Inc. Now it has several aspects to it.

And, you know, I have been a big fan of physical AI for a long time because one unique advantage we have in Cadence Design Systems, Inc. is the privilege to work with all the top companies in the world. And we believe that, of course, AI infrastructure is huge, but physical AI has a potential of being even bigger, followed by sciences AI. That is why we have laid this three-phase evolution of AI. And now, you know, if you look in the marketplace also with autonomous cars or robots and drones, it is becoming much more, you know, public.

And, you know, our advantage is even though some of these things come out later, you know, the customer starts investing in R&D before they come out in public. You know? So but I think physical AI will play a very key role for our products because the silicon required, first of all, and physical AI will affect the whole three layers of that AI cake that I have talked about. So first of all, the silicon is different. In the car or in the robot or in the edge devices, it is different than data center silicon. I mean, it is still AI-driven, but it is more power optimized, runs on lower battery as you know.

So the silicon is different. The simulation and design are different. Of course, AI models themselves are different. They are more word models than LLMs. But all these physical AIs still need to be trained, you know? Even if the inference, like, for autonomous cars runs on the car, the actual AI model is trained on the data center. The beautiful thing about physical AI is not only it creates new opportunities for us, it also emphasizes the importance of AI infrastructure in the data centers. So it is helping both sides of that equation, and so we are benefiting from that. You know?

And we are, as you know, working with all the main AI data center players, you know, as they design chips and systems. So the impact is both on the data center side and the edge side. But there is still an evolving market. I think physical AI is still in the early innings. You know, there is still, like, three to five years of more development to go. So but overall, I think what I would like to say is that the customer environment is, I feel, personally, is better than it was six months ago.

Joe Vruwink: That is great. Thank you.

Operator: And our next question comes from the line of Gianmarco Conti with Deutsche Bank. Your line is open.

Gianmarco Conti: Yes. Hi, there. Thank you for taking my question. I mean, firstly, congrats on another amazing quarter. Simply what led to Cadence Design Systems, Inc. increasing the growth outlook even though you could not recognize one month China revenue? Guess, like, the curiosity of whether there was a single stack of renewals across CDA or was this across all fronts? And maybe you can give us more comment on backlog and the development for the year. Thank you.

John Wall: Yeah, Gianmarco. Great question. I mean, yeah, it has been an interesting quarter. I mean, China ended up being 9% of our revenue in Q2. That is down from 11% in Q1, but we have seen strong demand across all geographies. And strength in other regions more than offsets any near-term softness related to China during Q2. We have spoken in the past about how well-diversified our customer base is, and we are increasingly seeing growth, and we are seeing the growth in bookings from AI, HPC, and system design workloads globally. But we are very, very pleased with the way backlog ended up at the end of Q2.

It is stronger than we expected going into the quarter despite all of the restrictions. But, yeah, we are very, very pleased with where we are halfway through the year. Anirudh, anything to add?

Anirudh Devgan: No, John. That is right. I mean, overall, I would like to say the demand is broad-based. You know, you can see it in all the results of all the three main lines of business. I mean, hardware is doing phenomenally well. You know, we had a record quarter ever, you know, in terms of revenue. And we have a clear lead in hardware, and also, we are essential to all the major AI chips being designed using Palladium and our EDA software. And then, you know, all these agentic AI tools, like, you know, Cerebras AI Studio. I mean, that is a phenomenal new product. And then, Allegro X.

So I think both the software and hardware business is doing well in core EDA. And then IP had a great quarter. I mean, there are a lot of reasons behind that. One is the AI infrastructure build-out. But also, you know, there are at least four major companies doing advanced node foundries now. You know, with TSMC and our long-standing partner. Samsung, even today, there is a big announcement from Samsung Foundry. You know, Intel with 18A, 14A, and Rapidus in Japan. You know? I just came back from Japan with this big opening of Rapidus. So there are at least four advanced node foundries that all require IP. So I think that is also driving strength in IP.

And then the system continues to do well because of our focus on, you know, 3D IC, which is the fastest-growing part of the system market. And, you know, beta is providing us a good kind of integration with the rest of the flow, new products like Millennium. So if I look at all the three main, you know, areas, I think I feel we are very well positioned, and the market itself seems to be improving. The AI super cycle.

Gianmarco Conti: Got it. Thank you.

Operator: And our next question comes from the line of Vivek Arya with Bank of America. Your line is open.

Vivek Arya: Thank you for taking my question. Just a near and longer China impact question. So on the near term, how much of a headwind was China in Q2? I know, John, you mentioned they went from 11 to 9%, but what was kind of the expectation? Then if we zoom out for all of 2025, I think in the past, you had said China sales were expected to be flat year on year. Is that still the right approach because that would still imply quite a bit of a lift in the back half? And then, Anirudh, if we look longer term, what is the right China exposure for Cadence Design Systems, Inc.?

Does it naturally just come down over time, or, you know, will it probably stay at this, you know, nine, 10, 11% kind of range over the longer term?

John Wall: Yeah, Vivek, look. I will start. Because I understand your question. I mean, I would view our outlook for China to be optimistic but prudent. I mean, our guidance reflects what we believe to be a prudent and well-calibrated view of the second half of the year. The export control environment is dynamic, and while we have incorporated the current regulatory framework as of today into our assumptions, we always add some prudence to account for potential variability, whether that is geopolitical or operational. But we are very, very pleased with how China is doing. I know last quarter, we told you that we were expecting it to be flat.

It is hard to see how China will not increase a little bit over last year, but we have been prudent with our guide.

Anirudh Devgan: And Vivek, long term, I mean, China will, of course, invest in chip design and system design, just like all geographies. But I think the percentage of revenue should be similar or maybe, you know, maybe a little down. But because not because China will not do well, but I think the rest of the world is doing phenomenally well. Right? All the investment you are seeing in the US, and then Japan, Korea. I mean, so it is not to say in particular about China, but I think the rest of the world, which we saw in Q2, there is significant investment. So given that context, it is difficult to predict exactly what China will do.

But it is good to see that, you know, China is doing well, but the rest of the world is doing even better. Thank you.

Operator: And our next question comes from the line of Harlan Sur with JPMorgan. Your line is open.

Harlan Sur: Good afternoon, and great job on the quarterly execution. You know, if I look at many of the AI XPU, ASICs, and merchant chip design programs that are in design right now, many of them are looking to transition from 2.5D to 3.5D advanced packaging architectures, which includes chip stacking. Right? And many of these programs are going to start taping out 10 chips in a single package. Right? This is a very complex undertaking, integration, floor planning on top of that. You got signal integrity, thermal power challenges.

Wondering how much is this contributing to the bookings and revenue strength as more of your customers are adopting your Integrity 3D IC or your Allegro X advanced packaging platforms to tackle these challenges of 3.5D packaging. And then how much is advanced packaging roughly contributing to your overall revenues?

Anirudh Devgan: Yeah, Harlan, that is a great question. And a great observation, of course. I mean, the whole industry, in HPC, and AI is moving to this chiplet-based architectures. And, also, I think it is not just limited to the data center. Even, you know, if you look at the latest auto designs and all, they all, all the other markets will, I think, over time, move to this new packaging architecture. And we are, you know, Cadence Design Systems, Inc. is uniquely and very well positioned. I mean, I think we have talked even earlier. Allegro is the tool of choice for package design. Yep. And 3D IC is another way of talking about package design.

And then at the same time, we have Virtuoso, which is analog, Innovus, which is digital, and then all the system analysis tools like Clarity and Voltus and Celsius for, so, and that is all incorporated into Integrity. And then we closely worked with TSMC, you know, TSMC has done a fabulous job, by the way, in 3D IC. And we have worked closely with TSMC over the last several years, you know, to develop this 3D IC flow that is used by most of their main customers.

And then now, you know, Rapidus and Samsung and Intel, we are working with all the other foundries to develop this kind of 3D IC flow because it will be critical for all the other foundries. You know, we do not explicitly call out Allegro in our SDNA business. But it is a significant part of that business. But, also, it pulls in, you know, the other things. You know, it is not just Allegro by itself. But it naturally boosts an analysis tool, you know, and clarity and all those things, and even the base tools, like, like, Virtuoso and Innovus.

But it is a platform of choice for all the major companies as they implement this new 3D IC or now 3.5D IC technologies.

Harlan Sur: Yep. Thanks, Anirudh.

Anirudh Devgan: And this, you know, this is only in the beginning. I think any even with TSMC, OIP, they showed a roadmap that this is only going to increase. I mean, it is an orthogonal axis to Moore’s law. So Moore’s law, first of all, okay. We are always worried about, you know, there are natural questions from investors or employees sometimes. You know? How long will Moore’s Law continue? First of all, Moore’s law, anyway, is going to go to at least one nanometer. Right? So we are at three, you know, two, 1.41. Okay. That is ten years.

And I visited, you know, some of our research partners like IMEC, and they are planning, you know, to go till 2042 with new transistor structures. But at least for the next ten years, I see Moore’s Law being strong. But then this 3D IC and heterogeneous integration provides the orthogonal levels of integration. And if you look at TSMC and other roadmaps, you know, right, they have very aggressive roadmaps to be able to put more and more chips, like you said, in a package. So we are pushing on both of these dimensions.

You know, Moore’s law, we want to make sure we are aligned with all the latest technologies and customers, and then this 3D IC and heterogeneous integration.

Harlan Sur: Great. Thank you, Anirudh.

Operator: Next question comes from the line of Lee Simpson with Morgan Stanley. Your line is open.

Lee Simpson: Great. Thanks, and well done in another great quarter. I think it is forward to me to maybe ask about the AgenTx systems. You know, again, this is the second quarter. You brought it up. It does look as though development is moving ahead. And I think if, you know, if the comments are to be interpreted right, you are seeing some early sales, one assumes, in sort of pilot line development. But I am trying to, I am still trying to put this into perspective. What if we take a step back, do we need a new business model or a different go-to-market strategy to get full value here?

And more generally, you know, how will you monetize this added value that an agentic system will bring to the customer? Just any thoughts around that and maybe timing as well because it does look as though this is relying on still early-stage reasoning models. Thanks.

Anirudh Devgan: Yeah, Lee. That is a good question. So, I mean, as you know, we package them separate from our base tools. So, of course, base tools are phenomenal, but then we have these agentic workflows on top of our base tools. And customers are embracing both our base tools and the agentic AI flow. I mean, two great examples, one of them we mentioned briefly is in the back end, you know, Cerebras. Cerebras by itself, like I mentioned, is more than 50% of our designs are already using Cerebras, which let’s call it classical AI. But now with Cerebras AI Studio, it is a whole workflow. So it is more, it is an agentic AI solution.

Instead of just doing block implementation, it does floor planning. It does timing closure. So what typically a designer could do, like, you know, three to five million instance design, they could do, like, 30 to 50 million. So it is a massive productivity and PPA benefit. As the AI does more of the manual work that was manual in the past. So that tool itself had a lot of early adopters. Like we mentioned on the call, Samsung, NXT, and others. And then there is on the other side, which is verification and RTL writing.

You know, this whole notion of LLMs generating reasoning element generating code is a big thing, not just in software development, like C++ but also, you know, chip design and RTL. So those two areas are very, very positive. One is in the front end, with RTL generation and verification, and the other is in the back end and, you know, PPA optimization. And those are different tools than our traditional toolset. And we engage with customers on that. And our philosophy always is because we have a long history of innovation and automation in EDA, our goal is to deliver value to customers. Their workload is going up anyway. And align with the top customers.

And usually, they will, you know, reward us for that. And that is our history over the last ten years. And so we are focused on innovation and productivity, and we have all kinds of business models to monetize that in any way. And we will see how that progresses over time.

Lee Simpson: Great. That is a very full answer. Thank you.

Operator: And our next question comes from the line of Jim Schneider with Goldman Sachs. Your line is open.

Jim Schneider: Good afternoon. Thanks for taking my question. I was wondering if you could talk a little bit more about the core EDA results, very strong in the quarter, with a lot of growth. Can you maybe cite some of the drivers of the strength in the quarter, be it new customers or Cerebras pricing benefits, or anything else that was one-time in nature? And maybe give us a sense of how you expect the cadence of the core EDA revenue to trend in the back half of the year? Thank you.

Anirudh Devgan: Yeah. Core EDA is doing phenomenally well. I mean, just to remind, I think most of our investors know this already, but just to remind that we have the broadest portfolio in core EDA. You know, we have digital, which we are leading position in, especially in the TSMC ecosystem. Which is de facto standard in analog mixed signal. Verification, we have all the verification software tools, and Palladium and Protium in hardware. So Cadence Design Systems, Inc. has the most comprehensive EDA portfolio on the market.

And as, you know, AI, you know, as AI adoption happens, you know, it is both the core product portfolio plus AI-driven agents that we talked about, and we saw signs of that in Q2. And then some of the key customer wins we highlighted are, of course, SK Hynix. They are doing phenomenally well, as you know, with the AI and HBM. You know, ADI, which is a long-term Cadence Design Systems, Inc. partner, and then overall strength in hardware, which was very broad-based. Then in IP and in end systems, which is outside of EDA. So, overall, I think, you know, I am pleased with that.

Of course, as you know, we never focus on, you know, one individual quarter. There could be quarter-by-quarter variation. But overall, I think EDA is doing well, and I expect it to grow going forward.

John Wall: Yeah. And, Jim, we are getting proliferation at marquee customers, and we are seeing the second half looks particularly strong on the software side as well as hardware in core EDA.

Operator: And our next question comes from the line of Jason Celino with KeyBanc Capital Markets.

Jason Celino: Hey, thanks for taking my question. You know, John, if I think I heard you correctly, I think you said that China would be up a little bit this year versus flat previously. You know, this is on top of, I assume, you know, the China restrictions that were temporary. So this in itself seems important. Do not know if you will be able to indulge us a little bit, but what do you think China growth could have been if those restrictions, you know, never happened? Like, if we never had those six weeks. Thanks.

John Wall: Yeah. Yeah. Jason, I mean, great question. Very, very difficult to kind of figure out what revenue would have been in a kind of parallel universe where that never happened. The one thing I take comfort from, though, is that, you know, the restrictions came and they went. But so I tend to focus on the year. And when I look at the year that, you know, previously, we thought the year would be flat for China, with the strength that we have seen across the board, across all businesses, and across all geographies. It is really hard to see China remaining flat year over year now. But I think it will be slightly up.

But, of course, you know, we are normally very prudent with our guide, and I thought it was appropriate to remain prudent with the outlook for the year. So we have been cautious but optimistic with that outlook.

Jason Celino: Okay. Great. Sounds good. Thank you.

Operator: And our next question comes from the line of Gary Mobley with Loop Capital. Your line is open.

Gary Mobley: Hi, guys. Thanks for taking my question. John, when we entered the year, I think your expectation, correct me if I am wrong, was the year with a strong period renewal period in the second half. And, clearly, your bookings in the first half of the year have exceeded your expectation by, I assume, several hundred million dollars. And so my questions are two-part. I want to confirm that the June ending backlog excludes China. And, you know, with the strength in the first half that you have seen, what does that tell you about the potential for the second half bookings and exiting the year with perhaps record levels of backlog?

John Wall: Yeah, Gary. I mean, very astute question. Yeah. To confirm, we had to exclude a number of China bookings from our backlog by the end of Q2. We had to reserve for those because at the end of Q2, the restrictions were still in place for us. So the closing backlog at the end of Q2 reflects a lower level of backlog than it would have been had those China restrictions been rescinded prior to June 30. But and then in terms of the outlook for the year, yeah, I am pretty confident we are going to end up the year with a higher backlog than we started the year.

So I am very comfortable that we will end up with a book-to-bill of one second half bookings. The renewal cycle is strong in Q3 and Q4. I think both Q3 and Q4 will have bookings that exceed our revenue in those quarters. But and like I say, we should expect that the end of the year, we will have a new higher and record level of backlog than we had last year.

Gary Mobley: Thanks, John.

Operator: And our next question comes from the line of Jay Vleeschhouwer with Griffin Securities. Your line is open.

Jay Vleeschhouwer: Thank you. Anirudh, you spoke earlier in answer to an earlier question in your prepared remarks about agentic AI. And I would like to ask about the broader implications and requirements from that. One of the terms that has come up this year more broadly in software, not just in EDA, having to do with agentic and orchestration. And in your world specifically, if we think about what you are providing with agentic AI or AI generally, it is fundamentally, I think, a form of simulation. And therefore, the requirements for that would also seem to be new forms of process or data management and traceability, which is a critical function in simulation.

If our thesis is right about what they are really doing. So beyond just introducing these agents and aids, how are you thinking about the broader portfolio and capabilities that you need to provide customers, particularly since you referred to their workflows? Thank you.

Anirudh Devgan: Yeah, Jay. That is a great point. So yes, you are absolutely right. I mean, we want to make more of a work automation just like I mentioned with Cerebras AI Studio. So it is not doing a point function. It is doing multiple functions together with reasoning. And the critical need is, apart from the, you know, LLMs and all, there is a critical need for a data structure or database to store all these actions. So what I am pretty pleased about is the response of our customer to JEDI. You know, we talked about JEDI being our joint enterprise data and AI platform.

And it has both the data storage because we need to capture not just one tool or one point in time, you know, multiple tools and multiple flows, just like a human would do. So JEDI has become a very essential part of our AI deployment to customers. It is a very flexible system. You know, because some of our customers, some really big customers, want JEDI to be on-prem because their data is very, very sensitive. Some customers are okay with, you know, JEDI being on the cloud. You know, okay to use cloud LLMs or cloud data management. And then some customers want a hybrid, you know, on-prem and cloud solution.

So JEDI uniquely positions us to make that kind of invisible to the user. But JEDI is critical along with the AI agents to deliver this solution to our customers. And we are able to do much more, and we will do much more of a full workflow solution along with JEDI and then the agents on top, whether it is Vericium or Cerebras or Allegro X.

Jay Vleeschhouwer: Got it. Thanks, Anirudh.

Operator: And our next question comes from the line of Joe Quatrochi with Wells Fargo. Your line is open.

Joe Quatrochi: Yeah. Thanks for taking the question. Just to follow-up on another question on the China impact. I mean, guess, can you help us understand what would have RPO been had the restrictions not been in place exiting the quarter and it had been rescinded prior to exiting the quarter? Just that difference so we know what RPO, I guess, technically really is now. And then just to clarify, on the full-year guide increase, is that all driven by the upside from China, or is it other regions as well?

John Wall: Yeah. Joe, just take the second part of that question first. I mean, the increase is because of the strength we are seeing across the board and across all geographies. I mean, when we were doing our updating our guide, the guide we gave you at the end of last quarter was without any China restrictions. And at the time, we were updating the guide we obviously knew that those restrictions have been rescinded. So it is an apples-to-apples view when you compare the guides now against this time last quarter. We have taken the year up by $50 million. And we have taken up EPS by about 12¢.

And that is on the back of very strong bookings activity and performance that we are seeing right across the globe. In relation to the backlog impact of China, when we held up revenue for China, any of those orders in which revenue was paused as a result of the China restrictions as of the end of Q2, we had to back out the booking from the backlog at that time. But I think if you look on a year-over-year basis, the right way to look at it is that we will end up the year with a higher and record level of backlog.

The book-to-bill will be greater than one for the year, which indicates a very strong bookings half for us in the second half of this year. But that is mainly due to strength across all regions, across all geographies. And we have a high level of renewal activity that just falls into Q3 and Q4 because we have a number of expiring contracts in those quarters.

Joe Quatrochi: Thank you.

Operator: And our next question comes from the line of Charles Shi with Needham. Your line is open.

Charles Shi: Thank you for taking my question. Maybe this is for John. Hey, John. I think you reported the recurring revenue as a percentage in Q2 of 78%. This is probably a multiyear low, and I wonder what is the expectation for the full year. The recurring revenue percentage, and what is the long-term normalized level? Maybe this is a related question, if I may. I believe your hardware is mostly manufactured in The US, and presumably, there should be no direct tariff impact. But was there any customer behavior-related pull-ins that were seen in Q2 and possibly also in Q3? Thank you.

John Wall: Yeah, Charles. Great questions. But on the hardware side of the business, I mean, the hardware demand continues to amaze us, really. I mean, the tremendous products that we have there. But, and the team is continuously trying to improve our production capability and manufacturing capability to produce those hardware systems as quickly as possible to try and keep up with that demand. We make hardware systems in North America for the North American market and out of North America for the international market. So we think our tariff exposure is quite limited.

The, yeah, just generally, on the strength in hardware in Q2 combined with us having to pause a lot of ratable revenue in China during Q2 caused the recurring revenue percentage to dip to about 78% for the quarter. But if you look typically, we look at that as a kind of a rolling annual number. We would expect it to be about 80/20, 80% recurring and 20% upfront. And that has been growing. I mean, in the past, that was probably 85/15, and now it has gone more towards 80/20. But that is really the result of the strength in our demand for our upfront businesses, which mainly come out of IP and hardware.

Charles Shi: Thank you. Appreciate that.

Operator: And our next question comes from the line of Ruben Roy with Stifel. Your line is open.

Ruben Roy: Yes. Thank you for letting me ask a question. Anirudh, I wanted to touch back on IP. I know IP historically has been a little bit lumpy, volatile, whatever the word you want to use. But you have had quite a bit of strength recently. IP was up, I think, 30% last year, 40% last quarter, another 25% this quarter. You talked about your broadening portfolio, but it sounds like a lot of this is going into AI and HPC. And, you know, obviously, faster design cycles in those markets, etcetera, in recent years. I am wondering if you could talk about your longer-term perspective on IP growth.

Is this sort of sustainable at potentially higher rates than you have thought about historically for that segment? Thank you.

Anirudh Devgan: Yes. That is a great question, and, you know, in general, like, I think I am much more optimistic in IP than I was, let’s say, two, three years ago. I mean, there are multiple reasons for that. One is, you know, we are investing more in IP now because we feel, first of all, that our EDA position is very, very strong. You know, for years, we invested in EDA, and we continue to do that. At this point, we feel we are in a strong position in EDA. We are in a growing position in SDNA, given, you know, 3D IC and, you know, strength of Allegro and AI.

IP, historically, we did not invest as much, but things have changed. One is because of this, you know, like a previous question, you know, this emergence of chiplet-based architectures. I think it provides more opportunities for IP. Emergence of multiple advanced node foundries, you know, there are at least four major ones now. Provides more opportunities for IP. And our portfolio has also improved with some good M&A. You know, like, we got HBM4 from Rambus and there are several others over the last few years. So I feel now we are across, like, a critical mass for IP to be a good business for us.

And you are seeing that last year one year does not make a trend. I think we are seeing that this year. And so but I do think in the longer term that IP can grow faster than Cadence Design Systems, Inc. average. Which is what we like to see in this, and now it will have slightly lower margin than EDA, but, of course, it can grow faster. So at a rule of 40, you know, that is a good area that we continue to invest in that. Especially with the AI-driven IPs, new foundries, you know, this onshoring. I think it is a good business for us and good growth for the next several years, I expect.

Ruben Roy: Thank you.

Operator: And our next question comes from the line of Clarke Jeffries with Piper Sandler. Your line is open.

Clarke Jeffries: Hello. Thank you for taking the question. Just a clarification on the tax benefits. I heard $140 million for the remainder of the year. Just to clarify, is that for two quarters and that annualized benefit might be close to double that? And then just from a philosophy perspective, does this change around R&D expensing sort of change your appetite for incremental investment? Or is it a near-term windfall but normalized over time and no change to appetite? Thank you.

John Wall: Hi, Clarke. Yeah. I mean, no change at all to our approach and our strategy and our R&D investment. I mean, we love investing in R&D. We think we do that quite well. But in relation to the tax consequences of the OBBBA thingy, the primary change in fiscal 2025 relates to the immediate expensing of domestic R&D. The cash tax impact of that, we get a benefit of about $140 million before the end of this year. But there is a smaller portion of that of an impact to the GAAP P&L. Now from a non-GAAP perspective, we use an effective tax rate of 16.5%. That normalizes everything.

So the impact of the OBBBA does not change our non-GAAP rate. For this year, it is still at 16.5%. But the one-time difference on cash tax for the year is about $140 million. Now you will see the benefit of that in Q4. But it is already incorporated into our annual guide.

Operator: And our next question comes from Josh Tilton with Wolfe Research. Your line is open.

Josh Tilton: Hey, guys. Thanks for sneaking me in, and congrats on a great quarter and a nice raise to the full-year outlook. Most of my questions have been answered already, so maybe more of a medium-term thought question. You look at the guide for the full year, it still kind of implies that the recurring revenue side of the business is going to see muted growth. Now I know some of this is because there was a little bit of a hold this quarter because of China.

But how do we think, you know, long-term, the trajectory of recurring revenue growth from here, and your confidence in the durability of, you know, total growth is maybe you roll off the hardware cycle or you start to see slower growth on the upfront side? Thanks.

John Wall: No. Great question. Yeah. I think what we have seen over the last few years is we have seen a drift towards kind of a lower level of recurring revenue, higher level of upfront revenue. But that is mainly been as a result of, you know, IP and hardware and SDNA to a certain extent growing faster than the average Cadence Design Systems, Inc. business. But, I think, well, I mean, right now, we are at 80/20. We are not guiding anything.

We are at 80/20 for this year that, we continue to expect that split that, we are not guiding for next year yet, but I actually think that CoreEDA software is doing so well that there is quite a good chance that 80/20 remains for quite some time. Because we are seeing some, we are seeing good growth there. Like, we are seeing a lot of growth right across the whole portfolio of the Cadence Design Systems, Inc. business and then across all geographies right now. So we are very, very pleased with the way that is working out.

And, really, the change in recurring revenue is just a slight change in how customers consume our technology and our solutions, and it is how we provide them. And we are just delighted with the continuous adoption from those customers.

Josh Tilton: Love to hear. Thanks for sneaking me in, guys. Appreciate it.

Operator: And our next question comes from Naso Nying with Berenberg. Your line is open.

Naso Nying: Hi. Thank you for taking a question from me, and, also, congrats on the quarter and the good raise and the full-year guide. A question on agentic AI, please. I was wondering if you could maybe share your thoughts on what do you think will be the toughest adoption barriers because, you know, from my point of view, at least, the agentic AI of that you guys have, unlike, you know, the broader software AI that we have seen ROI, you know, should not really be a sticky point here. So I was wondering, you know, what would be the sticking point here?

Would it be the operational challenges, i.e., customers adopting or implementing your agentic workflows in their established workflows today, or is it more of a human element here where unfamiliarity with the technology or people are somewhat worried that, you know, their jobs may be at risk from adopting your AI solutions? Thank you.

Anirudh Devgan: Yes. Very insightful question. I think one thing I would like to emphasize is that there is a difference in chip design and system design versus general software. You know? What I have seen, you know, versus, like, because this is engineering software versus kind of IT or enterprise software. And our history in EDA, I mean, there are a few things that are different. First of all, engineering software or EDA, we have already provided over the years a massive level of automation. Now it was not because of AI. It was used in the past because of, you know, classical methods. So our users and customers are already used to a lot of automation.

If I look at, like, twenty years ago to now, I think the EDA productivity by EDA has gone up by, like, 100x. You know? Like, things like, you know, what we used to take like, 500 people five years to design will now take, like, 50 people, like, one year to design, something like that. So or, like, half a year to design. So our users are already used to a lot of automation, which may not be the case in, like, classical kind of software. The second thing is that our workload or workload of our customers is going up exponentially because of Moore’s Law and 3D IC.

So this is a very different environment than, you know, if the workload is constant in some industry that is not evolving. In chip design, you know, like by 2030, the chips will be, you know, right now, there are 100 to 200 billion transistors. It is expected the chips will be a trillion transistors by 2030. Then you add all the software. You add the new architectures. So the workload will go up by 30, 40x in the next five years. Okay? There is not even enough talent or headcount to hire to meet that requirement of 30x. So this is not an industry in which the workload is going to be fixed. Okay?

And then the worry of people is if you do use AI, you know, your job will be affected here. You know, you need AI to cope up with the 30x. So I believe that the customers, and this is talking to all the big customer CEOs, they will invest in R&D. Okay? But they will invest in headcount. But they do not want to invest 30 times the headcount. Okay? I think the headcount in our R&D will go up maybe by 2, 3x, but the remaining gap of 10x in productivity has to be made up with more automation.

And they are willing to invest in agentic AI and more compute to balance that because there are not even that many engineers you can hire. So the two things which are very different in EDA and SDA versus general software, one, our customers are used to more and more automation over the last thirty years. And second, the workload is going up so much that they have no other choice but to use automation in AI. So I think that is why the real test for us will not, in my opinion, be the customers are willing. I think the customers are willing. It is the productivity of our solution.

So what I have seen with our customers is if the product works, if they give better PPA, if they are faster, our customers will always adopt that. And because they have more work to do. And that is what we focus on, like Cerebras AI Studio, does it give 20% better PPA, or does Vericium give 5, 10x benefit? And this is the history of our customers. And because these are the best and the biggest and the brightest companies in the world. Right? All max seven are our customers, all the top 50 companies in the world.

So we deliver value, I have always seen they will adopt it because the workload that they are doing is increasing a lot.

John Wall: So, and the AI tools create more demand for our core EDA tools as well. Right? We always said it would take a couple of contract cycles. And we are always very mindful of the balance between delivering cutting-edge innovation and ensuring our solutions remain accessible and valuable and useful to customers of all sizes when the increasing design complexity, particularly with AI and advanced nodes, naturally creates demand for more sophisticated tools and IP. But our goal is always to deliver ROI through productivity gains, faster time to market, and the improved PPA, the outcomes that customers can get from using our core EDA.

So we do think core EDA has growth in there and could well benefit from that over the next few years.

Naso Nying: That makes a lot of sense. Thank you very much. Thank you for the thoughtful answers.

Operator: And our next question comes from the line of Siti Panigrahi with Mizuho. Your line is open.

Siti Panigrahi: Great. Thanks for taking my question. Yeah. Most of my questions have been answered, but just want to follow-up on one of your comments on that strong bookings. How do you characterize the demand for your traditional semi customer versus systems like hyperscaler, that segment? And do you see any kind of positive sign on the traditional semi customer?

Anirudh Devgan: Yeah. That is a very important question. I mean, first of all, the system companies are doing more and more than before, as you would expect. You know, not just the classical data center, but hyperscalers which are, but also, you know, like, physical AI, like cars. And then on the semi side, of course, some customers are doing phenomenally well. Right? Like, and, you know, some of, like, Broadcom. I think your question is more traditional semi. So I do think, I mean, of course, you know, this recovery in traditional semi has been projected for a long time. But I do think there is some recovery now.

I mean, at least in the memory market, there seems to be in the mixed signal. And we highlighted, for example, ADI that is doing phenomenally well, and we had a very good, well, ADI is a long-term partner with Cadence Design Systems, Inc., but we had a very good expansion in Q2. So I think there are some signs that traditional semi are also doing, but it is still early, and we will wait and see. For us, you know, we are, as you know, we are very diversified, both geographically and customer-wise. So it is important but not critical for us, so we are patient. So the recovery will happen in traditional semi.

Maybe some of it is starting. And to the extent it happens, you know, we will be ready for it. So but we are not critically dependent on a particular customer set recovering at a particular time.

Siti Panigrahi: Thank you.

Operator: And our last question comes from the line of Blair Abernethy with Rosenblatt. Your line is open.

Blair Abernethy: Thanks for squeezing me in, guys, and a great quarter. Anirudh, just want to ask you again about the system design analysis. The traditional simulation, the multiphysics simulation. You are outgrowing the market pretty substantially even if we back out a couple of extra months from Beta CAE. You are still, you know, mid to high twenties, it looks like organic growth. What is driving that organic growth? Is Millennium helping with that? And I am just wondering, as you look at that market, which is sort of a 10% kind of growth market, how long do you think you can sustain that significant growth?

Anirudh Devgan: Yeah. Good question. I mean, like I mentioned, the growth is by multiple things. I mean, 3D IC and the strength in Allegro, the pulls in other products is a key factor. It is not just Allegro or 3D IC by itself, but all the analysis tools. Because I think most of the disruption in the system space is either very, very close to the chip, you know, like, with 3D IC, or it is very, very far, like, data center simulation. And we have great partnership and products in, you know, Cadence Reality, which is full data center simulation. And then, you know, very close to the chip, which is Allegro and 3D IC and Integrity.

So those markets, I think, should be growing faster in the overall because that is where the disruptions are happening, and that is where we are focused on. And then Beta is helping to pull in some of the other, you know, because one of the key challenges in the system side is to build out the channel. And even though not only Beta provided great products, it also helped us on the channel side. Okay? So that is the second reason. Then I am super optimistic about Millennium, you know, and we are kind of spearheading this kind of revolution. You know? I can talk about it for a long time. You know?

The CPU plus GPU integration with partnership with Jensen and NVIDIA and, you know, AI together. But I think it is still in the very early innings. So Millennium is still in very, very early innings. I mean, we have a lot of pipeline and demand, but it still has to play out. So but overall, I think we will see, but we are pleased with our positioning in systems, especially because we are positioned in the more exciting part of the system market, I believe.

John Wall: Yeah. Just to finish, I would encourage you to keep focused on the kind of year, the annual kind of outlook for the company because quarter over quarter, numbers can look a bit odd sometimes. As you called out in your Beta is included in our Q2 numbers this year, but was not there last year.

Blair Abernethy: Yep. That is great. That is great. Thanks very much, guys.

Operator: And I would now like to turn the call back over to Anirudh for closing remarks.

Anirudh Devgan: Thank you all for joining us this afternoon. It is an exciting time for Cadence Design Systems, Inc. with strong business momentum and growing opportunities with semiconductor and system customers. With a world-class employee base, we continue delivering to our innovation roadmap and working hard to delight our customers and partners. On behalf of our board of directors, we thank our customers, partners, and investors for their continued trust and confidence in Cadence Design Systems, Inc.

Operator: Ladies and gentlemen, thank you for participating in today’s Cadence Design Systems, Inc. second quarter 2025 Earnings Conference Call. This concludes today’s call, and you may now disconnect.

Image source: The Motley Fool.

Date

• Friday, July 25, 2025, at 5 p.m. ET

Call participants

• Chief Executive Officer — Barry Port
• Executive Vice President and Secretary — Chad Keetch
• Chief Financial Officer — Suzanne Snapper
• Chief Operating Officer — Spencer Burton

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Takeaways

• GAAP diluted earnings per share— $1.44 GAAP diluted earnings per share for Q2 2025.
• Adjusted diluted earnings per share— Adjusted diluted earnings per share was $1.59 for Q2 2025.
• Consolidated GAAP and adjusted revenue— Both GAAP and adjusted revenue were $1.2 billion for Q2 2025.
• GAAP net income— GAAP net income was $84.4 million for Q2 2025, up 18.9%.
• Adjusted net income— Adjusted net income was $93.3 million for Q2 2025.
• Cash and cash equivalents— Cash and cash equivalents totaled $364 million as of June 30, 2025.
• Cash flow from operations— Cash flow from operations was $228 million as of June 30, 2025.
• Strategic capital deployment— Over $210 million invested in the first half of 2025 for growth initiatives.
• Lease-adjusted net debt to EBITDA ratio— Lease-adjusted net debt to EBITDA ratio was 1.97 times, post-investment, as of Q2 2025.
• Liquidity position— $593 million of unused revolving credit as of June 30, 2025, providing over $1 billion in investment capacity with cash on hand.
• Increased 2025 earnings guidance— Range raised to $6.34-$6.46 per diluted share (adjusted, fiscal 2025 guidance) and a 34% increase over 2023 (based on the midpoint of annual 2025 earnings guidance).
• Increased 2025 revenue guidance— Range raised to $4.99 billion-$5.02 billion for annual 2025 revenue guidance, up from the prior guidance of $4.89 billion-$4.94 billion.
• Operational expansion— Eight new operations and three real estate assets were added during and since Q2 2025.
• Acquisition pipeline— 52 operations acquired since the start of 2024, with ongoing acquisition activity expected to continue at a similar pace.
• Occupancy and skilled mix trends— Higher than anticipated results due to organic growth, without reliance on agency or overtime labor for cost control.
• Performance of major portfolio acquisitions— In the 17-facility California portfolio, as of the time of the Q2 2025 earnings call, 12 operations hold four or five-star CMS ratings, occupancy exceeds 92% for the portfolio transitioned in 2023, skilled mix days reached 47% as of Q2 2025, and all properties contribute positively to EBIT.
• Standard Bear Health Care REIT holdings— Owns 140 assets; 106 leased to Ensign operators and 35 to third parties, with $31.5 million in rental revenue ($26.8 million from affiliates) for Q2 2025 and $18.4 million in FFO.
• Standard Bear EBITDAR to rent coverage ratio— 2.5 times.
• Dividend record— Paid a quarterly cash dividend of 6.25 cents per share for Q2 2025 and has increased the annual dividend for 22 consecutive years.
• Stock repurchase program— Remains in place.
• Transitioned operations example: Sedona Trace Health and Wellness— EBIT increased by 130% over the prior year quarter, overall occupancy up 6.8% over Q2 2024, with registry labor fully eliminated.
• Transitioned operations example: Valley of the Moon Post Acute— Achieved a census consistently above 95%, zero nursing registry usage, and a CMS five-star quality rating post-affiliation.
• California workforce and quality incentive program funding— Revenue recognition for this program is expected through 2026 based on current state guidance.

Summary

The Ensign Group(ENSG 1.74%) increased both earnings per share (EPS) and revenue guidance for 2025, citing stronger than expected organic growth, disciplined acquisition integration, and improved labor efficiency. Eight new operations and three real estate assets were added during the quarter and since, supported by a flexible balance sheet with over $1 billion in available liquidity. Newly acquired portfolios, such as the 17-facility California group transitioned in 2023, benefited from support in training, compliance, and integration with Ensign systems and culture, validating management’s decentralized cluster approach. Management is maintaining strict pricing discipline on new deals and expects the positive acquisition pace to continue. Standard Bear Health Care REIT expanded to 140 assets, with greater unaffiliated tenant diversification and stable rent coverage metrics. Dividend growth continued for the 22nd consecutive year, underscoring ongoing capital return priorities.

• CEO Barry Port said, “We are raising our annual 2025 earnings guidance to between $6.34 and $6.46 per diluted share, up from the previously raised guidance of $6.22 to $6.38 per diluted share.”
• Chad Keetch stated that Ensign’s acquisition pipeline “spans across many states and markets, leaving us with significant bandwidth to grow in almost all of our markets.”
• Suzanne Snapper reported the lease-adjusted net debt to EBITDA ratio as lease-adjusted net debt to EBITDA ratio of 1.97 times as of June 30, 2025, highlighting post-investment balance sheet strength.
• Portfolio management includes routing certain properties to third-party operators, aiming for “healthy coverages,” with a target of “one five or close to it” for rent coverage on third-party leases.
• The company’s upward earnings forecast includes acquisitions that have closed or are expected to close during 2025, as well as management’s expectations for reimbursement rates, and factors in ongoing operational initiatives to sustain cost controls.

Industry glossary

• Skilled mix: The proportion of facility patient days composed of higher-acuity, higher-reimbursement payers, such as Medicare, as opposed to lower-reimbursement custodial care.
• CMS star rating: A publicly reported Centers for Medicare & Medicaid Services measure (1-5 stars) of nursing facility quality, with higher ratings denoting superior performance.
• EBITDAR: Earnings Before Interest, Taxes, Depreciation, Amortization, and Rent; assesses operational profitability before facility rent expense.
• Fund from operations (FFO): A REIT-specific performance measure representing net income plus depreciation and amortization, excluding gains on sales of properties.
• Managed care organization (MCO): An insurance provider offering plans and coordinated health services, often involved in value-based reimbursement contracts with care facilities.

Full Conference Call Transcript

Chad Keetch: Thank you, operator, and welcome, everyone. We filed our earnings press release yesterday, and it is available on the Investors Relations section of our website at ensigngroup.net. A replay of this call will also be available on our website until 5 PM Pacific on Friday, August 29, 2025. We want to remind anyone that may be listening to a replay of this call that all statements made are as of today, July 25, 2025, and these statements have not been or will be updated subsequent to today’s call. Also, any forward-looking statements made today are based on management’s current expectations, assumptions, and beliefs about our business and the environment in which we operate.

These statements are subject to risks and uncertainties that could cause our actual results to materially differ from those expressed or implied on today’s call. Listeners should not place undue reliance on forward-looking statements and are encouraged to review our SEC filings for a more complete discussion of factors that could impact our results. Except as required by federal securities laws, The Ensign Group, Inc. and its independent subsidiaries do not undertake to publicly update or revise any forward-looking statements if changes arise as a result of new information, future events, changing circumstances, or for any other reason. In addition, The Ensign Group, Inc. is a holding company with no direct operating assets, employees, or revenues.

Certain of our independent subsidiaries, collectively referred to as the Service Center, provide accounting, payroll, human resources, information technology, legal, risk management, and other services to the other independent subsidiaries through contractual relationships. In addition, our captive insurance subsidiary, which we refer to as the insurance captive, provides certain claims-made coverage to our operating companies for general and professional liability as well as for workers’ compensation insurance liability. Ensign also owns Standard Bear Health Care REIT Inc., which is a captive real estate investment trust that invests in health care properties and enters into lease agreements with certain independent subsidiaries of Ensign, as well as third-party tenants that are unaffiliated with The Ensign Group.

The words Ensign, company, we, our, and us refer to The Ensign Group, Inc. and its consolidated subsidiaries. All of our independent subsidiaries, the Service Center, Standard Bear Health Care REIT, and the insurance captive are operated by separate independent companies.

Barry Port: Our industry. We feel optimistic that state and federal governments will continue to recognize the importance of properly funding the health care needs of the senior population. Now more than ever, it is essential that we elevate the voices of our patients and frontline team members. Their stories reflect the heart of what we do. And we remain unwavering in our commitment to advocate for the resources and support needed to ensure they receive what they deserve. After such a strong first half of the year, we are raising our annual 2025 earnings guidance to between $6.34 and $6.46 per diluted share, up from the previously raised guidance of $6.22 to $6.38 per diluted share.

The new midpoint of this increased 2025 earnings guidance represents an increase of 16.4% over our 2024 results and is 34% higher than our 2023 results. We are also increasing our annual revenue guidance to $4.99 billion to $5.02 billion, up from $4.89 billion to $4.94 billion, to account for our current quarter performance and acquisitions we anticipate closing through the third quarter. This increased guidance is due to the continued execution of our growth model with organic growth stemming from stronger occupancy and skilled mix, which is more than expected for the second quarter. Other than during the pandemic, we typically experienced a slowdown in both occupancy and skilled mix during the second quarter.

However, due to the continued momentum and quality and the benefit from positive demographic trends, we were able to maintain stronger than expected performance in both occupancy and skilled mix, without the use of increased agency or overtime, which is also helping control our cost of services. In addition, many of our new acquisitions are performing well ahead of schedule, which highlights the continued improvement in our locally driven transition strategy, but also points towards solid underwriting and investment decisions. We are also excited about our performance so far this year and are confident that our partners will continue to manage and innovate while balancing the addition of newly acquired operations.

We are eager to continue to drive organic improvements and take advantage of the acquisition opportunities that we see on the horizon. The combination of improvements in occupancy and skilled mix in our more mature operations and the long-term upside in our newly acquired operations shows the enormous organic growth potential in our existing portfolio. Next, I’ll ask Chad to add some additional insights into our recent growth. Chad?

Chad Keetch: Thank you, Barry. We continued our steady pace of growth by adding eight new operations, including three real estate assets, during the quarter and since. These include four in California, three in Idaho, and one in Washington. In total, we added 710 new skilled nursing beds and 68 senior living units across these three states. This growth brings the number of operations acquired during 2024 and since to 52. We are always happy to expand our presence in some of our most mature markets, and each of these new acquisitions represents an opportunity to further deepen our commitment to the health care communities in some of our key states.

Our growth this quarter illustrates that we continue to prioritize adding beds in our established geographies, which allows our clusters to provide a comprehensive solution to the health care needs in those markets. We also point out that the distribution of our growth over the last several quarters spans across many states and markets, leaving us with significant bandwidth to grow in almost all of our markets. While we look to grow in some of our new states, we still see significant opportunity to continue to add meaningful density in the markets we know best. Our local leaders continue to recruit future CEOs for Ensign-affiliated operations.

We have a deep bench of CEOs in training that are eagerly preparing for their opportunity to lead. During the quarter, we reached an all-time high for our AITs in our pipeline. This high-quality influx of local leadership talent combined with our decentralized transition model allows us to grow without being limited by typical corporate bottlenecks. Therefore, our unique acquisition and transition strategy puts us in an excellent position to continue growing in a healthy and sustainable way. As we look at the current pipeline, we see opportunities that include everything from small to mid-sized owner-operated portfolios, landlords looking to replace current tenants, nonprofits looking to divest of their post-acute assets, and a steady flow of our traditional onesie-twosies.

We anticipate the current rate of acquisitions to continue this year and are expecting several to close or transition over the next few weeks and months. Given the growth on the near-term and long-term horizon, we wanted to provide an update on some of the larger portfolios we’ve acquired recently. In the past, Ensign has sometimes been painted with a brush that would suggest that larger deals are not consistent with our model. While most of our growth has been and will continue to be driven by the aggregation of Watson small deals, our approach to transitioning each operation as the complex health businesses they are also works on a larger scale.

This is particularly true when a larger deal spans several markets and geographies. For example, in 2023, we transitioned a portfolio of 17 in California, under a master lease with Sabra. To be clear, transitioning a large number of operations on the same day, especially if attempted in one big bite like would happen in a traditional centralized company, is definitely a huge undertaking. However, by applying lessons we had learned in years past, particularly from a large deal we did in Texas, our local leaders in California approached this deal as if it were six or seven small deals.

As our local market leaders in California prepared to transition these operations, they collectively took responsibility for two or three buildings, holding the new operation into an existing cluster of Ensign-operated facilities. In doing so, each of the 17 operations received the same amount of time, attention, and resources that a single acquisition would have received. This allowed the new operations and their teams to immediately benefit from their cluster partners for nearly all aspects of the transition, including training on new clinical systems and Ensign compliance standards, support in learning Ensign’s unique cultural expectations, and accessing the expertise of their new service center partners.

Rather than viewing the transaction as a merger of one company into a larger company, our teams approached it the same way as when we acquire a single asset from a small business owner or family. As we look to that portfolio now, which comprises the majority of our transitioning bucket, it’s clear to see the positive clinical and financial contribution that this larger portfolio is making to the organization. Of these 17 operations, 12 have achieved four or five-star ratings from CMS, occupancy is over 92%, skilled mixed days are 47%, and all are making substantial contributions to our overall EBIT. More recently, we completed a few larger portfolios, some of which span multiple states.

While each deal is unique, we are pleased with the progress we’ve achieved so far in these newly acquired operations. In the near future, we expect to announce the addition of a similar portfolio. And we expect that over the long term, we will continue to be presented with large and mid-sized portfolios. While we are continuously perfecting and improving the performance of our acquisitions in the portfolio setting, we are confident that our locally led approach is scalable in both new and existing geographies.

All that said, we must and will remain committed to staying disciplined and true to the principles that have contributed to our consistent success, including ensuring that we pay prices that will allow the operations to have enough of the necessary resources to invest in building the clinical systems in order to achieve the highest possible clinical outcomes. Lastly, we are also pleased with the continued growth of Standard Bear, which added five new assets during the quarter and since, and now is comprised of 140 owned properties. Of these assets, 106 are leased to an Ensign-affiliated operator and 35 are leased to third-party operators.

We were excited to add to our growing list of relationships with unaffiliated operators, which further diversifies our tenant base and helps our organization as a whole as we continue to advance our mission by working closely with like-minded operators that want to make a difference in this industry. Going forward, Standard Bear will continue to work together with our existing partners and new relationships we are developing in order to acquire portfolios comprised of operations that Ensign would operate and facilities that third parties are interested in operating under a lease. Collectively, Standard Bear generated rental revenue of $31.5 million for the quarter, of which $26.8 million was derived from Ensign-affiliated operations.

For the quarter, Standard Bear reported $18.4 million in FFO and as of the end of the quarter had an EBITDAR to rent coverage ratio of 2.5 times. With that, I’ll turn the call to Spencer, our COO, to add more color around operations. Spencer?

Spencer Burton: Thanks, Chad, and hello, everyone. As always, we’d like to share a few examples of how operations in various stages of their maturity are contributing to our outstanding results. It’s the aggregation of achievements like these that comprise Ensign’s story, and we believe that these examples are the best way to explain how we produce consistent results over time. The first operation I’ll highlight exemplifies what we hope to see in an operation as they transfer from our transitioning bucket into our same-store bucket. Sedona Trace Health and Wellness is a 119-bed skilled nursing facility located in Austin, Texas. It is led by Rachel Hurley, CEO, and Tiana Rowland, RN and COO.

Sedona was acquired as part of a multi-facility deal back in Q3 of 2021. Despite being constructed in 2017 and having a beautiful physical plant, the operation was consistently losing money and struggled with a poor clinical reputation. Compounding matters, the facility was in a staffing crisis, with a large percentage of nursing labor coming from the registry. Despite the challenges, the local team went to work. They focused on building a culture of high expectations and celebration, which started with hiring the right interdisciplinary leaders who, in turn, focused on getting and training high-caliber frontline staff. As a result, the team was able to completely eliminate registry labor, and they have stayed fully staffed since 2023.

As we consistently see with most transitioning operations, this formula methodically improved clinical results. CMS overall star ratings have jumped from two stars to four stars, and the facility currently has a five-star rating for quality measures. Sedona is now an attractive continuing partner for hospitals, and it has earned preferred provider status with Austin’s major hospital system, as well as managed care networks. The result has been steady growth in overall occupancy, which is up 6.8%, and skilled managed and Medicare days, which have increased 34.3% over the prior year quarter. For the same period, revenues grew by 21%, while the cost of services has remained stable.

As a result, EBIT increased by an impressive 130% in Q2 over the prior year quarter. We’re proud of the transformation that has occurred at Sedona Trace, but as their team would be quick to point out, there is still so much more work to be done. It will be exciting to see the growth continue for years to come as the facility continues to contribute as part of our same-store operations bucket. For the second facility example, I’d like to highlight an exciting niche where we have been able to apply our post-acute expertise to help a local acute hospital elevate the performance of their skilled nursing operation.

On a larger scale, we see a trend of hospitals choosing to focus on their core acute services, and we expect to have more and more opportunities to grow in a unique and important part of the continuum. Valley of the Moon Post Acute is a 27-bed, hospital-based skilled nursing facility located in Sonoma, California. It became an Ensign affiliate in 2019 when our Northern California company contracted with Sonoma Valley Hospital to take management and financial risk for the skilled nursing facility that they operated as part of their acute campus. Prior to this arrangement, this county-owned operation was underperforming clinically and was losing a significant amount of money.

The hospital leadership was faced with either closing the facility or looking for help. The hospital was under significant pressure to find a solution as the community did not want to lose the SNF services in their hospital. After many months of interviews and a public hearing, the hospital and county leadership selected our Northern California team to manage the SNF for them. Under this arrangement, our team maintains a close affiliation with the hospital management and board, including sharing certain services like nonclinical services such as laundry and housekeeping. The partnership has been an enormous success.

Valley of the Moon CEO Ryan Goldbard, COO Christina Ferrar, and their interdisciplinary team have established post-acute systems and elevated clinical outcomes while simultaneously bringing financial solvency to the operation. While running a small skilled nursing operation can be challenging, the Valley of the Moon team has embraced flexibility, teamwork, and an attitude of care without silos. And the results have been remarkable. Valley of the Moon uses zero nursing registry, has consistently low turnover, and maintains one of the lowest overtime wage percentages in all of California. They also produce incredible health care outcomes, including one of the lowest return-to-acute rates in the state and a CMS five-star rating for quality measures. The partnership has been beneficial for everyone.

The Sonoma community is benefiting from greater health care access. For example, on acquisition, the SNF was serving an average daily census of just 10 residents, whereas now census consistently runs over 95% or 25 plus patients. The hospital is benefiting from improved bed management and length of stay as they can now confidently discharge appropriate patients to a step-down level of care more easily. Payers benefit because more of their members can receive care in the most appropriate and cost-effective care setting. And residents, including some with challenging and complex medical cases, receive skilled nursing level care without having to transfer off the hospital campus while remaining under the care of the same physician providers.

We are excited about the impact Valley of the Moon Post Acute is having, and we look forward to continuing to find ways to help acute hospital partners throughout our footprint meet their communities’ full continuum of health care needs. With that, I’ll turn the time over to Suzanne to provide more detail on the company’s financial performance and our guidance. And then we’ll open up for questions. Suzanne?

Suzanne Snapper: Thank you, Spencer, and good morning, everyone. Detailed financial statements for the quarter are contained in our 10-Q and press release filed yesterday. Some additional highlights for the quarter include the following: GAAP diluted earnings per share was $1.44, an increase of 18%. Adjusted diluted earnings per share was $1.59, an increase of 20.5%. Consolidated GAAP revenue and adjusted revenue were both $1.2 billion, an increase of 18.5%. GAAP net income was $84.4 million, an increase of 18.9%. And adjusted net income was $93.3 million, an increase of 22.1%. Other key metrics as of June 30, 2025, include cash and cash equivalents of $364 million and cash flow from operations of $228 million.

During the first half of 2025, we spent more than $210 million to execute on our strategic growth plan, most of which have been in the works for months. We made this investment from a position of strength, as shown by our lease-adjusted net debt to EBITDA ratio of 1.97 times, which is after taking these investments into consideration. Our continued ability to maintain low leverage even during periods of significant growth is particularly noteworthy and demonstrates our commitment to disciplined growth, as well as our belief that we can continue to achieve sustainable growth in the long run.

In addition, we have approximately $593 million of available capacity on our line of credit, which when combined with our cash on the balance sheet, gives us over a billion dollars in dry powder for future investments. We own 146 assets, of which 140 are held by Standard Bear. 122 are owned completely debt-free and have gained significant value over time, adding even more liquidity to help with future growth. The company paid a quarterly cash dividend of 6.25 cents per share. We have a long history of paying dividends and have increased the annual dividend for 22 consecutive years. In addition, we currently have a stock repurchase program in place.

As Barry mentioned, we are increasing our annual 2025 earnings guidance to between $6.34 to $6.46 per diluted share, and our annual revenue guidance between $4.99 billion and $5.02 billion. We have evaluated multiple scenarios, and based upon the strength in our performance and positive momentum we have seen in our occupancy and skilled mix, as well as our continued progress on labor, agency management, and other operational initiatives, we have confidence that we can achieve these results.

Our 2025 guidance is based on diluted weighted average common stock outstanding of approximately 59 million, a tax rate of 25%, the inclusion of acquisitions closed and expected to be closed during 2025, including a smaller portfolio that we expect to transition in the next few weeks. The inclusion of management’s expectations on Medicare and Medicaid reimbursement rates, net of provider checks, with the primary exclusion coming from stock-based compensation. Additionally, other factors that could impact our quarterly performance include variations in reimbursement systems, delays and changes in state budgets, seasonality in occupancy and skilled mix, the influence of the general economy on census and staffing, short-term impact of our acquisition activities, variations in insurance accruals, and other factors.

And with that, I’ll turn it back over to Barry. Barry?

Barry Port: Thanks, Suzanne. As we wrap up, we are as positive as ever about this industry that we collectively love and are committed to. It’s hard not to be excited about our trends, our labor trends, and our growth opportunities. But I can’t emphasize enough how incredibly honored and grateful we all are to work alongside our operational leaders, field resources, clinical partners, and service center team. They are behind these record-setting results, and it’s their commitment that has blessed the lives of so many, including our own. We’re as excited about our future as ever because of them. And with that, we’ll turn it now over to the Q&A portion of our call.

Kate, will you please provide instructions for the Q&A?

Operator: At this time, I would like to remind everyone in order to ask a question, please press star then the number one on your telephone keypad. Your first question comes from the line of Tao Qiu with Macquarie Capital. Your line is open.

Tao Qiu: Hey. Good morning. Chad, I think you highlighted the success of the North American portfolio integration. Now we collect that deal with more of an opportunistic transaction. So based on the prepared comment, I get a sense that there’s a strategy shift as you are more open to those larger multistate portfolio deals. I’m curious if you could highlight any changes you made in your system, personnel, operating model, or lessons learned that give you more confidence in consistently executing those larger deals. And then what is the pipeline like for these larger transactions? And when you know, whether Ensign is more of a competitive advantage given your scale and balance sheet, you know, conditions. Thanks.

Chad Keetch: Yeah. Thanks for the question, Tao. So I wouldn’t say there’s necessarily been a strategy shift at all. I just I think it’s more we’re just trying to point out that we have done some of these, you know, more portfolio type deals, including the one in Tennessee that we closed recently, and then we did we did one in the Northwest. You know, with Providence Hospital Systems recently. So, yeah, I think we definitely see a pipeline for deals like that, you know.

And like I said in my prepared remarks, you know, large, midsize, and smaller portfolios are they’re all out there, and I think the you know, in terms of lessons learned and, you know, something that we’ve we’ve just experienced and that I highlighted again today was you know, for us, we look at a portfolio, and we try to see geographic how it fits into our existing structure. And when we take a larger deal split it up into a bunch of smaller pieces, and do that locally. Right? So we’re we’re talking about taking, like, a said in that example, those 17 buildings spread across six or seven of our markets.

So it was really only two to three acquisitions per market or cluster. That’s a lot more digestible than trying to just kind of, you know, assume something and do more of it like a merger style acquisition. So I think that’s probably the and we’ve we’ve done both. And certainly learned in that Texas example back in 2015 that just trying to take a big organization and just fold it in all at once was not successful, and that took us a long time to kind of you know, essentially transition that deal twice. To get to and now it’s obviously, doing great.

But that was probably the biggest lesson that we wanted to highlight today is that you know, we have experience now. We’ve done several of these portfolio deals. And they’re they’re, you know, going very well. And the key for us is to do it the way we’ve always done it. And, you know, each of these buildings are, as you know, highly complex businesses. That demand a lot of time and attention, you know, starting on the transition date. And that’s the part that we have to stay true to and disciplined about regardless of how big the deal is.

And to the extent we can do that, you know, if it crosses several markets, several clusters, several states, then we feel like that is a scalable approach to growth and one that we can we can handle. Great. And to on that topic, as you take on these larger deals, there may be assets that will fit a third party operator better. I know that you added a another third party operator this quarter. I’m just curious how large do you think you can ramp up the exposure there, you know, given what you consider qualified operator pool in your targeting markets?

And, also, you know, if you could talk about the rent coverage you are on the these assets at. Know, that would be much appreciated. Thank you.

Chad Keetch: Yeah. Another great question. So, yeah, the best example is this portfolio we closed on in the Northwest. It was eight buildings. And we took six of them, and we leased two to a third party. That’s a perfect example of one where, you know, it was and that was a real estate, you know, driven deal, of course. But that’s a perfect example of the types of acquisitions that we feel like Standard Bear helps us do and complete.

And so, yeah, I think, you know, the key there is making sure that the price that we pay is correct and that know, we’re not asking a third party tenant to take on a lease payment that we ourselves wouldn’t take on. Right? So when you’re talking about coverages, you know, we’re always trying to target very healthy coverages. And so, you know and, obviously, it will vary by market, but you know, I think we’re you know, we’re our goal is to be at a one five or close to it.

And even and maybe it’s not a one five on the first month, but we could see a clear path to getting there in a short period of time. And, you know, the key, though, is finding sellers that are willing to, you know, do deals at the at the right prices so that you can have some coverage after the after the fact. And that’s that’s where, you know, again, when we talk about our discipline, we’re we’re really hyper focused on that. And in terms of, you know, relationships with third party tenants, I mean, we’re we’re saving more and more interest.

Each time we kinda do one of these and announce it, we’re getting more folks that are reaching out to kinda understand what it is we’re doing and how we’re doing it and how we might work together. And so, yeah, as bigger portfolios come along, this certainly this pathway certainly gives us another way to do it and break it down into smaller bite-sized pieces.

Tao Qiu: Awesome. Thank you for the color.

Operator: Your next question comes from the line of Ben Hendrix with RBC Capital Markets. Your line is open.

Michael Murray: Hi. This is Michael Murray on for Ben. Thanks for taking my questions. The skilled nursing industry appears to have dodged direct impacts of the one big beautiful bill but there still seems to be some potential for potentially some indirect impacts related to smaller Medicaid budgets. So we’d love to hear your thoughts on the OBBB generally. And how are you sizing any indirect risks as a result of it?

Chad Keetch: Yeah. It’s a good question, and thanks for asking it. I think it’s important to point out that legislators were very overt about making sure that they carved skilled nursing out of any large direct impacts to Medicaid and instead focused their efforts around reform with workforce requirements, eligibility requirements, and large directed payments and other types of payments that weren’t necessarily in line with standard practice for the program.

That we’re giving large benefits where they ought not to be and having to carve out on the provider tax piece, I think, was a clear indication from legislators that they wanted to protect funding for seniors, and I think is a good bellwether for states now as yes, while they do will have, in a few years, maybe some more limited budget pool to pull from. I think it sets a standard for how states should act. And the good news for us is that we have really good working relationships in every state that we operate in. With our state legislators and governors’ offices.

And now have time as there’s, again, a couple of years before, some of these things start to get implemented, for us to work with them and make sure that, that we put ourselves in a position to remind them of how important funding for seniors is in the skilled nursing setting. I suspect that, you know, with more finite budgets that there will be some movement in terms of how they shift dollars around. But there is not a state we operate in where legislators have the sentiment that they feel like skilled nursing is overfunded.

In every state we operate in, there’s always a push to how do we find more money to get you better funded, not the opposite. So you know, if we remember back to why Medicaid was created, it was created to help the elderly, the disabled, and indigent children and I think we will be able to now have conversations around how to make sure that funding is directed to those recipients best. And I think skilled nursing senior funding will always be a priority for most of the states we operate in, and we feel confident that we’ll have the data and the ability to have those discussions at a state level over the next couple of years.

We don’t anticipate that there will be any other reconciliation bills and certainly no more discussion at least during this presidential term around big changes to Medicaid. So I feel like we feel like the worst is behind us, and now we can have productive conversations at a state level to make sure that we’re in good shape for the long term, which by the way, is nothing new. We have always had this dynamic at a state level where we’re advocating for proper funding for skilled nursing and this doesn’t really change that much.

Michael Murray: Okay. That’s helpful color. Just shifting to M&A, we’ve gotten some questions from investors recently on valuation of acquisitions over the past few years. It’s hard to parse out just because you’re doing more and more real estate transactions and geography also plays a big role in this. But to the extent you can normalize, for this, how are valuations trending generally, and do you continue to see attractive opportunities and valuations in your current markets. Thank you.

Chad Keetch: Yeah. Thanks for that question. I think we probably see valuations probably moderately increasing over time. Certainly, post-COVID, you know, with the rate environment being a little stronger and some of those things, I think, have gradually pushed pricing up a little bit. But, you know, I think the thing I just you know? And, obviously, when we’re leasing buildings, it’s a much different evaluation than if we’re buying a real estate and I know that can make it tricky to look from the outside to see how we’re viewing it. I think probably the key to how we evaluate deals is and, you know, not to always talk about this, but it’s locally driven.

And our local teams in the geography in which we’re looking to grow, they’re the ones that are helping us decide kinda what the appropriate price to pay would be, whether it’s a rent or a purchase. And the fundamentals of that decision are you know, we basically break down the target opportunity and, you know, kinda leave an opening around what their DAR is gonna be. And, obviously, rent is a function of the price that we pay. And so, you know, our operators are very focused on what the DAR is gonna be. And we sort of back into what price we feel like is appropriate based on what an appropriate DAR would be for that market.

And that’s sort of our driving factor into how we decide on whether to do a deal or not and what we’re willing to pay. And it’s such a smarter way to do it than trying to follow some kind of macro trend and you know? Because it because we’re forcing by doing it that way, the decision is driven on the fundamentals of at the facility level for each of these businesses. And that’s probably, I think, the thing I’d like to highlight most. You know, we’re not and certainly, we’re aware of the market trends and following those things closely.

But if pricing gets out of whack and people in the market are paying prices we don’t think are sustainable, then we just pass on those opportunities, and that’s where we stay disciplined. But when the pricing’s right and we feel like we can pay a fair price that will leave us with a DAR that’s sustainable over time. That’s when we move forward and close those deals. So you know, the environment’s been really positive. I think our growth track record over the last couple of years shows that there’s a lot of doable transactions out there. We still feel like the pipeline looks really strong and healthy. But we don’t set growth goals.

We don’t start out the year saying we’re gonna do x number of deals and so if pricing gets out of whack, like I said, we’ll slow down. And if pricing’s really good, that’s when you’ll see us be active. So hopefully, that’s helpful.

Michael Murray: Yeah. Yeah. It is. Thank you.

Operator: Your next question comes from the line of Raj Kumar with Stephens Inc. Your line is open.

Raj Kumar: Hey. Good morning. First question, just kinda thinking about Medicaid reimbursement and more particularly on the California workforce and quality incentive program, which is set to end by 2025. Can you can you speak to the current contribution Ensign receives from this program? And then maybe what are some of the conversations you the industry are kinda having at the state level in order to kinda maintain adequate funding in California?

Suzanne Snapper: To start off, just a point of clarity, how we actually have been recording that program for us. We’re actually expecting that funding to go through ’26 just to test how the state year works and how our revenue recognition works. And so it’ll actually be there for 2025 and 2026 based upon the recent change. And it’s something that would when we look at and this is not just you, to California, but this is for every statewide program. Now we work with the state and how they’re looking at their overall state budget.

And a lot of these quality programs come or originally came from the base rate and were really to incentivize providers to provide better quality care. And so as we work with them and we look with them about how their program will change over time, our goal would be for to help them remind them and see that the original amount came from the base rate. As we continue to work with them, that’s the talk that we’re here starting to hear that it might be getting back to the base rate. And so that’s something that we’re do we do in every state.

When there’s a quality program, making sure that we understand how the quality program works, but how that also interacts with the base rate.

Raj Kumar: Alright. Thank you. And then just as a follow-up you know, kind of speaking to, you know, you had strong skill mix in the quarter and just you know, thinking about as you guys kind of continue to add density in your market, and kinda just the dynamics of managed care reimbursement and the typical discount versus fee for service. Are kind of any of your cluster or at the cluster level kinda participating or having engagements with payers around participating in, like, value-based care oriented reimbursement models to maybe close that gap further?

Suzanne Snapper: Of course. I mean, that is a continued discussion that we’ve had. From the last couple of years. I think when you start to look at value-based care and value-based modeling, we’re all in for it with the managed care participants in that particular area. We love to do things that are value add both for us, and for the MCOs so that we can make sure that we’re giving great quality of care to our residents. I think when we talk about the volume, that there’s value that programs have encompassed over there, they’re relatively small.

But we’re definitely their part the MCO’s partners in every market and really kinda come up with unique programs based on what’s happening in that local market. That’s gonna benefit what the MCO is trying to overcome in that market.

Raj Kumar: Thanks for the color.

Operator: Your next question comes from the line of AJ Rice with UBS. Your line is open.

AJ Rice: Hi, everybody. Maybe a couple questions. First, you know, one of the things that I think the company talked about was potentially some of the more recent deals have been started at more challenging point as this jumping off point, how they performing before you acquired them. But it sounds like the deals in general are outperforming I’m just trying to understand. Are you realizing improvements quicker than maybe historically was the case or are you did you just take a more conservative approach in the way you assume those would impact your financials?

Chad Keetch: It’s a great question. I think there’s a couple of things at play. I think our assumptions haven’t really changed. We’re or our projections haven’t changed. We always try and break down the fairway of what we think is if we, you know, make aggressive changes as needed. And what we have seen is there’s there’s a slightly better environment that we’re seeing in some of the areas where we grown recently around agency labor. You know, a year or two back, we were seeing some of our acquisitions you know, where you’re 50%, 60% of their labor was agency.

And when you’re having to you know, completely rebuild a you know, a health care operation, from the line staff up, that takes a little bit more time. So that’s been an environmental thing that’s slightly better. I’d say the biggest thing, though, is we’ve we have higher density and we have stronger clusters working around these acquisitions, we’re just able to move things quicker. We’re able to, you know, backfill key staff positions from, you know, cluster partner buildings. We’ve got a better program of developing talent. So you know, one facility has redundant talent that can know, go be leaders in another facility.

And as you have higher density in your acquisition, you’re able to do that without asking those employees to move across the, you know, the country. So there’s a lot of things at play. I would say the final thing is just you know, we learn every acquisition we do. Well, they’re done locally. We have a great method for sharing and forum for sharing that. So we’re constantly learning from our mistakes and from what we do right. And the more we do that, you’d expect we get better and better over time. And I think we’re seeing a bit of that.

AJ Rice: Okay. Great. Let me just ask you on I know you asked earlier about the one big beautiful bill. I wondered about how it’s translating into market activity, particularly two areas Have you seen it impact the pipeline in any way? Are there more or sellers because of the chatter around that? Or people’s expectations around pricing adjusted in any way? And then also in your discussion with states on rate updates, are you seeing any impact at this point? I think it’s probably early, but I figured I’d ask. Is it having any impact on you know, composite rate expectations for this year or next year.

Chad Keetch: Yeah. So I’ll take the pipeline question. So I guess the short answer is, I guess, we’ve seen but, you know, the thing about it is that you know, last year, was the minimum staffing bill. Right? Like, there’s there’s the constant in our industry is there’s always something out there that is, you know, that you know, basically regulatory change, whether it’s you know, rates or, you know, some kinda staffing requirement or whatever it is. And I think so, you know, I can’t really say I’ve seen more deals come, but just it’s been really steady.

Maybe the reasons are of why are kind of always shifting, but it’s just a lot a lot more deals that we could ever do in a in a you know, are coming our way, and so that allows us to be really selective.

Suzanne Snapper: And on the right front, I mean, we’re always active in having these at a state level, like Barry mentioned and we mentioned in our prepared remarks. I mean, we don’t see anyone shifting that way yet, but it’s just part of who we are is to be actively involved in the discussions at the local level in each state talking about what may or may not be happening with that state rate. And then to you know, if we have a state where a rate does go down, that doesn’t necessarily mean that it’s gonna go to the bottom line for us.

And we’ve done that time and time again where our operational perform our operational reaction to a rate decrease, there’s so many different ways that we can pivot through that. And so even when we do have an have had it identified where the rate is going to go down, we are able to work through it by changing our operational performance.

AJ Rice: Okay. Thanks a lot.

Operator: Ladies and gentlemen, that concludes today’s call. Thank you all for joining. You may now disconnect.

Image source: The Motley Fool.

DATE

Thursday, July 24, 2025 at 2 p.m. ET

CALL PARTICIPANTS

President and Chief Executive Officer — Tony Labozzetta

Senior Executive Vice President and Chief Financial Officer — Tom Lyons

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TAKEAWAYS

Net Income: $72 million, or $0.55 per share, reflecting improvement over Q2 2024 and Q1 2025 (GAAP).

Return on Average Assets (ROA): 1.19% annualized for Q2 2025.

Return on Average Tangible Equity: 16.79% annualized for Q2 2025, adjusted for intangible amortization.

Pretax Pre-provision Return on Average Assets: 1.64% annualized for Q2 2025.

Revenue: $214 million, a record for Q2 2025, driven by net interest income of $187 million and noninterest income of $27 million.

Net Interest Margin (NIM): 3.36% in Q2 2025, up two basis points versus the prior quarter; projected in the 3.35%-3.45% range for the remainder of 2025, assuming two 25-basis-point rate cuts.

Loans Held for Investment: $318 million increase, or 6.8% annualized, led by commercial, multifamily, and commercial real estate growth.

C&I Loans: Annualized growth rate of 21% in Q2 2025, reflecting increased origination and line usage.

Commercial Loan Portfolio Growth: 8% annualized commercial loan portfolio growth, with 20% of originations in commercial real estate and 80% in commercial and industrial loans.

Deposit Growth: $260 million increase, or 5.6% annualized. Average cost of total deposits decreased to 2.1%.

Allowance for Credit Losses (ACL) and Reserve Release: ACL coverage was 0.98% of loans, following a $2.9 million reserve release due to improved economic forecasts.

Asset Quality: Nonperforming assets declined to 44 basis points of total assets; net charge-offs were $1.2 million (three basis points of average loans); total delinquencies at 65 basis points of loans; Criticized and classified loans down to 2.97%.

Tangible Book Value per Share: Tangible book value per share increased $0.45 to $14.60, with tangible common equity ratio up to 8.03% from 7.9% last quarter.

Efficiency Ratio: Improved to 53.5%. with annualized noninterest expense to average assets at 1.89%.

Dividend: Quarterly cash dividend of $0.24 per share declared, payable August 29.

Commercial Loan Pipeline: Pull-through adjusted pipeline of $1.6 billion at a weighted average interest rate of 6.3%.

Fee-Based Businesses: Provident Protection Plus revenue up 11.3%, income was up 10.1% compared to Q2 2024; Beacon Trust revenue declined 5.2% due to lower average market value of AUM, with end-of-quarter AUM at $4.1 billion, flat sequentially.

Noninterest Expenses: $114.6 million, including approximately $750,000 to $1 million in nonrecurring severance charges; Full-year core operating expense guidance reaffirmed at $112 million to $115 million per quarter.

Tax Rate: Effective tax rate of 29.7%; projected at approximately 29.5% for the remainder of 2025.

CRE Ratio: Commercial real estate exposure was 444%. Merger-adjusted CRE ratio was 408%, improving from 475% a year ago.

SUMMARY

Management highlighted strategic loan mix diversification, with significant growth in commercial and industrial segments and reduced reliance on commercial real estate, following planned objectives. Executives noted robust commercial loan pipeline momentum and affirmed confidence in sustaining current loan growth trends for the remainder of 2025. Management stated that Beacon Trust hired a chief growth officer, targeting expansion and deeper integration with other business lines. Executives confirmed a neutral balance sheet position, with margin guidance for Q3 2025 and the full year factoring in two 25-basis-point rate cuts, and explained that upside in net interest margin depends on funding-side dynamics in a competitive deposit environment. Leaders stated business deposit funding remains stable and growing; approximately 30% of commercial loan production is funded by business deposits, with municipal deposit inflows expected in Q3 2025.

Tom Lyons said, “About 40% of the pull-through adjusted pipeline is in CRE. About 55% is in the commercial categories. And about 5% consumer.”

President Tony Labozzetta noted, “our main focus is on organic growth, but we’re not closing the door to M&A at all.”

There was a discussion that nonrecurring expense impacts included $750,000 to $1 million in severance, with additional expense variation possible due to incentive accrual adjustments later in the year.

Executives clarified that net interest income (NII) growth is prioritized, and management may tolerate modest NIM fluctuation if NII continues to improve.

Competition for consumer deposits was described as elevated, with less stress seen in municipal and business deposit categories.

Asset repricing and accretive new loan production were cited as key drivers for NIM upside in Q3 2025 and the remainder of 2025, as roughly $6 billion of the back book is set to reprice within twelve months as of Q2 2025.

INDUSTRY GLOSSARY

CECL: Current Expected Credit Losses, a forward-looking reserve methodology for estimating future credit losses on financial assets.

CRE Ratio: The ratio of a bank’s commercial real estate loan exposure to its total risk-based capital, used to monitor CRE concentration risk.

Pull-Through Adjusted Pipeline: The loan pipeline figure adjusted for estimated deal closure rates, reflecting the realistic likelihood of loans being funded.

ABL: Asset-Based Lending; commercial loans secured by company assets.

AUM: Assets Under Management, the total market value of assets managed by a financial institution on behalf of clients.

NII: Net Interest Income, the difference between interest earned on assets and interest paid on liabilities.

NIM: Net Interest Margin, a measure of the difference between the interest income generated and the amount of interest paid out to lenders, relative to total earning assets.

ACL: Allowance for Credit Losses, the reserve set aside for estimated future loan losses.

CET1: Common Equity Tier 1 capital, a key measure of a bank’s core equity capital compared to its risk-weighted assets.

Full Conference Call Transcript

Tony Labozzetta: Thank you, Adriano. Welcome everyone to the Provident Financial Services earnings call. The Provident team delivered an impressive performance this quarter. Our team gained momentum with solid earning asset growth, improved margins and asset quality, record earnings, and expansion of tangible book value. During the quarter, we reported net earnings of $72 million, or $0.55 per share. Our annualized return on average assets was 1.19% and our adjusted return on average tangible equity was 16.79%. For the second quarter, pretax pre-provision return on average assets was 1.64%. These core financial results improved from the trailing quarter and the same quarter last year, and we are confident in our ability to sustain this momentum throughout the remainder of 2025.

We continue to build our capital position, which comfortably exceeds levels deemed to be well-capitalized. For the quarter, our tangible book value per share grew $0.45 to $14.60, and our tangible common equity ratio expanded to 8.03%. As such, this morning, our board of directors approved a quarterly cash dividend of $0.24 per share, payable on August 29. During the quarter, our deposits increased $260 million, our annualized growth rate of 5.6%. We continue to improve our average cost of total deposits, which decreased to 2.1%. During the second quarter, our commercial lending team closed approximately $764 million in new loans, bringing our production to a record $1.4 billion for the first half of the year.

As a result, our commercial loan portfolio grew at an annualized rate of 8%. This quarter’s production consisted of 20% commercial real estate and 80% commercial and industrial loans. Our strong capital formation combined with our production mix has reduced our CRE ratio to 444%. Adjusting for merger-related purchase accounting marks, the CRE ratio is actually 408%. Notwithstanding the high level of loan closings this quarter, our loan pipeline remains robust at approximately $2.6 billion, and the weighted average interest rate is stable at 6.3%. The pull-through adjusted pipeline, including loans pending closing, is approximately $1.6 billion.

We remain confident about the strength of our pipeline and our ability to achieve our commercial loan growth expectations for the rest of the year. Our credit quality is strong relative to our peer group, with a modest improvement in our nonperforming assets and a decline in delinquencies and classified loans. Our net charge-offs decreased this quarter to just $1.2 million or three basis points of average loans. These numbers demonstrate our commitment to prudent underwriting and portfolio management standards. Overall, Provident’s fee-based businesses performed well this quarter. Provident Protection Plus maintained its strong performance with an 11.3% increase in revenue for the second quarter, and its income was up 10.1% compared to the same period in 2024.

Given market conditions early in the quarter, Beacon Trust revenue declined 5.2% due to a decrease in average market value of assets under management. However, asset valuations have recovered, and Beacon closed the quarter with $4.1 billion in AUM, which is consistent with the trailing quarter. The Beacon team is focused on building AUM, and I am pleased to report that Beacon has hired a new chief growth officer to further this objective, with a projected start date late in the third quarter. Overall, we are proud of our performance this quarter. We have a dynamic team and a solid foundation to grow our core businesses, expand profitability, and create even more value for our stockholders and customers.

Building on our strong results, we believe we will continue this momentum and achieve our desired goals for the remainder of 2025. Now I will turn the call over to Tom for his comments on our financial performance.

Tom Lyons: Thank you, Tony, and good afternoon, everyone. As Tony noted, we reported net income of $72 million or $0.55 per share for the quarter, with an ROA of 1.19%. Adjusting for the amortization of intangibles, our return on average tangible equity was 16.79% for the quarter. Pre-tax pre-provision earnings for the current quarter were $99.6 million or an annualized 1.64% of average assets. Revenue increased to a record $214 million for the quarter, driven by record net interest income of $187 million and noninterest income of $27 million. Average earning assets increased by $383 million or an annualized 7% versus the trailing quarter, with the average yield on assets increasing five basis points to 5.68%.

Our reported net interest margin increased two basis points versus the trailing quarter to 3.36% while our core net interest margin remained stable. We currently project a NIM in the 3.35% to 3.45% range for the remainder of 2025. Our projections include 25 basis point rate cuts in September and November. Period-end loans held for investment increased $318 million or an annualized 6.8% for the quarter, driven by growth in commercial, multifamily, and commercial real estate loans, partially offset by reductions in construction and residential mortgage loans. C&I loans grew at an annualized 21% pace while total commercial loans grew by an annualized 8% for the quarter. Our pull-through adjusted loan pipeline at quarter-end was $1.6 billion.

The pipeline rate of 6.3% is accretive relative to our current portfolio yield of 6.05%. Period-end deposits increased $260 million for the quarter, however, average deposits decreased $278 million versus the trailing quarter. The average cost of total deposits decreased to 2.1% this quarter. Asset quality remained strong with nonperforming assets declining to 44 basis points of total assets. Net charge-offs were just $1.2 million or an annualized three basis points of average loans this quarter. In addition, total delinquencies declined to 65 basis points of loans, criticized and classified loans fell to 2.97% of loans.

This strong and stable asset quality, coupled with an improved economic forecast used in our CECL model, drove a $2.9 million reserve release this quarter. This brought our allowance coverage ratio to 98 basis points of loans at June 30. Noninterest income was steady at $27 million this quarter, with solid performance realized from core banking fees, insurance, and wealth management, as well as gains on SBA loan sales. Noninterest expenses were $114.6 million with annualized expenses to average assets totaling 1.89%, and the efficiency ratio improving to 53.5% for the quarter. We reaffirm our previous guidance of quarterly core operating expenses of approximately $112 million to $115 million for 2025.

Our effective tax rate for the quarter was 29.7%, and we currently expect our effective tax rate to approximate 29.5% for the remainder of 2025. Our sound financial performance supported asset growth and drove strong capital formation. Tangible book value per share increased $0.45 or 3.2% to $14.60, and our tangible common equity ratio improved to 8.03% from 7.9% last quarter. That concludes our prepared remarks. We would be happy to respond to questions.

Operator: If you have dialed in and would like to ask a question, please press 1 on your telephone keypad to raise your hand and join the queue. If you’re called upon to ask your question and are listening via speakerphone on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Again, hit 1 to join the queue. And our first question comes from the line of Mark Fitzgibbon with Piper Sandler. Your line is open.

Mark Fitzgibbon: Hey, guys. Good afternoon.

Tony Labozzetta: Hey, Mark. How are you?

Mark Fitzgibbon: Good. First question I had for you, Tony, is on the Beacon business. I heard your comments about, you know, growth starting to ramp with some new people. I guess I was curious, is there any change in strategy or is it just simply you brought in some new people that will go out and market and grow the business? Or are you trying to market to a different audience?

Tony Labozzetta: Great question. I really don’t think that I would call it much of a strategy. I think our focus has been growing the AUM. Beacon is a really strong platform. I think one of the things that we’re looking to enhance is the sales and service more the sales side. Right? I think we’re trying to build a bigger force that could easily work with our business line partner on the other commercial, retail, treasury, insurance so that we can penetrate not only our existing business, but we can also get new to bank or new to Beacon clients as well. So it’s a forward strategy with, and also a focus on retention.

And so integrating it better into our businesses is what we’re trying to do, and I think the individual we hire for this role is going to be key to that initiative.

Mark Fitzgibbon: Okay. And then a couple questions around provisioning. You mentioned in the release that, you know, part of the reason for the reserve release was improved sort of the economic forecast. Assume is that Moody’s? Their assumptions changed?

Tom Lyons: That’s correct, Mark. Moody’s baseline and primarily in our case, the main driver in terms of macroeconomic variables is the commercial property price index. That drove most of the release.

Mark Fitzgibbon: Okay. And then it’s kinda related. I guess I was curious. Your bottom line ROA and ROE estimates kind of imply that provisioning will be pretty modest in the back half of the year. Am I thinking about it the right way? Because you’ve given really good guidance on most of the other items, and that’s the one that kinda sticks out.

Tom Lyons: I think that’s the case, Mark. If you look at asset quality, we saw some nice improvement in terms of criticized and classified and don’t see it in the release, but the watch list credits have improved as well. And for good economic reasons, we saw improved lease-up in both the retail commercial real estate space as well as the multifamily space. So feeling pretty good about credit quality overall.

Tony Labozzetta: Barring any shift in market conditions or some global event, I think that’s a good outlook.

Tom Lyons: Yeah. And I’ll note, Mark, even though you saw a small increase in dollars of NPLs, there’s no loss content in the driver of the increase. There was one loan in excess of $10 million that was really almost, I guess, a technical nonmaturity in the sense that there’s some ownership concerns among the owners of that business as to the disposition of the property. But really strong valuation. So we’re not concerned about losses there.

Mark Fitzgibbon: Okay. And then last question, Tony. Last quarter, I had asked you about sort of M&A, and you said you’re focused on organic growth. But open to M&A. However, your stock price wasn’t, you know, didn’t fully reflect the strength of the company, etcetera. Your stock is up maybe 10, 12% since then. Do you feel like the currency gives you capacity to be able to seriously consider M&A at this point?

Tony Labozzetta: Well, you know, you just say, you know, always clear last time. I think we’re always in a place where we have to evaluate all our strategic options. We continue to do that. I think right now, our main focus is on organic growth, but we’re not closing the door to M&A at all. In fact, if there was the right opportunity to meet the strategic things that I talked about last quarter, came up. We would have to entertain, observe it, and evaluate it to what it means for our shareholders as we go forward.

But I think the price is starting to reflect a little bit more of what we think Provident is, and I think there’s still some more room that we can move there.

Mark Fitzgibbon: Great. Thank you.

Tony Labozzetta: Yep.

Operator: And our next question comes from the line of Steve Moss with Raymond James. Your line is open.

Thomas M. Lyons: Hey, guys. This is Thomas on for Steve. Thanks for taking my question. Just wanna start it off with loans here. C&I growth was really strong. What’s driving that right now? Is it more line utilization? Or is it, you know, new originations? And maybe what additional hiring opportunities are you seeing for C&I lenders these days? Thanks.

Tony Labozzetta: Well, I would characterize our organizational capacity as where we want it right now. And, you know, additional hirings will come from the standpoint of expansion and what we’re thinking about. I think that growth is because of the book. I think that growth, not only the book, but also Phil Fink being here, the team’s focus on C&I. You know, we have a very diverse set of products today that we have three years ago. We have the ABL, and healthcare lending, mortgage warehousing, SBA is ramping up. So we have all these businesses. They’ve all contributed nicely to our production this year, this quarter. And our pipeline shows that they’ll continue to contribute nicely.

But our focus is not away from CRE. I just wanna be careful, and not to express that. We’re growing our CRE book. We’re doing it. It’s just that those other lines are moving at a much faster pace. And so we’re pleased with that. They’re bringing in some great deposits with it. We do have the capacity, but we’ll just keep going when we need to. And we have a good plan on expansion both from a capacity numbers and to your geography. So I think I’m pretty pleased with the general direction of where we are with the commercial bank.

Tom Lyons: And I would agree with Tony that it was primarily driven by a rich origination, but we did see increased line usage over the last number of months. We call it normalization. We were traveling in a low territory for a long time as I guess was much of the industry. We’re back up around 45% line utilization.

Thomas M. Lyons: Okay. And I’d add also in terms of the pipeline, Tony talked a little bit about the mix going forward. About 40% of the pull-through adjusted pipeline is in CRE. About 55% is in the commercial categories. And about 5% consumer.

Tony Labozzetta: I just would like to round out that comment by saying it’s not accidental. I think part of our strategic objective was to kind of diversify our commercial book so we’re not CRE heavy. And as you can see by the reported number that if you adjust for the merger-related charge, we’re at 408%. That’s a pretty solid number. And it’ll continue to improve as we continue to build our other lines of business.

Tom Lyons: Especially when you consider we were at 475% a year ago.

Tony Labozzetta: Correct.

Thomas M. Lyons: That’s all great color. I really appreciate that. If I can get one more in, you know, wealth management fee did feel a little light at, you know, 68 basis points of EOP AUM. Was that driven by maybe lower average AUM from market volatility? Or maybe something else?

Tom Lyons: Yes. That is the case. For the quarter. Like, as Tony noted, I think, his opening comments, the average balance was down impacted revenue for the quarter, but we did see a market recovery, and we’re back up actually a little bit ahead of where we were at the end of the period at the first quarter. So client count has remained constant. We’re actually at plus three on the client count. The AUM per client has gone up a little bit. So nice recovery by the end of the period.

Thomas M. Lyons: Okay. Great. That makes sense. That’s all for me. Thanks, guys.

Tony Labozzetta: Thanks, Eric.

Operator: And our next question comes from the line of Feddie Strickland with Hovde Group. Your line is open.

Feddie Strickland: Hey, good afternoon. Just wanted to start on the expense guide. Last quarter, I think you mentioned you might be able to come in potentially at the lower end of the range. Do you still feel like maybe that’s achievable and we could see the quarterly expense line even come down a little bit in the back half of the year?

Tom Lyons: I do, Feddie. You know, so there was a little bit of unanticipated what I would consider nonrecurring costs in terms of some severance charges about $750,000 to a million dollars, let’s say, in nonrecurring there. That said, the back half of the year is usually when we take a closer look at some of our incentive accruals for the current period as we get greater visibility into where we might end the year. So the various incentive programs throughout the different disciplines in the bank we try to get a finer point, a little more precise, and that can affect the accruals either positively or negatively. So that’s why we’re given a range of $112 million to $115 million.

Feddie Strickland: Got it. Appreciate that. And just wanted to talk through the municipal deposit flow seasonality, kind of what your expectations are there? And am I thinking about that correctly that maybe the increase in brokered deposits is really to replace some of that outflow and then we maybe see those broker deposits come back down as maybe have some seasonal inflows in municipal deposits?

Tony Labozzetta: Yeah. I think that’s a fair statement. I would kind of expand on that to say, we also allowed some high-yielding CDs that we had, you know, on our books from pre-merger. During the liquidity times. And that was just a trade-off between the broker deposits or, you know, the consumer CDs, which were high yield. And we thought that a good trade. And it also made up the delta in funding needs because of the municipal outflow. So there was a combination of those two things.

If you look at our municipal pipeline now, not only do we expect the flows, which are strong in the third quarter, particularly this month, and we’re starting to see that, but you also are now seeing the pipeline of municipal potential new municipal business is also there. So that should come along nicely as we achieve those wins.

Tom Lyons: You are correct, though, that the municipal deposits the trough is the deepest in the second quarter historically.

Feddie Strickland: Alright. Great. Thanks for the color.

Tom Lyons: Thanks. Welcome.

Operator: And our next question comes from the line of Tim Switzer with KBW. Your line is open.

Tim Switzer: Hey, Tim. Hey, good afternoon. For taking my questions. With you guys a little bit less interested in M&A right now, do you have, like, a target capital level you’re trying to get to? And how does that play into your appetite for more share repurchases?

Tony Labozzetta: I don’t think it’s a significant strength. I kinda like around 11 and a quarter for the CET one.

Tim Switzer: Okay. Okay. And sorry if this has already been asked, but for the NIM trajectory, you guys took up the high end of the guide a little bit. Can you talk about what’s helping drive that? And, you know, how would Fed rate cuts impact your margin?

Tom Lyons: The balance sheet’s fairly neutral. So, I mean, the two cuts 25 basis points are built into that margin expectation. You know, there’s we run a whole number of models and working on the most likely, though, but it looks like around a 3.40 in Q3. Maybe exiting as high as 3.45, 3.47 even at the end of the year. But, you know, again, to exercise a little caution in that, and, again, that’s two rate cuts in September and November.

Tim Switzer: Great. Okay. That’s good to hear. And the last one for me, the loan pipeline moved down just slightly lower, but you obviously had pretty good growth in Q2. Is there any, like, slowdown or uncertainty causing borrowers to be more cautious at all? Or, you know, everything still looks pretty good. People aren’t too concerned about tariffs or anything like that.

Tony Labozzetta: Yeah. Actually, that’s one of the real bright spots. You know, while the pipeline went down, it did go down because of some what I would call, very strong loan closings in the quarter. Right? And I think the key is we scrub our pipeline incredibly well. So the stuff that’s in there, we feel pretty good about it. And so we also in all the conversations with our verticals, don’t see any signs of anything slowing down immediately. The replenishment appears to be happening. We do expect to have a nice pull-through in the third quarter. And continue to replenish it. And so again, I don’t see anything right now that I’m concerned.

I think it’s a bright spot for us moving forward.

Tim Switzer: Okay. Great. Thank you, guys.

Operator: And our final question comes from the line of Manuel Navas with D.A. Davidson. Your line is open.

Manuel Navas: Hey, I appreciate that commentary on the NIM in the back half of the year. Is the main driver there, the accretive, new loan production? With deposits kind of being more flat, or could you see some deposit costs decline as well? I guess you do include two cuts, so that’s part of it as well.

Tom Lyons: Yeah. I would put more emphasis on the asset repricing though. You got about $6 billion of the existing back book repricing over the next twelve months? You know, about $5.1 billion is floating. So you know, as the rates move, we should see that benefit. Then the new loan production coming on at accretive levels as well. I would be cautious about taking too much credit even with the rate cuts on the funding side just because the competitive environment, I think, is a little bit more challenged now. Deposits are a hot commodity.

Tony Labozzetta: I would add one dimension to that. I think certainly, there’s a lot of accretive loan production. I think whether we’re in the high end of the range or low end of the range, it’s gonna be dictated by the funding side. But I also want to preface us that while we make managerial decisions, we’re focusing a lot of our energy around the NII. So we’ll be willing to give away one or two basis points if our NII can grow. So I just want you guys to remember that for the next earnings call. That’ll be management decisions that we’ll make to drive better earnings and that’s part of the management game. Right?

Tom Lyons: That’s a really good point. And you saw some of that even on the investment portfolio side. I think I mentioned last quarter, I’d be very comfortable taking the investments back up to about 15% of assets. Still a little bit under that now. But the leverage growth obviously gives you a little bit less spread, but good income with very little credit losses because we’re buying high-quality treasuries and agency securities.

Tony Labozzetta: Right. But we’re feeling pretty good because some of the funding growth that we’re seeing, and if that manifests along with the loan production, it should be well in the range of what Tom is saying.

Manuel Navas: I definitely sense the optimism on NII growth. Could you speak a little bit more to that competition you’re seeing? Just in some of that commentary? I mean, that’s also because there’s more demand out there, but just could you just speak to that for a moment?

Tony Labozzetta: Yeah. I think a lot of the competition we’re seeing now Tom could jump in at any moment, we’re on the consumer deposit side, we’re seeing more of stress. Right? Whether they’re the deposit accounts moving into money markets or other banks are starting to get a little bit more competitive for the space, particularly with CD products. Our business deposits are stable and growing. Just a fact point, for everybody on this call. We’re probably funding about 30% of our commercial production commercial funding is being done with business deposits, and that’s a pretty good ratio. And so if we can have the municipals come back, we’re not seeing a lot of stress there in terms of competition.

We’re seeing the competition more on the consumer side. Not that the municipals don’t have it, but the biggest level of competition is happening on the consumer deposits. Tom, would you like to add on that?

Tom Lyons: I think you covered it just to accentuate that it’s not just banks. The availability of viable investment alternatives for folks as well, and they can get a decent return.

Manuel Navas: I really appreciate the commentary. Thank you.

Tony Labozzetta: You’re welcome.

Operator: And that concludes our question and answer session. I will now turn the conference back over to Mr. Tony Labozzetta for closing remarks.

Tony Labozzetta: Well, thank you, everyone, for your questions and joining the call. We hope everyone has an enjoyable summer, and a great rest of the year. We look forward to speaking with you soon. Thank you very much.

Operator: And, ladies and gentlemen, this concludes today’s call, and we thank you for your participation. You may now disconnect.